Thursday, July 19, 2007

"Megan's Law" for Activists in Japan

"Megan's Law" is well know in America, meant to warn the community of convicted child-molester felons potentially on the prowl in one's community. Apparently, once can sign up for "text-alerts" to one's cell-phone for such warnings.

Japanese courts have seemingly done the same to would-be rapist of Japanese corporations, Warren Lichtenstein and his Steel Partners Japan Fund, by branding them "Abusive Acquirers", and so permitting Bulldog management to fend off the undesired attention of their erstwhile suitors through dilutive warrant issuance. Tonkatsu, it would appear, will remain safely Japanese.

To suggest that the decision is a proverbial kick to Mr Lichtenstein's (and his investors) so-called crown-jewels would perhaps be an understatement, evidenced by the market's post-ruling response (see two price graphs above and left). And this price destruction appears to be BEFORE Steel's liquididation, unless they've used stealth OTC or derivative sales to cover their material sales.

Cassandra will admit to experiencing some schaudenfraude here. Not because she feels so strongly that "Abusive Acquisition" is altogether a bad thing (though I will admit to admiring some of the positive externalities that result from more harmonious capital-labour relationships and longer-term investment horizons), but rather because she feels that Steel Partners (and others using similar so-called fiduciary positions as "agents" combined with the economics of market impact in tandem with incentive fee accrual, is simply rather disingenuous when so-gamed, and in the process attempting to profit from something that IMHO is financial chiccanery at its most cynical. Well played? Yes, Steel has played well, certainly until this court decision.

But the real result of this decision, is that the market (and more importantly Steel's external investors) can now see the difference between the mark-to-market of their positions, and the likely "realizable value" of their positions should they be denied what they seek, and try to exit. The result is sobering, not least because said investors are likely to have already paid large incentive fees on the mark-to-market of the portfolio. I will admit it is not fraud on the scale of Lauder's "Lancer" fiasco, though one should take the opportunity to compare the similarities, at the same time as they consider the differences.


Charles Butler said...

It all makes for a curious circumstance when one can derive one's incentive fee from a price effectively created by... oneself's presence in the market. It doesn't seem substantively different from scams that invest in illiquid assets like stamps, and then price the collection themselves to keep the subscibers happy.

Welcome back. How were the Picos?

"Cassandra" said...

The fact of this is that largest marginal buyer de facto sets the price, but the transparency of an apparently large market of potential buyers and sellers gives the warm and fuzzy feeling of legitimacy (not accorded to stamps of other illiquid assets).

However, the fact that one owns 10% of the shares outstanding in real life equates to something approaching 30% of the float and an even larger percentage of the amount that can be discretionarily traded without creating a large tax event (at least in Bulldog's case). THAT is a lot of power to dictate the prevailing price and power that few can resist using to dramatically inflate the price to their mark-to-market benefit, especially where incentive fees are accruable in a sticky manner. To put it into perspective, SPJF's position of 1,770,000 shares of something that in their absence trades an average of 16,000 per day implies 110 trading days (6 calendar months) of volume where they might be 100% of volume. Taking into account that one is typically 25% of volume (generously speaking) this is well over a year in the absence of someone making a block bid, the co. itself doing a buyback, or selling to another trade buyer, all presumably at a price far below (as it was in this case) the previously prevailing market price.

Following LTCM I have spoken at length to the senior audit partners at several of the big-8 firms as to why they harass me and my fund with qualifications about our financial statements and their liability, while their audit of, for example, SPJF would barely make a mention , footnote or for that matter try and take a stab at the potential market impact of transacting upon the value of the portfolio as and when the IM attempts to liquidate some of all of the positions. This was Lancer's folly (as well as Sacane's Durus'), but the audit firms don;t even want to touch that one. The result is an investor looks at his quarterly or annual NAV and says "Wow I've made 25%!!", not understanding that it was generated by the IM's market impact in acquiring more stock of the same with subsequent investors investors money, in classic Ponzi fashion. Some like Vinik, and Druckenmiller manage to generate subsequent impact in the context of the liquid market, AND MANAGE TO EXIT at higher avg prices then avg entry prices. I am waiting to see what SPJF achieves in terms of its average exit prices (ex-market movement) to see - in the end - their true prowess.

I actually wasn't in the Picos this time (though I've been through then & cycled them before - resting in Llanes for a few before), but in more northernly climes where, crazily enough it snowed!

Charles said...

Stamps sure felt warm and fuzzy to these folks, a few of which I know...

(Poke around the page til you find the 'Spanish Stamp Scandal' headline)