ABUSIVE LITIGATION

The mail on Monday brought a “NOTICE OF PROPOSED SETTLEMENT OF CLASS AND DERIVITIVE ACTION AND HEARING” in the matter of Associated Estates Realty Corporation Shareholder Litigation.

As a former shareholder a detailed reading of the notice was undertaken to learn what, if anything, the former shareholders were receiving out of the settlement. The bottom line was absolutely NOTHING. But, the lawyers were getting $390,000 from the plaintiffs in the litigation. The apparent justification for the settlement was that the suit caused enhanced disclosures.

The litigation arose out of an agreement by Associated to effectively sell the company at $28.50 per share. Immediately on the announcement several law firms began trolling for lead plaintiffs willing to participate in a class action suit and, when plaintiffs stepped forward suits were filed.

Long term shareholders, who stayed informed about the company knew that the company had not done anything or taken any action detrimental to the shareholders interest. The shareholders knew that, in December of 2014, the company announced that it had retained Citigroup Global Markets, Inc to assist the Board in reviewing the Company’s business. Usually, announcements like this are interpreted by the market as indicating that a company might be “in play”. Thus, any potential purchasers of similar companies would have focused on Associated. Then, in March of 2015 an activist shareholder group announced its intention to nominate candidates to replace three specific directors. Finally, in April of 2015 an Agreement and Plan of Merger was signed with Brookfield whereby shareholders would receive $28.50 per share in cash for their shares. Then followed the filing of several shareholder derivative actions.

These lawsuits were frivolous and abusive with no indication of righting any grievous wrongdoing by the Company. It is apparent that the sole purpose of the lawsuits was to earn fees for the lawyers with no motivation to enhance the shareholder payout. Based on everything that was public these lawsuits should have been very winnable and should have been dismissed. This prompts the question of why would the defendants agree to a settlement? The answer is simple. Settlement was “cheap” considering the exposure to mounting legal costs to defend and the avoidance of any delays to the transaction. These lawsuits were nothing but a gigantic “shakedown” by unscrupulous lawyers motivated by the knowledge that, for various and sundry reasons a settlement was a most probable outcome rather than being motivated to correct wrongdoing.

Followers of legal gymnastics are aware that any announcement of a merger or buyout is grist for the legal mill. Shareholder derivative actions are very common and have been for years despite the very negative view of the law firms that bring such suits. Over 20 years ago an attorney being retained by the independent directors of a company involved in a merger began the first meeting by saying “when you get sued – any you will note that I said ‘when’ not ‘if”…” And, he was correct. The company and directors did get sued despite any identified wrong doing.

While the class action attorneys in the Associated case are part of the problem, the larger problem is that the system is “broken”. There are probably many causes of problems. First, is holding a law license has become license to steal with lawsuits instead of guns rather than a permit to engage in an honored legal profession. The law has ceased being a profession and has become a business. When it was a profession attorney’s regularly refused to take on cases without merit. That appears to be no longer the case. Today potential plaintiffs will just shop around until they fin a lawyer hungry enough to take the case and the lawyer moves ahead knowing that, at worst, fees wll be paid via settlement. Another part of the problem is that judges permit plaintiff attorneys to use a “market basket” of causes of action without concern of receiving sanctions for allegations that are without any merit. Attorneys apparently are not required by the Courts to do their homework first, before filing suit. The next problem is discovery which initially was supposed to streamline litigation but instead has become a weapon for harassment employed by attorneys to try to force parties to drop out. At least, the State of Delaware Courts are trying to do something about the problem by making it far less certain that meritless cases receive settlement approval resulting in only legal fees being awarded, as in the Associated case.

Another problem is recognized when Corporations are found to have committed a wrongful act and reach settlement to pay huge fines to the government. The corporate personnel responsible for the wrongful act escape jail time and the Corporation, not they, pays the fine. So, the shareholder investors are the ones punished by the government and other litigants and not the wrong doer. Something is wrong with this picture.

Shareholders need to be more aware as to how litigation can adversely impact their investments without any potential to be protected as it is they, not the wrong does, who get the privilege of paying the bill.

