[Corp. Watch] With pay tied to stocks, corporate execs 'pump and jump'

[Corporation Watch]

Before the Bust, These CEOs Took Money Off the Table

  By Mark Maremont, John Hechinger, and Maurice Tamman

(Wall Street Journal, Nov. 20) -- The credit bubble has burst. The  
economy is tanking. Investors in the U.S. stock market have lost more  
than $9 trillion since its peak a year ago. But in industries at the  
center of the crisis, plenty of top officials managed to emerge with  
substantial fortunes.

	Fifteen corporate chieftains of large home-building and financial- 
services firms each reaped more than $100 million in cash compensation  
and proceeds from stock sales during the past five years, according to  
a Wall Street Journal analysis.

	Four of those executives, including the heads of Lehman Brothers and  
Bear Stearns, ran companies that have filed for bankruptcy protection  
or seen their share prices fall more than 90% from their peak.

	The study, which examined filings at 120 public companies in such  
sectors as banking, mortgage finance, student lending, stock  
brokerage, and home building, showed that top executives and directors  
of the firms cashed out a total of more than $21 billion during the  
period.

	The issue of compensation and other rewards for corporate executives  
is front-and-center in the wake of the financial meltdown. Congress  
has held several hearings attacking Wall Street chieftains and others  
for perceived excesses given the state of their companies and the  
economy.

	America's boardrooms also are wrestling with the issue, trying to  
formulate pay plans that give proper long-term incentives.

	Some experts say huge paydays inevitably coincide with economic  
booms. In the tech bubble of the late 1990s, more than 50 individuals  
each made more than $100 million from selling shares just prior to the  
crash. Many had founded companies that never turned a profit.

	"The system tends to reward people for participating in bubbles,"  
says Roy C. Smith, a finance professor at New York University's  
business school. Smith, a former partner of Goldman Sachs, says that  
almost nobody anticipated the recent collapse.	

	Still, some firms are taking action to change their compensation  
systems.

	This week, Goldman Sachs, which recently received government funds,  
said its top brass would forgo bonuses for this year. Swiss banking  
giant UBS said it would hold some future compensation for executives  
in escrow, and pay it out only for strong long-term performance.

	Many executives highlighted in the Wall Street Journal study defended  
their compensation, noting that the cash they took out was tied to  
strong financial results and that shareholders flourished along with  
them.

	Some officials executed regularly scheduled sales of stock. Others  
exhibited good timing in stock sales, cashing out shares months or  
years before the market's steep decline.

	Most of those at the top of the list retained far more shares than  
they sold, meaning that their paper losses exceed the amount they took  
out of their companies. Some are founders or long-time executives who  
had built up equity over decades. Others on the list left their  
companies long before the crisis hit.

	In a surprising finding, home-building executives often made more  
money than better-known Wall Street titans. One is Dwight Schar,  
chairman of NVR, a Virginia-based home builder best known as the  
parent of Ryan Homes.

	He made more than $625 million in the five years, nearly all of it  
from selling stock. NVR's stock, though down 64% from its 2005 peak,  
has held up better than that of many rivals, in part because the  
company didn't buy vacant land on which to build its mostly mid-priced  
homes.

	Schar's own home these days is an 11-acre oceanfront compound in Palm  
Beach, Fla., with a tennis court and two pools, purchased in 2004 and  
2005 for $85.6 million from billionaire investor Ronald O. Perelman,  
according to county officials. Through a spokesman, Schar declined to  
comment.

	In its study, the Journal analyzed the compensation and stock sales  
of insiders at financial and housing-related companies over a five  
year period. The study used compensation data from Standard & Poor's  
ExecuComp and stock-trading information from InsiderScore.com.

	The goal was to determine how much cash insiders actually collected  
-- including salary, bonus, and cash realized from stock-option  
exercises and open-market sales of stock. The tally doesn't include  
paper profits from vesting of restricted stock or exercising options,  
unless the executive sold the resulting shares.

	By surveying entire industry groups, the Journal's study includes  
some companies that are under intense regulatory and law enforcement  
scrutiny because of their actions during the bubble. It also includes  
firms merely swept up in the crisis, as well as those performing well  
considering the economy.

	For example, Charles Schwab, chairman and founder of the brokerage  
company that bears his name, realized $817 million over the five  
years, almost all through stock sales. A spokesman says Schwab, 72,  
regularly sells stock to diversify his holdings and pursue charitable  
activities, and still holds a 17% stake.

	Schwab shares are up over the past five years and have held up well  
in the downturn. Schwab and his wife have established a charitable  
foundation that gives millions annually to help children with learning  
disabilities, among other causes.

