Carnegie Investment Management's
allegedly bogus offer to buy
shares pulled in an investing spectrum ranging from naive individual investors to Wall Street powers and pension funds.
Carnegie's solicitation netted about 2.5 million Mattel shares from companies such as
, as well as individuals who expected to get more for their Mattel shares than they could in the market.
With Mattel shares beaten down to about 13 because of management turmoil and losses associated with its ill-fated acquisition of
The Learning Co.
, Carnegie on Nov. 1, 1999, issued a so-called mini-tender offer for 11 million Mattel shares, or 3.5% of the company. Then it audaciously raised its offer to 15 3/4 three weeks later.
Investors, Mattel shares in hand, came running for the rare opportunity to get a premium price for a stock clearly in distress. Instead, they allegedly got nothing.
Carnegie now is in Chapter 11 bankruptcy proceedings, and some of its creditors allege that
, its Philadelphia-based information agent, dodged and ducked investors who had tendered more than $30 million worth of Mattel shares. In several lawsuits, they say Carnegie, which creditors charge is run by LMC's Hubert and Jeffrey Leach, deposited the shares in an account at Boca Raton, Fla., brokerage
First Colonial Securities
and used them as collateral to finance a margin-propelled, tech-stock trading binge.
Callers to LMC Assets were directed to call Carnegie's "legal team" at another number. The attorney, Vaughn Booker, didn't return calls for comment.
Carnegie's total liabilities are $31 million, and about $20 million of the tendered Mattel shares is sitting in an account at
, First Colonial's clearing firm.
Almost comically, when the solicitation appeared on the wires in November, none of these investors apparently thought to question Carnegie's offer to buy Mattel shares. The wire services wrote stories, and Mattel's board of directors, fearing a hostile takeover, even took steps to make it more difficult for a hostile bidder to acquire the company, according to news reports a few weeks after the tender offer.
One reason the audacious plan worked -- up to a point -- was its novelty. "This is a new one. I don't remember anything like this," says Richard Ryder, the editor of the
Securities Arbitration Commentator
and one of the nation's leading experts on securities law.
Either way, it's a cold-blooded lesson on the potential danger of mini-tender offers, that is, offers for less than 5% of the shares of a company. "This is bold, but it was also careless for a lot of the investors," says New York securities attorney Aegis Frumento of
. "Once you turn over the stock, they can do anything they want. You have to make sure they don't get your stock before you get their money."
Having secured the more than 2 million shares of Mattel, and stock from a mini-tender of 2.2 million shares of similarly beleaguered
Fruit of the Loom
in mid-October, Carnegie embarked on a trading spree using the unpaid-for Mattel shares as collateral.
It made million-dollar bets on almost every highflying Nasdaq name on the tape:
, according to Carnegie brokerage statements in the bankruptcy filings.
And Carnegie did it mostly with money borrowed from PaineWebber. In January, according to Bankruptcy Court filings, Carnegie's margin loan balance as of Feb. 21 was $10.4 million, and in less than 60 days, the company had been charged interest of more than $79,000. Carnegie made more than 60 transactions in Nasdaq stocks in February.
But by Feb. 29, the value of Carnegie's account had fallen to $18.2 million from $23 million and it owed its broker $7.7 million.
Its plan essentially came undone in late March when PaineWebber ordered Carnegie to pay investors. PaineWebber sold roughly 500,000 of the 2.4 million shares that were in Carnegie's account at First Colonial after demanding Mattel investors be paid for their shares.
Carnegie then filed for bankruptcy.
LMC Assets is run from a nondescript Philadelphia office in which the directory lists it along with LMC Management Consultants, LMC Property Management and other firms with the same name permutation.
Jeffrey Leach is listed as the representative of Carnegie Investment Management on an
Internal Revenue Service
W-8 form as a foreign citizen with control over a U.S. brokerage account, according to the Bankruptcy Court filing in the
U.S. Bankruptcy Court in the Eastern District of Pennsylvania
A May 2 court filing, though, lists Ira Johnson of Pittsburgh and Russell Lewis of Glassboro, N.J., as Carnegie's directors, and Jeffrey Leach as the guaranty member.
On seven occasions between Nov. 29 and mid-March, Deutsche Bank representatives tried to reach either LMC Assets or Carnegie to obtain payment for the firm's shares, according to Deutsche's suit brought in
U.S. District Court for the Southern District of New York
Calls to LMC were handled by Hubert and Jeffrey Leach, and calls to Carnegie's Cayman Islands telephone number were bounced to LMC's Philadelphia office, the suit says.
Securities and Exchange Commission
doesn't require those making tender offers for less than 5% of the outstanding shares to file anything with the SEC. It does, however, warn investors to take the utmost care in responding to these so-called mini-tenders.
Web site, the SEC warns that unlike tender offers for 5% or more of a company's outstanding stock, mini-tenders are not subject to the filing, disclosure and procedural requirements of the federal securities laws and regulations.
Among other things, the SEC recommends that before accepting such mini-tender offers, stockholders should look at the market price and tender price, consult with their brokers or financial advisers and determine where to get the best price if they want to sell. The SEC warns investors not to assume that a premium over the market price is being offered for their shares.