Extortion on Wall Street

By DAVID MOON, Moon Capital Management
June 5, 2005

As a result of a recent court approved agreement, a number of former Clayton Homes shareholders have an opportunity to complete a bunch of paperwork, submit a claim and, if their claim is approved, receive a check totaling about 10 cents a share. I'm sure Knoxville will blossom as a result of this economic windfall.

As almost always happens in these types of cases, this shareholders' litigation resulted in little for the shareholders and a lot for the litigation.

When Warren Buffett and Berkshire Hathaway purchased Clayton Homes in 2003, some Clayton shareholders believed takeover price was too low. (I was not among that group, by the way.) Some shareholders grumbled to their brokers or barbers. Some called local Clayton executives and complained. Some went to the shareholders' meeting and plead their case.

And of course, some disgruntled shareholders handled things in the good ole' fashioned American way: they filed a lawsuit.

Using the Denver Area Meat Cutters and Employees Pension Plan as the plaintiff, a group of attorneys filed suit to stop the acquisition. When the judge denied the request to block the transaction, the plaintiffs sought an unspecific amount of damages, alleging that the takeover price was too low and the shareholders had been harmed.

Based on the size of the agreed-to settlement, the lawsuit had nothing to do with reparations for shareholders. These types of suits never do. At first, the suit was about extorting money from Warren Buffett. If someone with a big enough bullhorn could make a nuisance claim about the takeover price being too low, maybe the billionaire would pay some chump change to make the irritation go away. However, Buffett knows the Wall Street equivalent of what the folks at the CIA and the NSA have always known: once you negotiate with terrorists you just encourage more terrorism. Buffett refused to budge on the price.

It is not uncommon for a law firm to file suit against a company like Clayton, then later offer to withdraw the suit if the defendant is willing to pay the firm to go away. If you've ever watched the Sopranos, this is called protection money. 'If you pay me, I'll leave you alone and you won't see me no more. If you don't take care of me, I'm going to keep suing your butt until a court gives me some dough. I'll say I'm doing it to help the poor little shareholders. Capisce?'

Almost two years after the completion of the acquisition, the plaintiffs were awarded $5 million. The attorneys who represented the Denver pension plan get $1.6 million of that, leaving the shareholders $3.4 million, or about 10 cents per share. Instead of getting $12.50 for your Clayton shares, you get about $12.60. And you had to wait two years ' and fill out a bunch of forms ' to get the last dime.

Tell me again how this was about the shareholders and not the attorneys. I no caspisco.

* * * * *

A few weeks ago I referred to Rome and Leningrad as 'famous Greek cities.' The sentence was intended as satire. Please forgive me if I ruined your vacation or high school geography exam.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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