SOURCE: Parish & Company at www.billparish.com.
SEC Chairman Pitt Asked to Extend HP Compaq Vote Two Weeks Due to Insufficient Disclosure Pertaining to Warburg Pincus Ownership of Institutional Shareholder Services (ISS) and Its Extensive Business Dealings with HP Management. Major Legal Actions Against Hewlett Packard Management, Barclays Global and Warburg Pincus for Breaching Their Fiduciary Responsibility to Pension Managers Predicted If Voting Deadline Not Extended and Adequate Disclosure Made.
PORTLAND, Ore., Parish & Company, a global leader in analyzing complex financial transactions, today discloses in original research based upon a recent SEC filing that the venture capital firm Warburg Pincus, which maintains extensive business relationships with Hewlett Packard, owns a majority stake in Institutional Shareholder Services (ISS). ISS is the shareholder advisory firm that issued an opinion supporting the merger with Compaq Computer and this opinion was used by numerous major HP shareholders as justification for supporting the merger. Barclays Global, owning almost 3 percent of all HP stock, publicly stated it would vote its shares based upon ISS opinion due to a conflict of interest since Barclays CEO also sits on HP's board of directors and is a member of its audit committee.
Remarkably, HP management aggressively marketed the ISS opinion supporting its merger with Compaq Computer as independent without disclosing its numerous relationships with ISS owner, Warburg Pincus. This was a complete breach of its fiduciary responsibility to shareholders.
This letter to Chairman Pitt outlines many of these key relationships with the hope that the SEC will step in and require a voting extension of two weeks subsequent to new disclosures being made and thereby protect interested parties from significant legal actions. Such an extension would allow this situation to gracefully unwind and give all the related a parties a "way out." Relying on the Delaware Court to intervene, as expected by Walter Hewlett, would also rob the SEC of a valuable opportunity to help restore credibility to the markets.
Interestingly, Warburg Pincus is also a leading provider of private equity investment services to many public and private pension plans throughout the country. According to a November 29, 2000 article in "The Daily Deal," these institutions include General Electric Asset Mgmt and Cornell University. Many of these major pension plans voted based upon ISS opinion, stating "we are going with ISS", yet had no idea that ISS was effectively owned by Warburg Pincus. Please also refer to this previous linked report, noting that much of it is updated here, for valuable background information.
Dear Chairman Pitt,
My former employer and your former client, Arthur Andersen, may indeed collapse soon. This is a clear tragedy that could have been avoided. Today I would like to again officially alert your office regarding new facts pertaining to the merger vote between Hewlett Packard and Compaq Computer and request that you intervene and extend the voting deadline two weeks, subsequent to new disclosures being made, in order to avoid another tragedy.
As an investment advisor having previously worked as a Certified Public Accountant with Arthur Andersen and also as a Chief Financial Officer for a financial institution, I must admit that I have never seen a large public corporation of Hewlett Packard's stature so blatantly ignore critical SEC disclosure rules.
I appreciate that my concerns have become a matter of "chairman's correspondence" and, as you know, I have been trying to persuade Institutional Shareholder Services (ISS) since November to publicly disclose its board of directors and ownership structure. I was repeatedly told by ISS that this information was not publicly available and that my concern over potential independence issues was unfounded.
Please allow me to highlight a few new facts for your review, the details of which are summarized in this report. I do admire your focus at the SEC on disclosure rather than writing new rules and regulations and perhaps, if the SEC stepped up and made a statement here, you could silence many of the SEC's critics in addition to helping avoid numerous legal actions.
I. The venture capital firm Warburg Pincus owns a clear majority position in ISS in addition to controlling three of eight board seats on ISS's board of directors. This was not adequately disclosed to users of the ISS report recommending the merger between Hewlett Packard and Compaq Computer.
As of March 30, 2002, Warburg Pincus' website does list Pat Hackett and Mark Colodny as ISS board members yet it fails to indicate that Sidney Lapidus, who started his career as an attorney at the SEC, is also a board member. Both Hackett and Lapidus are also on the operating committee of Warburg Pincus itself. In contrast, ISS's website still does not list its board and ownership structure and, although this might have been disclosed to a few large institutions, wouldn't the FD disclosure rule require such information to be disclosed to all shareholders?
