Insider Buying at BIF: Manipulation or Hallucination?

Dan Plettner has been blogging in great detail regarding his contention that Boulder Growth & Income Fund’s (BIF) incestuous relationship of BIF’s advisor and its control shareholder (“EHT”) have acted in concert for its own collective economic interest to the detriment of fellow shareholders. I thought his case had merit and I wanted to explore his contentions to see if it could be empirically demonstrated.

Conclusion: The actions of the advisor and the control shareholder appear on the face of it to be concerted as demonstrated in the chart below. Notwithstanding, I’d recommend owning shares of BIF for a 6 to 9 month holding period for risk-oriented investors looking to piggyback on the actions of the advisor and the related control shareholder. The recent actions by both constitute “betting with the house”. I always like those odds.

For the same reasons I like the stock in the short-term, I would not be a long-term holder of BIF by virtue of the enormous potential for conflict of interest. For this reason, I would concur with Dan that shareholders should vote against a staggered board as proposed by management. Good corporate governance requires “checks and balances”. In the case of BIF there appears to be none.

Smoking Gun: I believe the determining factors with regards to whether the actions depicted in the chart below are manipulative are in the end-game. I would conclude that such actions are without question manipulative if after the controlling shareholder completed its acquisition plans: 1) the advisor either announces or implements a plan to aggressively convert its cash holdings into equity investments; 2) the board declares a single, cumulative year-end distribution for all of FY ’09 that would include recently accumulated shares by EHT.

BIF’s Timeline: The chart below is a timeline of BIF’s advisor’s actions and those of its control shareholder from the beginning of 2008 to April of 2009. The chart also shows the premium/discount (“prem/disc”) of BIF and the Eqcome Prem/Disc for the General Equity Funds for the same period.

The chart depicts four significant events in relation to the comparative prem/disc of BIF and its peer group.

1. The first is the announcement of the rights offering in April of 2008. At that time BIF was trading at a premium to its NAV. It’s always a good time to issue equity when a stock is trading at a premium to its NAV. (The corollary is also true: buying back stock when it’s at a material discount to NAV—as it is currently).
2. The completion of the rights offering which raised an additional $76 million of shareholder equity at the end of May ‘08.
3. The suspension of the dividend in October ‘08. (Another factor listed in the annual report but not represented on the chart is the advisor’s decision not to deploy the funds raised in the rights offering).
4. The accumulation of shares by EHT, the control shareholder (person), from November 14, ‘08 to May 4 ‘09. During this period EHT accumulated 1,074,293 shares in 287 transactions for an average cost of $4.11 per share. During this period, EHT increased its holdings 33.5% to 4,267,825 shares for an ownership stake of 16.7%. Prior to November of 2008, EHT was a seller of BIF.

In the chart, I compared the prem/disc of BIF with that of the Eqcome CEF Equity Prem/Disc Sub-Index. The purpose of the comparison was to discern whether the actions of BIF’s advisor had an impact on its prem/disc independent of its peer group. It would appear that BIF’s dramatic deterioration in its prem/disc could not be totally explained by changes in the prem/disc of its peer group.

On the face of it, one could argue these series of transactions were designed to drive the share price down in an effort to allow the control shareholder to accumulate additional shares and later affect changes in investment and distribution policies that would drive the stock higher.

Incestuous Relationships: The chart below depicts the interlocking relationships among BIF’s shareholders, Trustees, employees and beneficiaries. There is almost complete control of BIF by the Horejsi affiliated entities and the potential for conflict of interest is significant. I will not spend any time here outlining these relationships and refer you to Dan’s blog articles. (For a better rendering of the charts visit here.)

Let’s Push the Numbers: Let’s make the major assumption that BIF’s advisor/owners carefully planned to manipulate the stock. Then you’d have to go back to March of 08, prior to the rights offering as a baseline. BIF shares at that time were trading at premium of 3.9%. BIF’s prem/disc has devolved to a 22.7% discount as the end of April ‘09. This is far greater a swing than its peer group during the same period.

EHT purchased 1.1 million shares at an average cost of 4.11 per share for a total of $4.4 million at an average month end discount during the acquisition period of 20.3%. Based on the end of April 09’s NAV, which I believe is a conservative assumption, if the stock price were to again go to a 3.9% premium it enjoyed prior to the rights offering then the return on investment of the incremental shares would be 39.0%. Let’s be more conservative. Let’s use the current discount for BIF’s peer group which is a discount of 8.8%; the return would then be 22.0%. This is without taking into account any subsequent resumption of distributions.

Items to be considered: There are two items that are curious with respect to maximizing the economics of such concerted manipulation.

The first would be: Why would the advisor discontinue the monthly return of capital distributions during the period of EHT’s accumulation? In theory the distribution would help fund EHT’s purchases by providing it with 100 cents on the dollar while it was buying the shares at a 20% discount. The answer to this question may be that maintaining the dividend would support the stock price and increase the cost of acquisitions.

The other item is less easy to explain away. The suspension of the dividend would constitute an opportunity cost of implementing this strategy. Since EHT owned 3.2 million shares prior to its recent accumulation, it incurred a loss of approximately $2 million of tax-free income (return of capital distributions) to EHT if the dividend were based on a 10% managed distribution policy at the time the dividend was eliminated (10/31/08). Including the lost of dividend on existing shares, the return on the incremental share investment by EHT is reduced to the range of 7.5% to 18.8%. Still moderately attractive based on conservative assumptions. (This calculation is highly sensitive to the managed dividend assumption. At an 8.0% assumption, the return range expands to 11.1% to 27.7%)

Importantly, investors who purchase the shares at this juncture don’t assume that opportunity cost and enjoy the higher levels of return.

Disclosure: Long BIF and would increase that position.

