The GMI Blog

Small Print

By Paul Hodgson - CCO and Senior Research Associate

Sweet Deal

Compensation Analyst Ashley Kotzur found this WSJ article on the proposed package for Hostess Foods’ rescue CEO.

Hostess fears that, without Mr. Driscoll, its plan to breathe new life into its struggling business and emerge from bankruptcy could be in jeopardy…. [the deal would] guarantee Mr. Driscoll $1.5 million in a yearly base salary plus annual cash incentives and a "long-term incentive compensation award of up to" $2 million.

That’s a pretty hefty base salary for a company this size and, apparently they’re not disclosing what the potential cash incentive might be….

Sounds Like the Start of a Bond Film

Events Team Leader Mark Magee spotted another WSJ article on February 10^th about Bombardier.

Bombardier Inc. (BBD.B.T) received an order for 24 CRJ1000 NextGen regional jets from an unidentified airline that's worth about $1.32 billion if all options are exercised, the Montreal-based plane and train maker said Friday. The airline customer, which requested anonymity, placed a firm order for six jets, valued at about $297 million at list price, and has taken options for 18 more, Bombardier said.

Anonymity? What’s that about?

The Newest Transformer: Ingredion (It's a Decepticorn)

Ashley spotted this press release from Corn Products. Mark explains the headline: Just in case you’re not a Transformer fan, Autobots are the hero robots and Decepticons are the baddies. He dubbed this move a “Decepticorn” because, well, why try and hide you’re a corn company if you’re a corn company?

Corn Products International, Inc. (NYSE:CPO), a leading global provider of ingredient solutions to diversified industries, today announced that it intends to change its name to Ingredion pending shareholder approval at its annual meeting in May. The new name better reflects the company's position as a leading supplier of starch and sweetener ingredients to a range of industries, including packaged food, beverage and brewing.

How about Ingreedycorn? That works too.

CEO Quotation of the Week

This week’s winner of the CEO Quotation of the Week Competition goes to Emerson’s CEO David Farr, collected by Mark again.

Diversified manufacturer Emerson Electric Co. (NYSE: EMR) plans to acquire $5-$6 billion in assets by 2015, primarily in the areas of industrial automation and process management. At the same time, the company plans to sell $2-$3 billion in assets. The CEO told the company’s annual investor conference, “We’re going to drive our growth. We can’t sit back on our ass and wait for it to come to us.”

Whoever thought CEOs would sit back on their ass and wait for things to happen?

You'd Think That Would Be a Given

Mark also spotted this in a No Action letter among Citigroup’s SEC filings. The SEC ruled it could be excluded, but wouldn’t you think that the board would want a director like this?

The proposal directs the company to add "a full time director who is knowledgeable in Business Economics to the Board of Directors for representing the interest of the owners of the corporation (primarily the holders of common shares)" and "having the right of directly communicating with shareholders by email."

Directors communicating with shareholders and representing their interests? What will they think of next?

Red Hot Fares and Crews at Ryanair

Thanks to Research Analyst Nathaniel Flanner for spotting this slap on the wrist for cheap airline Ryanair.

In February 2012 Ryanair faced some negative press after the U.K.'s Advertising Standards Authority (ASA) banned two of the company's ads after receiving 17 complaints.  The ASA said the ads were likely to "cause offence." The adverts showed women posing in bra and pants with the headline "Red Hot Fares & Crew! One way from £9.99". Ryanair claimed that the ads do not "objectify" women.  Ryanair claimed that, since crew members volunteered to take part, it could not be seen to "objectify" women.

Doing a lot of claiming there, Ryanair, and as Nathaniel points out, there are no women on Ryanair’s board. But I did a little digging and found that Ryanair are serial offenders in the offensive commercial line. For example, in 2010, Ryanair ran adverts depicting rival Easyjet CEO Sir Stelios Haji-Ioannou as Pinocchio and suggesting he was lying about Easyjet's punctuality. The ad called him “Easy Jet’s Mr. Late again”. That was the subject of a libel suit that Ryanair settled out of court.

Then in 2008, Ryanair was told to withdraw an advert featuring a model in schoolgirl-style clothes and a headline "hottest back to school fares". The ASA said the "irresponsible" image appeared to link teenage girls with sexually provocative behaviour. The advert showed the model with a bare midriff in a short skirt, tie, shirt and knee-high socks in a classroom.

Then there were three more ad withdrawals in 2007, two in 2006 and one each in 2005 and 2004.