The only two other entities listed as ISS owners in the SEC filing appear to have minority stakes and they are RAM Trust and Hermes Asset Management. RAM Trust is an asset management business with $212 million under management based in the U.S. Hermes is one of Europe's largest pension managers and maintains extensive business dealings with Barclays in the UK, parent to Barclays Global, one of HP's largest shareholders.
Robert AG Monks is both Vice Chairman of Hermes in addition to being on the board of directors of RAM Trust where he works with two long time colleagues John Peabody Monks Higgins and Karen Constance Lowell. Both Lowell and Higgins are listed as representatives of RAM Trust in ISS's ownership structure in the SEC ADV filing, Robert AG Monks is not. This is confusing since ISS's Chairman of the Board, according to the SEC ADV filing, is Robert CS Monks, the son of Robert AG Monks.
II. Hewlett Packard management aggressively marketed the ISS opinion as independent and justification for pension fiduciaries to vote in favor of the merger, knowing full well that it was not, due to HP's extensive business relationships with ISS owner Warburg Pincus. These key relationships include BEA Systems and WebGain among others.
One of Warburg Pincus' most significant investments, with a market value to Warburg of $2 billion per Warburg's website, is BEA Systems. Three top Warburg partners, Cary Davis, Stewart Gross and William Janeway are members of BEA's board of directors and the firm appears to be its largest shareholder. Various top BEA employees are also originally from Hewlett Packard, including its Chief Financial Officer, William Klein, Director of Corporate Development, David Logan and others. BEA's board includes Dean Morton who was once Chief Operating Officer and a director of Hewlett Packard until his retirement in 1992. The point here is that this is not some garden variety "tech" relationship yet rather a long standing close relationship between Hewlett Packard, BEA and Warburg Pincus.
In the months preceding the merger vote, BEA also announced a new "landmark partnership" with Hewlett Packard, resulting in significant new revenues to BEA and the potential for stock market gains to Warburg Pincus. The related financial benefit accruing to Warburg Pincus, ISS owner, was not adequately disclosed in the ISS report supporting the HP Compaq merger. A 10 percent change in BEA's stock value would represent a gain of $200 million to Warburg Pincus. The issue here is not the relationship itself but rather that important independence issues requiring financial disclosure in the ISS report were withheld.
Hewlett Packard is also a key "industry partner" with Webgain, an entity formed by Warburg Pincus and BEA Systems. Long term key HP management employees including Steve Brasher have gone to Webgain.
Warburg was also a major investor in Covad, whose CEO Robert Knowling now sits on Hewlett Packard's board of directors and is a member of its audit committee. Although Warburg has since sold its major stake in Covad, a company whose stock reached $100 and now trades at $2 per share, Covad's CEO Robert Knowling is quoted on Warburg's website as saying "When you say you're a Warburg financed company, doors open." The question becomes, should ISS be opening those doors without disclosing its ownership structure.
Also noteworthy is that a key member of Hewlett Packard's outside legal counsel, Barry Taylor, left Wilson Sonsini, where he was a member of the executive committee, to join Warburg Pincus.
The objective here is not to disparage any of these fine executives but to rather clearly note that Hewlett Packard management was fully aware of major potential conflicts of interest with ISS owner Warburg Pincus and chose to not disclose this to shareholders.
III. The SEC database for ADV filings seems to indicate that a filing from ISS was posted on March 4, 2002, one day before the report was issued supporting the merger between Hewlett Packard and Compaq.
Although the report was signed by the ISS compliance officer on February 12, 2002, it appears that it was not posted onto the SEC system until March 4, 2002. This is confusing because, after seeing this March 4, 2002 reference, the SEC did a database update in late March and the date field showing when the report was posted to the SEC system does not now seem to be clearly evident. In addition, the report now has a date of March 28, 2002 by ISS compliance officer, indicating ISS did some type of update recently.