EXCESSIVE EXECUTIVE COMPENSATION

Well, it’s annual report time again and stockholders’ have this year’s opportunity to register an advisory vote on Executive Compensation. Starting with the current levels of compensation it is astounding how many of the largest public companies provide total compensation, including perks, to their CEO in the eight figures plus ($10,000,000 and upwards) range with the touted ceiling at close to $40 million.. This suggests several questions:

Is any “hired” as opposed to founding (genius/innovator) CEO worth such high levels of compensation? The answer must be “probably not”. The argument might be made that the high levels of compensation are necessary to retain top talent but such argument would suggest that if the compensation was pegged at say $5 million no equally talented manager would apply for the job. That just wouldn’t make any sense. It seems that the CEO’s of America constitute American Royalty equal to athletic and entertainment superstars. Athletes win their pay by pitching winning games, batting home runs, throwing touchdown passes just as entertainers earn by the quality of their performance and audience approval. Other than a CEO who happens to be the inventor/developer of highly successful products (like Steve Jobs was) what exactly does the typical CEO personally do to earn his or her outlandish monetary rewards as differentiated from the work of the other highly competent corporate staff? It would be very interesting if the proxy material detailed the specific unique accomplishments and contributions of the named executives who will benefit from the advisory vote.

All of the proxy language designed to demonstrate that the executives’ interests and shareholders’ interests are aligned often falls very flat when examined in the light of history. General Electric may be a case in point. It is safe to assume that many retirees hold GE in their pension plan either directly or indirectly and have held that stock for many years. In late 2007, just before the financial collapse, GE stock traded at $42.15 while today it trades at $30.78 or 30% below its pre-collapse level. Yet, the CEO who presided over the collapse in share value continues to receive outsized compensation just as if nothing bad happened. But, he suffered no financial pain in the post 2008 period. Bank of America is another case in point. Although the current CEO was not at the helm at the time of the financial implosion, the shares now trade in the $13-$14 range while in March of 2008 they traded at $44.55.. It is sad that none of those in charge at the time of the financial meltdown went to jail for their part in the collapse. There were no claw backs of the outrageous compensation levels they received while making what were probably the most incompetent deals (Countrywide and Merrill Lynch) imaginable. The shareholders took a major “haircut” while those executives who moved on are “laughing all the way to their way to the bank”. Bank of America is not yet “out of the woods” but, despite that, there was no discussion as to why the CEO compensation package was to be at the levels suggested. What did the current managers do that any competent manager could not have done? The shareholders are entitled to know that. The cases of GE and BofA clearly suggest that the interests of the hired executives and the interests of the shareholders are not aligned in any meaningful way.

The Board’s of many companies often rely on “studies” of peer group compensation performed by an outside compensation consulting firm. These studies have the appearance of focusing on compensation levels rather than detailing the specific contributions of named executives on which the company may base its decisions. To that degree, the so called “studies” are a “follow the leader” road map for justifying unreasonable compensation levels. The compensation committees are apparently not doing their job and take these “studies” as sort of a gospel.

Any observer of military history recognizes that there are, in each army, some very gifted and irreplaceable leaders like Patton, McArthur, Marshall and Eisenhower in modern times and Grant in the Civil War while there are many generals who, competent as they may be, do not rise to the level of greatness. Add to these the large number of totally incompetent military leaders and you have a tapestry of leadership. Why should anyone expect the corporate leadership pool to be any different? A few absolutely gifted leaders and the rest of them.

In considering compensation, the Boards’ should be probing the unique contributions of the leaders and not relying on peer group studies. Boards’ should be focused on the leaders who can not only provide a highly functional management structure but also one who can provide innovative thoughts and actions. It is sad that financial analysts do not often focus on the innovative manager who keeps things growing through brilliant management and ideas. They are the ones who really earn the large compensation packages.

Reading the history of Eastman Kodak and Polaroid provide a good example of innovative management versus a rigid corporate structure that is stuck in the mud. Eastman failed to see the future and failed to plan for it, much to the detriment of shareholders. On the other side of the coin there are current innovative and progressive corporate leaders like Zukerberg the Facebook guiding genius and Benioff the leader of Salesforce. These kinds of managers earn every penny of their compensation yet are often painted with the same brush by the analysts as all other, less creative managers.

The question that won’t go away is “what would happen, if on Monday morning, the public work up to learn that all the CEO’s in America had died over the weekend? Would the share values collapse? Maybe yes if the CEO had failed to build a functional “team” who would carry on in his or her absence. But, with a good “team” in place business should go on as usual.

