February 25, 2021

High & Low Finance: A Regulator, a Lawmaker and a Quandary

Had the small investors not been frozen out, the remaining shareholders, including the executives and directors who made the decision to eliminate the small investors, would have received only pennies per share less in the eventual merger, which was approved by the remaining shareholders in late June.

The S.E.C., in keeping with its normal policy, declined to comment on whether it had looked into the company, DEI Holdings, but there has been no indication that it is doing so.

Just starting an investigation could pose substantial political risks for the agency. The founder of the company, who remained a director and substantial shareholder even after he stepped down from management, is Representative Darrell E. Issa, a California Republican who is chairman of the House Committee on Oversight and Government Reform and has been a harsh critic of the S.E.C.

He has cited his experience as a director in criticizing what he sees as burdensome S.E.C. regulations. He says he thinks rules should be changed to make it easier for companies to raise money from American investors — particularly relatively wealthy ones — without having to comply with S.E.C. disclosure rules.

“As a member of the board of a small public company, I am well aware of the cost and difficulties of being public,” he told Mary Schapiro, the S.E.C. chairwoman, at a hearing of his committee in May, several months after the company froze out small shareholders and more than two years after the company deregistered its shares and stopped being subject to S.E.C. rules.

Neither Representative Issa nor James E. Minarik, the chairman and chief executive of the company, which makes electronic equipment for autos, responded to requests for interviews.

The tale of DEI Holdings as a public company was an unfortunate one for nearly everyone involved, but most particularly for individual investors who invested in it. It is a story that involves the way current rules allow companies to raise money from investors who believe they have the protection of American securities law, and then to withdraw much of that protection.

The company went public in December 2005 in an offering that was relatively small — it raised $150 million — but nonetheless had a prominent list of underwriters. Goldman Sachs was the lead underwriter, with J. P. Morgan Securities, CIBC World Markets, Wachovia and Citigroup also listed on the cover of the prospectus.

A large part of the money went to selling shareholders, including Representative Issa’s family foundation, which received $3.8 million, and most of the rest went to pay off debts. None of the offering proceeds were to be invested in company operations.

In 2005, Goldman served as a lead underwriter of 20 American initial offerings. DEI, then known as Directed Electronics, sought less money than any of the other 19, although one of the other issues raised less after Goldman cut both the size of the offering and the price in response to weak investor demand.

DEI was priced at $16, in the middle of the indicated range, when the company filed to go public, but the underwriters did not do a good job of estimating investor interest. The price fell 12.5 percent, to $14, in the first day of trading. It was the worst first-day performance of any Goldman I.P.O. that year.

The stock held its own for more than a year, but by late 2007 was trading below $2. Goldman, which had never had a buy recommendation on DEI, stopped writing research on it on Dec. 13 of that year.

Early in 2009, facing the loss of its Nasdaq listing because of its low share price, DEI chose to not only leave Nasdaq but also to “go dark,” as Wall Street jargon refers to a decision by a company to withdraw its S.E.C. registration. It could do that under a rule allowing such an action by a company with fewer than 300 shareholders of record. DEI said it had 284.

The phrase “shareholders of record” is a term of art in securities law. Shares held by a brokerage firm are all counted as being held by the same owner, even if they are actually owned by dozens or thousands of investors.

Article source: http://feeds.nytimes.com/click.phdo?i=a66cc2064715602d525d846de4bbdef7

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