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When
greed isn't good
Late
last summer, Charles Farrell, a retiree from Katy, Texas,
noticed something fishy with his $20,000 investment
in the stock of Roanoke-based Optical Cable Corp. Farrell,
who day trades stock, became suspicious when his shares
in the maker of telecommunications gear began dipping
substantially. "I wondered about it, but I thought
maybe it had something to do with the bad times in the
telecom industry," he says.
A few weeks later, Farrell learned the truth. Robert
Kopstein, Optical Cable's president, CEO and board chairman,
had stumbled into a personal financial mess. After the
company he had founded went public in 1996, Kopstein
had started playing the bull stock market, using shares
of his firm as collateral. He made some bad plays and
ended up owing millions in margin calls to six big brokerage
houses, including Merrill Lynch and Salomon Smith Barney.
To cover their losses, the investment firms started
unloading Kopstein's holdings in Optical Cable. Stock
tumbled from about $8 a share to $2 a share, before
settling slightly above a dollar. The firm had reported
weakened earnings, but Kopstein's fire sale was the
major reason for tanking the stock.
Farrell hit the roof. He filed suit in the U.S. District
Court for Western Virginia in Roanoke, accusing Optical
Cable and Kopstein of defrauding shareholders. Farrell
says his investment of about $20,000 that he made last
year has shrunk to about $2,000. "I felt that he
(Kopstein) didn't report the liability he imposed on
other stockholders by using his holdings as collateral.
If I had known that, I wouldn't have invested in the
stock." Neither Kopstein nor Optical Cable executives
could be reached for comment.
Sadly, this cautionary tale is a needed reminder of
the obligations of American executives. True, many have
become swashbuckling icons, such as John D. Rockefeller
or Bill Gates - highly self-confident individuals unafraid
of being called greedy as they go after the big win.
And when they make it big-time they often share the
wealth with the less fortunate. That, at least, is the
version according to American folklore.
In reality, though, executives have a fiduciary trust
with their fellow officers and shareholders. They must
play by the rules and make full disclosure of any personal
liability that might hurt their company's performance
and its stock.
Kopstein's case is curious since he has been a highly
regarded corporate official. Under his leadership, Optical
Cable grew from its founding in 1983 to become a major
player in the nation's telecom industry and a shining
star in the Roanoke business community. Thanks largely
to his performance growing Optical Cable, Kopstein's
net worth shot up to about $617 million. His salary
alone was $500,000 a year. Yet, Kopstein wanted more
and went to the stock market to get it.
Unfortunately for him, Optical Cable and shareholders
such as Farrell, the affair has soured. On Dec. 3, Kopstein
was fired as president, CEO and board chairman. Worried
about possible takeover attempts, the company has tried
to shore up shareholders' rights.
To
be sure, there are plenty of other stories of otherwise
competent and trustworthy top executives getting burned
when they mix personal stock plays with their own company's
nest egg. One Ohio CEO, for instance, got fried in a
stock margin call but was saved when his board agreed
to loan him $9 million so he wouldn't sell his holdings
and tank the company's stock.
Yet, shareholders have every right to fight back when
a CEO toys with their trust or uses their investments
as a personal piggy bank. Today, shareholders are getting
tougher, thanks in part to the Internet, which has democratized
stock trading by individuals and made full disclosure
easier and even more essential.
What's more, powerful institutional holders such as
the Teachers Insurance and Annuity Association College
Retirement Equities Fund (TIAA-CREF), are making sure
that corporate governance finally gets the attention
it deserves. TIAA-CREF, for instance, is on a tear trying
to get companies to dump antiquated poison pills and
other protections. These might have helped stave off
unwanted suitors in the 1980s, but more recently tend
to keep incompetent boards in place. Hopefully, their
efforts will expand. Boardroom behavior demands scrutiny.
Only then will the values of transparency and democracy
become realities in U.S. business and not just pleasant
myths.
Return to Virginia Business - January 2002 |
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