Boards of Directors should insist on much better tools for the analysis of executive compensation but, instead, seem satisfied with “peer group” studies and short term results as the justification for approving management suggested compensation levels. Directors and shareholders should demand an in depth analysis of exactly what the CEO did or does to justify their compensation package as differentiated from what other staff did. CEO’s benefit from the contributions of staff by taking credit for those contributions. Shareholders and Directors need to know if the CEO personally is an innovator and/or provides forward thinking leadership as differentiated from just providing management of what is already in place.

Unfortunately, there has been no indication that shareholders, in general, are angry enough about the system to force change. Now, as this is being written, regulators appear to be stepping into the situation to bring about change. This sounds good but, more regulation is not what is needed. Regulation, if it follows usual patterns, will produce unintended consequences that will protect mediocrity instead of inducing the assurance of a system that rewards innovative managers rather than rewarding someone for “just showing up”. There is a need to make sure companies can claw back excess compensation when the CEO takes actions that turn out to be against the best interests of the shareholders. This would have been a good thing in the case of Bank of America and possibly GE.

Institutions and pension funds own large blocks of stock in major corporations but, other than a few activist investors these institutions do not appear to be taking any steps to reign in these outlandish levels of pay. It is time for shareholders’ to vote AGAINST all advisory compensation proposals until there is better justification for the pay levels proposed.

MORE ON EXECUTIVE COMPENSATION

Well, it is annual report time again and the shareholders get a view of the amount of compensation received by the CEO, which in most cases is beyond anything rational. But, then the shareholders are often offered the opportunity to cast an “advisory” vote on compensation, not that it means anything.

Annual compensation in the 8 figure and occasionally 9 figure range should make shareholders demand an answer to the question What did the CEO actually do to deserve such a ridiculously high rate of pay? How much of any corporate success is really the work of a single CEO? Conversely, how much did the CEO contribute to a shortfall or failure? Whatever the corporate results, it is suspected that hundreds or even thousands of individual executives, and not just one, were responsible. In some cases corporations were or are run by creative geniuses like Steve Jobs, Bill Gates and other founders of tech companies where it is easy to see their initiation of great ideas and products. It is easy to understand why Dr. Edwin Land of Polaroid fame became wealthy based on his company and inventions. Shareholders in companies like these never doubted the contribution of the CEOs to the success of the company. Nor do shareholders who have invested in the genius of Warren Buffet ever doubt his contribution to the success of his ventures. But, what about the others? One can see how the innovators and geniuses have earned any handsome rewards provided.

No annual reports or discussions of compensation therein ever itemize exactly what the CEO has done to deserve the compensation package awarded. Shareholders need to know if the CEO is just a “cheer leader” for the management team or an innovator who comes up with new and exciting ideas. If the CEO depends on the inputs and consensus of the management team to develop strategies, products or ideas, then that CEO may just be a cheer leader and organizer but not an innovator or a force for success. Shouldn’t the shareholders be informed as to the precise contribution of the CEO and the kind of performance evaluation made by the Board in adopting the compensation package?

It is suspected that compensation packages are often developed based on an analysis provided by a compensation consulting company citing a review of the compensation packages of “peer” companies. It is suspected that, in adopting a compensation package, the Board may rely on the consulting report to justify their approval action rather than conducting any thorough independent evaluation. If these suspicions are accurate, shouldn’t Boards of Directors, and particularly the “independent” directors undertake a thorough review and analysis of the actions and contributions of the CEO in the previous year as part of setting compensation? Shouldn’t performance awards be based on something more tangible than meeting pre-set targets which, most probably do not reveal the contribution of a single person but rather reflect the results of a large team, or, maybe only the results of a vibrant economy and robust stock market. What seems clear is that Directors, theoretically acting independently, don’t seem to be taking any steps to rein in runaway compensation.

Thinking back to the financial collapse of 2008, one must ask why the highly paid CEO’s of investment banks and commercial lenders did not foresee the collapse when all of the signs should have been readily obvious. Were they all so blind that they didn’t see? That result would be hard to imagine. So, it must have been the substantial profits being generated from the activities that induced blindness. Whatever, how many of these CEOs paid any price for their complicity in the collapse? Despite failures, how many financial CEO’s from that era are still pulling down gigantic compensation packages or were moved out with a tremendous severance package? Public memories are short but that should not be the case with Boards of Directors.

