SEC Eyes Unauthorized Hollinger Payments

Allegedly lax oversight by the board is also under investigation. Also: Fastow plea deal collapses -- Lea Fastow, that is; MLB's hot-stove league fueled by one-year, ten-year notes; GE decides that its insurance operations are worth an IPO; and more.

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The Securities and Exchange Commission has launched an investigation into the millions of dollars in controversial payments to top executives at Hollinger International Inc., according to The Chicago Tribune, citing a government source close to the investigation.

The regulatory agency also plans to probe Hollinger’s star-studded board of directors, which has been widely criticized for its allegedly lax oversight of deals that personally benefited the company’s top two executives, the paper added, citing an SEC source. The company’s board members include former Secretary of State Henry Kissinger, former Assistant Defense Secretary Richard Perle, and ex-ambassador Richard Burt.

Hollinger, which owns the Trib’s crosstown rival, the Chicago Sun-Times, announced Monday that press baron Conrad Black will resign as chief executive, effective Friday. Black will remain chairman and keep other positions within the Hollinger group of companies, and will also help find a buyer for Hollinger.

Also resigning were Hollinger COO and Sun-Times publisher F. David Radler and Hollinger vice president and corporate counsel Mark Kipnis.

The shakeup came after an internal investigation uncovered $32 million in unauthorized payments to Black and other executives.

Hollinger named independent director Gordon Paris, an investment banker, as interim CEO. But Black insisted on Tuesday he was still in control, noting, “I’m still the chairman, I’m still the chairman of the parent company,” according to Reuters.

The Tribune noted that a review of Hollinger’s filings with the SEC shows that many board members, including some of the most prominent, failed to attend large numbers of board and committee meetings in recent years, when some of the payments were made to Black and the other executives.

The paper noted, for example, that in 2000, 6 of the 16 directors did not attend 75 percent of their meetings. Kissinger failed to attend at least 75 percent of his board and committee meetings from 1999 to 2002, and Limited Brands Inc. CEO Leslie Wexner did not attend 75 percent of meetings from 1999 to 2001, according to the paper.

Hollinger has revealed that more than $16.5 million worth of “non-compete” payments tied to the sale of $472 million in newspapers in 1999 were never disclosed to the board of directors. The payments were made to Hollinger’s parent company, which is controlled by Black.

Hollinger stated in a filing Monday that it is seeking repayment of this sum.

In addition, $15.6 million more in payments to executives eventually were made public but never were authorized by the board’s independent directors, the company said. Black and Radler each pocketed $7.2 million, according to published reports. Two other Hollinger executives received $600,000 apiece.

In Monday’s filing, the company announced that Black, Radler, and one other executive agreed to repay Hollinger the full amount of their share, plus interest.

According to the Tribune, citing a source close to the investigation, the SEC has been working quietly for some time with former SEC chairman Richard Breeden, who was hired last summer by Hollinger’s board to head up a special committee investigating the payments. The paper also pointed out that former Illinois governor James R. Thompson, a member of the Hollinger board and head of the audit committee, said Tuesday that he had no knowledge of an SEC investigation.

Fastow Plea Deal Collapses — Lea Fastow, That Is

It looks like Lea Fastow, the wife of Enron’s former chief financial officer Andrew Fastow is going to trial after all, according to the Houston Chronicle.

Lea Fastow’s lawyers had hoped to work out a deal that would have her serve about five months in jail, enabling her to get out by the time her husband’s trial begins April 20. This would have allowed her children to have at least one parent at home at all times.

However, negotiations broke down last week, the paper reported, and it’s unclear whether the Enron Task Force prosecutors will offer her any other deal in the three months before her scheduled February trial.

Lea Fastow is a former assistant treasurer at Enron who is charged with six criminal counts, including conspiracy to commit wire fraud, money laundering, and four counts of making false tax returns. She has pleaded not guilty to all counts.

U.S. District Judge David Hittner also ruled that Lea Fastow’s trial will not be moved from Houston, and attorneys will not be allowed to individually question all potential jurors as the defense had requested, the Chronicle reported.

