Kozmetsky's Raiders: The Early Years
By Kathy Mitchell
November 1991; pages 4-5; Volume 3, No. 2
Despite the recent publicity surrounding the failure of Fred Carr's Executive Life Insurance Company, most of the transactions that may have actually helped it push it over the edge remain obscured by time and by the rapid merger or failure of many of the other companies involved. Some (not very many) of the players from the early years have gone to jail.
Others, like George Kozmetsky, the UT System's chief financial advisor and "visionary" head of the Institute for Constructive Capitalism here on campus, are still making money, although they no longer have their ally Fred Carr and his money to back their ventures. In the early eighties, the two may have regularly parked stock in the insurer's portfolio, then paid for it with notes that probably never got paid after the 1988 collapse of United Savings. Holders of Executive Life insurance policies now just keep waiting to find out what kind of a retirement they will eventually get out of the morass of junk bonds, old-growth forest (Hurwitz's MAXXAM) and empty office buildings that clog the company's books.
While Michael Milken whines from his jail cell that his six felonies should be forgiven because he brought to his cooperation with prosecutors "the same energy and intensity that characterizes his work" (as quoted in Barron's), George Kozmetsky and his good friend Houston developer Charlie Hurwitz are still down here in Texas advising and developing. Polemicist, ever fascinated by the ways in which UT's money manager manages his own money, has decided to look into some Kozmetsky, Hurwitz - Executive Life connections from the rock-'em sock-'em eighties.
The story begins with a most unlikely player, the Simplicity Pattern Company - makers of those pin-on paper clothes patterns that have been the bane of every young girl ever exposed to Home Economics in the public schools.
Rending the Fabric
Managers of Simplicity Pattern, a sewing pattern maker since 1948, watched without any real concern a slow-down in pattern sales in the latter part of the seventies. The new woman of the eighties, it seemed, was not as interested in making her own clothes after a long day at her service-sector job.
Although its share price dropped slightly on the New York stock exchange, the small firm's $90 million in cash and liquid assets would certainly carry it through any hard times. Competely debt-free, management invested its cash savings so successfully that the increases in investment income had already offset any troubles faced by the industry. Until, that is, the corporate raiders arrived.
The list reads like a Wall Street cliché. In 1981 and 1982 raiders Victor Posner, Carl Icahn, the London-based Graham Ferguson Lacey, and the Texas home team of Kozmetsky and Hurwitz vied for access to that $90 million pie. With the help of a now familiar crew of facilitators (Michael Milken, Fred Carr and Saul Steinberg of the Reliance Group), one raider followed another until Hurwitz and Kozmetsky, the white knights of the corporate chess game, wound up with the prize.
The series of quid-pro-quos began with a proxy fight for control of the Board of Directors between Lacey, CEO of a British energy company called NCC Energy Ltd., and veteran raider Carl Icahn.
Lacey, raider number one, had gained control of 20% of Simplicity's stock in early 1981 with the help of Michael Milken, Victor Posner and unknown company insiders, all of whom received generous premiums for their good work, according to the The Wall Street Journal (4/23/82). Placing himself at the helm of the company, Lacey began to arrange a merger between Simplicity and his own company, NCC - a merger which involved the transfer of more than $35 million of Simplicity money to various NCC projects.
In October of 1981, Carl Icahn, already a veteran of ten such raids, filed papers with the SEC that indicated his control over 13.3% of Simplicity stock and stopped the merger. In a related move, an Icahn affiliate offered to buy out the company although it owned no stock at the time.
Lacey, in order to keep control, paid a $5 million non-refundable deposit to an Australian ally who then offered to purchase Icahn's stock at a price higher than the market. In November, Icahn announced that he would sell his shares to the Australian firm and allow the merger to proceed. Lacey had offered him $14.50 per share of stock that traded at $9.00, and he walked off with a cool $2.7 million. His affiliated withdrew the tender offer without ever having purchased a single share. Milken received a percentage on this, his second series of transactions over Simplicity.
In order to fund the deal, Lacey borrowed the $5 million from a company called Cook International. As a term of the loan, Cook agreed to purchase 631,000 Simplicity shares on the open market. The proxy reveals that Cook bought the stock from Drexel, Burnham Lambert for $6.8 million - then passed them on to NCC's bank as collateral for a line of credit. Once again Simplicity money flowed into Drexel coffers.
Meanwhile, Fred Carr of Executive Life reported to the SEC that he now owned a 10% interest in the now-hot clothes-pattern company.
On March 30, 1982, in a surprise move, the British government forced Lacey into bankruptcy and required him to sell his Simplicity holdings to satisfy British debts. Who should arrive to save the bankrupt raider but our friends George Kozmetsky and Charles Hurwitz, then officers of two closely related companies, MCO Holdings and Federated Development. Both firms purchased portions of the Simplicity stock from Lacey, and in May 1982 Hurwitz and Kozmetsky elected themselves CEO and Director, respectively. As one of their first acts, they doubled the salary of Directors, according to Simplicity's 1983 proxy, and assigned Hurwitz a $100,000 annual salary.
Shortly thereafter, Fred Carr of Executive Life quietly sold his share of the company back to the new Simplicity Management, also at a higher than market price. Carr could mark a substantial profit for temporarily parking the stock, although he did not take any cash when he returned it. Instead, Hurwitz gave him a note of $14.5 million that would not come due until 1989. This was the second such note to Executive Life by Hurwitz. Less than a year before Fred Carr returned a chunk of MCO stock to Hurwitz for a note of $17.6 million. Since most of Hurwitz's assets sank with United Savings in 1988, we infer that these notes are among the many bad debts on Executive Life's balance sheet. We could not find out such details from the public record, however.