The key point here is that the report posted on the SEC's system on March 4, 2002 was the first time that ISS publicly disclosed its new ownership structure and board of directors. Disclosing this one day prior to the issuance of the report supporting the merger and two weeks prior to the actual HP Compaq vote after HP management had aggressively marketed the report as independent is not adequate per SEC guidelines. While some may argue that disclosure was adequate, ISS's refusal to notify myself, leading business journalists or pension managers this critical board and ownership structure information, even after the March 19, 2002 vote, clearly implies inadequate disclosure. Even today, the average institutional manager has no idea that Warburg Pincus owns ISS. It is important to note that since the sale of ISS to Warburg occurred in late July, 2001, any filing prior to that would not have identified these important potential conflict of interest issues.
Even Robert AG Monks himself, in written correspondence on March 19, 2002, the day of the HP Compaq merger vote, informed me that he did not know who all the board members of ISS were. In addition, in conversations with ISS representatives after the 5th, when I continued to ask why this was not being disclosed, there was no mention of the SEC filing.
One rather confusing area regarding ISS is the involvement of the Monks family. The ISS ADV filing indicates that ISS's Chairman of the Board is Robert C.S. Monks, son of Robert AG Monks. The same filing also lists John Peapody Monks Higgins, not to be confused with Robert AG Monks Sr., as the Chief Investment Officer for RAM Trust. It is not known if they are related. In any event, one might ask if it is appropriate that RAM Trust and Hermes both have significant influence from Monks Sr. who is Deputy Chairman of Hermes in the UK and on the board of directors at RAM Trust, when Robert Monks Jr. is Chairman of the Board of ISS.
Robert AG Monks is a leader on Corporate Governance issues and on April 28-30, 2002 he will be a co presenter at Stanford Law School's "Fiduciary College" along with Barclays Global CEO Patricia Dunn. The two day session will focus on key issues such as "the basics of fiduciary principles" and "ethical issues for fiduciaries." Monks is probably one of the most widely quoted and respected figures in the area of Corporate Governance. Interestingly, in order to fulfill her fiduciary responsibility to Barclays Global investors, mostly large public pension plans, Dunn assigned Barclays' vote on the merger to ISS, whose Chairman of course is Robert CS Monks. Dunn is not only a director of HP itself yet is also one of four members on HP's audit committee along with Covad CEO Robert Knowles. Knowles has had an especially close relationship with Warburg Pincus. Of the four members, it doesn't appear that any have strong knowledge of accounting and auditing issues. Perhaps the SEC could encourage HP to get such expertise on this committee.
Barclays is also one of the largest investors in BEA Systems, owning 1.7 percent per Nasdaq.com on 4/1/2002. Barclays is known for indexing yet this percent does seem much higher than BEA's share of the overall market index. Johnson and Johnson is 1.7 percent of the S&P 500 and has a market cap of $198 billion while BEA's market cap is only $5.5 billion, implying that if Barclays were indexing off BEA, it would own significantly less than it does.
An important question for determining any potential independence issues at ISS might be, who are all the executives and board members at RAM Trust, ISS, Hermes, Barclays and Warburg Pincus who are either related by family or marriage to Monks. These are of course not important related to RAM Trust, Barclays or Hermes directly but rather only due to RAM Trust and Hermes being listed in the ownership structure of ISS per the SEC filing on March 4, 2002.
Warburg Pincus's ISS is selling "independence" to pension fiduciaries all over the country and enjoys a virtual monopoly in the provision of this service due to its merger with Proxy Monitor Inc. in 2001. Some of Warburg's competitors such as Merrill Lynch might even argue that this provides them an unfair advantage in the capital markets.
Summary Recommendation to the SEC:
Parish & Company officially recommends to the SEC that it step in and require the HP Compaq merger vote be reopened for two weeks due to insufficient disclosures by HP management, which deceptively marketed the ISS report as independent, prior to the March 19 vote. Failure to do so could result in numerous unnecessary legal actions and a variety of other complications. One might ask if Barclays in the UK, parent of Barclays Global here in the U.S., could have significant legal exposure since its CEO, who sits on HP's board and its audit committee, relied exclusively on ISS's opinion on the merger vote. Shortly after the HP Compaq vote, Barclays in the UK did announce that it is exploring the possibility of separating itself from its US subsidiary, Barclays Global. They are clearly sensitive to potential legal exposure.
