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Day-Trading Activist Shareholders Playing Their Own Version Of The Long Game

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I'm sure you've all been following the saga of Wet Seal, which, I'm guessing, sells ... probably not wet seals, anyway? Clothes for teen girls apparently? It's got a five-letter ticker so you know it's awesome. Anyway the story in brief is:

  • Clinton Group owns about 7% of WTSLA's stock.
  • There was a saga.
  • Clinton got mad and is running a proxy fight to oust a bunch of directors who have experience doing one sort of retail and put in some directors who have experience doing another sort of retail, or something; there's a lot of yelling.
  • But meanwhile Clinton is buying and selling stock, often on the same day, and there is a name for that, and that name is "day trading," and it is Bad.

Here is the company's latest:

Every day new evidence emerges demonstrating that Clinton Group only has short-sighted and short-term goals that do not promote the creation of long-term shareholder value. The fact that Clinton Group has been engaged in day trading is the latest evidence, and it should be a huge warning sign to our shareholders. ...

According to its SEC filings, Clinton Group has been day trading in Wet Seal stock since late July 2012. For example, over the past six trading days (September 21-28), Clinton Group has sold over 127,000 Wet Seal shares at an average price of $3.22 and bought back only 33,000 shares at an average price of $3.12. Similarly, on Friday, September 7, the day Clinton Group filed its Consent Statement, it bought 155,000 shares at an average price of $3.10. The next trading day, Monday, September 10, Clinton Group turned around and sold 100,000 shares at $3.25. One could speculate that Clinton is a seller when the stock trades above the $3.20 level. To trade like this during a consent solicitation process in which you are advocating for “long-term change” is strange behavior to say the least, and it shows Clinton Group's true colors as short-term investors with no long-term commitment to Wet Seal or its shareholders.

Aren't proxy fights the best? The vitriol, the taking things out of context, the need to be on offense constantly ... it's like politics, but for people who can read, and add. Here is Clinton's response:

The Board’s claim that Clinton Group’s motives are suspect because we have been “day trading” the stock is absurd. We have been the single largest net buyer of the Company’s stock in 2012. We have purchased more than 6.1 million shares, with cash. By contrast, before we started pressing this board, they had bought 20,000 shares in the aggregate during their entire, collective tenure as Board members. In fact, we purchased more stock this week than any single director has purchased in their entire tenure on the Board. We own more stock now than we ever have and remain the Company’s second largest owner. It is astounding to us that the directors – who, after all, have purchased almost no stock and have sold more than 1.8 million shares (all of which were given to them) – would criticize us for the way we arrived at owning 6.1 million shares.


As you can maybe tell I have no idea what's going on here and don't intend to find out, but: isn't this a silly way to frame the debate? It's not their fault, of course: part of the magic of American shareholder democracy is that it loves the heck out of long-term investors and looks unfavorably on interlopers. Thus, for instance, the SEC's proxy access proposals would have allowed large shareholders to submit director nominees without running a proxy fight, but only if they'd held their shares continuously for at least a year and promised to hold them through the date of the director election. You can't agitate for a company to start doing better the moment you buy shares in it; suffering through adversity is the only way to prove your bona fides, like with Mets fans.

In proxy fights, no such rule applies, but the rhetoric still runs to long-term-ism. You may think that splitting up two disparate businesses can add $50 a share in value, but your problem is of course that you're not looking at the long term. Especially if in the past you've had some success in getting in and out of stocks quickly. As Clinton has. From the company again:

A glaring example of Clinton Group’s self-interested “activism” is their most recent target prior to Wet Seal, Jakks Pacific, Inc. (Nasdaq: JAKK). In March 2012, Clinton urged Jakks’ board of directors to sell the company. Under the threat of a consent solicitation to remove the board, in April 2012 Jakks settled with Clinton Group, resulting in an $80 million self-tender offer at $20.00 per share and the expansion of Jakks’ board to include one independent Clinton Group nominee and one additional director.

With their short-term, self-serving goal achieved, Clinton Group started to bail out of its position. As detailed in public filings, despite the changes to Jakks’ board and the $20.00 per share self-tender, Clinton Group chose to sell more than 30% of its Jakks’ holding between March 31, 2012 and June 30, 2012. Just last week, Jakks cut its earnings guidance by approximately 35% and Jakks’ share price dropped to approximately $13 in aftermarket trading, nearly 35% below the tender price and 22% below the closing price a day before Clinton Group filed its letter. We question whether Clinton Group currently owns any Jakks shares. One thing we do not question is that long-term shareholders in Jakks most likely regret Clinton Group’s “activism.”

Do they? I mean, maybe, but surely they mostly regret the earnings guidance?

In theory, of course, the nice thing about public equity markets is that they allow you to time-travel all the long-term beneficial effects of your long-term strategy to today: if your plan for making Wet Seal 30% awesomer in the future is a good one, and you convince the company to adopt it, then its stock price should be 30% higher today, more or less, adjusted for time and risk. If your plan is "take all the petty cash, burn down the buildings, dump our shares, and run away in the middle of the night," then by all means put that in your proxy statement, but won't it be hard to dump the shares for much more than zero?

Many people moan about shareholder pressure on public companies forcing them to be short-term-oriented, and maybe that's true, but the really short term is about quarterly earnings, and there's only so much activist shareholders can do about those.1 In the medium term, of course, sometimes - most of the time - "just pay out lots of cash to shareholders" is pretty short-term-oriented, compared to management's genius but hard-to-explain plan to make better use of shareholders' money than the shareholders would. If short-termism rules, that's partly management's fault - they should just be better at explaining their plans - but also partly shareholders' fault, with their odd habit of placing higher discount rates on their money than management does.

But some things aren't "sacrifice the future for cash today," or for that matter "reinvent the future and increase value by 100%." Some things are just "improve things a bit and make the stock price go up." If those things happen, that's nice for shareholders. If trying to make those things happen marries you to a company forever, well, then, fewer of those things will happen.

Wet Seal Letter to Shareholders; Clinton Group 13D/A [EDGAR]

1.You rarely see open letters to CEOs saying "we think you should stuff channels, accelerate as much revenue as you can to this quarter, and then release misleadingly high guidance for next quarter." I suppose letters saying "just sell more damn widgets" are more common but at least equally pointless.