	Six of those who made more than $100 million headed home builders,  
the Journal analysis found. One is Robert Toll, CEO of Toll Brothers,  
a Pennsylvania firm known for building deluxe suburban homes. Toll and  
brother Bruce Toll, a company director, together garnered $773 million  
in compensation and stock proceeds over the five-year period.

	A big chunk of Robert Toll's stock sales were in a one-month period  
just as Toll Brothers' stock roared to its all-time peak in mid-2005.  
It's off 73% since then. A Toll Brothers spokeswoman declined to  
discuss the timing of stock sales. She said the CEO's compensation is  
based on performance and that his stock gains resulted from equity he  
built up as a founder of the company.

	The list includes some familiar names, such as Angelo Mozilo, who  
realized $471 million during the five-year period as he piloted  
Countrywide Financial into a leading sub-prime lender. Amid huge  
losses, Countrywide was sold earlier this year to Bank of America.

	Mozilo defended his pay before Congress earlier this year, saying his  
compensation was tied to performance and he had built up equity over  
decades as a founder.

	Some who made large sums before the recent crisis don't appear on the  
list because their wealth isn't detailed in securities filings. These  
include hedge fund chiefs, Wall Street traders, and executives who  
sold their companies outright.

	In 2006, Herbert and Marion Sandler reaped more than $2 billion  
selling their mortgage lender, Golden West Financial, to Wachovia.  
Analysts have said losses in Golden West's loan portfolio contributed  
to Wachovia's subsequent downfall. Wells Fargo has agreed to buy  
Wachovia.

	Sandler, 77, defends Golden West's underwriting and says its loan  
losses weren't big enough to bring down Wachovia. Sandler, who pledges  
to give the proceeds of the sale to charity, adds that he held on to  
an "extremely material" amount of Wachovia stock, which lost 90% of  
its value since early 2007.

	"If we had foreseen what was going to happen, we would have sold all  
our stock," he says.

	The Sandlers' sale of their company has been well publicized. Others  
who profited have kept a low profile.

	R. Chad Dreier, 61, chairman and chief executive of Ryland Group, a  
California home builder, who made $181 million over the five-year  
period. Specializing in mid-range homes, Ryland did well in the boom,  
entering into hot markets, such as Las Vegas and Ft. Myers, Fla.

	Most of its buyers financed homes through Ryland's in-house mortgage  
unit, some through controversial interest-only mortgages.

	Dreier's bonuses, many tied to short-term profits, totaled $31.2  
million in 2005 and 2006 alone. Ryland paid him another $20.5 million  
over the five years to cover some of his tax bills. He made another  
$85 million from stock sales, most of them regularly scheduled.

	Next door to his 4,900-square-foot hilltop house in Santa Barbara,  
Calif., a Dreier private company owns an office building that houses  
his collection of baseball cards, sports memorabilia, gems, minerals  
and other items. State records say Dreier owns several cars, including  
a 2004 Porsche coupe worth $448,000. He has donated at least $6.5  
million to Loyola Marymount University.

	After posting huge profits during the bubble years, Ryland has  
reported hefty losses since last year amid plunging home sales. Its  
stock price is down 85% from its 2005 closing high.

	Through a spokesman, Dreier declined comment. The spokesman says   
Dreier's pay was "very closely tied to performance." He adds that the  
housing business is cyclical, and the Ryland chief's pay has sharply  
declined with the market.

	Wall Street once had a voracious appetite for student-loan debt. Ten  
insiders at First Marblehead Corp. seized the opening, receiving a  
total of about $660 million, mostly through stock sales over five years.

	Based in Boston, First Marblehead specializes in "private student  
loans." Students take out the loans if they've exhausted the cheaper  
government-backed variety. As with sub-prime mortgages, those with  
poor credit histories must pay higher interest rates.

	First Marblehead helped big banks, such as Bank of America and J.P.  
Morgan Chase, put together student-loan programs. First Marblehead  
earned rich fees assembling and servicing packages of the debt sold to  
investors.

	Chief Executive Daniel Meyers, a 46-year-old former arbitrage and  
derivatives trader, received almost $96 million in cash compensation  
and proceeds from stock sales over five years.

	Lee Jacobson, a First Marblehead spokesman, notes that Meyers co- 
founded the company in 1991 and didn't sell any shares until First  
Marblehead's October 2003 initial public offering.

	In 2004, Meyers bought a Spanish-style villa in Newport, R.I., the  
summer retreat of industrialists a century ago. He paid $10.3 million  
for the estate, on 45 acres with sweeping views of the Atlantic.  
Meyers tore down the villa and is constructing a five-building, 38,000- 
square-foot compound called Seaward with a carriage house, guest  
house, and caretaker's cottage.

