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A Short Seller Sheds Past to Help Lead Coca-Cola |
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Written by Administrator
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Friday, 22 December 2006 |
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A top executive sells short 100,000 shares in his own company a few hours before the company announces weaker profits than predicted.
The bad financial news for Coca-Cola Amatil, Ltd., a regional bottler in Sydney, Australia, sends share price tumbling 12 percent the next trading day and 23 percent over the next several days.
The executive, Muhtar Kent, in charge of Amatil's European division, rakes in a nice profit when his short position is closed out.
Insider trading? The Australian Securities Commission looked into it, declined criminal prosecution and struck a civil settlement. The executive disgorged his profit of $260,000, plus $30,000 to help pay for the investigation, with which he had cooperated. Kent denied he traded on inside knowledge.
In a comeback that could only occur in this post-post-Enron period, Kent is back. Having resigned under pressure from Amatil almost a decade ago, he was hired by Coca-Cola Co. in 2005 and promoted this month to president, chief operating officer and a leading contender for chief executive officer for Coca-Cola.
How did someone who left in disgrace a decade ago return to become the No. 2 executive in the world's largest soft-drink maker?
``This matter was thoroughly investigated and conclusively resolved by the ASC a decade ago and widely reported on in many publications at that time, and since,'' Coca-Cola CEO Neville Isdell said in a statement.
`An Honest Mistake'
``The board and I, guided by outside counsel, carefully reviewed the matter, and we are satisfied that it was the result of an honest mistake.''
Perhaps it was just that. No doubt Kent did need to diversify his portfolio, which contained only Amatil stock options and Coca-Cola shares. And maybe he did put too much trust in a financial adviser as to how to go about it, as he says.
Investor and expert comment reported since Kent's promotion credits Coca-Cola for investigating the trades before re-hiring Kent. Share price rose the day of the announcement, as well as on days when news reports previewed the promotion.
But not all Coca-Cola shareholders are resting so easily. There's me, for one. And there's James Berman, CEO of a $28 million hedge fund in New York, JBGlobal LLC, which has Coca-Cola among its top holdings.
``The burden is on Coke to demonstrate that there was nothing awry about what went on with Muhtar Kent at Coca-Cola Amatil,'' Berman says.
`Serious Accusation'
``It's a pretty serious accusation,'' says Charles Elson, director of the University of Delaware's Center for Corporate Governance. ``It's a stewardship issue.''
Coca-Cola declines to give details about Kent's short selling or the lawyers' investigation into it. It hasn't released records of the transaction, offered a single excerpt from the attorneys' report or named Kent's ex-financial adviser, who could confirm Kent's version. Or not.
``Disclose it all,'' advises Elson. ``It's critical in something like this to have complete candor and transparency.''
Kent, 43 at the time, may well have been unfamiliar with the mechanics or implications of short selling, in which you are betting share price will drop.
And it isn't likely that Coca-Cola would hire back and promote someone who used insider knowledge to bet against the very company he was helping run, especially one connected to Coca-Cola. All reports give Kent high marks for integrity, as well as business acumen.
Long Time Ago
But short selling by an insider at such an opportune moment is sufficiently suspect that investors shouldn't be brushed off with comments like, it was soooo long ago, and, we investigated thoroughly so you don't need to.
Yes, it was a long time ago, but at that time, the Amatil board (which included Isdell) wasn't satisfied by Kent's answers, according to news reports.
As for exoneration by outside counsel, Enron's executives were exonerated by outside lawyers, too.
I'm not suggesting a cover-up here.
But during the scandal-ridden years that began with Enron's collapse, surely we learned the need for transparency and the hazards of characterizing possible red flags as actual red herrings.
That is perhaps the most distressing signal in all of this.
``During the bear market, there was a significant push for greater transparency and greater integrity,'' says Berman. ``Now that the bull has regained its horns, there's a lot of corporate backsliding'' on governance.
Comeback at Dell
This week, Dell Inc., named as its chief financial officer Donald Carty, who was essentially run off as CEO of AMR, American Airlines' parent, in 2003. During sensitive labor negotiations, Carty failed to mention generous bonus payments to managers while persuading labor unions to accept $1.8 billion in pay cuts.
A couple of anecdotes do not a trend make. And there are signs that corporations are more accountable and transparent than before.
But would Coca-Cola or Dell have dared put these two men in such high positions back when investors first realized how severely they had been burned by corporate deception at Enron, WorldCom, HealthSouth, Tyco, Adelphia and the rest?
``It seems that the passion for establishing a new realm of corporate governance has dissipated,'' Berman says.
His is a rare voice among fund managers or investors, who for the most part aren't complaining about Kent's promotion or demanding more disclosure.
And that is what I find disturbing. Bear market or bull, companies need to give investors more to go on than simple faith in the company's benevolent wisdom. |
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