The following article was printed earlier this year, but tells a very telling story of how big money interests circumvent the rules to acquire large stakes of companies in regard to option strategies. They do this in order to get a seat at the table and become a major player inside the company. We could be seeing a similar play here with CEMJQ, except not with options, but rather BONDS.
Why are CEMJQ's Bonds doing so well? A chapter 11 company with Bonds trading at premium above par value? Makes one wonder what's going on. This is pure speculation, but it is my opinion that we are seeing big money interests buying up CEMJQ's bonds and driving the prices up in order to have a seat at the table. Check the resurrection of CEMJQ's BONDS from their earlier pitfalls this year. A story is unfolding here, folks.
Please read the following and start connecting the dots...
Icahn, Peltz Used Morgan Stanley to Take Motorola, Heinz Stakes
By Miles Weiss
May 6 (Bloomberg) -- Billionaire investors Carl Icahn and Nelson Peltz are taking stakes in public companies through an options strategy employed by corporate raiders and challenged by regulators during the 1980s.
By using options contracts, often provided by the investment bank Morgan Stanley, Icahn, 76, and Peltz, 65, can invest in companies without actually holding enough shares to subject them to U.S. antitrust laws. In 1988, the Federal Trade Commission sued three clients of Bear Stearns Cos., including Donald Trump, for belatedly reporting that they made similar options deals before attempting hostile takeovers.
In the past three years, hedge funds managed by Icahn and Peltz have revived the practice without triggering FTC lawsuits. They used options to acquire millions of shares in Motorola Inc., H.J. Heinz Co. and Wendy's International Inc. Other investors took positions in Southern Union Co. and James River Coal Co. through options. The strategy avoids FTC-mandated filings that would tip off the targets and reduces the amount of cash needed.
``If you can build up a stake and launch a sneak attack, you have a huge strategic advantage,'' said Henry Hu, a corporate and securities law professor at the University of Texas Law School in Austin.
Icahn Capital LP and Trian Fund Management LP, the New York- based hedge funds run respectively by Icahn and Peltz, have used the options strategy to make initial investments in at least eight of their largest targets, according to filings with the U.S. Securities and Exchange Commission. The two have used these stakes to push for changes they say will increase share value, including stock buybacks, spinoffs and asset sales.
Both men and Mary Claire Delaney, spokeswoman for New York- based Morgan Stanley, declined repeated requests by phone, letter and e-mail to comment for this article.
Matched Options
The 1988 cases and the more recent arrangements by Icahn and Peltz both involved the use of ``matched'' put and call options. Call options are contracts providing the future right to buy stock at a predetermined price. Similarly, put options are contracts that give the right to sell shares at a set price.
In general, an investment bank would write call options on a stock for a client and then acquire actual shares in the open market. Simultaneously, the bank would purchase put options from the investor that obligate him to either buy the stock at its original price if the market value declines or reimburse the brokerage in cash for the difference.
Here's how the strategy worked last year when Icahn took a stake in Motorola, the world's third-biggest maker of mobile phones. In a proxy statement dated March 12, 2007, Icahn disclosed that he paid Morgan Stanley $184 million for options to buy 35 million Motorola shares at $13.50 each between Jan. 19 and 31, 2007. The stock closed between $18.31 and $19.58 during that period.
Icahn's Motorola Options
Purchasing the actual shares, a 1.4 percent stake in the Schaumburg, Illinois-based company at the time, would have cost $657 million, based on Motorola's closing prices in the last two weeks of January. Icahn would have had to put up about $329 million of his own money under standard margin requirements, or almost twice as much as he paid for the options.
``Carl is always trying to figure out the cheapest way to own stock with the least amount of risk,'' said Walter Blasberg, who worked for Icahn as an options trader in the 1970s. Blasberg is now vice president of alternative investment development at Conning & Co., a Hartford, Connecticut, money management firm.
On Jan. 30, 2007, CNBC reported that Icahn had acquired a 1.4 percent stake in Motorola and was seeking a board seat, based on an interview with the financier. The stock jumped 7 percent to close at $19.58.
`Parking the Stock'
Icahn purchased call options on 12.6 million more shares from Morgan Stanley during the first two weeks of February, paying $76 million. On the last day of that month, Motorola disclosed it received notice of an FTC filing by his funds.
