Senators try to shut down predatory hedge fund activity
New legislation in the Senate aims to curb predatory activity by Wall Street firms that take control of a company to extract as much profit as possible as they drain cash, shut down factories and leave devastated communities in their wake.
It is called the Brokaw Act for the village in Wisconsin that plunged into bankruptcy after hedge fund activist Jeffrey Smith led a “wolf pack” of investors to seize control of Wausau Paper Co. and forced the 2012 closure of the century-old paper mill in Brokaw, throwing hundreds of people out of work.
The bill was introduced by Wisconsin Democratic Sen. Tammy Baldwin together with Sen. Jeff Merkley, D- Ore. Two of the Senate’s most outspoken Wall Street critics, Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, have signed on as co-sponsors.
The legislative proposal comes as Sanders seeks the Democratic nomination for president with a campaign against a “rigged economy” and a Wall Street he says has fraud as its business model.
Sanders looks to fall short of winning the nomination as rival Hillary Clinton has racked up a strong lead in delegates, but he continues to campaign and draw thousands to his rallies.
Likewise, the new legislation has little chance of becoming law, with Republican majorities in House and Senate.
But it is another sign that the war on Wall Street is not going to go away soon, regardless of what happens to Sanders’ campaign or any particular piece of legislation.
The surprising success of Sanders’ candidacy, like the ap- peal of Republican insurgent and front-runner Donald Trump, taps into the anger and frustration of Middle America, where jobs seem to be disappearing even as the rich get much richer.
“We cannot allow our economy to be hijacked by a small group of investors who seek only to enrich themselves at the expense of workers, taxpayers and communities,” Baldwin said in a statement announcing the legislation. “The Brokaw Act will take on a rigged game by increasing transparency and strengthening oversight of activist hedge funds. These reforms will help ensure that no other small towns in America will fall victim to activist hedge funds on Wall Street.”
Merkley sounded a similar populist note. “Hollowing out longstanding companies so that a small group of the wealthy and well-connected can reap a shortterm profit is not the path to a strong and sustainable economy for our nation,” he said in a statement. “It’s time to take on this rigged system and stop the shortterm game-playing that sells our workers, businesses and economy short.”
In particular, the bill seeks to block the tactics used by Smith in his Wausau investment by shortening the disclosure period for taking a 5% stake in a company from the current 10 days to two days. This will make it more difficult for an activist hedge fund to tip off other predatory investors before the filing so that they can buy up shares and make a profit when the disclosure is actually made.
In addition, the bill will require disclosure of derivatives activity — these investors will sometimes simultaneously bet against a company they are investing in with a short position in deriva- tives — and require disclosure by any group acting in concert even if individual stakes fall below the 5% threshold for disclosure.
Forbes writer Antoine Gara dubs the bill “useless,” even though he concedes it might incrementally add transparency to Wall Street, “something that should be applauded.”
But he believes that Smith’s activism might have been a “good faith debate” about the best strategy for a company in a troubled industry and should be ranked among those instances where hedge fund activism helps companies.
Former Wausau chief executive Hank Newell, who was eventually ousted by the Smith-controlled board, would dispute that claim, citing instances where the hedge fund investors mandated stock buybacks and increased dividends instead of investment that would have secured growth for the company.
For the Forbes writer, however, “the proposed legislation and the sweeping rhetoric from the Act’s sponsors offer few-to-no effective solutions for the complex business issues it confronts.” But that is the point. The “sweeping rhetoric” provides the context for what is ultimately an incremental change. This is a relatively small measure, but part of a much wider effort to curb Wall Street excesses.
Given congressional deadlock, this bill is likely to die without a floor vote. All the more need for it to issue a clarion call for the overall objective.
This was the note sounded by Baldwin with that telling rhetoric, drawn almost word for word from Sanders’ stump speech: “It is time to stand up for our Main Street economy and rewrite the rules for Wall Street so we can build an economy that works for everyone, not just those at the top.”
The bill is called the Brokaw Act for the village in Wisconsin that plunged into bankruptcy after hedge fund activist Jeffrey Smith led a “wolf pack” of investors to seize control of Wausau Paper Co.