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1. No Houlds Barred
The feds will take their books raw, thank you very much.
That was the message out of the AIG (AIG) - Get Report probe this week. A former reinsurance executive, John Houldsworth of the General Re unit of Berkshire Hathaway (BRKA) , pleaded guilty to conspiracy and agreed to cooperate with investigators. The accounting inquiry already has led to longtime CEO Hank Greenberg's ouster.
The Securities and Exchange Commission and the Justice Department allege Houldsworth helped AIG pad its numbers through false reinsurance deals. "Houldsworth and others helped AIG structure two sham reinsurance transactions that had as their only purpose to allow AIG to add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001," the SEC said Monday.
The SEC complaint details a November 2000 phone call in which the executive discussed the sham reinsurance deal with a colleague.
"Yeah, I mean as you say, if there's enough pressure on their end, they'll find ways to cook the books, won't they?!" Houldsworth says. "It's no problem there, it's up to them! We won't help them to do that too much. We'll do nothing illegal!"
Talk about famous last words.
To view Colin Barr's humorous video take on the cooking going on at AIG and General Re, click here
2. Box Score
Just because you're part of the solution doesn't mean you can't be part of the problem, too.
The New York financial services giant has long trumpeted its efforts to help customers deal with the loss of key information such as Social Security numbers. "Our team of Identity Theft Solution Specialists provides personal support and assistance through the process of re-establishing your credit," the company says on its Web site.
But this week Citi revealed that records on 3.9 million CitiFinancial customers were lost in a box being shipped to a credit agency.
Of course, it wasn't all Citi's fault. The company blamed shipping giant
for losing the box. But Citi also admitted that the act of sending unencrypted tapes through the mail also leaves something to be desired. "Beginning in July, this data will be sent electronically in encrypted form," Citi said in its statement to users.
Of course, just last month
had similarly mislaid a box full of tapes full of personal data. By coincidence, around the same time, UPS started a contest encouraging small businesses to show how they think "
out of the box."
There's an idea: Don't put the tapes in the box to begin with.
investors are getting reacquainted with that old sinking feeling.
The Washington, D.C.-based Internet service provider started the week on a nice spring run. Languishing below a buck in March, the company did a 1-for-20 reverse stock split that was followed by a furious rally. Cogent shares reached $28 and change on a postsplit basis in late May, even as Internet access prices remained soft. Shares fetched $22.28 at the close Friday.
All that changed Monday, when Cogent set plans to raise money by selling stock. The company said it would try to raise $75 million through underwriters led by Lehman Brothers. On Tuesday, the company said it would settle for $60 million -- by selling 10 million shares at the bargain-basement price of $6 each.
Now, below-market prices are hardly unusual in big stock placements. Even highly liquid names like
tend to accept discounts when
moving millions of shares at once. For outfits like Cogent that have a thin public float and little institutional following, the drop can be steep indeed.
Even so, "I've never seen a stock take a 75% haircut to get a deal done," a source told
Scott Moritz. Cogent shares plunged 53% Tuesday and another 28% Wednesday.
CEO David Schaeffer said he knew ahead of time the pricing would be tricky. "It was difficult for us to understand what the correct price was," he said in an interview Thursday. Still, wasn't he surprised that investors wanted to pay barely a quarter of the market rate?
"Surprised is the wrong term," he said. Calling himself a "perennial optimist," he did allow that he "hoped we had created more shareholder value" than the $6 price tag would indicate. But, Schaeffer added, "The people who have the checkbook set the price."
That's a concept Cogent holders are all too familiar with by now.
4. Sounds of Silence
Silence wasn't golden on Wall Street this week.
First, investor Edward Lampert's
posted quarterly numbers. Under Lampert's stewardship, of course, Sears has
famously declined to indulge analysts with monthly same-store sales reports, regular earnings and sales guidance or even a quarterly earnings calendar.
Sears' latest report wasn't bad, going by
Lampert's preferred metric: Pro forma earnings before interest, taxes, depreciation and amortization rose to 3.2% of sales in the latest quarter from 3% a year ago. Still, the stock -- which has doubled in value over the last year -- fell 9% Tuesday, as investors focused on other data.
isn't going as far as Lampert, though it too is leaning toward saying less is more. On Thursday, the New York cosmetics giant put an end to its midquarter updates.
Avon looked at its own disclosure practices and those of its peers and concluded that the midquarter updates weren't necessary, spokesman Victor Beaudet says. He adds that Avon will continue to provide guidance when it reports quarterly numbers. Still, Avon shares fell 5% Thursday.
Ironically, Avon made its move on the very day that many investors were eagerly awaiting chip giant
own halftime report. Of course, Lampert has said he believes investor relations efforts can "distract and detract from accomplishing our fundamental objective of creating value for all our owners."
Go figure. Some people seem to welcome the distraction.
5. Train of Thought
Plans for driving
forward haven't been hard to come by lately.
In Wilmington, Del., chief Rick Wagoner used the annual meeting to map out four key points including
25,000 coming job cuts. In Los Angeles, Kirk Kerkorian's Tracinda raised its GM stake to 7.2% from 3.9% through a tender offer that
scared off some short-sellers.
And in New York, followers of former presidential candidate and mail-fraud felon Lyndon LaRouche told anyone who would listen that it's time for a congressional bailout.
LaRouche's followers made their latest appearance on Wall Street on Tuesday. A few times a year they set up shop outside Federal Hall, handing out political pamphlets and occasionally heckling passers-by with questions like, "How's the recovery going for you?"
Of course, LaRouche believes the U.S. economy is on the verge of collapse. So the execs at GM and rival
have it all wrong. Where they want to build better cars and cut costs, LaRouche sees a "fascist 'solving' of financial crisis by ripping out production and gouging labor."
The answer, his
newspaper reports in its May 30 issue, is "a special kind of federal receivership" aimed at saving the nation's "machine-tool-centered labor-force." Why, with a shift out of financial speculation, the U.S. could refocus the auto industry on crucial infrastructure projects like magnetic levitation trains, LaRouche indicates.
Now there's a man who stands by his convictions.
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