The billionaire sold the call options back to Morgan Stanley on April 3. Exercising them would have brought his total outlay to $18.96 a share, including the cost of the options and the $13.50 exercise price. The stock closed that day at $17.67. Icahn reported purchasing 56.1 million Motorola shares on April 3, without disclosing the price or saying where he bought them.
``It has the same effect as parking the stock,'' said Kurt Wulff, an independent energy analyst who advised Icahn on proxy fights in the 1980s, when provided with a description of the matched options. Morgan Stanley and the other investment banks that provide the options to Icahn and Peltz ``appear to be facilitating a potentially unfriendly deal.''
FTC Posture
After a yearlong fight, Motorola said April 7, 2008, that it agreed to name two Icahn nominees to the board and solicit his advice on the mobile phone unit. Icahn, the holder of 6.4 percent of the company, agreed to end a proxy contest for four seats. His funds paid $2.08 billion for 144.56 million shares, or $14.41 each, based on a March 26 filing. The stock closed yesterday at $9.90.
The arrangement permits the hedge funds to delay triggering the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which doesn't apply to option holders until they decide to exercise the purchase rights. In 1988, the FTC ruled that these matched put- call agreements passed ``beneficial'' ownership of the underlying shares from Bear Stearns to its clients, making them immediately subject to the rule.
``We looked at it back in the 1980s and, rightly or wrongly, concluded at the staff level that this should not be allowed,'' said Jeffrey Zuckerman, director of the FTC's Bureau of Competition when the 1988 enforcement cases were brought. The agency staff revisited the issue around 2005 and ``concluded it's not a problem, and it has been used since then by various types of investors,'' said Zuckerman, who now works in the Washington office of the law firm Curtis, Mallet-Prevost, Colt & Mosle LLP.
Voting Rights
Roberta Baruch, deputy assistant director for compliance in the FTC's competition bureau, said in an e-mail that the agency has reviewed put-call options used during the past several years that don't transfer ownership ``to the same extent'' as those covered in the 1988 cases. ``It's certainly been a hot issue,'' she said in an interview.
Icahn and Peltz may not have any voting rights under the option agreements, a factor the FTC considers when determining whether a filing is necessary, said Sandy Pfunder, a former FTC attorney who helped write the Hart-Scott-Rodino rules and now works for the law firm Gibson, Dunn & Crutcher LLP in Washington. Moreover, when Morgan Stanley purchases stock at the same time it writes options for a hedge fund such as Trian, the firm may be seeking to reduce its own risk as opposed to stockpiling shares for the investor.
$63 Million Threshold
``Technically, Morgan Stanley is hedging a position,'' said David Krein, the president of DTB Capital LLC, a New York firm that advises hedge funds on structured transactions. ``Trian can decide later on down the road whether they want to take delivery of the shares'' or simply settle the contracts through cash payments, he said.
Passive investors, defined by the FTC as buying shares for investment only, can purchase as much as 10 percent of a company before coming under the antitrust rules. In contrast, active investors such as Icahn who are planning to influence management or seek control must make a filing when the value of their holdings reaches a dollar threshold, now set at $63 million.
On reaching that point, an activist investor must stop buying shares until receiving FTC clearance, which can take as long as 30 days. He must also notify the target. Some companies respond by bolstering anti-takeover defenses or disclosing the stake, triggering a run-up in the shares while the investor is awaiting FTC approval.
``There is always some group of investors interested in not having to file,'' the FTC's Baruch said. ``They don't want to tell the target, or they don't want to wait.''
Morgan Stanley's Role
The FTC rule in practice can force an investor to reveal a stake much sooner than the disclosure requirements set by the SEC. Icahn and Trian fully report their option holdings under the SEC rules, which require active investors to file a disclosure when their stakes reach 5 percent of shares outstanding.
Because the FTC rule is based on the dollar value of a stake rather than the percentage, it kicks in earlier for deals involving large companies. At current prices, for example, Icahn would be able to buy just 0.3 percent of Motorola before triggering the reporting requirements, compared with 5.2 percent of the Vancouver film company Lions Gate Entertainment Corp., one of his other holdings.
Peltz identified Morgan Stanley in regulatory filings as providing matched options for his initial holdings in Heinz and Tiffany & Co. of New York. Merrill Lynch & Co. in New York and UBS AG of Zurich provided such contracts on shares of Cambridge, Massachusetts-based Biogen Idec Inc., according to Icahn's filings, which also show that he obtained matched puts-calls on shares of BEA Systems Inc., a San Jose, California software company that was acquired by Oracle Corp. last month.