Warburg Pincus could also have exposure by failing to adequately disclose its ownership of ISS. Warburg is a leading technology venture capital firm structured as a partnership perhaps not unlike Arthur Andersen. Its board and advisors include numerous national leaders including Harold Brown, former defense secretary, Charles Schultz, former Secretary of State, and Laura Tyson, top economic strategist. It is not known if these advisors own stock options in BEA Systems or other companies with significant business relationships with HP.
Already, leading securities litigation firms are beginning to target investment firms and their role at Enron and in other situations. It would seem that a good way to avoid this would be to require a new vote in the event that HP and Compaq do not mutually agree to terminate the merger in such a way that no break up fee is paid by either party. Such a vote may be awkward, yet its outcome, whatever it may be, would surely be accepted by both parties. This should clearly be within the purview of the SEC, not some court in Delaware.
Institutional Shareholder Services Board of Directors
per SEC ADV filing on March 4, 2002
| Name | Title | Firm |
| Dwight Allison | Chief Financial Officer | ISS |
| James Heard | Chief Executive Officer | ISS |
| Robert C.S. Monks(Robert A.G.Monks son) | Chairman of the Board-ISS | Not Known |
| Patrick Hackett | Investment Banker - Technology | Warburg Pincus |
| Sidney Lapidus | Investment Banker - Technology | Warburg Pincus |
| Mark Colodny | Investment Banker - Technology | Warburg Pincus |
| Michael Danziger | Known Yet Not Confirmed | Known Yet Not Confirmed |
| Michelle Edkins | Director of Corp Governance | Hermes Asset Management |
Comments on Institutional Share Services (ISS) Board Structure:
1) Warburg Pincus directly holds 3 of 8 board seats in addition to
owning what appears to be a majority equity position in ISS, thereby achieving
operating control.
2) Robert AG Monks is deputy Chairman of Hermes and Michelle
Edkins is the Director of Corporate Governance. Edkins sits on ISS board.
Edkins is quoted in a January 6, 2002 article in the London Times saying
"audit committees need to smarten up about how critically they view their
non-audit and audit contracts." This might be a challenge in HP's
case because its committee, which includes Patricia Dunn of Barclays Global,
Robert Knowling CEO of Covad and two others doesn't seem to have much accounting
or auditing background.
Institutional Shareholder Services Ownership Structure per same SEC filing
| Full Legal Name - Occupation | Ownership Entity | Ownership Status |
| John Peabody Monks Higgins - Chief Investment Officer | RAM Trust Services | Manager, Not Known if Related to Robert C.S. Monks, ISS CEO |
| Karen Lowell - Compliance Officer | RAM Trust Services | Manager |
| Warburg Pincus - Investment Bankers | Warburg Pincus | General Partner |
| Possfund, Britel, Hermes Inv Mgmt | Hermes USA Investors Venture | Manager |
Comments on Institutional Shareholder Services (ISS) Ownership Structure
1) RAM Trust, Warburg Pincus and Hermes are the three ownership entities
involved. Of these, it appears that Warburg Pincus has operating
control, as general partner. ISS has said that Hermes only maintains
a 20 percent stake in ISS and only received one board seat. RAM has
also said that it does not have a controlling ownership stake in ISS.
Parish & Company's "opinion" is that Warburg owns a controlling stake
in ISS of at least 60 percent, based upon the rumored purchase price of
ISS from Thomson financial of $43.5 million and the following reference
in the Washtech Online Mid-Atlantic Venture Investments 3rd Quarter 2001
Recap indicating that Warburg Pincus invested $26.1 million in ISS. (Use
browser search term "proxy" to quickly find reference here at the Mid-Atlantic
summary.
2) John Peabody Monks Higgins and Karen Lowell, two co-directors and
long time colleagues at RAM Trust with Robert AG Monks, are both listed
in the ownership structure of ISS as representatives of RAM Trust.
