At the end of this post, we have embedded a letter from the law firm Clare Locke objecting to a July post about its client, Chatham Asset Management. Chatham, through four hedge funds it manages, is the unhappy majority owner of American Media, the owner of National Enquirer and other publications.
Clare Locke asked us to update a July post to reflect the fact that it got the New York Post to change part of a sentence that we had quoted. More on that shortly.
We took interest in this story because one of these four funds is a CalPERS dedicated vehicle called Eureka which holds the biggest American Media stake, roughly 34%.
Recall that CalPERS announced that it was exiting hedge funds at the end of 2014, yet here it is, 2019, and it still is tied up in Eureka. In fact, CalPERS is apparently so embarrassed about its interest in American Media that CEO Marcie Frost has been falsely saying that CalPERS no longer owned American Media, when CalPERS in fact sill had a position in the Chatham fund and the Chatham funds had not yet gotten rid of American Media. The New York Post reported in that same July 11 story that Chatham had yet to close on its sale of American Media, meaning CalPERS was still a proud part owner.
And it appears that CalPERS still holds an interest in American Media. At last Monday’s Investment Committee meeting, board member Margaret Brown asked staff to say what was in the residual “absolute return,” as in hedge fund, portfolio. What was left is significantly and probably entirely the Chatham Eureka fund.1 In yet another example of staff insubordination to the board, Brown did not get an answer.
Instead of being upset about the optics of having an interest in a sleazy publisher, CalPERS ought to be embarrassed that American Media is such a financial train wreck that CalPERS has been unable to have Chatham complete the liquidation of the fund. The company has a negative net worth that was reported earlier this year as being over $200 million with latest year losses of over $30 million.
But CalPERS instead appears to be distressed by the fact that in February, Los Angeles Times reporter Matt Pierce got exercised that CalPERS had such a big economic interest in the owner of the National Enquirer that held off from dishing the dirt on the Stormy Daniels/Trump affair and publishing Jeff Bezos’ dick pics. As we wrote:
So why is this even a story? Dem state invested in a company that went after that paragon of American capitalism, Jeff Bezos, and indirectly that supposed icon of journalism, the Washington Post?
Wellie, CalPERS didn’t pull that trigger. It gave the money to a hedge fund manager, Chatham Asset Management, that acted at least some of the time like a private equity fund and invested in private-equity type things like private companies. And maybe because it was a private equity wannabe rather than the real thing, this American Media private-equity-type investment was a dog on top of becoming a PR nightmare…which is making it even more of a dog, if such a thing were possible.
Specifically, as many of you know, this particular private company is in a quite a bit of legal hot water, first due to the Stormy Daniels affair, which led to American Media entering into a no-prosecution agreement in return for its cooperation, and again due to its haggling with Jeff Bezos over those notorious wiener photos. Prosecutors are looking into Jeff Bezos’ claims that the American Media attempted to blackmail and extort him, which if true would be violations of the no-prosecution agreement, in which American Media said it would fly right and not break the law for three years.
As you’ll see from the letter, it wasn’t that post that got Chatham’s dander up, but a later one where we quoted text from a New York Post article that Chatham found offensive and its lawyers contend was defamatory, a characterization we do not accept.
All that Chatham objected to is the use of “parked transaction,” which we carried over in a quote from the Post story. Chatham appears to believe that readers, and in particular, readers of the Post, would not recognize that American Media was a private company, and would mistakenly assume the meaning “parked” has in a public securities context. “Parking” is a securities law violation that occurs when a licensed securities dealer arranges for another party to take his position in listed stocks with an agreement to buy it back at a profit.
As you will see from the letter embedded at the end of this post, Chatham’s attorneys did not dispute the accuracy of the facts in the article. The short outline is that Hudson News agreed to buy American Media for $110 million with the sale expected to close late in the summer. Putting on my valuation hat, that is a remarkably high number. And maybe that’s because, as the Post reported, Chatham is looking at buying Hudson. If that happened, Chatham funds would again own American Media, but via Hudson, which doesn’t seem to solve much, unless the point is to get CalPERS out and hope a period of lower profile for American Media might make it more appealing to an independent buyer.
