Dear Barron's:

In your July 22nd issue you had an article about the best of the best mutual fund managers. In the article there was a quote from Mr. Sanborn, "When I joined the business in 1982, companies were being run for the benefit of their workers and their management," he says. "But takeovers and the globalization of the economy have changed that. Now they're being run for the benefit of customers and shareholders, by people highly incentivized to produce. There's tremendous pressure to perform."

I couldn't help but laugh when I read that.

I could list hundreds of examples of why companies prove time in and time out that they don't care about customers, but someone else would just come back and give examples of why they do. I rarely get the service or products that I am promised and many of my friends and colleagues agree.

As far as what it's like being a shareholder? Let me give you some examples of what it's like being a shareholder. A few weeks back Iomega sold shares in its company for $35 a share to a select few who had the special privilege of turning right around and selling them for $40 in the secondary market. A few years back I was trying to learn more about how the stock market and companies worked, I wrote several companies asking questions. Only about 10% even took the time to reply and the few who did were not up front with me about what I was asking and I was not asking anything about privileged information (just general questions about spreads and market makers). The past few weeks I have watched about 20 stocks and their news stories. Out of the 20 stocks, only 1 company addressed the issue of its stock price dropping. The other 19 companies didn't have a single comment to make about their stock dropping. The drops were from 10% to 70%. I realize that they don't have to, that's not my point. Last week I read in Business Week where some companies were telling privileged people information about its company business several hours before issuing a news story to the other shareholders. And there is numerous examples of high level corporate officials like the CFO of Intuit giving out inside information at the dinner table, we all know he knew what he was doing. When your stock drops by 30% and you find out the company told others about the market-moving information before letting you know really shows you how companies care about all the shareholders. Mr. Sanborn must be referring to being an institutional shareholder and not a individual shareholder.

Mr. Sanborn claims that companies care more about customers and shareholders then employees. Not to give employees a hard time, but let's look at semiconductor companies. In the past year many of these stocks have lost 75% of their value, that's a 75% loss to the shareholders. Have most of these companies laid off 75% of their work forces, 50%, 40%? Have most of the employees given up 75% of the wages, 50%, 40%? With the future looking so bad for these companies why haven't the companies laid off all these employees? My point here is not that the companies should lay off a bunch of employees just because Wall Street doesn't like the stock anymore, but to say that I think companies care about their employees, as they should, as much if not more then they care about their shareholders.

Mr. Sanborn must be from another planet if he thinks companies care more about their customers and shareholders then management. During the last recession I got 10 company notices of annual meeting reports. Every CEO (and many officers below the CEO) received raises of no less then 10%. The rest of the population were not even getting any raises at all. The CEOs were all still given bonuses even though their stock prices were down over 20%. Granted, the bonuses were not as much as before, but they were still getting them. The only thing the CEOs were not able to do was to exercise options. However, many option exercise prices were just reset to a lower level which guaranteed the CEOs huge amounts of money in the next few years when the market took off. I'm sure many of Barron's individual shareholders would love to buy call options and if the price dropped to just reset the strike price to a lower level. Don't you ever ask yourself why, as companies grow larger and larger, management owns less and less of the company's common stock? It is because it is better being a high ranking officer than being a shareholder. Being a shareholder means risk in losing money, that's something that rarely happens to a CEO. A CEO might not always be able to exercise their options, but that nice fat salary is always there. Remember even a $200,000 salary is about 5 times what the average Joe makes. I wonder how many of your readers could live on $200,000 (OR MORE) a year?

Finally, Mr. Sanborn say's, "There's tremendous pressure to perform." One of the last statements made in your article was, "Our philosophy is to try and win at this loser's game," Wiles says. "Last year, 87% of all managers under performed the market." That's a loser's game." Wiles is most likely referring to the market as the S&P 500 which is an average. If your kid came home and said they did "average" most people would not be to impressed, and if you kid said they did "below average" most people would say that's a problem that we need to do something about it. What do you think really happened to those 87% of the fund managers that under performed the market. Did they get fired, did they give up 50% of their salaries? Most likely not, they probably just had to give up some nice fat bonuses. Tremendous pressure to perform? I would love to have a job that I could claim victory when I didn't even beat the average (for example when a fund manager says, "My fund was up 25% last year," when the S&P 500 was up over 30%). The past two weeks have been very bad for mutual funds in general. How many of the fund managers do you think are going to accept full responsibility for the funds poor performance during that period? How many of the fund managers do you think are just going to say, "The S&P is down and that's why my fund is down." Tremendous pressure to perform?