Perhaps it is time that shareholders begin demanding far greater accountability and justification for the compensation awarded to executives by Boards. In being forced to accept the levels of compensation, shouldn’t shareholders be absolutely convinced that the pay is reasonable and justified by individual performance? This means that annual reports should tell the shareholders more of what they really need to know rather than just making sure all disclosures are covered.

TRADERS RULE

What do the wild, short term swings in the Dow and other indices mean? How much of the activity causing swings is induced by short term, high frequency trading (HFT)? Is this healthy?

Viewing the wild swings from the vantage point of history suggests that short term “ups & downs” provide little, if any, insight into the medium or long term direction of the market, except in unusual circumstances. The fact that the Dow may fall 200+ points on Monday and recover 200+ points on Tuesday makes the market look irrational particularly when there has been no game changing event reported. Reports of negative news of one industry or company are micro-economic events, and logically should not influence markets in a manner that might be expected when there is a macro-economic event.

If this observation is realistic, then it might be postulated that short term, high frequency traders, judging time in terms of minutes or hours rather than months or years cause this market volatility. It seems obvious that the typical, individual investor buying or selling 100 to 1,000 or more shares of X stock would not move a market one way or another Moreover; the typical individual investor would not sell out a position on the belief that their stock would decline by $0.25 per share tomorrow. Instead, they would hold on to the stock if they continued to believe in the future of the company.

There has not yet been any definitive study indicating whether or not HFT is good or bad for the market. There is some evidence that 50% of all trades are HFT transactions. Some have argues that the market liquidity available because of trading activity is good for the typical investor both in terms of keeping transaction costs down and limiting volatility. But, there is no definitive study supporting these conclusions. Logic persuades that if 50% of the shares traded are the result of HFT activity, which, in turn is predicated on a short term view, the short term trading causes volatility. Moreover, the short term trader is more of a gambler than a typical investor. From the standpoint of the individual investor, with their investments in IRA’s, stocks and/or mutual funds, day to day volatility is unsettling and confusing.

Much of the confusion is caused by the “talking heads” at CNBC when they talk about what “investors” like and don’t like. But, are they talking about the typical individual investor? That is very doubtful since the orientation of their commentary and the commentary of their guests seems mostly framed in the short term unless they are reporting on people like Warren Buffet. Their commentary seems focused on the traders and institutions rather than individuals. While it is probably good theater for the viewer, it is doubtful that individual investors learn much that will guide a buy-sell decision now or tomorrow.

Another deviation from the sphere of typical investors is the frequent reference, by the “talking heads” to XYZ making a BET on a certain outcome. The word “bet” very frequently crops up in broadcast and print financial news. It should be obvious that short term traders, trading thousands of shares at a time, in mille-seconds, are “betting” that a stock will rise or fall in value in the very short term (minutes rather than days or months). It has been said (but not proven) that the holding time of securities bought by high frequency traders is less than 10 minutes. If they bet right they win. The typical, prudent investor does research before purchasing a security. It is doubtful that the HFT trader does any material research into the companies they trade and are in every sense gambling on an uncertain outcome that is algorithm based.

What is interesting is the fact that there are both Federal and State anti-gambling laws and 19 states disallow social gambling. The legislative purpose of these laws seem to be to protect the citizens against shady people running card and dice games for their profit or to eliminate the corruption of “fixing” in sports betting. Much has been written about prohibiting on-line, internet betting despite the practical impossibility of effectively stopping it. But, if risking money on an uncertain outcome is gambling, then Wall Street provides the largest casino in the world, although one in which there are numerous rules to protect the investor against misrepresentation and fraud.

HFT is not a strategy available to the typical investor and benefits one specific group rather than all participants. Is it otherwise bad? Probably not unless it is clearly demonstrated that HFT induces a higher degree of volatility into the market than would otherwise exists. But, this research has not been undertaken. One fact, however, jumps out. HFT activity does not appear to add anything to the GNP of the U S. To the extent that lawmakers might come to the conclusion that HFT is a form of gambling they might wish to consider a transaction tax of $0.25 per share or $10 per transaction, whichever is less, on all securities purchased and held for less than 48 hours.

One thing is sure – the stock market does not provide a level playing field.

