Pirate Cove: Chapter 11

Preferred Stock

A few days later I received a call from Alex’s assistant Loren. She told me I would be receiving a FEDEX package at my home that afternoon. She didn’t know what was in it, just some documents for me to sign. But she did make it very clear to me that I needed to sign them and return them to Alex that very afternoon. A return envelope and completed air bill were in the package as well.

Well, that got my attention.

My curiosity piqued; I gave Jeff a call to see if knew what was coming. He did. The package contained the corporate resolutions appointing me President and Chief Executive Officer. I was also being appointed as the second member of the two-person board directors of Solar Night Industries.

Seems Southport only thought it necessary to have two board members. Jeff and me. Now, boards of directors can have as many or as few members as the shareholders want. Usually, the number of required board members is set out in the corporate by-laws. Two seemed a little small. But hey. It was their show.

It was also a Friday… in the waning days of summer in the south shore of Boston. As a result, I was kind of itching to get down to the harbor front so my wife and I could hit our favorite restaurant.

Our beachy little tourist town had hundreds of pleasure boats — sail and power — moored in the harbor. Its one of those towns whose population doubles during the summer months. So if you didn’t get to this restaurant by 5:00pm, you wouldn’t get in until 8:00 or 9:00pm.

To quote a dear friend, “I wouldn’t wait to get into Le Cirque.” I am completely on board with that. We love this restaurant but no way I am hanging around to get in that late.

The FEDEX package finally arrived. I grabbed it and quickly closed myself off in our makeshift home office.

I opened the package and found three documents as well as the return envelope and air bill. Jeff was right, there was a corporate resolution appointing me to the following positions.

• President
• Treasurer
• Secretary
• Member of the board of directors.

Jeff was also listed as a member of the board as well. He also signed the resolution as the “Sole Director and Officer.”

There was also another resolution signed by Jeff. This one authorized Solar Night to issue up to 50,000 shares of preferred stock. I read the 70-page information package a few days earlier. There were no preferred shares either issued or outstanding.

Okay, I thought. They are giving themselves options and flexibility to do so in the future. That made sense.

But next I pulled out a piece of paper I would come to regret ever seeing. It was a Preferred Stock Certificate. It looked like it was printed on someone’s desktop computer. Even down to being printed on ordinary white copy paper.

It was completely filled out. It only needed the signatures of the Secretary of the corporation. Which I had just learned a few seconds ago… was me!

It carried certificate number 464. As if there were already 463 certificates of Preferred Stock issued. It constituted 20,000 of the 50,000 shares authorized just the day before. According to the “certificate” the shares were issued to “Southport Specialty Finance.”

Making matters worse, Southport Specialty Finance was also “selling and transferring” those very same 20,000 shares immediately to Redwood Reinsurance. Redwood was a Southport owned reinsurance company based in the Cayman Islands. I knew nothing about it

Hmmm… wasn’t Southport Specialty Finance the recipient of the $3,000,000 that precipitated Alex Burns vivid description of “Shit I Did.” So, they get three million dollars from Premium Wine Acquisition and now they are getting 20,000 preferred shares of the company that doesn’t even own the vineyard yet? This was screwy.

Also of note, the ownership transfer section for the shares was signed by Alexander Chatfield Burns.

I stared at the certificate for a few minutes. My mind was racing. There was so much I didn’t know and that makes me nervous. As is my habit, I started making a list of questions. I was holding the pen so tightly that after a few minutes my hand actually got a cramp.

I put down the pen and called Jeff again. I needed answers. But he was unsure about the money trail as well. We both agreed, this was an unusual way to conduct business. He suggested I call Alex. Which I did. Immediately.

Alex had skipped out of Manhattan early to beat the traffic to the East End of Long Island. He was spending the weekend with a group at the vineyard estate house — which he now called, “my house.” The master bedroom was now, “my room.” No one was allowed in it.

I had spent the work week there. I arrived on Monday and headed back to Boston on Thursday night.

One of my less pleasant tasks during that summer was cleaning up after Alex and his “friends.” Whoever they were, they were slobs. Most Monday nights or Tuesday mornings when I arrived, the house looked like it had been the scene of a college rager the night before. Half empty wine glasses were everywhere. Plates with the remainders of the last meal made were still sitting at the tables. It was as if the dinner had ended only moments earlier. A cake — now stale and hardened — with a knife still in it was sitting on the butcher block island in the chefs kitchen. The bathrooms looked like they been used on concert night at Madison Square Garden.