ADDENDUM (June 12, 1998)

The main purpose of this web page is to give readers an alternative opinion on the workings of the stock market. It is not about trying to make you change your point of view, but is about making you think more independently. In the 60s many young Americans started to question the "status quo," unfortunately, these same young Americans who are now older seem to be reverting back to their parents ways which was to believe everything they read and watched. Beware, especially when it comes to the way you think about Wall Street and your retirement money.

Thinking independently is what I want you to do with the following information. Here's a news story titled "It's a bear market for shareholder suits, Pending legislation, court ruling likely to add new barriers." Do you think what the court did is fair to individual investors?

If you want to go to the story directly you can click here CBS MarketWatch, I don't know how long CBS will make the story available so I quoted certain parts of the story for my story:

"By Tom Murphy, CBS MarketWatch Last Update: 07:06 PM June 12, 1998"

"SAN FRANCISCO (CBS.MW) -- Pity Bill Lerach and his litigious brethren. The San Diego-based attorney has won fame and fortune as one of the most active and successful lawyers in the field of shareholder lawsuits, particularly those alleging companies hid bad news while insiders dumped shares.

His firm, Milberg Weiss Bershad Hynes & Lerach, has sued more than 50 companies, mostly technology companies that tend to have volatile stock prices. But the times, they may be a'changin -- for the first time since the 1929 market crash.

A federal appeals court heard arguments this week to make it tougher to file suits. And a bill wending through Congress would bar securities suits from state courts, where legal standards vary, forcing litigants to meet federal tests.

Lerach was on vacation and couldn't be reached for comment, but the firm's senior trial attorney, Patrick Coughlin, predicted the changes under way will hurt individual investors and, eventually, the market itself.

'It will make it tough across the country for the average person to bring a suit against a company that committed fraud,' Coughlin said. 'You'll have less people in the market.'

Reform act

Change has been in the air since 1995 when Congress approved the Private Securities Litigation Reform Act, overriding a presidential veto. The act's stated intention was to raise the bar for shareholder suits.

In a hearing before the 9th U.S. Circuit Court of Appeals in San Francisco on Thursday, another Milberg Weiss lawyer argued the standard should rest on a relatively lax ruling by the 2nd Court of Appeals before the act became law.

That standard allows plaintiffs to sue if they can show a 'strong inference' that defendants had 'motive and opportunity' to commit fraud. They can also show 'recklessness.'

The case before the appeals court involved Silicon Graphics (SGI). Early last year, the company's shares tumbled after it said a shortage of parts would hurt sales of its Indigo II workstations.

Upbeat forecasts

Before the news, the company had made several upbeat predictions for the Indigo. They said the new Indigo model could add $1 billion to sales. That was big news, because company had $1.6 billion in revenue the prior year. Meanwhile, several executives were quietly selling their shares, the suit said.

But U.S. District Court Judge Fern Smith dismissed the suit. She said the 1995 act eliminated the 'motive and opportunity' standard. Smith instead said the plaintiffs had to show 'specific facts' leading to circumstantial proof of fraud in order to pursue a suit.

'These people sold $13.8 million worth of stock,' attorney Leonard Simon told the three-judge appeals panel now pondering the case. But the judges, including two known for their conservative leanings, didn't show much sympathy as they grilled Simon and two other attorneys who want the case reinstated.

Judge Joseph Sneed suggested the company's problems with the Indigo was simply a case of 'bad business.' Simon responded: 'It's way more than 'bad business' to say a product is shipping in volume when it doesn't work.'

Richard Walker, director of enforcement for the SEC, told the court that members of Congress had repeatedly referenced the 2nd Circuit Court's standard as they reviewed the act. 'The statutory language is modeled directly after the 2nd Circuit's standard,' he said. But Judge John Rhodes noted other lawmakers said the act's language was 'partly' based on the 2nd Court's ruling.

