Institutional Investor's Alpha Magazine - April 2008 - (Page 14)

grown a lot in 2008,” Steinberg says. “We’re looking to grow our business. A lot of our competitors are not in a growth mode.” The ﬁt between Charlotte, North Carolina–based BofA and its prime brokerage began to fray long before the January sale announcement. Former CEO Stephan Vermut left to start his own shop, Merlin Securities in San Francisco, in 2003, taking a number of employees along. COO Glen Dailey defected to Jefferies & Co. with ﬁve colleagues — more followed — in early 2006. In October 2007, Christopher Pesce, global head of prime brokerage, left. The acquisition of a U.S.-based prime broker would be key to BNP’s growth plans, as its current unit is only Europe-based. It might be a bit of a challenge, however, to persuade U.S. hedge funds to do business with a French bank. BofA’s small, independent, entrepreneurial hedge fund manager clients are more relationship-driven than bigger, institutional investors, who care more about access to capital and securities. BofA, the biggest U.S. retail bank, is dumping the prime brokerage as part of a broader restructuring aimed at scaling back its investment banking business — “I’ve had all the fun I can stand in investment banking” is how CEO Ken Lewis famously put it last fall — and focusing more heavily on its core retail franchise. The bank is in the process of buying Countrywide Financial, the troubled mortgage lender, for $4 billion. The sale is expected to close in the third quarter of 2008. Before Bear Stearns, JPMorgan had emerged as the leading bidder against two other suitors who had reportedly begun the due-diligence process: Barclays Capital and Fidelity Investments. — Frances Denmark UPDATE Rail Wars hat began as a nas t y power struggle bet ween the activist hedge fund firm Children’s Investment Fund (UK) and its latest target, U.S. railroad group CSX Corp., has escalated into an ugly court battle in a case that holds broad signiﬁ cance. If CSX prevails, it will be a rare win for an executive team faced with a well-organized group of hostile shareholders, and activist investors everywhere may have to rethink strategies for seizing control of corporate boards. TCI’s effort against CSX started when Christopher Hohn, the hedge fund’s 41-year-old founder and managing partner, personally went after the CSX management team, including CEO Michael Ward. In an October letter to CSX’s board, Hohn said Ward and his team were undisciplined spenders who didn’t understand the economics of the business. In December, London-based TCI banded with such like-minded investors as New York–based 3G Capital Partners to nominate five directors, including Hohn, to the rail company’s board (see Alpha, December 20 07/ January 2008). Unbowed, CSX sued TCI in the U.S. District Court for the Southern District of New York on March 17. The complaint alleges that TCI and 3G violated securities regulations by using swaps and swap arrangements to avoid making outright stock purchases, thereby evading filing requirements, to build up an early, undisclosed position in W the rail group in excess of 5 percent. According to the suit, Snehal Amin, a partner in TCI, told CSX executives in February 2007 that “TCI owned 14 percent of CSX,” ten months before the ﬁrm disclosed to the Securities and Exchange Commission that it had a position in the group, instead of within ten days, as required by law. CSX, which is based in Jacksonville, Florida, and operates an extensive network of freight lines and port connections in the eastern U.S., asserts that TCI and 3G used “sophisticated derivative transactions” and secretly conspired “to change or inﬂ uence control of CSX by acquiring a large stake in CSX while evading the reporting requirements of the securities laws.” Not to be outdone, TCI this month ﬁ led a counterclaim categorically denying the allegations and asserting that the rail company had sought to prevent shareholders from “even considering proposals that would strengthen CSX’s corporate governance procedures.” It added that CSX directors had gone “to extraordinary lengths to entrench themselves in their current positions,” including withholding information from shareholders and “enriching themselves by setting certain ‘springloaded’ stock grants for insiders while in possession of material nonpublic information.” Neither side would comment, and CSX shareholders will have much to decipher when electing new directors in late June. — L.A. No Don Quixote, He I f you think Phillip Goldstein is tilting at windmills in challenging the federal ban on hedge fund marketing, think again. Goldstein is the guy who led the successful fight in 2006 against the requirement that most hedge funds register with the Securities and Exchange Commission. The very name of Goldstein’s hedge fund ﬁrm, Bulldog Investors, seems an extension of his dogged persona. So is his new cause, which stems from a February 2007 citation by the securities division of the ofﬁce of Massachusetts Commonwealth Secretary William Galvin. The division charged Goldstein with a violation of state securities laws because he used a Web site to disseminate information about Saddle Brook, New Jersey–based Bulldog, which has about $500 million in assets under management. Visitors to the Web site were allowed access to some details about Bulldog if they checked a box agreeing that they understood the site was for “information purposes only” and not an invitation to invest. Goldstein says the complaint is a case of sour grapes prompted by an unrelated business dispute with a Massachusetts resident who sought revenge by reporting the Bulldog site. “As strongly as I believe in this, it wasn’t something I chose,” he says. In December, Goldstein lost his motion for a preliminary injunction against the division, but the judge left the door open for further argument. A spokesman for Galvin’s ofﬁce declines to comment. In the interim, Goldstein has pushed the issue at the SEC, where he has lobbied for lifting the federal ban, a change that would in all likelihood be adopted by the states, which typically model much of their investment- 14 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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