One exec pays off risky loan, another pays a big price

January 23, 2010

One veteran Indianapolis executive who used his company’s stock as loan collateral has successfully extricated himself from the risky arrangement.

Another who did the same thing is paying a steep price, with a bank launching foreclosure proceedings on his 9,000-square-foot home.

Emmis Communications Corp.’s CEO and founder, Jeff Smulyan, disclosed in a Jan. 12 regulatory filing that he paid off a loan collateralized by nearly all his Emmis stock—almost 5 million shares.

Meanwhile, GMAC Mortgage on Dec. 11 filed a lawsuit seeking to foreclose on a Williams Creek home owned by John Wynne, one of the founders of Duke Realty Corp., who retired as the company’s chairman in 1999. The suit says Wynne owes $1.2 million on a mortgage he and his wife took out in 2001.

Wynne had pledged Duke stock in a Merrill Lynch margin account—collateral the investment firm apparently cashed in two years ago after the Indianapolis real estate developer’s stock price tumbled.

Such are the harsh realities in these still-treacherous times. Executives who borrowed millions of dollars against their stock portfolios might think they’re taking a relatively small risk—especially if the shares serving as collateral are in a business they have supreme confidence in, the one they helped build from the ground up.

But almost no one expected the financial meltdown that hit the nation in 2008. Executives across America saw the value of their pledged shares shrivel. Nervous lenders began cashing in stock, fearing it would fall even lower, or demanding additional collateral.

Smulyan in recent years threw in so much collateral that Emmis put this disclosure in its proxy statements: “If Mr. Smulyan defaults on the line of credit and the pledge is foreclosed, the sale of shares … could result in a change in control of the company.”

In a 2007 regulatory filing, Emmis investor Frank Martin, senior partner of Elkhart-based Martin Capital Management, fretted: “Of concern to us is that if the CEO has his back up against the financial wall, his judgment ... may be impaired,” a scenario that might prevent investors from getting full value for their stock.

Smulyan, who never bought into such gloom-and-doom scenarios, told IBJ he paid off the debt by selling his investment in a private company. He declined to say how much he had owed or which investment he liquidated.

The net worth of Smulyan, Emmis’ biggest shareholder, has declined as the company’s fortunes have deteriorated. Emmis shares now fetch about $1.15 apiece. They’ve more than quadrupled from their 2009 low, but still are 98 percent off the all-time high they hit in 1999.

“It was a matter of disagreement with one of our shareholders,” Smulyan, 62, said of the pledged shares. “I didn’t think it was the end of the world, and now it is not an issue anymore.”

Losing home

Roger Harvey, a spokesman for Wynne, blamed the home-foreclosure lawsuit pending against Wynne on “the difficult and challenging real estate market,” rather than on the executive’s use of Duke shares as loan collateral. Harvey noted the Wynnes had been trying to sell the home, but without success.

In a phone interview with IBJ in October 2008, Wynne refused to confirm or deny that margin calls had led Merrill Lynch to sell millions of dollars in Duke shares.

Securities and Exchange Commission filings show Wynne had been pledging Duke shares since at least 2003. As of that year, he had put up 210,686 shares then worth $6.5 million.

In February 2008, he put up an additional 16,351 shares as collateral and registered the stock for possible sale. At that time, Duke shares were fetching $22, making those shares worth $360,000. Later that year, the stock price fell to just $4.07.

For an executive like Wynne, 77, who built his wealth over decades, margin sales in the depth of a bear market are a double whammy. Because stock prices are depressed, sales fetch only a meager sum. Yet, because the shares have a low tax basis, they trigger hefty capital gains taxes.

Wynne, an attorney, had been holding Duke Realty shares since he, Phil Duke and John Rosebrough founded the company by buying the then-ailing Park 100 industrial park in 1972.

According to the foreclosure lawsuit, Wynne stopped making payments on the six-bedroom, seven-bath home at 510 Forest Blvd. in May 2009.

The Wynnes, who have moved out of the home, are asking $1.2 million, a sum equal to the amount due on the GMAC mortgage.•


Recent Articles by Greg Andrews

Comments powered by Disqus