CIT's Pain Is Goldman's Gain

In light of the recent apology that was offered up by Lloyd Blankfein, CEO of Goldman Sachs (GS), I came across something that highlights Goldman's role in the world of guerrilla investment banking. I pulled the old Value Line for CIT Group (CIT) dated November 24, 2006. I was trying to determine the pre-banking crisis book value of CIT.

What caught my eye was the brief historical description of CIT which indicated that the company was established in 1908. In 1915 the company moved from St. Louis, MO to New York City. According to Value Line:

On 11/18/97, J.P. Morgan (JPM) and Goldman Sachs jointly led CIT's initial public offering of 36,225,000 shares, priced at $27.00 per share on the NYSE. On 6/1/01, CIT was acquired by TCH, a wholly-owned subsidiary of Tyco Intl., Ltd. On 7/8/02, Tyco sold 100% of CIT's outstanding stock in an IPO, led by Goldman Sachs and Lehman Brothers (LEH). Offering was for 200,000,000 shares, priced at $23.00 per share on the NYSE.

In the first public offering done with Goldman Sachs as the joint underwriter, CIT was valued at $978,075,000 or just less than $1 billion dollars. Four years later, Tyco International (TYC) acquired CIT Group in a cash and stock deal worth $9.2 billion. CIT was taken private for a year then relisted as an IPO. Who was there to administer the second IPO but none other than Goldman Sachs, of course.

It is important to note that TYC shares were trading at a (pre-split) price of $57 a share when the acquisition of CIT took place. By the time the second IPO of CIT took place, TYC was trading at $12 a share (a decline of 80%.) What led to the dramatic decline in Tyco shares? Insiders at TYC were tried and convicted of manipulating the financials and using the company cash as a personal treasure chest. Based on the court proceedings that followed the trial of CEO Dennis Kozlowski and CFO Mark Swartz, it became apparent that the earnings that led to the high share price that allowed TYC to buy CIT Group was based on fraud.

What is most interesting about the second issuance of CIT Group was that somehow in a years time the company lost more than half of its value. The IPO on July 8, 2002 was valued at $4.6 billion, exactly half of the price that the company was initially paid for by TYC. Either TYC paid 100% more than CIT Group was worth or TYC raided the coffers of CIT.

TYC is a shadow of its former self. TYC had to do a reverse split in order to mask the deplorable condition of the company. At an all time high of $250 (pre-split $62.50) in January of 2001, the stock has fallen to the current $37.08 (pre-split $9.27), a decline of 85%.

As for CIT Group, well that company just recently filed for bankruptcy. CIT traded as high as $61 in May of 2007. The last quote of CIT on November 18, 2009 was $0.20 or twenty cents.

Goldman Sachs, doing God's work [the implied message in a recent interview], had no problems brokering fraudulent transactions. Some would say, "How could you accuse Goldman Sachs of knowing that Tyco was cooking the books?" I would suggest that the question should be, how could they not know? This is where knowledge of stock market history is plenty useful. There are too many examples to reference where corporate raiders descended upon hapless companies that didn't have the largess of a high stock price to defend themselves.

It is clear that somebody got hosed in the Tyco/CIT Group deals. One thing is for sure: Goldman Sachs wasn't one of them.

Disclosure: No positions

Comments

[apppro]

The real GS crime is still not being acknowledged. Who do you think was taking all those Chanos, Einhorn, Ackman, Paulson, etc. SHORT SALES BETS (and that's all they were and are - gambling bets) that eventually brought down the entire country. That is what GS is apologizing for, but no one says it.
When are we going to go after the true culprits and not just GS's stupidity?

2009 Nov 19 07:20 AM

[onlythefacts]

I'm willing to wager that you cannot find anything in the trials of Kozlowski or Swartz that refers to "manipulating the financials." It's just NOT what the trial was about. If you read the results of the internal investigation into accounting done by David Boies, he concluded that there was no accounting fraud at Tyco. So, although you use this fraud as a basis for the assertions in your blog, you made of the underlying facts!