PROXY SEASON 2014

Proxy season has begun and, again, investors should notice what should be a disquieting pattern of information presentation. To begin with, it seems that an inordinate amount of space is devoted to executive compensation leading to a non-binding vote. The notion that, through the vote shareholders have a real say in the important issues involving corporate governance only becomes apparently ridiculous after reading through the proxy material.

Without naming names (you know who they are), companies that experienced significant reduction in share values in the period from 2008 through 2013 did not seem to reflect any comparable reduction in executive compensation. Instead, compensation appears to have increased over that time period. And, even if an individual shareholder was unhappy with the compensation packages, a NO vote by an individual shareholder is useless as a governance tool as it is non-binding. Millions of shares in corporate America are owned by institutions and, unless they, jointly take action to protest executive compensation nothing will happen.

Despite the overly generous rewards to corporate executives the proxy material does not provide any disclosure of the specific contributions of the executives being rewarded that would justify their compensation levels. Shareholders must just accept, on faith alone, that they are worth it. Yet, only in rare instances are the compensations of the few the most important part of the profit picture. Today’s CEO’s have become America’s royalty with all of the accompanying perks.

It is also interesting to read the “shareholder proposals” and recognize that very few, if any, ever obtain a management recommendation for a yes vote. Management always seems to be able to write a detailed argument for voting against the shareholder proposals no matter how meritorious they may be and rarely does management ever present its own proposal covering the same issue.

Shareholders should question whether or not the “independent directors” are really “independent” or just go along with management recommendations. There are too few examples of directors challenging or opposing the recommendations of the CEO and executive management team to convince shareholders of independence. Rarely, when shareholders are asked to vote for directors (new or re-elected) are they provided information detailing the expertise of the nominees that would be most helpful in managing the company. More attention seems to be paid to “politically correct” nominees.

Despite attempts of the regulator to “level the playing field”, the investing game remains the province of the institutions and traders. The market is a trader’s market with high speed trading adding a level of de-stabilization and leading to the ability of a few to “front run” the market. Despite regulation attempts to cause full disclosure, the typical individual gets his or her information long after the “professionals” received theirs and, more importantly, long after the critical time to take action on the information.

Years ago, before the “information age” investors bought shares for the long term and what happened on a quarter to quarter basis was not the driving force. Brokers advised clients to buy a stock and “just put it away”. It those days that was a good strategy. But, now the entire focus of the market is short term with little, if any, discussion on investing in a security for the long term. This short term focus is not beneficial to the typical individual investor but rewards the short term trading accounts.

Unfortunately, this is the environment within which individual shareholders are asked to vote their proxies. It is very difficult to come up with a plan to cure the negative governance and market problems but it may be worth the effort to try.

J P MORGAN CHASE LOSES $2 BILLION +

Astounding! J P Morgan Chase managed to lose $2 billion. But, whose money was it? Was it money belonging to the executives of the firm or the traders? Most probably not. How did they lose it? According to press reports it was “bets” gone awry. Focus on the word “bet”. That word appears in almost every media report describing the transactions that induced the loss. Yet, J P Morgan Chase has been a vocal opponent of the kind of financial regulation that might prevent these kinds of losses.

Reading the news stories underscores the view of many that Wall Street is a giant casino and that the players are driven by a casino mentality. The lines between investing and outright gambling have been blurred. High speed trades based on a wide variety of factors generally do not involve an in depth analysis of quality of the firms whose stock is being traded. The amount of time that traded shares are held can be miniscule. The admonition “don t fight the tape” would be the same as the admonition “don’t fight the dice” at the dice table but these are very short time strategies more geared to gambling than to investing.

When the trader is under pressure to deliver results the odds would favor taking more chances than would be taken if there were no pressure threatening salaries or bonuses. Would the investment model be different if the trader had a significant amount of his or her own money in the trade? Probably yes.

Imagine what would happen if there was an application for an IPO in a company whose business model was to take the investors money to Las Vegas and bet it on the tables even if the betting strategy was a hedging strategy. Would that kind of IPO be approved?

At various times the Federal Government has moved to outlaw internet gambling. That, some may say, is a sensible protection for the people who would not protect themselves. But, the policy says nothing of putting money into trading strategies that are pure and simply high speed gambling.

The individual trader using his or her own money studies and analyzes their trades because a trade that didn’t work out is money right out of their own pockets. That is the way it should be. The people have expressed a lack of confidence in the investment banks and that lack of confidence is earned. People are right to question a culture that seems to have lost sight of placing the interests of their customers and investors first.

