There was a nearly palpable sense in Los Angeles last week of blood returning into the veins of investors and financial markets.
“Maybe it was the football games over the (preceding) weekend, which got people’s minds off the tragedy, and made us feel like we could get back a normal life,” said John Marrone, branch manager in Century City with the Roth Capital Partners securities brokerage. “There was something very healing about the weekend.”
Marrone said even market mavens underestimated the depth of angst and nervousness on Wall Street when the markets reopened for trading on Sept. 17.
“I don’t think it was fully understood, even within the financial media, what a deep, deep funk Wall Street has been in following the World Trade Center attack. … I have never seen so much fear, or depression, even in 1987 (when the market sank by more than 30 percent).”
Almost everybody on Wall Street knew someone, perhaps a friend, former colleague or someone’s spouse, who perished in the attack. Many, including Marrone, confessed to having had tears spontaneously well up in their eyes a week or more after the attack.
Adding to the gloom, many Wall Street phone lines were still dead and whole firms eliminated, or nearly so. Analysts could not make recommendations, and many informational services traders and others normally use were not available.
But the huge rally on Sept. 24 was the shot in the arm the markets and street denizens badly needed, said Marrone. “Greenspan is lowering interest rates, flooding the system with money,” he said. “There will be a huge amount of construction in Manhattan, new computer systems will be bought. The federal government is spending. Soon Wall Street will put itself back together, analysts will be able to communicate, and I think we will send out a message that we are going to be all right.”
Harry Baxter, branch manager with Schoff & Baxter, also in Century City, looked harried but relieved last Monday, after the 368 point, 4.5 percent Dow Jones rally.
“Last week (when trading reopened) was my worst ever in the business,” said Baxter. “Just draining. You tell people not to sell, but the market just keeps going down. But today (Sept. 24) I did not have a single sell order. Everybody was buying.”
Some Wall Streeters last week did not want to be quoted, reluctant to appear relieved, or seeking profit, so soon after a tragedy many deeply felt. And the market remained volatile after Monday’s strong showing. But there is a strong sense of better times, whether of portfolios, or actual buildings.
“I guess if there is such a thing as a truly recession-proof business, this one is it,” said Steven Buchwalter, a sole practitioner in Encino whose law firm takes on arbitration cases for customers who feel they have been done wrong by securities brokerages. Since a Supreme Court ruling in 1987, brokerages compel investors into binding arbitration to resolve disputes, a process usually managed by the National Association of Securities Dealers.
With major market indexes down, more investors are scrutinizing their brokers, and many do not like what they see, said Buchwalter.
A successful stratagem for investors of late has to been to allege that a brokerage had conflicts of interest in recommending and selling a particular stock to clients.
In the late 1990s and into 2000 there were a profusion of Wall Street deals in which brokerages variously acted as venture capitalist, then merchant banker and finally the initial public offering underwriter for a company.
While not an inherently nefarious arrangement, the practice meant that a brokerage might have loans or equity vested in an enterprise — and those loans or equity stakes would do a lot better if the IPO was a rousing success.
Buchwalter recently successfully argued a case in which the brokerage had extended loans, in the form of promissory notes, to a company it later took public. The notes were paid back with IPO proceeds, not an unusual arrangement. But when the company tanked, Buchwalter’s client alleged that the brokerage conducted the IPO in order to get its notes paid back. Buchwalter finds that in such conflict-of-interest cases, brokerages tend to settle, before complying with arbitrators’ orders to produce paperwork detailing relationships between the brokerage and the company it took public.
“When we get a ‘motion to compel,’ that is, the arbitrators say the brokerage has to produce their due diligence file, which will have a lot of the business dealings specified, we find the brokerage then wants to settle,” said Buchwalter, who takes on between 20 and 50 cases a year.
In such settlements, Buchwalter said he gets “most of” what his clients wanted.
Dealmakers complain that it has been difficult to obtain financing to make acquisitions, but the food industry seems to be something of an exception. People have to eat, as they say.
Last week Leib Orlanski, partner with the Kirkpatrick & Lockhardt law firm in Beverly Hills, confirmed that financial shop Levine Leichtman Capital Partners had financed a management leveraged buyout of a Dallas-based meat processing firm, Simeus Corp. Levine Leichtman liked the deal, as they already own a chicken processing house — Culver City-based Overhill Farms Inc. Both companies service the restaurant industry, so some synergies are expected.
Deal terms were not disclosed, although Orlanski said management at Simeus would retain a one-third stake in the meat processing outfit, and that Levine Leichtman came up with $40 million to execute the deal. It was Orlanski, a board member with Simeus, who connected the company to Levine Leichtman.
Bob Poletti, partner at Levine Leichtman, was reluctant to talk last week, as his firm is raising $800 million for a new fund, meaning that he is in something of a SEC-mandated “quiet period.”
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg
Reprinted with the permission of the Los Angeles Business Journal. October 1, 2001