2009 Nov 19 08:22 AM

[Dividend Inc]

You're probably right OTF, however, the convictions of Kozlowski and Swartz included securities fraud. The extent of the securities fraud was extensive which is the reason it was included in the list of convictions. In order to commit and get convicted for securities fraud you have to manipulate the stock.

Manipulation is described by the SEC as, "... intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions." (www.sec.gov/answers/tm...)

As you imply, the trial of Tyco executives may have been done only for the purpose of show. However, it cannot be denied that manipulation was part of their conviction...unless we wish to argue semantics.

Below are the quotes and sources citations for at least two sources. There were many more articles that point out securities fraud but there is a limit I'm sure.

Enjoy and thanks for the commentary.

Sources Citation:

"Each man is serving 8 1/3 to 25 years in state prison following his 2005 convictions for grand larceny, securities fraud, conspiracy and other charges..."

Stashenko, Joel. "Court Upholds Convictions of Ex-Tyco Executives." The Legal Intelligencer (2008). General OneFile. Web. 19 Nov. 2009.


"Tyco's former chief executive, L. Dennis Kozlowski, 58, and former finance chief Mark Swartz, 44, were found guilty in June on 22 counts of grand larceny, falsifying business records, securities fraud and conspiracy - actions that prosecutors said involved both men giving themselves more than $150 million in illegal bonuses and forgiving loans to themselves, besides manipulating the company's stock price."

"Former Tyco execs sentenced to up to 25 years." Accounting Today 19.18 (2005): 4. General OneFile. Web. 19 Nov. 2009.


On Nov 19 08:22 AM onlythefacts wrote:

> I'm willing to wager that you cannot find anything in the trials
> of Kozlowski or Swartz that refers to "manipulating the financials."
> It's just NOT what the trial was about. If you read the results
> of the internal investigation into accounting done by David Boies,
> he concluded that there was no accounting fraud at Tyco. So, although
> you use this fraud as a basis for the assertions in your blog, you
> made of the underlying facts!

2009 Nov 19 10:50 AM

[Dividend Inc]

In regards to the issue of accounting fraud or manipulation of financials, several leading sources seem clear that management of financial information was present on the books of TYC. This might explain the reason why the CFO went to jail along with CEO Kozlowski. Enjoy.


Source Citation:

"WorldCom, Enron, HealthSouth, Tyco: The early years of this century have given us plenty of spectacular examples of accounting irregularities, where executives have been caught 'cooking the books.'"

Blaskowski, Laddie. "Cooking the books and how bankers can detect it." The RMA Journal (2006): 16+. General OneFile. Web. 19 Nov. 2009.


"Beginning with Enron, a number of accounting scandals hit the financial markets from late 2001 through the first half of 2002, including (with the dates the accounting irregularities became public): Homestar and Kmart (January 2002); Qwest Communications and Global Crossing (February 2002); WorldCom (March 2002); Adelphia Communications (April 2002); Tyco..."

Nogler, George E. "The changing information content of auditor going-concern opinions: it appears that the failure of Enron and surrounding events caused auditors to be more cautious." Commercial Lending Review 21.1 (2006): 43+. General OneFile. Web. 19 Nov. 2009.


"Chief Executive Dennis Kozlowski used acquisitions to turn Tyco, once a sleepy conglomerate, into a growth company. Earnings and stock price soared. Kozlowski was well rewarded, getting $77 million in restricted stock from 1999 through 2001, based in part on the growth in pretax earnings and operating cash flow he delivered. Except that those earnings were manipulated in the company's treatment of acquisitions, and Tyco's earnings and stock price collapsed in an accounting scandal during 2001. The company subsequently restated prior 2001 earnings lower by $507 million."

Roney, Maya. "It Paid to Cheat." Forbes 9 May 2005: 134. General OneFile. Web. 19 Nov. 2009.

2009 Nov 19 11:49 AM