IT’S PROXY TIME AGAIN

It’s annual report time again when stockholders receive their proxy materials and financial reports for the concluded year. The reports and proxy material are a true testament to the genius of the financial regulators and accountants but are usually unintelligible to the stockholders.

All of the rules and regulations governing full disclosure that are designed to provide “transparency” appear to only increase the complexity of reporting. It seems that most of the really important stuff is buried in the footnotes rather than highlighted in simple English in the report text. Financial reporting appears to be far beyond the comprehension of the typical individual investor requiring membership in the CPA Club or the financial analysts’ fraternity to understand. Even though directors are required to “sign off” on the annual reports and proxy materials it is inconceivable that those without specialized training really understand what they have “signed off on”.

Now that many companies are providing shareholders with an “advisory vote” on executive pay, the majority of proxy material (other than votes on directors) is taken up with a discussion of compensation that often is so complex that it is impossible to fully comprehend exactly how the proposals assure alignment of shareholder interests with the interests of the managers (executives). It seems that even when the share prices decline the executive compensation targets are met and the bonuses keep on coming. The performance targets can be designed in such a manner that even if earnings and share prices fall sufficient targets can be met to assure the payment of bonuses and grants of stock options.

There have been a couple of instances where shareholders upset the apple cart and voted NO on the advisory pay proposal. But, resistance to excessive executive compensation has been weak at best. There are possibly a handful of CEO’s that are actually totally responsible for the performance of their corporations but that is most likely not the case with the great majority. There may really be a few CEO’s who are worth annual compensation packages in the 8 figure range but it is doubtful that this is true of the majority. Has anyone ever wondered what would happen if on Monday morning the world woke up to the news that all of the CEO’s of the largest corporations had mysteriously died over the weekend? It is most likely that corporate business would just go on as it was on Friday under the capable leadership of a large cadre of other corporate executives thoroughly trained in the business. While it is possible that in a limited number of instances the loss of a CEO would be devastating to the corporate business such is probably by no means common to all companies. CEO’s have become America’s Royalty with all of the perks and trappings of regal life paid for by the shareholders. On the other side of the coin, the shares of corporations are really controlled by large institutional funds (pension funds, mutual funds etc) and not by the individual. Thus, those that control the votes are probably biased in favor of higher executive compensation.

The corporate “train wrecks” post 2008, in terms of share value didn’t appear to seriously disrupt executive compensation except in some instances where bailouts applied some brakes. The really dumb corporate decisions that caused a significant loss in shareholder value essentially went un-punished by the shareholders and the perpetrators of the dumb decisions kept their lavish bonuses.

Is it time for a new type of financial reporting that discusses the business issues and problems, as well as financial results with the shareholders in simple, intelligible language rather than in CYA language and footnotes that shareholders won’t comprehend? Is it time for proxy material to discuss exactly what the CEO has done and will be doing that set him or her apart from others in terms of earning the outsized compensation packages? Is it time to vote against the re-election of any director who was on the board at the time material business mistakes were made? Individual shareholders as distinguished from institutional shareholders lack any effective voice in dictating how the companies they invest in are run and report results. Is it time to change that?

HOORAY FOR RALPH NADER

The Wall Street Journal, on November 2, 2011, containing an opinion piece by Ralph Nader suggesting that it is time for a tax on speculation. It would be terrific if all members of Congress and the Treasury read that article and did something to move that idea along. The notion that a tax on speculation is appropriate is very worthy and the only question that should be the subject of debate is the form that the tax takes.

Last year, on this web page, it was suggested that programmed high speed trading destabilized the market while contributing absolutely nothing to GNP or economic prosperity. That point is even more emphatically made by the wild gyrations of the past few days induced by the Greek debt crisis. Individual shareholder investors were not leading the charge to sell both because they generally do not have a trader mentality but, more importantly, by the time they get the news inducing the rush to sell it is too late.

High speed trading has all of the ear markings of a “casino” game and the notion that it is gambling is well founded. It is strange that there is so much debate against internet gambling while high speed trading seems to be below the radar of the legislators.