Comments

[Alan Young:]

Joe, this is an exemplary piece of work: solid research, clear presentation, and well-articulated investment thesis. Well done.

As far as actually buying this piece of slime--now I know what the proverbial "10-foot pole" is used for!

May 10 07:45 PM

[Dan Plettner:]

I applaud the work of Joe Eqcome. I am discontent with concerted actions perceived by both Joe and myself. My own investment thesis is that value ultimately will be restored to shareholders in an unwinding of prior insider manipulation. Joe’s “betting with the house” investment thesis also has strong intellectual merit.

The “house” advantage is one of tremendous relevance given what I perceive as a manipulative insider history which I’ve most recently written about here:

seekingalpha.com/artic...

These insiders are intelligent, if unethical, and another SEC Form 4 Filing revealed an additional 48,000 shares acquired by the “EH Trust” just yesterday at prices $4.46-$4.49. Having said that, these insiders are still motivated financially my their aggregate holdings. I am confident insiders have not wanted to show the capabilities of Boulder Growth and Income Fund to restore shareholder value because they have been unable to do the same for Boulder Total Return Fund.

I believe Intelligent BIF investors would be wise to fight the current Board of Directors and insiders tooth-and-nail, without selling any of the inappropriately and artificially undervalued shares.

Shareholders who owned BIF prior to the March 6 record date can call 1-800-992-2856 and make sure they are recorded as voting AGAINST Proposal 1. If you already voted and wish to change your vote, you can! Proposal 1, if passed, would make it more difficult to change the BIF Board of Directors promptly.

I also encourage BIF shareholders to get their commentary toward recent failures to restore shareholder value on the record. You can write the board at the address below, or can fax to [phone]

Boulder Growth and Income Fund Board of Directors
c/o Boulder Investment Advisors, LLC
2344 Spruce Street, Suite A
Boulder, Colorado 80302

May 12 04:47 PM

[Greg Spears:]

[e-mail]
Dan,
Why wouldn't you continue to purchase BIF? i have been following your blog for several weeks now. Isn't this as simple as if one buys BIF he/she is purchasing Berk/A at a 15%-20% discount based on the % of Berk/A that makes up BIF portfolio? Please explain why I should not be purchasing BIF at the current discount?
Greg



On May 12 04:47 PM Dan Plettner wrote:

> I applaud the work of Joe Eqcome. I am discontent with concerted
> actions perceived by both Joe and myself. My own investment thesis
> is that value ultimately will be restored to shareholders in an unwinding
> of prior insider manipulation. Joe’s “betting with the house” investment
> thesis also has strong intellectual merit.
>
> The “house” advantage is one of tremendous relevance given what I
> perceive as a manipulative insider history which I’ve most recently
> written about here:
>
> seekingalpha.com/artic...
>
>
> These insiders are intelligent, if unethical, and another SEC Form
> 4 Filing revealed an additional 48,000 shares acquired by the “EH
> Trust” just yesterday at prices $4.46-$4.49. Having said that, these
> insiders are still motivated financially my their aggregate holdings.
> I am confident insiders have not wanted to show the capabilities
> of Boulder Growth and Income Fund to restore shareholder value because
> they have been unable to do the same for Boulder Total Return Fund.
>
>
> I believe Intelligent BIF investors would be wise to fight the current
> Board of Directors and insiders tooth-and-nail, without selling any
> of the inappropriately and artificially undervalued shares.
>
> Shareholders who owned BIF prior to the March 6 record date can call
> 1-800-992-2856 and make sure they are recorded as voting AGAINST
> Proposal 1. If you already voted and wish to change your vote, you
> can! Proposal 1, if passed, would make it more difficult to change
> the BIF Board of Directors promptly.
>
> I also encourage BIF shareholders to get their commentary toward
> recent failures to restore shareholder value on the record. You can
> write the board at the address below, or can fax to [phone]
>
>
> Boulder Growth and Income Fund Board of Directors
> c/o Boulder Investment Advisors, LLC
> 2344 Spruce Street, Suite A
> Boulder, Colorado 80302

May 26 10:44 AM

[Dan Plettner:]

Greg

You have mentioned my name in your post and responded to one of my comments, but please note this is Joe's article we are both commenting on. Your mention of my name may be by accident, but going forward, please realize that it is more appropriate to direct your questions to the author.

I hope Joe responds to you and I'll keep my response short because this is Joe's article. I bought additional shares of BIF just today and BIF is by far the largest holding I have ever built.

In my view, the discount is much less relevant than the ease with which any ethical or prudent Board of Directors could close that discount and restore shareholder value.


On May 26 10:44 AM Greg Spears wrote:

> [e-mail]
> Dan,
> Why wouldn't you continue to purchase BIF? i have been following
> your blog for several weeks now. Isn't this as simple as if one
> buys BIF he/she is purchasing Berk/A at a 15%-20% discount based
> on the % of Berk/A that makes up BIF portfolio? Please explain why
> I should not be purchasing BIF at the current discount?
> Greg
>

May 26 11:20 AM

[Dan Plettner:]

A non-Horejsi-Family Board Member's Insider Purchase SEC filing showed up yesterday:

www.sec.gov/Archives/e...

Of course, plenty of information making the restoration of BIF shareholder value so obvious for any ethical Board of Directors to do is readily available as public information through N-Q filings paired with Horejsi's stated investment thesis at the Annual Shareholder Meeting April 24th.

May 28 08:52 AM

[Dan Plettner:]

It is regrettable that the very articles that Joe Eqcome found to have merit were removed from Seeking Alpha following a letter from the Boulder Investment Advisers' attorney.

For Joe's readers who wish to do some background reading and understand why the articles were removed, the explanation from Seeking Alpha's Editor-In-Chief is shown here:

home.fuse.net/danplett.../

Jun 25 10:00 AM