One wonders what it is about Ryanair that makes them incapable of learning a lesson. Is this the same ad agency designing these ads? Or perhaps there is a clue in a quotation from Sir Stelios about Michael O'Leary, CEO of Ryanair: “It is not very often that someone as arrogant and as powerful as O'Leary is forced to apologise to someone else in public and in writing.”

I miss Britain.

Stock and Option Awards are Valueless for Executives at AMR, but what about the Pensions?

By Greg Ruel- Research Associate

AMR will not be filing a proxy or holding an annual meeting in 2012. Therefore, the company disclosed compensation policy and figures in its 2012 annual report, filed yesterday, laying out the compensation for CEO and Thomas W. Horton as well as other current and former named executive officers.

As you may remember, Mr. Horton was promoted to chair and CEO of AMR and American Airlines in November 2011, the day prior to AMR filing for bankruptcy protection. He received no salary raise with the promotion, having previously served as CFO, and his compensation remaines fairly modest as he attempts to guide the company through Chapter 11. According to the 10-k, Mr. Horton received a base salary of $618,135, the same as the prior two years. He also got a small cash bonus of $83 (customer service component of the Annual Incentive Plan) though received no other bonuses when performance metrics went unsatisfied. Mr. Horton's perks were just under $32,000.

The company does not plan to distribute the nearly $2.7 million in stock and option awards expensed as compensation to Mr. Horton in the summary compensation table; the Chapter 11 filing and delisting of AMR shares renders these grants virtually worthless.

There is, however, an additional compensation element to resolve, that of AMR pension and non-qualified deferred compensation (NQDC) earnings. The summary compensation table shows an increase of $871,138 for Mr. Horton and an increase of more than $2 million in pension and NQDC for former chairman and CEO Gerard Arpey in 2011. The present value of these benefits is about $4.4 million for Mr. Horton and more than $6.7 million for Mr. Arpey. In Mr. Horton’s case, he has received almost four additional years of age and service credit under the NQDC plan – worth about $1.5 million – and, despite leaving the company from 2002-2006, had prior credited service in each plan reinstated. Similarly, former Executive Vice President Robert Reding was able to earn two years of credited service in the NQDC plan for each year of credited service. Mr. Reding “earned” 10 additional years of service credit under the NQDC plan with an estimated value of nearly $1.7 million.

The question left unresolved in the AMR 10-k is exactly what will happen with these pension and deferred amounts at AMR. Specific 10-k excerpts include:

We also currently have substantial pension funding obligations and we cannot predict whether or to what extent our pension funding obligations will be reduced during the proceedings in Chapter 11. Our substantial indebtedness and other obligations could have important consequences. For example, they could: limit our ability to obtain additional funding for working capital, capital expenditures, acquisitions, investments and general corporate purposes, and adversely affect the terms on which such funding can be obtained; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes; and limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

Working Capital AMR (principally American) historically operates with a working capital deficit. In addition, the Company has historically relied heavily on external financing to fund capital expenditures. More recently, the Company has also relied on external financing to fund operating losses, employee pension obligations and debt maturities.

A couple of weeks ago, the WSJ posted an article that the Pension Benefit Guaranty Corp. was in the process of filing liens against AMR’s international assets. The move came in response to AMR Corp’s decision to pay just $6.5 million of the $100 million the company was scheduled to contribute to pension plans by January 15, 2012. The article goes on to mention that AMR indicated it may trim pensions owed to about 130,000 workers and retirees as part of the restructuring effort. This news comes in addition to a restructuring plan to lay off 13,000 workers which has been met with picketing; both plans were reiterated in the 10-k filing:

“On February 1, 2012, the Company announced the principal terms of a new business plan. The chief components of this business plan include targets of an annual $2 billion in cost savings and $1 billion in revenue enhancement. The business plan contemplates, among other things, reducing headcount by approximately 13,000, terminating American’s defined benefit pension plans, and discontinuing subsidized retiree medical coverage for current employees.”

From the WSJ article: "‘American is sitting on a pile of cash $4 billion high,’ said PBGC spokesman Jioni Palmer. ‘By failing to make its required pension payments, it is threatening the retirement security of 130,000 families.’ Also, the article explained, “The PBGC puts the funding level of American's pension plans at about 45%, with about $8.3 billion in assets covering $18.5 billion in liabilities. PBGC officials said Monday that at least $1 billion of American's pension shortfall comes from a law passed by Congress in 2007 that allowed American and a few other airlines to contribute less cash to their pension plans.”

