How Shady Was Charlie Ergen's Wireless Shopping Spree?
The Wall Street Journal has a fun story today about Gary Howard, a former director of Dish Network, who resigned a few weeks ago over what he apparently viewed as some shady dealings in connection with Dish's bid for bankrupt, possibly deadly wireless-network company LightSquared.
The main joy of LightSquared is that virtually all dealings in connection with it come with at least some amount of shade -- the Securities and Exchange Commission called some of LightSquared's erstwhile owner's dealings "like the final exam in a graduate school course in how to operate a hedge fund unlawfully" -- sure, shady, why not.
Basically what happened here is that Charlie Ergen, the chairman and biggest shareholder of Dish, went around buying up LightSquared debt, with his own money, at a discount during its bankruptcy. Then Dish put in a bid to buy LightSquared out of bankruptcy, with its money. Some of that money would then naturally go to Ergen.
The conflict is fairly straightforward: The more Dish pays for LightSquared, the more money Ergen makes on his LightSquared debt. He's got incentives to try to make Dish overpay to line his own pocket,* and he's got enough power over Dish to be able to do so. Recognizing this conflict, Dish's board set up a special committee to approve its bid for LightSquared. Howard served on the committee, and it approved the bid -- but was then disbanded two days later, "to the surprise of the committee's members," the Journal reports. Howard and the committee members planned to stick around to supervise the bid -- which is still being fought over in bankruptcy court -- and perhaps try to negotiate to get Ergen to give some of his profits to shareholders. Ergen had other ideas.
This sort of thing doesn't come up a lot. I mean, the basic issue of a company's founder-chairman-major-shareholder having a conflict of interest with his company in which he wants a high (low) price and they want a low (high) price is very common. It's called a management buyout and naturally leads to special committees with fairly standard well-defined roles.
But this specific issue -- an executive going around and buying up an asset for cheap, then convincing his company to buy all of that asset for a higher price -- doesn't come up a lot because it's so obviously shady: If you're supposed to be devoting your time and energy to finding opportunities for your company, it looks pretty bad to steal those opportunities for yourself. Also, because the conflict is so hard to reconcile: Either Dish overpays and gets hosed, or Dish underpays and Ergen gets hosed, or they magically settle on the exact right price after spending tons of time and energy on bankers and consultants and special-committee procedures.** When this sort of thing does come up, the executive involved often gets in bad trouble, as when David Sokol, a Berkshire Hathaway executive, bought some Lubrizol stock ahead of convincing Berkshire to buy the company, and then got quasi-fired and investigated for insider trading.***
Here, though, Ergen is unlikely to get in trouble, because of yet another layer of shadiness in the deal. Dish couldn't buy any LightSquared debt, so Ergen wasn't stealing an opportunity from his company. Really, he was helping them out. Dish couldn't buy the debt because LightSquared's credit agreement forbids the company's competitors -- including Dish -- from owning the debt. So Ergen bought it himself as a way around that rule. Though now LightSquared's former owner, Phil Falcone's Harbinger hedge fund, is suing Ergen, claiming that this workaround shouldn't work and that he was "really" buying on behalf of Dish.****
Which I guess is news to Howard? Also, it puts everyone in a bit of a pickle: If Ergen hands over some of his profits to Dish, it looks like he was really buying on behalf of Dish, and Falcone's efforts to block Ergen from pushing through Dish's bid might have a shot at success. If he doesn't, and stands firm in his claim that he was buying entirely for his personal account, then he kind of looks like he's ripping off his own company.
It's a fun little pickle, and it's hard to know what the right answer is: Ergen's buying up debt on the sly to avoid the transfer restrictions and allow Dish to acquire LightSquared was pretty clever, but now faces unpleasantness on all sides. There are some obvious wrong answers, though, and disbanding the special committee early and enraging a committee member enough that he quit is probably one of them.
* I guess. The incentives are somewhat complicated as he owns a lot of Dish stock, and a lot of the money Dish pays for LightSquared doesn't go to Ergen. So he's, like, paying himself X cents with every dollar of Dish's of which he owned Y cents, solve for something.
[Update Thursday 11am: Also there's some limit to "the more Dish pays the more Ergen gets": he's got the senior secured debt and at some point it just pays off at par, so his upside is not unlimited. (Though from the Journal it sounds like he was buying at 50-60 cents on the dollar so: lotta upside.) Not clear yet whether Dish's bid pays out LightSquared's senior secured at par.]
** Actually the most likely outcome is that Ergen feels aggrieved and underpaid, and Dish shareholders feel aggrieved and sue, claiming that Dish overpaid, and they all spend even more money on lawyers.
*** Or the thing where Aubrey McClendon, the former chief executive officer of Chesapeake Energy, got a lot of sweetheart deals to invest in oil and gas wells alongside Chesapeake. Then he got a Reuters investigation, and then he got more or less fired.
**** And possibly with Dish's money, which is fascinating if true though not especially supported I don't think.
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Matthew S Levine at firstname.lastname@example.org