WASHINGTON — Kevin McLaughlin had been saying it for years: The Securities and Exchange Commission, the nation’s guardian of stock markets, botched a potential investigation into opaque financial dealings that cost small investors millions of dollars.
Now an internal investigation has vindicated some of his claims.
"If you're a guy sitting out here in Des Moines like me, you want to invest in accounting systems you understand," said McLaughlin, who filed 17 complaints with the SEC about the telecom company Metromedia International Group from 2005 to 2007 before it took any action. "I thought I had cops on the beat who could warn me about what's going on."
McLaughlin isn't the only one whose complaints to the SEC fell on deaf ears. The SEC was criticized for missing the multi-billion-dollar Ponzi scheme of Bernard Madoff despite numerous opportunities to stop him, as well as overlooking an alleged scheme by now-indicted financier Allen Stanford.
Recent revelations about Goldman Sachs, Moody's Investors Service and others have prompted the SEC, under new leadership, to improve its handling of complaints and to file high-profile suits against Goldman Sachs, among others.
For McLaughlin, however, that comes too late.
In the 1990s, McLaughlin, an Iowa stockbroker, invested in Metromedia, a media company in the former Soviet Union that owned television and radio stations, wireless networks and other media in the Republic of Georgia and northwestern Russia. He thought that because Metromedia was traded on a U.S. exchange and had to adhere to its accounting principles, it was a safe investment.
He was wrong, and when things fell apart, he appealed to the regulator he'd trusted. Yet only after McLaughlin enlisted several lawmakers, including both his state's senators, Republican Charles Grassley and Democrat Tom Harkin, did the SEC begin to look into the Metromedia case, ultimately mobilizing its internal watchdog, David Kotz, to investigate.
Kotz concluded that the SEC had "mishandled and mismanaged" McLaughlin's complaints, and hadn't looked into the matter seriously until it was too late.
McLaughlin had charged that the firm's financial reporting was delinquent and erroneous, that its assets were sold at below-market prices and that Metromedia management had engaged in "self-dealing," or arranging deals for its own benefit, not for shareholders, Kotz's report found.
"His statements were completely unfounded," responded Mark Hauf, the CEO of Metromedia from 2003 to 2009. "The man cost us a huge amount of money with his foolishness . . . poured down the hole of that man's boundless ego and paranoia."
McLaughlin, who'd recommended that several of his clients invest in the company in the '90s, when the stock was trading at $10 to $25 per share, was upset at the opaque way the company operated. Metromedia last reported full-year numbers in 2003, and issued its last quarterly statement in 2004.
In April 2007, the SEC issued a warning saying that it was giving Metromedia 15 days to make all its filings current, but the commission didn't follow up, and the company was sold that August, for $1.80 a share.
Metromedia upset other investors, as well, including large hedge funds such as New York-based Esopus Capital.
"They just didn't file their reports," said Martin Sklar, an attorney for Esopus.
As Metromedia failed to keep up with its filings and its stock hit bottom, management aimed to sell the company to recoup at least some investment. In January 2005, it tried to sell all the assets for $300 million to foreign investors Emergent Telecom, First National Holdings and a Cyprus-based investor, Baring Vostok Capital. The deal didn't fly.
"Why so little?" asks McLaughlin, who said that the telephone systems in the Republic of Georgia alone were worth more than a billion dollars.
Hedge fund Mellon HBV Alternative Strategies, which owned more than 6 percent of Metromedia at the time, also was unhappy about the $300 million valuation and wrote a letter trying to stop it, according to regulatory filings.
Meanwhile, Metromedia sold its Russian telephone subsidiary, which accounted for only a portion of the company's sales, to the same group of foreign investors for less than $215 million.
McLaughlin had alleged "self-dealing" in that deal, as Kotz's report found. CEO Hauf got a bonus of more than $1.3 million to complete the Russia deal, which McLaughlin also thought was underpriced, and other officers received similar amounts, according to filings.
The SEC, however, didn't take testimony about the deal from Metromedia's officers, relying instead on transcripts.
Hauf said the bonuses were incentives to complete the deal.
"The board was astounded with the price we could attain for the property," he said. "Completing a deal like that in Russia with the amount of competition that occurs there was not a trivial."
Hauf said Metromedia was a "company that struggled its way through a difficult market and wound up making some money for its shareholders."
The company ultimately was sold to two London-based private equity firms, Salford Capital Partners Inc. and Sun Capital Partners Ltd.
McLaughlin had invested $300,000 of his own money in the company, and he said that his family probably invested another $300,000. He said his sister had to sell at a "ridiculous" price to pay medical bills, and that he'd gone into a hole and was still fighting for recompense from Metromedia.
In addition to complaining to the SEC, McLaughlin has sued to get Metromedia's records, but he's spent almost as much fighting the company as he invested in it. Though he probably has recouped half his cash investment, he said he'd spent more than $250,000 on legal bills, travel and expenses.
Feelings about the merits of McLaughlin's claims are mixed.
One investor, Esopus, first bought stock in 2005 and made money, according to Sklar, but didn't think it made enough.
"While it was a successful investment for them, they did not feel that the consideration reflected the full value of the assets," Sklar said in an e-mail.
Nevertheless, "It's good that (McLaughlin did bring it to our attention), because there were issues there that needed to be addressed," SEC Inspector General Kotz said.
The SEC said it was installing a new system to centralize the complaints process and was creating an office of market intelligence. The commission only now is converting its case-closing process from a paper-based system to an electronic one.
Iowa Senator Grassley isn't "in a position to judge the merits of the complaint," his press secretary, Jill Gerber, said in an e-mail.
"However, the lack of attention to the complaint appears to be the latest example of the shortcomings and failures of the SEC's enforcement division," Gerber said. "Sen. Grassley will continue to work to strengthen the SEC's enforcement division."
(The Medill News Service is a Washington program of the Medill School of Journalism at Northwestern University.)
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