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David Pauly: Since when don't investors have the right to know?

Section: Daily Dispatches

By David Pauly
Bloomberg News Service
Monday, March 19, 2007

The public markets have a new hero.

He's a judge in U.S. Bankruptcy Court in New York named Allan Gropper.

Gropper, who presides over the bankruptcy of Northwest Airlines Corp., told a group of hedge funds last week that they should get over themselves.

The funds, including Owl Creek Management LP, the airline's third-largest shareholder, had claimed they didn't have to disclose to the court when they had bought their Northwest shares and how much they paid for them.

Their reasoning: The information would show other investors how the funds worked, letting them horn in on fund strategy and siphoning off some of the profit. Gropper told them they had to comply with standard disclosure rules like everyone else in the case. The funds have appealed his decision.

Gropper's stand on disclosure is especially welcome at a time when U.S. companies and even Treasury Secretary Henry Paulson are complaining about the costs of telling investors what they need to know. The price is so onerous, they say, corporations may start trading their shares on overseas markets where restrictions are fewer.

By ruling against the hedge funds -- which make bets on any variety of investments and take big fees when they guess right - - Gropper exposed their arrogance.

Do the funds really think nobody knows what they're doing? I suppose they also want us to believe that news of takeovers doesn't leak from Wall Street before the deals are announced.

What's more, investors who copy hedge funds might not be too smart. In 2006, the average fund returned 13 percent, according to Hedge Fund Research Inc. in Chicago, while the average return for companies whose shares comprise the benchmark Standard & Poor's 500 Index was 16 percent.

The funds' poor performance probably stems from their proliferation -- there are now about 9,000 of them. It's hard for any one fund to find unique investments, and they all end up doing pretty much the same thing. Mutual funds have the same problem. Few of them beat index funds that merely match a market's results.

Corporate complaints about disclosure requirements focus on the 2002 Sarbanes-Oxley law -- passed after the massive frauds at Enron Corp. and WorldCom Inc. Company audits now have to be tougher and executives must swear to the accuracy of their financial statements.

Christopher Cox, chairman of the Securities and Exchange Commission, which regulates U.S. stock markets, said March 14 that while Sarbanes-Oxley has led to "duplicated or misdirected efforts," that can be fixed without changing the law.

Nasdaq Stock Market Inc., the biggest U.S. equities market after the New York Stock Exchange, is "110 percent behind" the 2002 law, Chief Executive Officer Robert Greifeld said yesterday. He had just hired former U.S. Rep. Michael Oxley, co-sponsor of the law, as non-executive vice chairman.

At a meeting this week on the competitiveness of the financial markets convened by the U.S. Treasury, Berkshire Hathaway Inc. Chairman Warren Buffett moaned a bit about following all the rules, no doubt with some justification. Good laws can get tangled in red tape. But Buffett acknowledged, "Corporate America in the 1990s did not deliver a magnificent account of itself."

And it still isn't. Several companies are now under investigation for backdating stock options to make them more lucrative for executives. SEC Chairman Cox said last week that some companies already are trying to get around new rules for disclosure of executive pay -- presenting the information in a manner designed to confuse.

CEOs who plead that stock markets outside the U.S. don't require them to reveal as much are making the same kind of argument the hedge-fund investors in Northwest Airlines made to Judge Gropper. Car dealers and home builders don't have to reveal their costs to potential customers, the funds said.

Gropper answered that the funds did themselves little good comparing themselves to car and real-estate salesmen.


David Pauly is a columnist for Bloomberg News Service.

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