November 22–29, 2001

news

Ivan-owe

Fifteen years after Wall Street bad boy Ivan Boesky pulled his insider trading scams, a local company is still hurting.

by Jerry Moskal

Ivan-a Break: The FCM Corp. wanted a tax break for Boesky-incurred losses. photo: Michael T. Regan

The buzz around FMC Corp.’s water coolers still centers on Ivan Boesky’s stock tampering.

That was a decade and a half ago, and it cost the Philadelphia-based chemical manufacturing company a bundle.

In the interim, Boesky pleaded guilty to one count of securities fraud and spent three years in the slammer. A federal judge also ordered him to pay $50 million in restitution to the victims of his stock manipulations.

Without a doubt, FMC was among the identified victims. Boesky’s stock manipulation put $19 million in his pocket and inflicted a $217.6 million dent in the company cash flow.

FMC claimed it had to spend that amount to revamp its capital reorganization plan, arguing that that’s how much was needed to undo the damage inflicted by Boesky’s insider trading.

The newly reorganized company, now divided into two separate parts with one based in Philadelphia, employing nearly 6,000 workers, and the other in Chicago, employing nearly 9,000, still finds itself paying the price. Only this time it’s the judicial system taking a swipe at corporate coffers.

If Boesky’s insider FMC stock deals weren’t enough, U.S. Tax Court Judge David Laro upheld an Internal Revenue Service ruling that FMC had to pay more than $2 million in additional 1994 taxes.

The blow was delivered after Laro found that the IRS properly ruled FMC could not deduct the $217.6 million.

Company officials now have to decide on their next move.

Instead of huddling around the water coolers, their discussions have moved behind closed corporate doors.

"We’re reading the opinion and evaluating what we’re going to do about it," FMC spokesman Jeff Jacoby, of Philadelphia, said last week. "We haven’t decided yet."

Otherwise, company officials were keeping mum.

A company tax consultant, who asked not to be identified by name, said FMC was "aware this was a potential outcome." He said he would urge the company to appeal Laro’s decision to the U.S. Court of Appeals. He said the company has plenty of time to decide on its next step.

"This opinion just came down on Friday [Nov. 9]," he said in a telephone interview. "It’s kind of premature to decide right now."

An IRS spokesman said the agency does not comment on pending tax cases.

FMC argued that it should be allowed to deduct the costs of restructuring its capitalization reorganization plan.

The firm has since become two separate entities — FMC Corp. in Philadelphia, which manufactures and markets chemicals, and FMC Technologies Inc., based in Chicago, which concentrates on its core machinery business as well as energy.

The company charged that an employee of Goldman Sachs & Co., which it paid $17.5 million for advice on its financial recapitalization, disclosed the secret plan to some of his pals on Wall Street, and the information fell into Boesky’s hands.

FMC’s petition — filed 20 months ago appealing the IRS ruling — argued that the company was entitled to a $217.6 million deduction as a "theft loss" on its 1994 tax return.

The company claimed that Boesky’s "illegal activities" forced it to redeem its old stock at an artificially high price and that Boesky benefited to the tune of $19 million from the insider information.

Under the revamped plan, FMC had to offer to buy back its stock for $70 in cash per share plus a share of stock in a new FMC corporation that was being spun off from the parent corporation.

Laro’s 32-page decision stated that based on the leak from the Sachs employee, Boesky bought 105,300 shares of FMC’s old stock for $71.75 a share on Feb. 18, 1986, and reaped huge profits when the stock price leaped to $82 a share three days later.

As a result, the company had trading of its stock stopped on the New York Stock Exchange on Feb. 21, 1986. But the damage was done.

Laro cited a U.S. Circuit Court of Appeals for the Second Circuit finding in favor of Goldman Sachs over FMC. The ruling held a corporation cannot be damaged "when it distributes corporate assets [its shares] to the beneficial owners of those assets," meaning its stockholders.

"The [appellate] court did note initially that FMC cannot claim injury because the additional [$70] cash payment inured to the benefit of its shareholders," Laro wrote.

The company’s 27-page petition that was filed with the tax court 20 months ago contended that "executives at several Wall Street investment banks and law firms," in effect, had a role in stealing "confidential information relating to prospective corporate transactions."

The petition said that the manipulation involved the stock of 25 publicly traded corporations, including FMC.

FMC, which last year had 16,000 employees and $4.1 billion in sales, charged in its petition that David Brown, a Goldman Sachs employee, learned about the firm’s confidential plan and passed the secret information to Wall Street traders, including Boesky.

According to the petition, Brown had not been on the team involved in developing the financial plan for FMC, but learned about it from sources within Goldman Sachs.

"Unbeknownst to FMC or Goldman’s management," the petition said, "Brown stole confidential information about FMC’s recapitalization plan and passed it to the Boesky organization."

The company’s court filing said Boesky filed a false report with the Securities and Exchange Commission, used his clout in the stock market, and "wrongfully caused the price of FMC shares to rise above the bona fide market trading range."

At the time, FMC was engaged in a stock buyback as part of its financial reorganization plan that led to the firm’s division into two companies. The stock manipulation caused company costs to implement the program to zoom.

In the aftermath, the petition said, "Boesky personally realized approximately $19 million in unlawful profits from his scheme against FMC."

Despite Boesky’s acts that caused the company to make huge expenditures and redo its capital reorganization plan, Laro upheld the IRS ruling denying deduction of those costs. Laro also rebuffed FMC’s claim that it was owed a $5 million refund.

Laro again cited the appellate court finding in favor of Goldman that FMC did not suffer a $217.6 million theft loss because of being forced to revamp its capital reorganization plan due to Boesky’s stock manipulation.

"The disposition of the prior action in [Goldman’s] favor rested on findings that [FMC] redeemed its stock for no more than it was worth and thus sustained no cognizable injury from the disclosure of the confidential information," Laro wrote in his 32-page opinion.