Monday, June 18, 2012

Old Tricks For NewLead

Investing in a company that is managed by the person who controls it is a bit of a mixed bag for investors. It's great when management has skin in the game, but not-so-great when management abuses its control at the expense of minority shareholders. Consider what happened in the case of NewLead (NEWL), where management not only controls the equity, but also has a significant stake (in fact, larger than its equity stake) in the company's debt.

CEO Michael Zolotas not only effectively controlled NewLead's equity, but also a large portion of its debt. This is a clear conflict of interest, and here's why: Zolotas just converted his debt to equity, issuing himself shares at a 40% discount to the market price of the equity. This caught the market off-guard last Monday, causing several circuit breakers to trip as the stock fell by 60% at one point during the day.

The company is bleeding red ink and has defaulted on some payments already, so such a conversion may have been necessary anyway. But the key issue here is that any negotiation between equity and debt holders is tainted by this conflict, which may have resulted in a conversion price that ripped off minority equity holders.

Be sure you know what you're getting into when you buy into a company that is controlled by one person or group!

Disclosure: No position

h/t @value_guy

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