The best unknown activist investment of 2009 | Hacker News Reader

The best unknown activist investment of 2009

greenbackd.com

93 pointsjakarta66 comments

What about the liability?...He contained the liability to his investment vehicle, Australian Style Investments. The A$4.5M was paid to an another entity of Bolton’s, Australian Style Holdings, to quarantine it from the $120M liability in Australian Style Investments.

I thought it was a great story until here. This just seems totally unethical. Am I missing something?

Certainly I can't just evade the liability of a risky short sale (for example) by making the trade through a shell corporation?

You are right. What he did was sell assets owned by corp A and put the proceeds of the sale in corp B. That seems definitely unethical. I do not know much about Aussie corp law but it may also be very illegal.

Also, he may have breached another rule by proposing an action that he obviously did not believe to be desirable when he had a large chunk of the corporation. Again I am not sure what the particular rules in this case are but usually large shareholders have fiduciary duties towards the corporation and small shareholders so they cannot do things that injure the corporation.

So I am not sure this guy should be admired. It seems that he just broke a bunch of rules betting that he would not get sued. And he is not getting sued, but that may have been due to luck rather than being right. I think what happened is that his ass was saved when a bank decided to buy out any shares that anybody wants to get rid of and make the necessary subscription payments. Thus the bank would buy Mr. Bolton's shares and make the payments, so the corporation would not have to sue Mr. Bolton for the payments.

Technically you could.

Most hedge funds are LLCs, if the trades spectacularly fail they're not on the hook for the potential unlimited losses of the short trade. Just the amount that is in the investment vehicle.

You're right. Something is off here. That seems like moving all the cash from one company to another and letting the first go bankrupt without the latter assuming liability.

What stops this happening more often?

Corporate law.

Care to be more specific? What happens normally that failed to happen here & why.

The law is different from country to country, and I am not sure about the law or the facts of the case here. But the person that controls a corporation usually has a fiduciary duty to the corporation and usually cannot merely give away the assets of the corporation.

Here the corporation had an asset (voting rights) that got sold, but the proceeds of the sale did not come back to the original corporation selling the asset but went to a completely different corporation. Depending on how this was done this may be improper.

What usually happens in this case is that someone that is a creditor of the corporation sues to get the money back. However, here the creditor did not sue because it seems like they were able to get their money from another source as explained in the other posts in this discussion.

BTW none of this is legal advice :).

That's exactly what corporations are actually for: allowing investment without exposure to liability in excess of the investment.

What I suspect was done here was that Investments sold the voting rights to Holdings for A$1, which in turn sold them on for the A$4.5M. It's a clever little trick that can almost certainly be dressed up to be legal by more knowledgeable people than myself.

Right, I guess what I'm really questioning is who let him take on that much liability without having him personally guarantee it. I can't get a small business loan for my brand new corporation, pay it all to myself as compensation, and walk away saying "oh well, the business failed."

The shares had an outstanding capital raising thingy going (don't know the terms)

Each individual share held the requirement to pay $2 at some later point.. So what he did was purchase a bunch of shares worth about -$1.99 for 1 cent each. It's on the market - so noone had to approve he could actually pay the later $2 installment.

He then managed to separate the value (voting rights) from the liability (oustanding $2/share) and profited from the value.

Ok, so basically the system wasn't really set up to deal with this strange asset. Because if I sell a put option (which means I may be required to buy shares later on), my brokerage is definitely going to enforce margin requirements to make sure I can afford those shares if things don't go my way.

Don't forget that many (most?) of the people that he bought those shared off originally were probably unaware of the liability associated with it when they bought it. There were other suits associated with that liability (many claimed they were never made aware of it when they invested), so the ethical situation is murky at best.

I don't understand why he had any need for this anyway. If he sold the shares along with the associated liabilities, why would he have any liabilities at all in Australian Style Investments?

If you're referring to the bank buying back shares as a "favor" to the investors who didn't know better, I don't think that was part of his plan, just luck.

No what I mean is that he sold the shares, these shares came with a liability. When he sold his shares to Thiess John Holland, why didn't the liabilities go with them?

He only sold the voting rights associated with the shares in that transaction.