Wendy's, Kraft, Chemtura
In other filings, Peltz disclosed that he entered into matched option contracts -- without identifying the counterparty -- for much or all of his initial investment in Wendy's, Kraft Foods Inc. of Northfield, Illinois, and Middlebury, Connecticut- based Chemtura Corp. Morgan Stanley Capital Services Inc., a derivatives unit of the investment bank, was buying millions of shares in each company around the same time that Peltz obtained his options, according to SEC filings.
Hedge fund manager Thomas Sandell of New York has also disclosed the use of matched puts and calls to take stakes in companies such as Houston-based Southern Union Co. and Houston Exploration Co. Thomas Hudson's Pirate Capital LLC in Norwalk, Connecticut, entered put-call agreements with Merrill Lynch on 400,000 shares of Richmond, Virginia-based James River Coal Co. in January 2006, according to filings.
Wendy's Options
The FTC's Baruch said there are ``good financial and other reasons'' for using matched options that ``have nothing to do'' with avoiding agency rules. It uses less cash up front than buying stock, allowing hedge funds to increase potential returns and spread their capital among trading opportunities.
In 2005, Peltz and Sandell purchased 950,000 shares of Wendy's, the Dublin, Ohio, hamburger chain, for $45.8 million between Nov. 7 and 10, according to a filing the following month. That would have brought them close to the $50 million FTC reporting threshold in effect at the time.
On Nov. 11, the two hedge fund groups began buying options with a ``financial institution'' they didn't identify. By Dec. 8, Trian and Sandell had obtained call options entitling their funds to purchase 5.4 million Wendy's shares at an average price of $50 each until Jan. 27, 2006. The filings didn't disclose how much the entities paid for the options.
Shifting the Risk
Meanwhile, Morgan Stanley Capital Services raised its Wendy's stake to 7.59 million shares by the end of 2005, from 227,458 shares at Sept. 30, according to SEC filings.
Trian also sold puts entitling the financial institution to sell 5.4 million Wendy's shares to its funds at the same average price on Jan. 27. The options permitted the institution to shift the risk of a decline in the Wendy's stock to Trian's hedge funds.
On Dec. 13, the two fund managers disclosed their stake, composed mainly of the privately negotiated options, through an SEC filing. After receiving FTC clearance on Jan. 6, 2006, to increase their holding, the funds exercised options on Jan. 17 and purchased 5.4 million shares from the financial institution for $269.7 million, or about $49.79 each.
Morgan Stanley Capital Services later reported that its Wendy's stake declined to 2.01 million shares as of March 31, 2006. And on April 24, 2008, Peltz's Triarc Cos. announced it would buy Wendy's for $2.4 billion.
1988 Cases
In the 1988 cases, which didn't name Bear Stearns as a defendant, the FTC cited a rule barring transactions designed solely to avoid the agency's reporting requirements. In each case, the regulator said investors improperly delayed filing notices on matched option investments.
Trump agreed to pay $750,000 in civil penalties in April 1988 to resolve allegations tied to investments in Holiday Corp. and Bally Manufacturing Corp., both of which ran casinos that competed with his Atlantic City gaming operations.
First City Financial Corp., an investment vehicle for the family of the Canadian Samuel Belzberg, a former corporate raider, agreed to pay a $400,000 penalty related to an investment in Ashland Oil Inc., according to the FTC. Wickes Cos. paid a $300,000 fine linked to a hostile bid for Owens-Corning Fiberglas Corp.
Trump declined to comment. Neither Sanford Sigoloff, the former chairman of Wickes Cos., nor Belzberg returned telephone calls. In all three cases, the FTC said the settlements didn't constitute an admission by Trump, Wickes or First City that they violated the law.
FTC Comments
In June 2006, Bruce Prager and Hanno Kaiser, a pair of antitrust attorneys who worked at Latham & Watkins LLP in New York at the time, published an article in The Deal magazine stating that the FTC staff had changed its longstanding position requiring immediate disclosure of matched options. The agency responded in a June 29 letter that it had always reviewed such transactions case-by-case.
``Put-call agreements and other legal or business arrangements that allocate risk of loss and benefit of gain can raise a number of HSR issues,'' said Marian Bruno, assistant director in the FTC's premerger notification office, in the letter, referring to the Hart-Scott-Rodino act. ``Whether a particular transaction requires a filing will depend on the specific facts involved.''
To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net
Last Updated: May 6, 2008 00:01 EDT
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