Somebody send Angelo Mozilo to jail. I can only think that it is a matter of time. If you think investing in stocks is as simple as looking at past earnings (or cash flow) and buying, you have another thing coming. As a silent partner in business, you have to dive into the financials and filings, and determine whether or not your management is acting like partners…or thieves.
Countrywide’s Angelo Mozilo? Let’s explore the tell-tale signs of a thief.
Over the past few days, the big Countrywide news was that Mozilo is giving up some $37.5 million in severance and benefits upon completion of the Bank of America acquisition. In a cut-and-dry acquisition, that may make a ton of sense and may be a sign of an executive that really believes in doing what is right for shareholders. In Countrywide, it is a meaningless gesture of a man who likely knows that his company is dead without the acquisition, and that he may be headed for legal trouble as well.
When is insider trading excessive?
If you were a Countrywide silent partner back in October of 2006, you would not have seen a ton of insider buying or selling. In fact, you could have felt pretty comfortable that your managers were not running from a ticking time-bomb. (We’ll ignore the business of Countrywide for this example).
In October of 2006, something magical happened. Call it “managerial intuition” or whatever you like, but Countrywide instituted a trading plan for Mozilo. In and of itself, not a cause for concern. What followed is quite likely the most grievous breach of duty – both fiduciary and to shareholders – I’ve seen since the tech crash of the early 2000s.
When your manager starts selling…a lot.
In November and December of 2006, Mozilo sold 891,999 shares of Countrywide, cashing out more than $35.5 million. At that point, Countrywide’s stock was still in the $35-$40 range, and investors should have heeded the warnings. But that’s not all.
I don’t preach that you should watch every transaction, but you should check in every quarter or so to see what the heck is happening at your company. Let’s say you didn’t catch it at the end of 2006. In the first quarter of 2007, Mozilo exercised and immediately sold another 1.6 million shares – for a total of $64.6 million. That was just in January through March of 2007.
Countrywide was still selling between $33 and $42 a share.
It gets better.
The price of Countrywide’s stock started tanking in early July of 2007. From April 1st through July 6, Mozilo went on to exercise and immediately sell another 1.7 million shares, cashing out another $66 million in the quarter.
From the date of the October 2006 trading plan to July 2007, Mozilo sold 4.3 million shares totaling $167.7 million.
Yep. It gets better still.
In July of 2007, Countrywide’s stock started falling, but that didn’t stop Mozilo. From July through October of 2007, Mozilo continued on his liquidation spree, exercising and immediately selling another 1.3 million shares for $34.2 million.
At least someone made money in Countrywide.
In just twelve months (November 2006 to October 2007), Angelo Mozilo was granted and immediately sold 5,536,539 shares for a total of $201.9 million. During this time, his personal holdings in Countrywide never increased, save the 11,799 shares he added to his 401k plan.
(At this point, you may be wondering why nobody was talking about Mozilo’s cash out. I’m wondering the same thing. Of course, it’s Wall Street’s job to sell, not analyze or protect.)
Was Mozilo ever really a partner?
When analyzing management, you should be looking for executives and managers that hold a significant amount of the company’s stock. Angelo Mozilo owns just 2 million of the company’s 576.8 million outstanding shares – 0.35%. In twelve months, he exercised and sold more than twice as many shares than he owned.
That is hardly the sign of committed management.
What do your partners have to lose?
What does Mozilo have to lose if the acquisition fails and Countrywide goes belly up? What is his incentive to turn this business around? What would prompt him to spend less time in the tanning salon and more time in the office?
Should we be cheering Mozilo’s shareholder sensitive plan to forego the $37.5 million severance and consulting package? (I’ll hold my applause until they take him away in handcuffs.)
What is reasonable for insider sales and holdings?
It is impossible to set a hard, fast rule on how many shares your managers should hold or be allowed to sell. Remember: Everything is a judgment call. Unless something jumps out at you – be it a great investment at a great price or a thieving manager cashing out hundreds of millions of dollars – follow Charlie Munger’s advice:
Another thing you have to do, of course, is to have a lot of assiduity. I like that word because it means: sit down on your ass until you do it.
Filed under: How to Think About Investing
MikeR,
What turned you off?
I might be going overboard, but I really think execs need better rules. I wish that their were a law that execs had to announce their sales 2 years prior to selling. Maybe 3 or 4. I do not care. These people make enough money. Why not 5 years? If anything ,that will make sure these people are shareholder friendly.
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kfh227,
It was the suit, the shirt with the collar different from the rest of the suit, the tie, and coup de gras the tan! He looked like he wanted to make a quick easy buck any way he could as long as he didn’t have to put in real work. I have seen him several times and he always has dressed like that. Sent me a message. No way he was going to mess up his pretty outfit, his hair, or his tan.
The best PR shot I recall from a CEO was Scott McNealy. I think it was in an annual report a long, long time ago, pre-2000. He was standing up leaning his butt on his desk. His shirt sleeves were rolled up, his arms crossed, his tie loosened, and his top button on his shirt undone. He looked like he had been working, I am sure he had, and they just came in and said we need you to pose for this picture for the report.
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I had a really good feeling about Kenneth Lay.
I decided to go with my gut and invest in Enron. I don’t have time to be reading annual reports! And have you seen how long they are? Some of them are at least 40 pages! And all those numbers!