In that case, I don't understand. Why couldn't every shareholder with unwanted stock do this, less receiving money in exchange fore his/her voting rights? Put differently, if this is possible and legal, what keeps everyone else liable?

I think in most circumstances, nobody would want to buy the voting rights.

This was an unusual situation in which Theiss paid for the voting rights to vote against the interests of the share holders.

A limited company is a firewall through which debt can't pass. How is what he did any more unethical than any other limited company?

(Or are you implying that limited companies are in principle unethical?)

It's just that it generally doesn't work this way, the moral hazard would be insane. Lenders are smart enough to have debt personally guaranteed by someone at the corporation when the company has no assets of its own to use as collateral.

Maybe debt firewalls (i.e. limited companies) should be two-way, i.e. if a limited compan doesn't have to pay its debts, nor do its debtors.

I don't see how anyone could disagree with this on fairness grounds. I'm not sure whether it would have good or bad economic effects.

In this case it says the bank offered to take all the shares off the investors hands for free to free them from the liability.

This however does not absolve Mr. Bolton from his conduct.

Also it seems like this was just luck. I don't think he expected to have the liabilities waived (by being bought back by the bank).

Now -THAT- is a hack. Bravo.

As for this quote:

He’s just ruined his corporate life forever.

I'd say he's just cemented himself as an incredible strategist that will be fairly in demand!

He made millions, but he didn't generate any wealth, he just worked the system. I won't say Bravo.

That's why I called it a hack. Fundamentally, it's not much different to gambling with an advantage - there were certainly a lot of opportunities for him to lose.

I don't think this called for a suspension of ethics, rather more of a disregard for the establishment.

Look, legally exploiting a flawed system to produce a net benefit for oneself isn't fundamentally evil. In fact, in this situation it seems (fortunately) that his actions eventually bailed out a whole lot of small-time investors.

What about using the other investors to blackmail management and then selling out these investors when management paid him off? When someone is this smart, the responsibility to be good is even more pressing and the condemnation for being bad should be more loud. And yes, I am judging.

You're right, he didn't generate any overall utility. But on the other hand, he didn't create overall disutility (i.e. harm people). So he's in a better moral position that Nathan Myrvold or other patent trolls.

In a way he did make wealth by increasing the market's efficiency no?

Yeah, you couldn't ask for a more glowing reference.

Indeed. What the guy who said that quote really meant was "Boo hoo, he's made us look stupid".

Bolton will probably be a billionaire by the time he's 50.

When I was 27 I would have found offensive to be called "a 27-year-old". Which age range do you need to belong to to be taken seriously?

Because if he had been 67, he would also be referred to with a dismissive "a 67-year-old".

He had, what, 10 man-years of experience at this sort of thing, at most? His opposition had what sounds like a man-millenium of experience, and he made A$5M off of them.

The "skill is proportional to experience" idea always puzzles me, especially in fields like finance and software where differences in productivity are measured in orders of magnitude. The most effective investors and programmers easily have 100x greater maximum productivity than the median.

The most effective investors and programmers easily have 100x greater productivity than the median.

I have a hard time believing that for programmers. 10x maybe, not 100x. If this were true, they should be making tremendously more than median programmers. When was the last time you heard about a software engineer employee making over $1m, let alone $10m?

Measuring things by times-faster is not really the right way to do it. Some software engineers are capable of completing important tasks, some are not. They are (error-divide-by-zero) better.

> software engineer employee making over $1m

Employers don't have any incentive to pay an especially effective programmer at whatever his "market rate" actually is. They just need to pay enough to fill their position with someone skilled, and there's plenty of programmers who'll take the near-guarantee of $MaxSalary/yr and live happily. ("After you've got enough to settle down and buy hardware whenever you need it, what else do you need?") If you want to realize your full "fair market value" (which is just a convenient theoretical fiction anyway), you need to take matters into your own hands.

I also don't think there's a consistent 100x variation in overall productivity/output, but maybe something more like maximum productivity (and edited the grandparent post). If you have a super-productive employee it's going to be hard to "fully saturate the pipeline" since any one single project isn't going to constantly require that level of work, and you can't just have him hop project to project within the company since there's a learning curve each time.

