THE WALL STREET
Aren’t Sharing the Ties They Have to Advisers
Investor Casablanca Made Deal for
Advice on Cliffs Natural Resources but Didn’t Disclose It
Susan Pulliam and
Oct. 2, 2014 7:00
Some activist investors have agreed to share trading profits with
small-fry players who bring them stock ideas—but they aren’t always
disclosing these financial ties.
Consider the activist campaign involving
Cliffs Natural Resources Inc.,
an iron-ore miner. Activist consultant Michael McNamara last year
pitched the idea of launching a Cliffs campaign to Casablanca Capital
LP, according to people familiar with the matter. Casablanca is an
activist hedge fund co-run by Donald Drapkin, a former lawyer of
high-profile investor Ronald Perelman.
Casablanca built a stake of about 5.2% it disclosed in January. In
exchange for his idea, Casablanca agreed to pay Mr. McNamara’s firm as
much as one-third of the hedge fund’s profits on the stake, according
to people familiar with the matter and a regulatory filing by Mr.
Casablanca didn’t disclose these ties in the Cliffs case, according to
a review of its regulatory filings. A regulatory rule requires
investors that acquire a stake of 5% or more in a company to describe
any arrangement with another party that includes guarantees of
profits, divisions of profits or losses, or other understandings
related to the company’s securities.
Drapkin referred calls to a Casablanca lawyer, David Rosewater, who
declined to comment on any profit-sharing agreement. Mr. Rosewater
said: “We are confident that Casablanca has made all appropriate
disclosures in this matter in accordance with applicable law.”
Securities and Exchange Commission spokesman declined to comment, as
did a spokesman for Cliffs.
issue is an SEC rule requiring investors to tell the public about
details of company stakes of 5% or more.
Disclosures in so-called 13-D filings are closely followed by
investors. A recent study by research firm S&P Capital IQ showed that
the trading volume of stocks targeted by activists in the past decade
jumped by an average of 40% from its typical volume on days when
disclosures were made.
Activist investors typically buy big stakes in poor-performing
companies and push for changes they hope will cause the stocks to
2013, activist funds on average produced hefty returns of 16%,
according to industry research firm HFR. That has helped attract a
flow of investor money. The number of activist funds rose to 72
through the first half of this year, from 52 a year earlier.
Lawyers and investors say that, increasingly, small investors who tag
along with activist investors are bringing them ideas in exchange for
a cut of the profit. One of the reasons they cite for the trend is
that, while the number of activists funds has grown, the number of
good investment opportunities hasn’t.
the Cliffs case, Mr. McNamara’s firm, ROR Capital LLC, disclosed the
outlines of the arrangement with an unnamed client in a filing with
the SEC in February 2014. The filing didn’t name Casablanca or Cliffs,
but a person close to the situation says the client is Casablanca and
ROR’s cut of the profits is tied to the performance of Casablanca’s
Cliffs investment, as well as any other of Mr. McNamara’s ideas that
the filing, ROR said it stands to receive an “incentive fee” from a
“client” that could equal up to 33% of the client’s profits.
two-man shop co-founded by Adam Seltzer, a former corporate
adviser—didn’t identify its client in the filing but said it “acts
solely as a consultant to another investment adviser…providing the
client knowledge of the metals and mining sector.”
Andrew Freedman, a lawyer who represents activist investors, says he
believes Casablanca should have disclosed the profit-sharing
arrangement with ROR if it is an agreement tied to a rise in
Casablanca’s stake in Cliffs.
Though Casablanca didn’t publicly disclose the arrangement with ROR
Capital, it has made other disclosures related to its Cliffs campaign.
July 29, Casablanca, which managed about $500 million at the end of
February, announced it had won the six Cliffs director seats it had
been seeking, a majority of the board. Casablanca’s news sent Cliffs
stock up; it closed with a 6.2% gain.
stock is down 62% this year, closing Thursday at $10 a share.
Casablanca remains in a losing position on Cliffs, having spent an
average $25.39 a share to assemble its position, according to a
—David Benoit contributed to this article.
Susan Pulliam at
Susan.Pulliam@wsj.com and Juliet Chung at