Chatham and Clare Locke apparently did not appreciate that Naked Capitalism has written extensively about private equity and our readers are sophisticated and well down the curve on these issues. We took pains in our headline to use the word “alleged” and even put “parking” in quotes to indicate that the use of that term was not the most apt description for the transaction sequence presented in the Post story, which Chatham has not contested. Instead, we used the phrase “wash out,” to which Clare Locke does not object.
That still is only approximate, particularly since it appears likely that the Chatham funds that wind up owning Hudson, assuming that transaction closes after a Hudson purchase of American Media, would not hold the Hudson interest in the same proportion they held the earlier American Media stake, raising questions of fairness. Specifically, if CalPERS does get cashed out of Eureka and hence American Media as a result of these transaction, it raises questions about the fairness of purchase price of Hudson to the non-CalPERS-connected funds that wind up buying Hudson.
We did not pick up the word “parked” from the Post to suggest any illegal activity, but because it indicated that if the American Media was sold to Hudson and then Hudson was acquired by Chatham funds, Chatham investors collectively would wind up with the same economic exposure to American Media as they had before. From what we can tell, our readers did not get the impression that Chatham was doing anything illicit. For instance, former CalPERS board member JJ Jelincic, who also worked for many years on its investment staff, told us that he did regard the proposed transaction as parking, but it was not illegal parking and he did not see parking per se as having negative connotations.
We must also contest two assertions in the Clare Locke article. The first is the notion that the post in question did original reporting, as in provided facts not previously published that called for verification. This post was analysis, which is a form of opinion, as well as commentary that was clearly opinion, such as calling American Media a “garbage barge.” Opinion is protected speech. We relied on facts reported in other recognized news outlets that were cited and linked to in our post.
The second is the absurd claim that:
If Chatham had been asked, it would have told Naked Capitalism in no uncertain terms that there is absolutely no agreement, intention, or desire to buy back the Enquirer after the sale is complete.
We have made it very clear that Chatham would love to be rid of the National Enquirer. And no where have we suggested that Chatham or its funds would buy back the National Enquirer, as opposed to a proposed new owned of National Enquirer’s parent, American Media.
However, Chatham has apparently not asked the Post to change its description of Chatham’s plans: that it intends to sell American Media to Hudson and it is also seriously contemplating a purchase of Hudson. If consummated, Chatham funds would be the ultimate owners of the National Enquirer, even though they had not purchased it directly. It would be helpful if Chatham or their attorneys would clarify their intentions and the transaction sequence. In the absence of further information, in combination with Chatham’s pointed silence on the substance of the New York Post article, the July 11 account still stands as the most complete description of “whither American Media” in the public domain. We hope they will reconsider and provide more information.
In addition, it is clearly counterfactual to suggest that Chatham would have answered any question from Naked Capitalism had it even been appropriate to pose one. The July 11 Post story stated:
Chatham and [Jimmy] Cohen [of Hudson News] did not return calls seeking comment.
If Chatham would not respond to the Post, it certainly would not have responded to us.
Finally, readers will see that Clare Locke sought to have us refrain from publishing their letter with a boldfaced notice. That is an outrageous and unenforceable demand. Clare Locke should have recognized that they could not impose a confidentiality obligation upon without our prior consent, which we were not asked to provide and would never have provided.
If Clare Locke wishes to communicate with us further, they need to do so via our attorney James A Moody in Washington, D.C., and take note that any future communications are also subject to publication. Similarly, were Chatham to contact us instead, any written or e-mailed message is subject to publication and any phone calls will be recorded and may be posted.
CalPERS’ holding in Chatham, the fund that owned the American Media stake, was down to $261 million at the end of June 2016, $235 million as of June 2017, and according to the Los Angeles Times story, “over $200 million” in 2018. That means the eventual writedown could be big enough to be hard to hide and lead to another round of bad press, unless CalPERS succeeds in burying it in a “prior period adjustment” where preparing fiscal year-end financial statements..
The amount reported for the “absolute return” category, which would include the Chatham fund which owns American Media, was $156 million as of June 30, 2019. Since Eureka still owned 34% of American Media as of then, with a pending sale priced at $110 million, the Eureka share of the sales price would be $37.4 million. Query whether CalPERS was less than forthcoming with Brown because staff had not written down its Eureka stake in line with the American Media sales price.00 L.Locke & A.Phillips to Naked Capitalism