I originally picked up the "programmer productivity varies a lot" meme from one of PG's essays, but have since seen it in industry: http://paulgraham.com/gh.html

If the value a select few brought to a company was > $10m, and this was widely known, they would bid up the price. Of course employers don't have an incentive to pay above market rate, that's almost a tautology. That is what market rate means. However, if there was so much value to be had, market rate would rise.

You seem to have misunderstood what I was talking about. I didn't contravene you at all.

> I have a hard time believing that for programmers. 10x maybe, not 100x.

Peopleware claims 10x.

You are incorrectly assuming that pay is fair. I can easily believe that 100x number. Especially considering how when a mediocre programmer under-performs he is usually augmented by other mediocre programmers which tends reduce the efficiency even more.

Anyway, Paul Graham wrote a pretty convincing essay about this.

"When was the last time you heard about a software engineer employee making over $1m, let alone $10m?"

Exactly. employees don't make make over $1m, but plenty of founders who sold startups have.

Does that really qualify as 'programmer' productivity though? Being a productive programmer is different from having a good idea and having the business sense to capitalize on it. Sure it may require productive programming to create it, but I would hardly say that 'hyper-productive programming' is at the core of most successful startups.

Years of experience gives you much better information to work with, but you're still using your same old thought processes to...process it. You can offset a lower intelligence with better information, but only to a point.

Yes. The words "man-years" is key. This guy had balls.

That attitude is sort of reminiscent of a 22-year-old college grad, "I'm a grownup now, everyone take me seriously, wahh!"

The reason they mention he's 27 is because it's unusual for someone that age to be a financial shark. Just like they can't stop talking about Brett Favre being 5-0 at 40, or if a 65-year-old won a Wii tournament that would be news, and by the time you reach 100, well, they just won't be able stop using the word centenarian every time your name comes up.

This is probably the single-best argument against longevity I have ever read.

Huh? If more people lived longer lives such things would no longer be rare and 'novel' so there were be no need for surprise.

Do you find it offensive when someone points out that you have hair as well? There isn't anything dismissive about the headline, by my reading, but I've never really understood why people find things like this insulting.

[Edit: I mean, if you read the article, he clearly was being taken quite seriously. He nearly took over the bloody thing. Interpreting the mention of his age as "dismissive" is silly - it's just context, in much the same way that his nationality, sex, and name are just context.]

Unless you happen to be referring to the media quotes in the article itself (e.g. "meddling kid", "ultimate poster boy for the much-maligned Generation Y", etc.), in which case you have a point. [2nd edit: Although, that still isn't really "not taking him seriously". It's just insulting him, though I will concede the possibility that part of the cause of the insults is his relative youth.]

On another note, the man the article is about is clearly either a genius or insane. Either way, it's an excellent story.

And the Australian securities authorities need to do some serious soul searching as to why a guy with a mere $47,000 in his pocket was allowed to purchase securities that leave him with a A$94mln liability - without even having the money at hand.

>"The reasons for creating such a security are beyond the scope of this post, but suffice it to say that stapled securities offer certain tax benefits."

And are those "stapled units" another byzantine financial product designed to work around an even more byzantine tax system? I am curious if such financial products would even make sense in a fair, flat tax system.

I put it down to a limitation of the Aussie (and other) stock exchanges. The shares had dropped to $0.01, when their true value was negative, given the stapled obligations that they carried. Bolton should have been paid to take on the debt in the first place.

A whole lot of other people apparently made the same transaction unwittingly, without reading the fine print, as it were. The sellers of the $0.01 shares were paid a peppercorn and washed their hands of the debt.

I reckon this is a problem for the regulators. Once the shares dropped below the value of the remaining obligations (give or take) a fairer price would be negative. Alternatively, trading should be suspended because there's a fair argument that the company is insolvent at that point.

Instead, this fact was hidden behind a little "complexity" and inadequate rules.

Bolton just took advantage of a broken situation.

The stock exchange can take plenty of actions against a stock and from a lay perspective it sounds like they should have.

I suspect it's not just tax systems these 'Byzantine' products are designed around. It's also getting around the various regulations around who can invest in what, accredited investors, investment grades, etc.

A good background article on him: http://thebigchair.com.au/news/insight/nick-bolton

"Bolton studied economics and mechanical engineering at Melbourne University. "I don't think I completed one unit in engineering, but I did well at economics," he says. At the same time, Bolton made money from an investment in Melbourne IT, which had a monopoly on internet and website domain names in Australia. With deregulation of that market looming, Bolton saw an opportunity.

