Thursday, May 15, 2008

A Cure for the Bad-CEO Blues: Sue Your Shareholders

Stephen Taub has an intriguing brief article in on the latest hot new trend among blame-shifting CEOs: Suing unruly shareholders.

Vaalco Energy is trying an unsual tactic to stave off a proxy fight: suing its shareholders.

The independent oil producer filed an action against New York City-based hedge fund Nanes Delorme Partners I L.P., and Pilatus Energy SA, of Zug, Switzerland, in federal court, alleging they violated securities laws by sending misleading information to shareholders in an effort to install three of their nominees on Vaalco's board, according to the Associated Press.

One of the targets of this imbecilic junk lawsuit responded as follows:

Julien Balkany, a Managing Member of Nanes Balkany Partners LLC, the General Partner of Nanes Delorme Partners, stated: "We believe that VAALCO has great potential, but that the company will continue to materially underperform without new independent representatives on the Board. In addition, rather than provide a clear strategic plan to rebuild stockholder value, the company has chosen to evade the critical issues facing Vaalco by filing a desperate and baseless lawsuit aimed at disenfranchising stockholders and 'chilling' the democratic process and to defend its failures by launching a campaign rooted in misleading facts and unnecessary scare tactics designed to distract stockholders from the company's poor performance."

Just goes to show you how far we've come from Enron. Nowadays, bad companies add insult to the injury they inflict on shareholders by lashing out at analysts, the media, and now investors. The SEC and other regulators, meanwhile, are snoring loudly in the background.

As perfected by's wack-a-doo CEO Patrick Byrne, the name for this kind of toxic blame-shifting is known as "issuer retaliation." That was also the theme in David Einhorn's great new book Fooling Some of the People All of the Time.

Einhorn chronicled his battle royale with a scuzzy company called Allied Capital. Here's a cogent review by Jesse Eisinger in Portfolio.

UPDATE: A rep for Vaalco wrote to say that this item gives this company a bum rap. I asked for a reply that I could post verbatim, and was sent the following:

VAALCO’s Board and management team are active, engaged and successfully executing on the Company’s strategy. Nanes Delorme Partners’ claim to the contrary simply ignores the facts:

· VAALCO has delivered superior stock price performance. VAALCO has outperformed its peer group and the broader market as a whole over the last six month, one, three and five year periods. Indeed, our stock performance has exceeded our peers[1] by 25%, 20%, 23%, and 167% in each of those periods, respectively[2].

· VAALCO’s operating performance is among the best in the industry. Since 2000, 80% of the exploration and appraisal wells drilled by the Company have been successful. We also have a 100% success rate with our development wells on the Etame Block, our principal producing asset. These are exceptional drilling success rates in our industry.

· VAALCO’s financial performance is strong. Revenues, cash flows and earnings per share have consistently increased in nearly every year. VAALCO’s average return on invested capital (ROIC) over the last five years is 30.7% and in the top 5% of our industry.

We are confident in our ability to build on this strong operating and financial track record. We believe 2008 will be a break-out year for your company and for the value of your VAALCO shares.

· VAALCO’s exploration program, which includes seven planned exploration wells, will expose the Company to in excess of 50 million net barrels compared to VAALCO’s current 6.2 million barrels of proved reserves. This represents an eight-fold potential increase. We have rigs arranged to commence drilling this summer.

· We expect continued significant increases in stockholder value in the near-term. VAALCO’s stock price historically surges when the Company moves from the property acquisition and seismic phase to the drilling phase – and this is precisely where we believe we are now.

THE PUBLIC RECORDS OF nanes delorme partners and Pilatus energy ARE

Nanes Delorme Partners and Pilatus Energy appear to be concealing what the public record makes clear – Nanes Delorme Partners and Pilatus Energy are conflicted and their ethics tainted by a scandal involving corruption, kickbacks, fraud and embezzlement. You deserve to know the following:

The Public Record on Nanes Delorme Partners*

The Public Record on Pilatus Energy*

Nanes Delorme Partners only recently purchased its VAALCO shares and more than half of its shares were transferred from Pilatus Energy on 02/14/2008.