The argument that the ordinary investor would bear the brunt of any tax through retirement funds or mutual funds is a very bogus argument. It would not take a financial genius to write a tax program that avoided any burden to the ordinary investor. Retirement funds and mutual funds should not be trading. They should be earning their fees by investment analysis and investment based on that analysis. If money managers are permitted to speculate with pension fund monies, why shouldn’t individual investors be permitted to play poker on the internet with their IRA or 401 K funds? That would make as much sense and the odds in a poker game are superior to the odds of accurately calling a market swing in an individual stock. The high speed trading that is taking place is not investing. It is betting that value will change within minutes after placing a buy or sell order. The average period of stock ownership in these high speed trading models has been indicated to be minutes not days. If a tax were to be applied to any trade where the position was held for less than one week, it is suggested that ordinary investors would be spared any burden. Further, if ordinary investor (as opposed to institutional investor) direct trades (not computer generated) involved less than $100,000, they could be exempted as well. This would keep the tax where it should be – on the speculators.

Some have argued that high speed trading activity provided liquidity to the market. That too is a bogus argument. The way in which the exchanges have traditionally worked provided adequate liquidity.

What individual investor shareholders should be concerned with is an exposure to excess volatility in the market induced by high speed trading that causes rapid swings in the value of their portfolios for no apparent real purpose beyond the ability of traders to make profits.

SHAREHOLDER’S VOTE ON EXECUTIVE PAY

It is Proxy time again but, somehow things just look a little different with so many companies now providing shareholders an advisory vote on executive compensation. It just seems like the proxy statement takes up an inordinate amount of space detailing the favorite subject of the executives – their compensation. Perhaps it has always been that way. But, completely absent in the proxy material that passed my way was any indication that executive compensation declined. The proxy materials, with some notable exceptions, seem to suggest that despite very meager share values relative to the highs before the crash, the executives are not suffering along with the shareholders. Total compensation packages for CEO’s in many large companies exceed 8 figures.
Redoing the formulas appears to be an exercise of setting the performance hurdles at a relatively low level to assure optimum bonuses rather than relating “bogies” to the sustained stock performance over the year.
Corporate executives are like many overpaid athletes who earn big paychecks even when turning in mediocre performances. Giving shareholders an advisory vote on pay may sound like a big deal but it will be nothing of benefit to shareholders until the large institutional shareholders band together and rein in excessive compensation and perk packages. But, it is all like the Wall Street salaries. In spite of all the bad press, the salaries and bonuses seem to just keep rising. The individual shareholder is a minor pawn in their game and appears to be treated as if they are lucky to be allowed to play. As corporations grow larger and larger the total executive compensation, as a percentage of overall expense is relatively small and like the ridiculously high audit fees are just accepted by the shareholders and the independent directors charged with looking out for the shareholder interests.

HOORAY FOR THE SEC

Last week, shareholders and former shareholders received a “legal” document from the Securities and Exchange Commissions which document was a “Claim form to claim a portion of a $150 million settlement from the Bank of America. The settlement arose out of the Bank of America failure to disclose certain information to shareholders involving the merger with Merrill Lynch.

There is absolutely no question that the Bank was guilty of ailing to disclose and that shareholders were “injured” by this failure. However, the Bank is an institution and doesn’t make decisions. The decisions are made by the bank executives and board of directors. The SEC, in fining the Bank of America $150 million received those monies from funds that would otherwise be available to the bank for the benefit of shareholders either through investment in improving earnings or distribution in the form of a dividend. So, in effect, the shareholders paid the fine and will get their own money back. That doesn’t seem like an equitable deal when the fine was supposedly a punishment for wrongdoing.

If the $150 million had to be paid by Ken Lewis, then CEO and his senior executives who participated in the decision or the Board of Directors who approved the proxy material, then a “punishment” of he real guilty parties would have been meted out. But, the “bad guys” (those who decided not to disclose) are not punished and the “good guys” (the shareholders) are the ones punished by paying the fine and, albeit getting it back in the settlement, are the ones “punished”.

Ken Lewis and his “team” destroyed the Bank of America for the shareholders by their idiotic acquisition of Countrywide and merger with Merrill Lynch. Ken Lewis and his “team” walked away with millions in bonuses and salaries over the years leading to his ouster. The SEC should have gone after that money and, hopefully other lawsuits will result in punishing Ken Lewis and his team for their complete mis management of an otherwise fabulous institution. In the meantime, the SEC should not earn any kudos for their manner of “punishing” the Bank.