	Meyers also owns a 66-foot sailing yacht, which he recently raced to  
a win at the famed Newport Regatta. In 2004, Meyers made a $22 million  
gift to the University of Virginia's Curry School of Education.

	Leslie Alexander, the 65-year-old owner of the Houston Rockets and  
until recently a First Marblehead director, cashed out $288 million in  
stock over the five-year period.

	In the credit crunch, First Marblehead's business ground to a halt  
after investors abandoned private student loans, which are  
experiencing rising defaults. Shares recently sold for about 75 cents  
apiece, down 99% from their January 2007 peak.

	The company's stock-market value is now roughly $75 million, about  
one-ninth of the amount that insiders cashed out of the company.  
Spokesman Jacobson notes that Alexander still owns 18.5% of First  
Marblehead, and Meyers retains 7%. He adds: "Both men have suffered  
significant losses alongside other long-term holders of the stock."

	Robert K. Cole, Edward Gotschall, and Brad Morrice, three mortgage  
industry veterans, founded New Century Financial in 1995. By the peak  
of the boom, it was the nation's second-largest sub-prime lender. The  
California company promoted mortgages that customers could apply for  
by merely stating their income with no documentation.

	Over four years, the three executives received cash compensation and  
stock proceeds totaling $74 million, including estimates of their 2006  
pay cited in a report by a court-appointed investigator after the  
company filed for bankruptcy protection.

	Cole, who was CEO for some of the period, lives in a 9,200-square- 
foot oceanfront home in Laguna Beach, Calif., that has a tax value of  
$30 million. The executives have been known as generous  
philanthropists in California. Gotschall's foundation gave $3 million  
in 2005 to a local hospital, which is naming a trauma center after his  
family.

	In 2007, New Century filed for bankruptcy protection. The company  
said its accounting is under investigation by the Securities and  
Exchange Commission and the Justice Department.

	In March, the court-appointed investigator filed a report in U.S.  
Bankruptcy Court in Delaware, alleging the company engaged in  
imprudent business practices and improper accounting, though he found  
insufficient evidence to determine earnings manipulation.

	Calling New Century's mortgage business "a ticking time bomb," he  
faulted the company for tying pay to loan volume and disregarding  
mortgage quality. The examiner said creditors had grounds to try to  
recover millions of dollars of bonuses paid in 2005 and 2006.

	Manny Abascal, an attorney for Cole, said the founders' compensation  
was approved by outside directors and was "fully disclosed to  
investors." Abascal said the founders "held onto the vast majority of  
their stock, and collectively lost approximately $200 million" when  
the company failed.

	Bert H. Deixler, an attorney for Morrice, said his client was "among  
the biggest victims of the collapse" of New Century, which he said was  
due to an "unforeseen worldwide debt and liquidity crisis." An  
attorney for Gotschall declined comment.

	Michael Gooch made a fortune from the booming trade in credit-default  
swaps and other complex financial instruments now being blamed for  
fueling the financial crisis. Gooch, 50, is chief executive of New  
York-based GFI Group, a leading broker of credit-default swaps. An  
immigrant from England, Gooch founded GFI two decades ago. It went  
public in 2005, and its stock nearly quintupled by late 2007.

	Credit-default swaps are private contracts, similar to insurance,  
that pay investors when a bond or company defaults. While boosters say  
swaps are a valuable hedging tool, critics call them a toxic invention  
that fanned the flames of the mortgage meltdown.

	With the swaps market contracting and Congress calling for  
regulation, GFI's stock price has tumbled, recently closing nearly 90%  
below its high of last November. Gooch, through a holding company,  
sold about $77 million in stock, most of it in May 2006. He says the  
aim was to diversify his personal investments.

	"In May 2006, nobody could have predicted the credit bust," he says.  
He also notes that his holding company still owns 43% of GFI's stock,  
and that trading credit derivatives is only a part of GFI's business.

	Not long after GFI went public, Gooch bought a 152-foot sailing yacht  
that had been listed for sale at $12.9 million. He lives in a 10,000- 
square-foot, seven-bedroom house on the water in Rumson, N.J, with an  
elevator, pool, and tennis court. He also owns a waterfront home in  
Delray Beach, Fla., and a Colorado ski condo.

	Unlike some executives, who used shares in their companies as  
collateral to borrow money and then were forced to sell in the  
downturn,  Gooch says his only major debt is a $1 million mortgage.  
"It could be paid off with the spare change in my bank account," he  
says.