SEC and Others Fear Hedge-Fund Strategy May Subvert Elections

Discussion in 'Wall St. News' started by loufah, Jan 26, 2007.


    SEC and Others Fear Hedge-Fund Strategy May Subvert Elections

    Private investment firms have found a simple way to profit from the workings of public companies: Borrow their shares, and then swing the outcomes of their votes.

    In some cases, the strategy has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does -- without their ever having to own any stock themselves. Some outside interests have used the strategy to hide their voting power within a company until the last moment. Often, individual shareholders don't realize their own stocks, and their voting rights, have been borrowed from their brokerage accounts, until it's too late.

    Fueling the practice -- dubbed "empty voting" in a study by two University of Texas professors -- is a booming business in lending shares.

    Vote counters often fail to keep track accurately and let the borrowers and owners of the same shares both cast votes. Four big banks paid the New York Stock Exchange $2.35 million last year to settle charges in this area. Meanwhile, other shareholders often are unaware that a big voting bloc has no real ownership stake in the company -- and that it may vote directly opposite the wishes of the stock's actual owners.

    This phenomenon has gotten the attention of regulators, who fear it is escalating just as shareholder voting is gaining importance as a way to improve corporate governance and keep management excesses in check. If elections can be too easily gamed, critics fear, a basic foundation of public companies -- that shareholders vote in the company's best interest -- will be undermined.
  2. Stock exchange collects a fine they are making money, brokers make money lending, the hedge funds are making money. SNAFU.

    What's up with this voting crap?