So, yes, the total compensation figure attributed to CEO Thomas Horton for 2011 is misleading. He didn’t received $4.2 million in 2011 as it reads and the expensed amounts for equity awards can basically be disregarded. But I have little doubt that pensions for pilots, flight attendants, and other long-term employees could be reduced by the time this is sorted out. American Airlines plans to seek bankruptcy court approval to terminate the pension plans and it will be interesting to see how differently executive pensions are treated from those of non-executive employees as this situation continues to unfold.

Yahoo!'s Dissident Shareholder Woes

By Beth Young - Senior Research Associate

Yahoo, its efforts to sell its Asian assets reportedly stalled, is facing another challenge: Hedge fund Third Point is making good on its promise to put up dissident candidates for the company’s board.  In a February 14^th 13-D filing (Third Point has not yet filed a proxy statement), Third Point took issue with Yahoo’s reported shift in strategic direction—emphasizing technology over the advertising and media revenues that currently account for most of Yahoo’s revenues—the “reluctance of the Board to prioritize shareholder value to date” and the absence of independent investor representation on the board. Third Point’s campaign highlights the difficulties faced by shareholders seeking to wring value from underperforming companies via boardroom change.

 

This wouldn’t be the first time in recent memory a large shareholder obtained board representation at Yahoo.  In 2008, activist Carl Icahn mounted a director challenge, nominating a competing slate in response to the company’s decision not to sell itself to Microsoft for over $30 per share.  That contest was settled before the annual meeting, with Yahoo agreeing to add Icahn and three others (two picked from Icahn’s slate) to the board. But Icahn resigned only 15 months later with the stock at just $17 per share. John Chapple and Frank Biondi, Jr., the two Icahn allies who joined Yahoo’s board with him, were not nominated for re-election in 2010. Although Icahn’s effort was widely viewed as catalyzing a needed CEO change, the tenure of new leader Carol Bartz was short, as she was ousted in September 2011. The stock has continued to languish far below the Microsoft offer price. [See chart]

 

As well, Yahoo’s board preemptively announced its own revitalization initiative, which makes election of a dissident slate a harder sell.  Board chairman Roy Bostock and three other directors will not stand for re-election at Yahoo’s 2012 annual meeting and two new independent directors will be added. Following those changes, no Yahoo board member will have served before 2010, removing the stigma associated with the 2008 Microsoft debacle and thus defusing a potential source of continued shareholder disgruntlement. The board changes came on the heels of the January resignation of Yahoo co-founder and former CEO Jerry Yang from the board and the appointment of yet another new CEO, Scott Thompson.

 

However, unlike Icahn, who nominated a nine-person slate to replace the entire Yahoo board, Third Point has announced its intention to nominate only four candidates, including Third Point head Daniel Loeb.  Third Point believes that the newly-appointed independent directors should remain on the board, together with additional directors to be recruited jointly by the board and Third Point. [See 13-D] This approach will likely make it easier to obtain the support of institutional investors, which may fear destabilizing a board too much even when performance has been poor. In the 2008 contest, reports indicated that large institutional holders were inclined to support some, but not all, of Icahn’s nominees.

Compensation was showered on Ms. Bartz both on appointment and on resignation, not having learned from those mistakes, the current board then paid out millions of dollars’ worth of golden hello to recruit Mr. Thompson, all of this causing GMI Ratings to brand Yahoo!’s compensation policy as high concern in its Board Analyst product. Given this situation, it is to be hoped that any new board members will rethink executive compensation policy at the company to make the majority of it dependent on the company’s performance, rather than simply turning up for work, getting hired, and/or getting fired.

My Article on CEO Pay in The New Republic's Income Inequality Issue

My article in The New Republic explains how CEO pay spun out of control -- and how to fix it.

Facebook's Lack of Board Diversity Draws Criticism

By Nathaniel Parish Flannery, Research Analyst

Last week, Calstrs, the California State Teachers’ Retirement System, (@CalSTRS) a major U.S. pension fund, said that Facebook Inc. should diversify the makeup of its all-male board and separate the chairman position from chief executive officer role.  Although Facebook has received a lot of positive attention for its inclusion of a woman, Sheryl Sandberg, as its Chief Operating Officer, the company has not appointed a single female candidate to its board, a characteristic that makes it a lot like other major U.S. companies that have zero women on their boards such as like Urban Outfitters, Under Armour, and Zale, the diamond company.

According to a recent report by GMI Ratings, 40% of the U.S.’s largest publicly listed companies don’t have any women on their boards.  Facebook, though, has attracted an unusual amount of attention.