Attorney Paul Bennett, representing plaintiffs in a related suit, complained Silicon Graphics initiated a 7 million share buy-back program while insiders were quietly dumping their stock.

Sneed said: 'Purchasing shares might help shareholders.' Bennett shot back, 'Not if you're purchasing them at an artificially inflated price.'

For the defense

By contrast, the judges listened intently as attorney Bruce Vanyo, representing Silicon Graphics, noted the 2nd District's standards were specifically thrown out by the House-Senate conference committee considering the act. Instead, Congress said plaintiffs now must 'state with particularity' any facts that suggest illegal activities. The case brought against Silicon Graphics didn't do that, he said. In fact, it didn't directly tie any of the upbeat predictions to the allegations of insider trading.

Vanyo also noted that seven of the company's nine directors held onto all their shares during the time covered by the suit. Even the executives who sold some stock held onto their valuable stock options, he said.

Vanyo also noted Indigo machines were selling in healthy volumes during the last quarter of 1996, so the statements made by the company were true at the time, and that quarter's profits were in line with Wall Street expectations. It wasn't until the following quarter that problems developed, he said.

Although the hearing appeared to go in Vanyo's favor, he noted it's difficult to predict how the judges will rule. 'I think they leaned back and forth,' he told CBS.MarketWatch.com. 'I don't know what they're going to do.'

Make a federal case of it

Meanwhile, a House subcommittee approved legislation Wednesday that would plug a different loophole in the 1995 law by requiring investors to file securities fraud suits in federal court rather than in state courts.

Some lawyers had reacted to the strong national standards for proving stock fraud in the federal law by using state or local courts, where different standards apply.

The bill passed by the finance and hazardous materials subcommittee of the House Commerce Committee is similar to a bill passed by the Senate on May 13. The full committee will consider the bill on June 24.

Coughlin, the Milberg Weiss attorney, said the bill's path is being greased by political contributions, particularly from Silicon Valley companies. 'It kind of reminds me of the tobacco industry,' he said. 'The tobacco industry used to get whatever they wanted in Congress.'

He noted the securities laws have been left unchanged since the stock market crash of 1929. 'I don't know why -- when the market's never been stronger -- we're changing the securities laws.

'It reminds me of the deregulation of the savings and loans in the 1980s,' he said. 'And the next thing that happened was the crash. I think that's what we're setting ourselves up for."

To judge for yourself if companies care about their shareholders, especially, the small ones. Pretend that you bought some of the stocks listed here Semiconductor Capital Equipment Makers and Disk Drive/Storage Device Makers. Go back a year from now (6-12-98) and imagine that you had bought some of these stocks in the Summer of 1997. Now look at the current stock prices, you will see that you would have lost anywhere from 50% to 90% of your investment. Now look at the corresponding news stories for the stocks that you bought and see if, as the stock was falling, you would have been satisfied with what the company was telling you about the situation.

You will found out that the companies rarely talked about their falling stock prices if at all. You would have had to make a decision (hold or sell) with almost no help from the company (as far as getting timely and truthful information about a company's situation).

I'm not debating legalities or even the ethics. I am simply letting you know that when you decide to become a small investor who invests in individual companies, you had better be prepared for not getting information based on "full disclosure."

This was a lesson I learned the hard way. After studying SEC documents and pamphlets I thought that I would be kept informed through constantly updated news stories on situations that affected companies that I owned stock in. What I got from studying the documents and pamphlets was completely wrong when you applied it to the real world.

This is one of the most important lessons I have learned and one that has made me a much better investor: A company will have no loyalty to its shareholders and it is best if the investor has no loyality to the company, when the company can no longer make a buck, dump them like a hot patato (And as far as investing in companies that haven't even made their first buck, don't even touch them. To read about stocks like these, those that haven't earned their first buck yet, check out this story IPOs: Good Investments or Wall Street Scam? Note: there is a exception to this rule and that is if you can purchase the IPO before it actually starts trading in the secondary market, go for it, most of the time this is a win, win situation.)

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