Robert AG Monks is not listed in the ISS ownership structure per the same
SEC filing.
3) Warburg Pincus, a leading investment banker, is particularly active
in the technology area and one of its primary investments, with a current
market value to Warburg of almost $2 billion, is BEA systems. Other
major investments with relationships to HP include WebGain. A significant
past investment was Covad whose CEO now sits on HP's board and is one of
four members of its audit committee along with Barclays Global CEO Patricia
Dunn.
RAM Trust Services Ownership Structure
| Full Name | Role at RAM Trust Services |
| John Peabody Monks Higgins | President and Director |
| Karen Constance Lowell | Chief Operating Officer and Director |
| William Stanley Schaffner | Treasurer and Director |
| Robert A.G. Monks | Director |
| William Fletcher Knowles Monks | Director |
Instructions for Accessing KEY Sec Reports on Institutional Shareholder
Services and RAM Trust
1) Go to SEC data base using the following link:
http://www.adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.asp
2) Select investment advisor search on left
3) Input Institutional Shareholder Services and press go
4) Click on highlighted business name on lower part of screen.
Should say "Institutional Shareholder Services" and wait for report to
come up.
5) Look on left to "Sections of form ADV and select "View all
pages"
6) Wait and select ok, note that report may take 1 minute to
generate
7) Print the 23 page report and refer to printed pages 16-18
for board of directors and ownership structure.
Helpful Hints for Reviewing the Reports
1) See Title or Status column of schedule A and look for word
director. Here you can confirm that ISS has 8 members on its board of directors
with 3 being from Warburg Pincus.
2) Go to schedule B and see that only 3 entities are listed as
equity owners. They are RAM Capital, Warburg Pincus and Hermes.
ISS has said that Hermes only maintains a 20 percent stake. RAM has
also said that it does not have a controlling ownership stake in ISS.
Parish & Company's "opinion" is that Warburg owns a controlling stake
in ISS of at least 60 percent, based upon the rumored purchase price of
ISS from Thomson financial of $43.5 million and the following reference
in the Washtech Online Mid-Atlantic Venture Investments 3rd Quarter 2001
Recap indicating that Warburg Pincus invested $26.1 million in ISS. (Use
browser search term "proxy" to quickly find reference here at the Mid-Atlantic
summary.
Other Helpful Links:
1) RAM Trust Management
Team and Directors - Shows John Peabody Monks Higgins, Chief Investment
Officer, and Karen Lowell, compliance officer, both of whom are listed
in the ownership structure of ISS
2) Warburg
Pincus - See team section and select partners to see 3 partners
noted in this report that are directors of ISS. They are Patrick
Hackett, Mark Colodny and Sidney Lapidus.
3) Institutional Shareholder
Services (ISS) Management Team (Page down to see who's
who at ISS)
4) Hermes Asset Mgmt
Org Chart Showing Robert AG Monks Sr. is Deputy Chairman - See
upper left of org chart.
DISCLAIMER: Given the complexity of these facts and the possibility that Parish & Company may have misinterpreted such facts, please do refer directly to the SEC filing yourself and make your own conclusions. The overall purpose of this report is to help the SEC see that a new vote due to inadequate disclosure could help avoid a broad range of future legal problems and also send a clear message that, in addition to pure accounting disputes, these issues of adequate disclosure surrounding the most important decision shareholders will ever make, that is whether or not to merge, are in the purview of the SEC, not the court system. Use the following steps to access the SEC filings for Institutional Shareholder Services and RAM Trust Services.
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Bill Parish of Parish & Company is an independent Registered Investment Advisor. His work has been widely quoted in the NY Times, Bloomberg, USA Today and other leading publications. Many of these reports are available for review at www.billparish.com Bill is a strong supporter of former SEC Chairman Arthur Levitt's reform agenda announced on September 28, 1998 and he has also been a keynote speaker at various conferences of investment and accounting professionals. You can contact Bill at bill@billparish.com if you would like to have him speak at your event.
Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR 97223
Tel: 503-643-6999 Fax: 503-221-3161
email: bill@billparish.com
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