In another Enron-related development, the bankrupt energy company said that it will sell Portland General Electric (PGE) to a newly formed entity backed by investment funds managed by buyout firm Texas Pacific Group, for $1.25 billion in cash. The investment group, which also includes the Oregon Public Employees Retirement Fund and former Oregon governor Neil Goldschmidt, also would assume $1.1 billion in debt and preferred stock. The deal requires approvals from state and federal regulators, as well as a bankruptcy judge.

If the deal is approved, when Enron emerges from bankruptcy sometime in 2004 it will be as two separate pipeline and power plant companies rather than three.

The proceeds will go into a pool of cash that eventually will be distributed to creditors, according to reports. Excluding the PGE sale, Enron has raised about $8 billion by selling assets and closing out contracts since going bankrupt in December 2001, according to reports.

In yet another Enron-related development, the company has sued more than 100 banks and companies to recover $1 billion in payments made shortly before it sought bankruptcy protection, according to a separate story in the Chronicle.

The lawsuit reportedly argues that holders of commercial paper urged Enron to repay the short-term loans shortly after the company revealed problems that ultimately led to its failure. “The early redemption transfers enabled each of the defendants to receive more than such defendant would have otherwise received,” the lawsuit states, according to the paper.

Between October 26 and November 6, 2001, Enron transferred more than $1 billion to J.P. Morgan and Goldman Sachs to pay its commercial paper obligations. According to the lawsuit, these companies transferred money to the other defendants, the paper said.

The payments were made in full when, in reality, the value of commercial debt held against an already insolvent Enron was worth far less, the lawsuit reportedly alleges.

MLB’s Hot-Stove League Fueled by One-Year, Ten-Year Notes

Major League Baseball plans to sell as much as $1.5 billion of notes, backed by revenue from television and radio broadcasts, as well as licensing and sponsorship contracts, according to Bloomberg. The proceeds will be used to refinance existing debt.

This is the organization’s first publicly rated debt sale, the wire service notes.

FleetBoston Financial Corp. will lead the sale of $1 billion of one-year notes and co-manage the sale of $500 million of 10-year notes with Bank of America. (The two financial institutions have agreed to merge in 2004.)

MLB expects to sell the notes in the first week of December, Bloomberg reported, citing chief financial officer Jonathan Mariner.

Analysts say the sale will likely draw strong investor interest because it will provide investors with conversational fodder, if not bragging rights. “It’s more cool than talking about a bunch of mortgage loans,” Mark Adelson, director of structured financial research for Nomura Securities, told Bloomberg.

Last year the National Football League sold $200 million of 15-year unsecured bonds.

GE Decides That Its Insurance Operations Are Worth an IPO

The slowly reviving IPO market should get a big boost early next year when General Electric takes its life and mortgage insurance operations public. The new company will be named Genworth Financial Inc.

GE plans to register the IPO early in January and complete the offering in the first half of 2004. It intends to sell about 30 percent of the equity of the new company, which currently has a book value of roughly $10 billion.

In other financing news:

  • BorgWarner Inc. said it will lift its dividend payout by 40 percent; this will be its second increase since 1994. Timothy M. Manganello, chairman and chief executive officer, cited the company’s “strong cash flows and confidence in our future growth.”
  • Pipeline operator Kinder Morgan Inc. said it plans to hike its quarterly dividend in January by at least 25 percent, to 50 cents per share. The company also raised its payout in June to take advantage of the tax cut on dividends.
  • Emerson Electric Co. filed a shelf registration to periodically sell up to $2.5 billion in debt securities, common and preferred stock, and other securities. The maker of electrical products plans to use the net proceeds for general corporate purposes.
  • Johnson Controls Inc. said its board of directors approved a two-for-one split and a 25 percent increase in the dividend.
  • Hong Kong conglomerate Hutchison Whampoa Ltd. raised $5 billion in a three-part private placement. The size of the deal was increased from an originally planned $3 billion and was led by Citigroup, Goldman Sachs & Co., HSBC Securities, and Merrill Lynch & Co. The offering included $1.5 billion in 7-year notes, $2 billion in 10-year notes, and $1.5 billion in 30-year bonds.

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