Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

This public program was initiated in collaboration with The Conference Board Task Force on Corporate/Investor Engagement and with Thomson Reuters support of communication technologies. The Forum is providing continuing reports of the issues that concern this program's participants, as summarized  in the January 5, 2015 Forum Report of Conclusions.

"Fair Access" Home Page

"Fair Access" Program Reference

 

Related Projects 2012-2019

For graphed analyses of company and related industry returns, see

Returns on Corporate Capital

See also analyses of

Shareholder Support Rankings

 
 
 

Forum distribution:

Short term stock pumping incentives for "long term value" sales pitch

 

Source: Wall Street Journal, October 2, 2014 article

THE WALL STREET JOURNAL.  |  MARKETS


Markets

Activist Funds Aren’t Sharing the Ties They Have to Advisers
Investor Casablanca Made Deal for Advice on Cliffs Natural Resources but Didn’t Disclose It

 

By Susan Pulliam and Juliet Chung

Oct. 2, 2014 7:00 p.m. ET

Some activist investors have agreed to share trading profits with small-fry players who bring them stock ideas—but they aren’t always disclosing these financial ties.

 

 

Consider the activist campaign involving Cliffs Natural Resources Inc., an iron-ore miner. Activist consultant Michael McNamara last year pitched the idea of launching a Cliffs campaign to Casablanca Capital LP, according to people familiar with the matter. Casablanca is an activist hedge fund co-run by Donald Drapkin, a former lawyer of high-profile investor Ronald Perelman.

Casablanca built a stake of about 5.2% it disclosed in January. In exchange for his idea, Casablanca agreed to pay Mr. McNamara’s firm as much as one-third of the hedge fund’s profits on the stake, according to people familiar with the matter and a regulatory filing by Mr. McNamara’s firm.

Casablanca didn’t disclose these ties in the Cliffs case, according to a review of its regulatory filings. A regulatory rule requires investors that acquire a stake of 5% or more in a company to describe any arrangement with another party that includes guarantees of profits, divisions of profits or losses, or other understandings related to the company’s securities.

Mr. Drapkin referred calls to a Casablanca lawyer, David Rosewater, who declined to comment on any profit-sharing agreement. Mr. Rosewater said: “We are confident that Casablanca has made all appropriate disclosures in this matter in accordance with applicable law.”

A Securities and Exchange Commission spokesman declined to comment, as did a spokesman for Cliffs.

At issue is an SEC rule requiring investors to tell the public about details of company stakes of 5% or more.

Disclosures in so-called 13-D filings are closely followed by investors. A recent study by research firm S&P Capital IQ showed that the trading volume of stocks targeted by activists in the past decade jumped by an average of 40% from its typical volume on days when disclosures were made.

Activist investors typically buy big stakes in poor-performing companies and push for changes they hope will cause the stocks to rise.

In 2013, activist funds on average produced hefty returns of 16%, according to industry research firm HFR. That has helped attract a flow of investor money. The number of activist funds rose to 72 through the first half of this year, from 52 a year earlier.

Lawyers and investors say that, increasingly, small investors who tag along with activist investors are bringing them ideas in exchange for a cut of the profit. One of the reasons they cite for the trend is that, while the number of activists funds has grown, the number of good investment opportunities hasn’t.

In the Cliffs case, Mr. McNamara’s firm, ROR Capital LLC, disclosed the outlines of the arrangement with an unnamed client in a filing with the SEC in February 2014. The filing didn’t name Casablanca or Cliffs, but a person close to the situation says the client is Casablanca and ROR’s cut of the profits is tied to the performance of Casablanca’s Cliffs investment, as well as any other of Mr. McNamara’s ideas that Casablanca uses.

In the filing, ROR said it stands to receive an “incentive fee” from a “client” that could equal up to 33% of the client’s profits.

ROR—a two-man shop co-founded by Adam Seltzer, a former corporate adviser—didn’t identify its client in the filing but said it “acts solely as a consultant to another investment adviser…providing the client knowledge of the metals and mining sector.”

Andrew Freedman, a lawyer who represents activist investors, says he believes Casablanca should have disclosed the profit-sharing arrangement with ROR if it is an agreement tied to a rise in Casablanca’s stake in Cliffs.

Though Casablanca didn’t publicly disclose the arrangement with ROR Capital, it has made other disclosures related to its Cliffs campaign.

On July 29, Casablanca, which managed about $500 million at the end of February, announced it had won the six Cliffs director seats it had been seeking, a majority of the board. Casablanca’s news sent Cliffs stock up; it closed with a 6.2% gain.

The stock is down 62% this year, closing Thursday at $10 a share. Casablanca remains in a losing position on Cliffs, having spent an average $25.39 a share to assemble its position, according to a regulatory filing.

—David Benoit contributed to this article.

Write to Susan Pulliam at Susan.Pulliam@wsj.com and Juliet Chung at Juliet.Chung@wsj.com

 

Copyright ©2014 Dow Jones & Company, Inc. All Rights Reserved.

 

 

This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.