In a statement posted in its website, CalSTRS said “While we acknowledge that Facebook's proposed structure is not unique for emerging private companies that go public, we encourage the company to strengthen its corporate governance and increase the diversity of its board.”

In an article in Bloomberg, Anne Sheehan, CAlSTRS’ director of corporate governance said “We are disappointed that the Facebook board will not have any women members.”

“This is particularly glaring in view of the fact that Facebook is going public at a time when there is clear evidence that companies with diverse boards perform far better than the companies with more homogenous boards,” she added.

Other experts have expressed a similar displeasure with the fact that Facebook, the preeminent company in the modern area of social-networking has appointed a board of the sort that corporate governance expert Nell Minow (@nminow) has called “Male, Pale, and Stale.”

CalSTRS’ CEO, Jack Ehnes, said in the statement, “Given that this company embraces an innovative business culture and a diverse user base, nearly 60 percent female, it seems paradoxical that it should adopt such a centralized, old business governance structure.”

“This type of governance structure is definitely not conducive to ‘friending’ new shareholders,” he added.

In the corporate governance twittersphere, a point of contention has been the fact that 60% of facebook’s users are female.

Malli Gero, the Executive Director of 2020 Women on Boards, (@2020wob) a group that aims to increase the percentage of women who serve on public boards, published a statement entitled “Facebook IPO is No Friend to Women.”

“Does Mr. Zuckerman think that women are too busy socializing on line to sit on his board?” Gero asked.

In an op-ed piece, Reuters columnist Lucy Marcus (@lucymarcus), explained that the absence of diversity on Facebook’s board is important for investors because “Businesses led by diverse boards that reflect the whole breadth of their stakeholders and their business environment will be more successful businesses.”

Likewise, in a recent post for the Diverse Director Datasource, a project that aims to help increase board diversity, Sara Meyer-Davis (@SaraMeyerDavis), Managing Partner, Strategic Diversity Advisors explained that global surveys indicate that women feel undervalued by marketers, and that “best-practices companies actively seek out talented women for their Boards and executive ranks as a matter of good business.”

In an article on Forbes.com, Moira Forbes (@moiraforbes) explained that “it is precisely because Facebook is a friend to women that the issue of their board composition has become such a high-profile subject of concern.”

At a fast-growing private company, a powerful Chairman / CEO can silence dissent and push through his personal vision.  At a publicly traded companies, investors demand adequate independent board oversight and a diverse array of viewpoints on the board.  Increasingly, board room diversity is being seen as one component of a broader program of corporate governance policies that can help protect long-term investor value.

In a recent article in Reuters, Janice Hester-Amey, a portfolio manager in CalSTRS Corporate Governance unit, explained that “No matter how brilliant you are, when you come to the public market -- not that we want to ever tell Zuckerberg or anyone like him how to run his company -- there should be some protection especially for long-term, patient money.”

 

 

Problems at Hanwha Highlight South Korea's Governance Problems

By Nathaniel Flannery, Research Analyst

Even though he was convicted of kidnapping and assault, the board at Hanwha Group, a Korean conglomerate that makes explosives and chemicals, did not ask its chairman, Kim Seung-youn
to retire, a move that might have helped the company avoid damaging its brand. Now, prosecutors are seeking a nine-year jail term for the company’s controversial chairman, who is currently being accused of embezzling $81 million worth of company funds. The ongoing saga at Hanwha highlights a broader trend of management issues at major Korean companies. For Korea’s prosecutors, the time has come for change.

On Friday, February 3, 2012, the Korean Stock Exchange warned that it might suspend Hanwha’s shares from trading. However, on Sunday, February 5, the exchange decided not to suspend or delist Hanwha’s shares, ruling that taking such an action against a company that is valued at $2.6 billion would have an adverse effect on the exchange.

According to Naveen Reddy, a Research Analyst at GMI Ratings “Hanwha has a long-history of governance problems- we’ve given them a ‘D’ rating since 2010.”

For now, the company’s shares continue to trade, even though Kim Seung-youn and ten other Hanwha executives, including Representative Director, Nam Young-sun, are accused of misappropriating assets. Mr. Kim is accused of using company money to pay back debts of firms he ran under borrowed names. All of the executives deny the charges. A verdict is expected on February 23.

This latest scandal is not the first time that Mr. Kim’s actions have put the company reputation at risk. The 59-year-old executive was imprisoned in 2007, accused of abducting employees of a bar and transporting them to a construction site where, according to the Financial Times, “he beat them with a steel pipe in revenge for an attackon his son.”