"I started Bottle Domains at the age of 19 and became a competitor to Melbourne IT." He timed his investment well. By the following year, Bottle was an established player, and Bolton dropped out of uni to run his new business from his St Kilda flat.

He claims to have made his first million before his 21st birthday, but "it's never been about the money," says Bolton. "I live reasonably conservatively; even my clothes are not overtly expensive. I might be wearing a $1000 jacket, but with a $20 pair of shoes. I'm not driven by price in terms of what I acquire." "

Can someone clarify? He bought 19.9% of the voting shares, called for a meeting to dissolve the trust (what is the trust? Is the trust the same thing as BrisConnections?), then sold his shares to someone who wanted to ensure that BrisConnections continued to exist?

Tricky and smart, but what is the value that BrisConnections holds and to which other people want access? Is it just the two upcoming installments that investors owe?

BrisConnections was developing a toll road, but the actual tollroad development assets were held in the trust for tax reasons.

If the trust were to be dissolved as the development was in process, it would have killed the project. That's why his particular stake had so much value because it would help stave off the dissolution.

Investors would owe the 2 upcoming installments. So he was going to owe $48M and another $48M for the next two installments. That's one of the incentives they too would have had for dissolving the project since the ones who picked up shares at $0.001 would also owe that money.

Much thanks, that really clarifies the situation, but it also inspires further questions.

So people purchasing shares were theoretically providing the investment funds to complete the toll road, and as a result of that risk, would have access to the profits of the toll road in proportion to their investment, correct?

So BrisConnections doesn't want to see the fund dissolved because it loses all the capital represented by the $.001 investors by virtue of still owing $2, and Thiess John Holland wanted to maintain the entity that owed them a contract for building part of the road?

Feel free to correct me, but I believe the trust was funding for the ~$5B project that BrisConnections was beginning. If the trust was dissolved, BrisConnetions would be unable to complete their project. In order to protect their project, they purchased Bolton's voting rights.

Bolton sold the rights to the contractor that was to build the toll road:

> Bolton had already sold his voting rights to Thiess John Holland, the design and construction contractor for the Airport Link

BrisConnections is the one that raised the money in trust (which was why they were meeting about dissolving the trust).

> BrisConnections, backed by Deutsche Bank, Credit Suisse Group, JPMorgan Chase & Co. and Macquarie Bank, raised A$1.23B ($1.16B) in July last year through the sale of an unusual equity security called a stapled unit.

Thiess John Holland bought the voting rights so that they wouldn't lose the contract with BrisConnections if it went under (which the dissolution of the trust would have caused). To them it was a deal since there was a lot more than A$4.5million at stake here.

Bolton:

1. Bought a controlling share in the company/trust

2. Brought about a situation that would cause the company/trust to collapse (which a lot of other investors were in agreement with)

3. Sold his controlling share's voting rights off to someone that had an interest in seeing that BrisConnections didn't go under.

4. Still holds the shares that he's going to owe $1 on for the next to 'periods,' but separated the shares and the payment for voting rights so that he gets to keep the money and just let the other business die in debt.

He's not so good with keeping my credit card details though:

http://www.theage.com.au/business/bolton-loses-his-bottle-ov...

Gordon Gekko approves.

I don't get the 'ultimate posterboy for the much-maligned Generation Y' comment... A financial sharks a new thing? Or are these people just sheltered by rose-colored glasses that they use to read their history books?

If he was a Baby Boomer, would we see comments like "ultimate posterboy for the much-maligned Baby Boomer generation?" I really wish people with their 'get off my lawn' comments would crawl back under their rocks.

He doesn't sound like a likeable guy, but that is besides the point.

His actions did demonstrate the pitfalls of "stapled units" to Australia. Shame should be on the people who created this instrument. Any time you have a security created to manipulate tax code, it is ripe for abuse.

He sounds to me like a predatory, sociopathic parasite. Perfect for Wall Street! :)

That bloke showed those toll thieves how to do business.

These guys are doing a lot of monkey business and some times it blows in your face, get over it!!!!

Reply on news.ycombinator.com