White Knights With a Dark Past
Federated Development, as reported in the May 1990 Polemicist, resurfaced to purchase Simplicity after some trouble with Texas State Securities Board over its purchase of SMR Holdings, of which it had been a subsidiary. The Board declared the merger legal, but noted that the shareholders of Federated would probably not benefit from their assumption of a $10.8 million debt from Hurwitz's investment company, including a $5 million note that had been backed by Hurwitz personally.
Charles Hurwitz had also previously faced regulators on insider trading charges. In 1970 he took a new company, Summit Group Inc., public and in a related transaction artificially inflated the price of another security, according to SEC charges. He agreed to settle the case out of court. In 1974, the New York Superintendent of Insurance declared an insurance subsidiary of Summit Group insolvent and charged Hurwitz and other executives with fraud, mismanagement, and breach of fiduciary duty in the insurance company's collapse. Although the state of New York eventually dropped the charge, the case lasted until 1979.
George Kozmetsky, namesake and one time Dean of UT's Graduate School of Business and officer of MCO, was himself embroiled in insider trading charges at the time he and Hurwitz made their bid for Simplicity. A Director of the military contractor and computer firm Datapoint, he faced charges in April of 1982 that he and other Datapoint officers and directors had falsely reported overly optimistic 1981 earnings, dumped their personal holdings at a premium price, and then later informed the market that the company was in trouble.
Kozmetsky et. al. eventually faced 19 separate suits by shareholders and an SEC lawsuit charging that Datapoint violated a series of corporate disclosure rules. Without pleading guilty, Datapoint officers and directors consented in 1984 to an order barring them from "future violations of the Securities Exchange Act and SEC rules." Kozmetsky eventually settled out of court in 1989 the several shareholder suits that named him personally.
Simplicity shareholders, therefore, hardly exalted in their white knight. Said one small shareholder of the company to Hurwitz at the first meeting of the new board of directors, "Mr. Hurwitz, you come at the end of a long list of people suddenly interested in the pattern business." At that meeting, Hurwitz piously promised his new company that no Simplicity money would be invested in MCO or its affiliates.
Sweetening the Bitter Pill
Hurwitz didn't break that promise, but he did create new patterns of behavior for Simplicity. In something of a departure from past practice, Simplicity began to purchase real estate and sugar companies. In April of 1983, for example, Hurwitz charged into a buyout of Amstar, a producer of sweetners. Purchasing stock for $28.6 million from Simplicity's coffers, Hurwitz became Amstar's largest shareholder. In a now familiar pattern, Executive Life also began to quietly purchase Amstar stock. Amstar, to protect itself from the assault, sought a leveraged buyout and subsequently went private, paying both Carr and Hurwitz a premium for their stock.
In the same month, a few days later, Simplicity bought a troubled department store chain called Twin Fair, whose sales business had evaporated leaving nothing but commercial property - empty or rented department stores. Simplicity loaned $12.5 million to MCO to purchase stock in Twin Fair, and bought another $25 million itself, according to proxies. Hurwitz, as the new owner, appointed himself CEO and took control of the properties. According to the Wall Street Journal, Simplicity made the purchase in order to give management freer reign over the company's real estate. In fact, Hurwitz and Kozmetsky quickly used the Simplicity money pumped into Twin Fair to satisfy their tase for sweets once again.
In early 1984, Twin Fair began purchasing stock in Holly Sugar, while MCO and Federated attempted to buy out the pineapple company Castle and Cook. Castle and Cook sued in 1984 to prevent the take-over, according to the documents filed with the court, and eventually paid the Hurwitz gang cash to rescind the bid - which means that MCO and Federated had "greenmailed" Castle and Cook. Holly Sugar also fought over the take-over attempt and eventually repurchased its stock at more than ten dollars per share over the price paid by Twin Fair. In addition, Holly promised Hurwitz and Kozmetsky that if anyone offered an even higher per share price, it would pay them the difference for the next ten years.
Hurwitz, enamored of such sweet deals, finally consolidated his holdings under the name MAXXAM in mid 1984. Rich with their windfall profits, Hurwitz and Kozmetsky began their assault on Pacific Lumber, with the help of now old friends Fred Carr and Michael Milken. The Pacific Lumber story, chronicled in this magazine last year, would be the largest and most egregious chapter in this long and sordid history.
Interestingly, even as some of their old associates - Milken and Boesky most notoriously - do light time in white collar prison, Kozmetsky and Hurwitz roam the streets of the corporate world freely. The UT System even rewards Kozmetsky's financial acrobatics by employing him as its chief economic advisor. In an ironic footnote to Kozmetsky's economic gamesmanship, the IC2 Institute last year released a study showing that Americans have begun to lose their faith in Capitalism. While Kozmetsky attributes the changing attitudes to a "society in flux" in which people need time to understand new processes, we wonder if instead most people understand only too well - one of the companies directed by Kozmetsky laid off 5,000 people in 1987. Did he ask them what they thought of the "new process"? It looks a lot like the old process to us.
The study defined capitalism as "a dynamic ideology that allows individuals to create and retain wealth through creative endeavors," and further notes that only 35% of those surveyed could define the concept adequately. Again, we have to wonder what definitions were provided by the other 65%. If capitalism is a place where a few men gamble with the production of all the others, then it's no wonder that Kozmetsky's "venturing" no longer appeals.