Cigar butts — lots of cigar butts — were in glasses and flowerpots. Many were stamped out on the patio. Or my personal favorite, floating in the pool. I don’t need to go into detail what that looked like. Use your imagination.

Once I was told that one of his guests asked if they should clean up before they left. Alex apparently replied, “we have people who do that” and walked out.

Yeah. Me and the cleaning service. Thank God for the cleaning service. They earned every cent we paid them and more.

That house was a source of endless irritation to me from the very beginning to the very end of my time with the company. People loved that house. Not me. Something was always broken and the fix was never cheap.

Alex and others at Southport regularly let their friends and friends of friends and colleagues use it for a weekend. Many took souvenirs with them. I finally had to put a double lock on the wine cellar door. Some people took that as an affront and called to complain. Most never even said thank you. Nearly all told me that something needed to be fixed.

During that first summer, I actually slept on the huge couch in the home movie theater in the basement. The house was surrounded by 25 plus acres of vineyard. During the day it was beautiful. But at night it was kind of creepy when you were alone.

But every week, I packed up whatever garbage I had created and brought it home to Massachusetts. I would also unload the two massive dishwashers which the cleaning service left chock full from Alex’s exploits the previous weekend.

I only allowed myself to use one of the six bathrooms — the one in the basement near the movie theater. So, I cleaned it and got out of there. I didn’t want to leave any sign of having been there during the week.

I just found the whole house situation and Alex treatment of it extremely weird. Uncomfortable.

So I called Alex after hanging up with Jeff. If I were a betting man, I would say he was already well past his first bottle of wine.

First thing out of his mouth was that he was glad I called. He wanted to know where the big red Kitchen Aid mixer was. He wanted to do some baking.

I told him where it was. I wish I said, “It’s right where you found it last time when you baked that stale-ass cake I found a few days ago.” But of course, I didn’t.

Knowing where the mixer was, he was ready to hang up when I asked him about the Preferred Stock.

“What about it?” he replied.

As is my habit when I am a bit nervous, I talk really fast.

“What’s it for?” “Why is Southport Specialty Finance giving it to Redwood?” “What was the purchase price consideration?” “Where is the subscription agreement.” “Has the State of Nevada been informed.” “Where is the documentation for this?”

Finally, I blurted out the most important question, “How much is it for?”

I have to admit. This kid was smooth. Without missing a beat, he dumped it all back to me which caught me completely off-guard.

“Richard. After I reviewed your spreadsheet, we knew we needed to clean this up a bit. This is how we intend to do that” he said. “You need to do a few things to help” he continued.

“First, go through your spreadsheet and separate out all the vineyard related stuff from the non-vineyard related stuff. We will make the vineyard related stuff the amount of the preferred. Second, get the lawyers working on the documentation for the preferred right away. We can clean all this up next week.”

“And Redwood?” I asked.

“That is where the money came from.” he replied.

At first blush it seemed plausible. It made sense. It was still totally backwards process-wise. But if it all got done… then we had a proper paper trail. Good. I could fix this.

So, I signed the Preferred Stock Certificate and put it into the return envelope. On the way to our favorite harbor front restaurant, we put it into a FEDEX drop box with moments to spare before it was picked up. But it was still nagging at me.

A short time later and after the calm and perspective afforded by a proper Martini, I knew I would regret signing that certificate.

______________________________

The Wall Street you don’t see regularly impales itself upon its inability to do the little things right.

Process matters. Paperwork matters. Full disclosure matters. Doing things in the proper sequence matters. Proper reviews by competent attorneys and accountants’ matter.

It just didn’t matter to guys like Alex and Andrew. These guys talked a great game but their inattention to detail and process would be one of many things that would screw them over.

During this time, Alex and I began speaking often. Sometimes several times a day. He began asking me if I would look at some of their other companies — but not the insurance companies. They were sacrosanct.

Unsurprisingly, nearly every one of their private equity investments I looked at were dogs. After dealing with the vineyard for nearly four months I was pretty sure why. It was simple. They didn’t know what they were doing.

Worse, they were overpaying for crummy companies. But to me, this many crummy companies in one portfolio? That had the sweet smell of job security.

It was also around this time, perhaps feeling a touch full of myself I tried to coach Alex a bit, “Alex, private equity investing is a process driven endeavor, and you ignore that process at your peril” I said.

His reply was dismissive, sarcastic and pissy. “I know how to do deals, Richard.”

But it was clear. He hadn’t the faintest clue.

Next: Jesus with a telescope on Mars.

Twitter: @Bailey_RDB

LinkedIn: Richard D Bailey