In September 2007, The Seoul Central District court suspended the 18-month prison sentence that had been imposed on Mr. Kimon the condition that he complete 200 hours of community service.

The problem for investors is, the troubles at Hanwha area sign of broader investment risk at Korea’s chaebols, or industrial conglomerates.

According to data from GMI Ratings,75% of South Korea’s largest publicly traded companies have majoritynon-independent boards and 40% are involved in cross-shareholding arrangements.

There is a growing consensus that although Korea’s mega-corporations have long since established themselves as global leaders,they are still being coddled by the country’s judicial system. For some, the “infant industry” argument isstarting to sound like a grating whine.

The prosecutors in the Hanwha case toldKorean media that “Tycoons [in South Korea] have not been properly punished forthe reason that when the economy is bad, punishment may weaken the economy and when the economy is good, it may throw cold water on it. If we continue to fail to punish them for those reasons, there is no future for our society.”

 

Small Print

By Paul Hodgson - CCO and Senior Research Associate

Corporate Dollar Menu

Thanks to Events Analyst Dovid Muyderman for both this February 6^th 8-K from U.S. Steel, and for the headline.

On January 31, 2012, U. S. Steel Serbia B.V., a wholly owned subsidiary of United States Steel Corporation (U. S. Steel) sold U. S. Steel Serbia d.o.o. to the Republic of Serbia for a purchase price of one dollar. In addition, U. S. Steel Košice s.r.o., a wholly owned subsidiary of U. S. Steel, received a $40 million payment (as determined under Section 7.4 of the Master Share Purchase Agreement) for certain intercompany balances owed by U. S. Steel Serbia d.o.o. for raw materials and support services.

What’s with that? They’re just giving this stuff away. If I were a U.S. Steel shareholder, which of course I’m not, I wouldn’t be too happy, unless the subsid. was losing money hand over iron fist.

Sounds like a Merchant/Ivory film: Mr. Andy's Compensation

Mr. Andy’s Compensation

On January 2, 2008, the Board elected Mr. Andy as Chairman of the Board. In lieu of all other cash and non-cash compensation during the three-year period subsequent to his election as Chairman of the Board, the Board agreed to grant Mr. Andy a one-time award of 69,882 shares of restricted stock, which had a fair value of $1,000,000 based on the January 2, 2008 closing market price of the Company’s common stock and vested in annual one-third increments over a three-year period. Effective January 1, 2011, which concluded the three-year award period for the above grant, Mr. Andy, as Chairman of the Board of Directors, began to receive the same retainer and annual restricted stock unit award paid to the other non-employee directors, plus an additional annual cash retainer of $100,000 per year. Mr. Andy did not receive a restricted stock unit award for our 2011 fiscal year and the actual amounts paid to Mr. Andy for his board service during our 2011 fiscal year were prorated based on the ten months from January 1, 2011, through October 29, 2011. Although Mr. Andy generally attends all committee meetings, he does not receive any committee retainers.

Thanks to Compensation Analyst Ashley Kotzur for spotting that great paragraph title in Spartech’s 2012 proxy statement. As a matter of fact, the new compensation for Mr. Andy is a bit of a pay cut as a third of $1 million, his pro-rated pay over those three years, is a lot more than the $235,000 he is in line to receive going forward. You don’t see that too often.

A Bonus Bonus Bonus Bonus

Compensation Analyst Manager Scott Patterson found this special bonus bonus bonus bonus in the “all other compensation” column in Analog Devices 2012 proxy statement. This is what his contract says about it:

Additional Bonus. For each fiscal year during the Employment Period commencing with the fiscal year that begins on October 31, 2010, Executive shall be entitled to an additional annual bonus (the “Additional Bonus”), not to exceed $5 million for any fiscal year, equal to two (2) times the Annual Bonus paid to the Executive for such fiscal year. Such Additional Bonus shall be paid at the same time(s) that payment(s) of the Annual Bonus are made to the Executive under the ADI Bonus Plan. Any Additional Bonus payable under this Section 3.3 shall be paid no later than 21/2 months after the end of the later of (i) the calendar year in which it was earned or (ii) the Corporation’s fiscal year in which it was earned.

As Scott rightly points out: “His contract expires October 2012 so it will be interesting to see whether this type of award will be supported by shareholders when/if renewed.” Because this is what it adds up to, let’s face it. “Hey, boss, you earn your bonus, and we’ll triple it.” What is this? Gambling? No wonder it’s under “all other compensation”.