Source: Nanes Delorme Partners definitive proxy statement filed with the Securities and Exchange Commission on 05/07/2008

Pilatus Energy is a limited partner of Nanes Delorme Partners. It recently purchased 2,700,000 shares of VAALCO between 11/28/2007 and 01/30/2008.

Source: Nanes Delorme Partners revised preliminary proxy statement filed with the Securities and Exchange Commission on 05/05/2008.

(Notably, Nanes Delorme Partners’ prior preliminary proxy statement filed on 04/25/2008 did not mention Pilatus Energy by name, but only referred to an unnamed “limited partner.”)

Nanes Delorme Partners I LP is a New York based hedge fund that invests primarily in the oil and gas exploration and production sector.

Source: Nanes Delorme Partners press release, 04/24/2008

Pilatus is comprised of Pilatus Energy and Pilatus Ressources (sic) which are two companies based in Zug, Switzerland. Pilatus has positions in the majority of the African and Middle East countries.

Source: Pilatus Energy press release, 01/31/2008

Julien Balkany, a 27-year old French citizen, paid Nanes Delorme Partners employee, and nominee to your board is leading Nanes Delorme Partners’ proxy campaign.

Source: Nanes Delorme Partners revised preliminary proxy statement filed with the Securities and Exchange Commission on 05/05/2008; Nanes Delorme Partners press release, 05/08/2008

“…Pilatus Energy and Pilatus Resources, two companies run from behind the scenes by France's Loik Le Floch-Prigent…”

Source: Africa Energy Intelligence, “Abbas I. Yousef Al Yousef,” 12/19/2007

“The name of the former Elf CEO doesn't appear on their list of executives but it is he who makes all of their investment decisions.”

Source: Africa Energy Intelligence, “Le Floch-Prigent's New Incarnation,” 12/05/2007

Nanes Delorme Partners is paying its two other nominees $25,000 simply to stand for election and additional monies if they fail.

Source: Nanes Delorme Partners definitive proxy statement filed with the Securities and Exchange Commission on 05/07/2008

(While Nanes Delorme Partners’ nominees may have no affiliation with your company, these payments show that they are by no means independent from Nanes Delorme Partners.)

“France's mammoth Elf corruption case, probably the biggest political and corporate sleaze scandal to hit a western democracy since the second world war.”

Source: The Guardian, “Gigantic Sleaze Scandal Winds Up as Former Elf Oil Chiefs Are Jailed,” 11/13/2003

“Le Floch-Prigent, 60, and a former Elf director, Alfred Sirven, 76, are both already serving time after losing appeals earlier this year against separate convictions over corruption at Elf, since absorbed into the Franco-Belgian oil company Total. Both have admitted some of the charges against them during the four-month trial.”

Source: Associated Press, “Verdicts Expected in France's Biggest-Ever Graft Scandal,” 11/12/2003

Nanes Delorme is a broker for the sale of oil and gas assets, including those of VAALCO’s competitors. “In recent years, Nanes Delorme advised Afren on buying up the stake of Gulf Energy Resources in Angola’s Cabinda Central concession and on acquiring Heritage’s interests in Congo-Brazzaville.”

Source: Africa Energy Intelligence, “The New African Oil Trail Blazers,” 02/20/2008

“In a matter of months, the small Swiss group Pilatus Energy has built up an African portfolio with the help of a few middlemen who can knock on presidential doors…In September, it was awarded the Ngoki concession in the Mossaka region thanks to the advice of the former chief executive of Elf, Loik Le Floch-Prigent, who negotiated with the Congolese officials on Pilatus’ behalf.”

Source: Africa Energy Intelligence, “Pilatus Has Right Connections,” 11/29/2006

(These activities are competitive with VAALCO’s core operations.)

Ask yourself: If this information is available simply from the public record, what else about Nanes Delorme Partners and Pilatus Energy has yet to be revealed?

[1] VAALCO peer group as defined by the independent governance and proxy advisory firm RiskMetrics (ISS)

[2] Based on closing stock prices on May 13, 2008

* Permission to use quotations neither sought nor obtained.

So there! The formating of the chart ain't so good, but I can't seem to fix it.

Incidentally, it's nice to get a dignified response to an item, one that takes issue with the facts and does not engage in mudslinging. A refreshing change, even while I disagree with their actions here.

© 2008 Gary Weiss. All rights reserved.

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