Michelle Leder
12/01/2006
While only a fraction of all 13-Ds include a letter commenting on the investor’s aims, the practice of sending venomous missives is growing. More than 200 letters were filed by hedge funds through the first eight months of 2006, a pace well ahead of 2005, itself a banner year. Many letters include full-frontal attacks on company executives and boards. Among those practiced in the craft are Daniel Loeb of Third Point Capital in New York, J. Carlo Cannell of Cannell Capital in Jackson, Wyo., and Pirate Capital of Norwalk, Conn. (the disclosure practices of which came under regulatory scrutiny in September).
Robert Chapman Jr., managing member of Chap-Cap Partners in El Segundo, Calif., may be the originator of this unique prose style. He wrote his very first letter in 2000, stopped for nearly two years while he traveled around the world, and returned to it earlier this year.
Consider the letter Chapman sent this past July to chairman John C. Lewis and the directors of Vitesse Semiconductor, a midsize chip maker in Camarillo, Calif. Vitesse was clearly a troubled company. The company’s stock options woes had been exposed in the Wall Street Journal, its top executives had been fired, the stock was falling and the company was unable to meet routine deadlines for providing financial information to its investors. In mid-May, the company received formal subpoenas from both the SEC and the U.S. Attorney’s Office. In late June, it received a delisting notice from Nasdaq, forcing its shares onto the decidedly unglamorous pink sheets. Chapman’s letter was merely the cherry on top.
Though the letter started out cordially enough, notifying the board that Chap-Cap had acquired 16 million shares of the company’s stock over the course of two months, in the second sentence Chapman noted that his fund now owned 13 times as much Vitesse stock as the entire seven-member board of directors and that "the board’s stewardship shall be proven grossly negligent, if not fraudulent." Those words (typed in bold for extra emphasis) segued quickly into a demand that Vitesse be sold to a larger company. The letter stretched on for 11 pages and included a whopping 83 separate footnotes.
In the letter, Chapman repeatedly used the term "the Three Stooges" in reference to three former top executives, including former Vitesse CEO Louis Tomasetta, who had been terminated after an internal investigation by a special committee of the board had determined that the executives had taken part in backdating stock options in the late 1990s. The letter ended with these words:
"I am sure that the Three Stooges have only themselves to blame as for you, Mr. Lewis, to quote you personally, ‘You live by the sword and you die by the sword.’ We suggest, figuratively speaking, that you draw yours and fall upon it before Vitesse’s owners are forced to do so themselves."
At press time, the company had resisted Chapman’s urgings to seek a buyer.
Back to Main Article: Best Practices: On The Board: Wolves at the Gates.