Coho Energy Holders Stage Online Revolt, Collect Proxies
September 27, 1999 - Wall Street Journal (page C1)
By ALEXEI BARRIONUEVO Staff Reporter of THE WALL STREET JOURNAL
In what may be the first full-fledged shareholder revolt online, a small group of investors has used an Internet message board to solicit and collect proxies to oust an executive, possibly violating securities laws in the process.
Waging a furious month-long campaign, a group led by a California real-estate appraiser and the head of an East Texas truckers' association used a Yahoo! message board to solicit proxies from 600 shareholders of Coho Energy Inc., a Dallas company that filed for bankruptcy protection last month. The group says it has collected proxies for more than half of Coho's outstanding shares and hopes to oust Chairman and Chief Executive Officer Jeffrey Clarke.
But in their zeal, the shareholders may have trampled over Securities and Exchange Commission rules that require investors acting in concert to say who they are and what they plan to do with the company.
The movement's leaders say they don't believe they have done anything illegal.
"I don't think there is anything wrong with someone soliciting proxies on the Internet," said J.D. Davis, a Longview, Texas, resident and Coho investor who collected the proxies. "We didn't solicit these proxies; they were volunteered to us." Mr. Davis, 53 years old, says a Longview attorney advised him that the effort didn't violate any securities laws.
The Coho movement underscores the massive changes that instant communication has brought to investing. Earlier this year, a group of shareholders in United Cos. Financial Corp. swapped 6,000 postings on a Yahoo message board as they debated how to save the Baton Rouge, La., high-risk lender, which filed for Chapter 11 bankruptcy protection in March.
In addition to becoming forums for gossip and rumors, message boards and online chat rooms can become cyber-war-rooms for novice investors, allowing groups to rally and plot strategy without giving a thought to the rules intended to prevent back-room deals.
Coho lawyers say they told the SEC about the insurgents about a month ago. The SEC won't say whether it is investigating.
But securities-law experts who reviewed several of the more than 1,600 message postings say the disgruntled shareholders appear to have ignored securities laws that require disclosure of the identity and background of those soliciting proxies and their agenda for the company. They also appear to have solicited votes for the purpose of changing management, which the SEC prohibits without sending a full disclosure document to the shareholders.
"This seems to me a clear violation of the proxy rules," said Alan Bromberg, a professor specializing in securities law at Southern Methodist University, who reviewed several of the postings. "The danger here is that this may be a way to take over a company by stealth without the informed vote of the shareholders."
Mr. Davis says he "backed into" a leadership role in Coho's shareholder movement. For the past nine years he has fought for the legal rights of truckers as founding director of American Drivers Association, political-action committee that attracts members by promising to contest their traffic tickets.
In March, Mr. Davis bought about 10,000 shares of Coho. A few months later he found the message board, which dates to 1997. At first, investors used it mostly to exchange stock tips and debate the future of Coho, an energy company weakened when crude-oil prices dipped earlier this year. The company's situation turned from bad to worse in May when Dallas investment firm Hicks, Muse, Tate & Furst Inc. pulled out of an agreement to pay $250 million for a majority stake in the company. Coho has sued the investment firm for $500 million in damages.
Investors on the message board attacked Mr. Clarke, blaming him for nearly all of Coho's woes. By July their frustration reached a fever pitch. The company had yet to call an annual meeting, traditionally held in May, and speculation was running high that the company was going to file for bankruptcy protection. Then David Marx, a 42-year-old commercial real-estate appraiser from Santa Barbara, Calif., who goes by the alias, stockmeister7," proposed kicking out Mr. Clarke.
"I would vote for a new CEO and I have 125,000 shares toward that end," Mr. Marx wrote on July 16. "Who else would support this. Please post your vote and the number of shares you have to vote for a replacement."
That same day, Mr. Davis pledged 742,200 shares -- the combined total of the members of his association -- and offered to foot the bill for attorneys in a takeover battle. "Stockmeister you have our total support and proxie," Mr. Davis wrote. "Let's get together on this and oust the guy. It's time he got a job driving a fork lift."
The next day, Mr. Davis told investors he had received more than 60 calls and promises for another 412,000 shares. He also said he was personally buying more Coho stock, which had slipped to 75 cents; he now has about 160,000 shares. Within two weeks, he said he had proxy pledges totaling some six million shares. Some, while declining to give their proxies, said they would vote with the group at a shareholder's meeting.
On Aug. 23, Coho filed for Chapter 11 protection under bankruptcy laws, listing $414 million in debt and $595 million in assets.
The move only seemed to accelerate the shareholder movement. Today Mr. Davis says he is sitting on proxies totaling nearly 13 million of Coho's 25.6 million shares outstanding. "It just mushroomed," said Mr. Marx. "J.D. and I never in our wildest dreams thought it would get this far."
Though they haven't told other shareholders, Mr. Marx and Mr. Davis hope to elect Donald G. Warmington, a 39-year-old corporate finance specialist from Houston, as Coho's next CEO.
Coho, naturally, isn't pleased. "Some of these messages are flat-out lies," said Louis R. Strubeck Jr., a bankruptcy attorney with Houston-based Fulbright & Jaworski and Coho's lead counsel. "Certainly there are free-speech concerns. But what they are doing could be very, very damaging to the operations of the company in bankruptcy."
Coho senior vice president Anne Marie O'Gorman said the insurgency has made a difficult situation worse. "These individuals were openly soliciting our employees to provide inside information," she said. "That is clearly a violation of securities laws."
Some investors were suspicious. Philip Grant, an assistant district attorney in Houston who has 1,000 Coho shares, prodded the message board's leaders to reveal their credentials. He and Mr. Davis spoke on the phone. But Mr. Marx didn't reveal his identity and profession on the message board until Thursday of last week.
"It concerned me that here are all these people who are going to participate in a complicated legal maneuver, a proposed takeover of a company, without really knowing what the legal ramifications were, as well as not knowing who the leaders of the charge were," Mr. Grant said.
John P. Kenny, a 31-year-old real estate appraiser from Santa Barbara, Calif., initially resisted giving up his proxy for his 30,000 shares. "At first I thought it was a bad idea. What do any of us know about oil?" said Mr. Kenny. "The whole thing seemed pretty funny, the blind leading the blind." Then, he said, "I thought, 'What do I have to lose by getting involved?' "
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