Oreos must have been Peter Pan's favorite cookie... Not!

Ashley found this in a February 8^th press release on OREO’s website. As Events Team Leader Mark Magee says, this starts out sounding like a serious piece of social commentary until you realize it’s just a ploy to sell more Oreos.

New Global Report Reveals That the Spirit of Childhood is at Risk

The results of a new global report released today by the OREO brand and Ipsos Public Affairs indicate that from China to Poland and Portugal to Venezuela, the spirit of childhood – that is, the chance for children and adults alike to enjoy simple, carefree moments – may be destined for the endangered species list. The report reveals that the vast majority of parents surveyed believe today’s kids are growing up quicker than previous generations. In fact, seven out of 10 parents worldwide say their children should have more time to "just be kids."

"Across continents and cultures, one thing we have in common is the desire to celebrate the kid inside all of us. 2012 marks the 100th birthday of OREO. In recognition, we’ll be finding more ways to celebrate the spirit of childhood and make special, simple moments happen for families and OREO fans around the world," said Philip.

I have to tell the fine folk at OREO, and I’m sorry to disappoint them, but I managed to grow up as slowly as possible without eating a single Oreo. I ate a lot of biscuits (which is actually what Oreos are because they have snap and aren't soft like cookies) but for the life of me I don’t remember them having any anti-aging effect on me, not even when I dunked them in my tea. And I have to say that keeping your kids more child-like is going to take a bit more social change than pulling a multi-layered brown biscuit apart and eating the cream inside it first.

Governance at Diamond Foods: Going Nuts

By Kimberly Gladman, CFA, Ph.D. - Director of Research and Risk Analytics

Yesterday, Diamond Foods’ stock plunged on the announcement that it would restate its financials for 2010 and 2011, a move that may reduce its earnings for those years by half and derail the company’s planned acquisition of Pringles from Procter & Gamble.  The maker of Emerald and Diamond brand nuts and Kettle brand potato chips also ousted its CEO and CFO.  If that were not enough, a number of analysts now think that the company may breach its debt covenants, therefore raising its interest expense.  News accounts note that short-sellers had seen the company’s problems coming well in advance; so too had governance-watchers at GMI Ratings.  We’d given Diamond an ESG rating of F, due to concerns including the accounting investigations begun last year and poor compensation practices.  Our AGR rating, designed to predict accounting fraud, had to be suspended recently for Diamond due to the company’s delinquent filing status.  However, in 2011 our model flagged the company for a number of metrics suggesting inadequate expense recognition and overvalued assets, and in 2010 the company’s AGR ranked it among the more aggressive companies in our universe with regard to accounting practices.   The sorrows of the snack maker—and its shareholders—illustrate the usefulness of proactively incorporating ESG metrics into investment decision-making.

For Charles

From our very own Mark Magee - Events Team Leader and Cartoonist Extraordinaire.

Quite simply the greatest novelist in the English language.

Health Management Associates, Inc., litigation risk, accounting risk, equity risk

By Paul Hodgson - CCO and Senior Research Associate

The AGR for Health Management Associates (HMA) fell well before any outward hint of trouble. During the period from September, 2009 through September, 2011, HMA’s AGR fell from 93 on a scale of 100 (“Conservative”) to 16 (“Aggressive”).  Not only that, but the company’s litigation risk score has ranged between the 1^st and the 4^th percentile for the past 12 months, currently with a 13.3% probability of class action litigation. So it comes as no real surprise for GMI Ratings subscribers to find that on January 26, 2012 a lawsuit was filed in U.S. District Court, Middle District of Florida, alleging that Health Management Associates, Inc. and certain of its officers and directors issued knowingly false and misleading statements regarding the Company’s compliance with applicable laws and regulations.

On August 31, 2011 the U.S. Department of Health and Human Services Office of Inspector General issued a subpoena for information on HMA’s physician referrals and hospital physician joint ventures, causing the share price to drop from $8.22 to $7.95 on September 1 and $7.39 on September 2. Again, no surprise to GMI Ratings subscribers since it was also rated in the 10^th percentile for Equity Performance, indicating a strong likelihood to substantially underperform the market.  But that wasn’t the end of the stock price’s descent. On January 9, 2012 an analyst reported that HMA’s former compliance director had filed a lawsuit for violation of Florida’s Private Sector Whistleblower Act, claiming wrongful termination for exposing Medicare fraud at several HMA hospitals.  Upon this disclosure the share price fell from $7.49 to $6.96, a cumulative drop of 30.7 percent.