But Mr. Lay’s no-nonsense suit and demeanor, that’s what convinced me. And once I saw that his shoes weren’t some designer brand name shoes, I knew I had to do business with this man.
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I posted this on another message board, and felt it appropriate here:
For the past 4 or so years, my employer has been involved in a venture with Countrywide, which, serentiptiously, my employer began the process of dissolving said venture earlier this year. My interractions with Countrywide represent a minute sliver of their overall organization, but I have found those interractions to be interesting.
Their words of partnership are dwarfed by their actions of domination and control. Once we agreed to work with them, they approached every interraction with an extraordinary degree of self confidence to the point of arrogance, bordering on hubris. It seems to permiate their organization as we have seen it on many different levels. Virtually, at every turn, they would remark how we were a small company and could not know what they knew, and that we could not possibly be right. When we announced to them our intention to dissolve our relationship, their response was initially and has been ever since not of an attempt to reconcile, but a bold prouncement that we will fall flat on our faces. Time will ultimately tell what happens, but now that the divorce is final, I ashamedly take some pleasure in seeing the haughtiness rewarded in a manor which it currently is.
In our final meeting last month, one of their Senior VPs, came into our office and re-declared our impending failure (basically stating that we were to stupid to go forward without Countrywde) and that, when we did ultimately fail, they would be there to pick up our pieces (a big, cocky smile on his face when he said this, too). When asked about their stock price, he unabashedly stated that he the market was dead wrong about the company, and that he had put a significant portion of his net worth into the company at $8.80 per share, over and above what he already had in the company. Furthermore, he said that if we were smart, we would follow suit.
I really hate arrogance, so while it is dead wrong to get pleasure that the suffering of others, I cannot help but smile when I think of him going home to his wife saying explaining what is happening to their nest egg.
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No one said they were basing investment decisions soley on how the CEO appeared in promotional material or wherever. But, you still need to feel comfortable with whoever is leading the company you’re investing or looking to invest in. Otherwise your confidence in the people handling your money may be compromised.. and emotion might weigh in during a short drop in price.
My brief take on it.
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My two cents: These managers, executives, etc. are your business partners. That’s precisely why you have to stay on top of them. While it is nice, and often conventional, to think that everything will be fine, you have to check in on your businesses and partners from time to time.
Though you shouldn’t judge people on appearance, you do have to trust your intuition. Remember: 99% of this game is art. In person, if someone rubbed you the wrong way, you wouldn’t give them your money. The same is true with management – on tv, in the news, etc.
Seeing Mozilo would not have turned me off; watching him giggle, laugh, and pump up Countrywide during the first half of 2007 while he cashed out hundreds of millions of dollars would have.
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Night,
Thanks for your comments.
Allen,
I worked in silicon valley a long, long time ago. I know people who know Scott McNealy. In fact my cousin was a VP at SUNW. I knew Scott was a no-nonsense hard-working person. So that photo sticks in my head because when I saw it I knew that Scott didn’t want to waste time with a photo shoot and just got up from his desk walked around it and said snap the picture and he got back to work. So it fell in place with everything else I knew about him. Yes the market took SUNW stock to the stratosphere and then it imploded like many others in the internet bubble. But SUNW has made many significant technological contributions to our world.
Yes reading annual reports and financials is the most important thing you can do. Why Jim Chanos was confident shorting Enron all the way to the bottom.
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Imagine you are deciding whether or not you want to hire them to run you company.
Google the CEO and see what comes up, not just the Financial news — look though pages and pages of google search results. You’ll have to dig, but it’s worthwhile.
It’s not perfect, but that’s life. People marry the wrong person all the time.
D.
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This was a nice piece of work, very interesting to read. The only question that comes to mind is whether we could reasonably be suspicious of managers historical actions by basing them off past sell-offs during stock price peaks?(with no major reason except stunted growth and missed earnings expectations).
Would this constitute a form dishonest profit making when these managers realize they can sell-out big positions during record highs?
I’d really love to get your take on how far your willing to tolerate sell-offs given that there’s no change in the fundamentals of the business OR reckless idiotic business practices.
Thanks in advance Joe, your my hero!
Amit D.
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I continue to be amazed at how many things Joe says end up coming true. It may take a while, but I guess it IS easier to tell what will happen than “when” it will.
I never owned Countywide but I bet most “investors” who did never saw this coming. Thanks Joe! (and awesome book!)
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SEC charging ex-Countrywide CEO Mozilo with fraud
http://finance.yahoo.com/…;_ylt=AurdiPqT8fY7cBP06yAJZEi7YWsA?sec=topStories&pos=main&asset=&ccode=
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I don’t know if you caught the full show interview of Jim Cramer by Jon Stewart. Stewart ripped Cramer and CNBC for just doing snake oil sales and not doing the exposure of things like Mozilla as a real business news network should. In case anyone is interested go to this site,
View the three links for the three unedited parts of the interview at the bottom. The first one is just preliminaries, Stewart gets on Cramer in parts 2 and 3.
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Hi Joe,
Is there a rule of thumb of percentage of net shares sold by insiders where we should start to get concerned about what they know that we don’t? Thanks Joe!
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Great advice on insider selling Joe. It really is difficult to determine when insider selling is a bad omen. There have been studies that show insider selling in general isn’t indicative of a company’s prospects, however, insider buying is.
Because of stock options the ratio of insider selling to insider buying isn’t one-to-one. There is much more selling than buying.
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