Friday, January 26, 2007

WSJ "How Borrowed Shares Swing Company Votes" by Kara Scannell

"SEC and Others Fear Hedge-Fund Strategy May Subvert Elections" (intro only is free - full article is subscription only)

If you have access to the whole story, it should concern you. "In some cases, the strategy has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does -- without their ever having to own any stock themselves." Yes, the regulators are interested. The issue seems most likely to succeed with a small-cap stock, but who knows? Buy a copy or go to your library.

What does it take to get someone to dust off a serious word: Manipulation.

One possible remedy in the article: outlaw voting by borrowers of shares. Surely the hedge funds and some lenders will argue this is not feasible; I will say of course it is.

To short a company's stock, then borrow more shares from institutional shareholders or through brokerages, and then vote in ways to negatively affect share prices, then rake in the money -- well, to the extent that this actually is a fair description of the practice -- that is just corrupt. I don't care if it is arguably legal (for now,) it is corrupt.

For an institutional shareholder, a mutual fund or pension fund to allow its shares to be borrowed by entities presumably attempting to negatively impact the value of those shares is a curious kind of stewardship. The "rental income" from the shares does not seem likely to be equal to the possible loss in value, or the hedge fund or other party doing the "empty voting" as the practice is called, would not be doing it! The article mentions that one mutual fund house, Lord Abbett, has scaled back its stock lending, and that Calpers and some other large pension funds have put some limitations in place also. Good!

The article suggests that brokerages and banks make about $8 billion annually from lending shares, and the institutions make an unknown amount. here's the link to the bit of the story on WSJ Online: - Login

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