margin call selling, involuntary stock sales, Sumner Redstone

Market Downturn Spurs Involuntary Stock Sales

October 15, 2008 08:20 PM
by Anne Szustek
Business executives admit to selling large stakes in their companies to cover debts to financiers in the latest wave of forced stock sales.

Businesses Dump Securities Stakes to Cover Themselves

Sumner Redstone, chairman and majority shareholder of theater chain National Amusements Inc., announced on Monday that the company had sold $233 million in Viacom Inc. and CBS Corp. stock to meet obligations associated with $1.6 billion in National Amusements debt. CBS’ stock has dropped 67 percent since the beginning of the year. Viacom stock has skidded 51 percent over the same period to close at $20.80.
National Amusements was quick to reiterate that the plunging stockmarket was the reason for the sell-off, rather than a family dispute. Rumors have been circulating of a growing rift between Sumner Redstone and his daughter, Shari Redstone, who is the president of National Amusements.

Pete Nicholas and John Abele, cofounders of medical-equipment manufacturer Boston Scientific Corp., sold a total of 31 million shares through last Friday to “collateralize a loan,” according to a company statement cited by The Wall Street Journal.

And executives of some energy companies, which have taken a wallop as the price-per-barrel of oil has dropped on the back of credit crunch concerns, have also had to sell shares meet loan obligations.

On Friday, the heads of both Chesapeake Energy Corp. and XTO Energy Inc. had to sell sizeable stakes in those companies after receiving margin calls. XTO CEO Bob Simpson divested 26 percent of his stake, or 2.8 million shares to satisfy “all considerations for debt, personal interests and family liquidity.” According to The Wall Street Journal, the stock sale generated $100 million.

Additionally Bruce A. Smith, CEO, president and chairman of San Antonio-based oil refiner Tesoro Corp., sold off 251,100 shares, or 14 percent of his holdings, to satisfy a Goldman Sachs margin call.

When company executives sell off shares in an emergency bid to shore up cash, it can stir trepidation among shareholders and spark a dash to dump shares even further.

Background: Margin call selling

Margin calls likely played a major role in last week’s reign of terror on Wall Street. Because margin calls are private transactions between banks and hedge funds or corporate executives, it’s difficult to pinpoint exactly how many investment houses called in loans. It can shock shareholders when they learn a significant amount of insider holdings in the company they own gets dumped in order to meet loan obligations.

The term margin comes from the minimum amount an investor must put up towards a purchase: one-half of the stocks’ purchase value, as stipulated by the Federal Reserve. From that point forward, an investor must maintain at least one-third of the value of the loan; some brokerages require even more particularly for risky securities.

"I believe that the predominant selling will be among hedge funds themselves and executives who control their own companies," Seymour Zises, the head of wealth management firm Family Management Corporation, was quoted as saying in the International Herald Tribune.

Statistics show solid growth in margin debt from late 2002 to 2007—peaking at $381 billion in July 2007, just before markets reached all-time highs. This amount was down to $292 billion by August 2008.

Elsewhere, there are calls within Australia to enforce similar reporting rules on margin debt after major companies trading on Australian markets had to sell off massive amounts of shares to settle margin costs.

Historical Context: Bernie Ebbers and the WorldCom scandal

Margin calls were one factor in the downfall of former WorldCom CEO Bernie Ebbers. Ebbers held a significant amount of WorldCom stock that was purchased on a margin to fund his other business ventures, including timber and real estate.

Concerns about sales by Ebbers, on top of a proposed merger between WorldCom and Sprint that was abandoned after U.S. and European antitrust authorities voiced concerns, negatively impacted WorldCom’s share price.

When his company’s shares dropped low enough to cause margin calls from brokers, WorldCom’s board of directors were persuaded in 2001 to lend Ebbers funds to cover his Due to the discovery of fradulent accounting, which ultimately led to the company’s bankruptcy—and prompted the passage of the Sarbanes-Oxley Act of 2002, overhauling accounting law.

Reference: Sarbanes-Oxley Act of 2002


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