Sunday, May 22, 2005

Fumo's shady sideline?

Vince FumoWhile the rest of us were busy with the primaries and other local developments, the Inquirer was publishing a three-part exposee last week Sunday through Tuesday about Vincent Fumo's involvement with PSB Bancorp (most visible as First Penn Bank). The company grew out of a small bank that Fumo's family started, and has undergone several mergers and expansions through the years, but remains a relatively small and unimpressive financial institution, without much to offer its shareholders in terms of price growth or dividends.

However, it appears that this bank and its various mergers have offered Senator Fumo quite a bit through the years, in a variety of ways that, while technically legal, have caused regulators some raised eyebrows and elicited comments about a bad smell. Certainly, the Board members at the bank are all longtime Fumo political allies, and many are contributors to his campaigns or substantial beneficiaries of his political support, so there is plenty of room for appearances of impropriety, if not actual back-room payola.

So, what does the Inquirer present? To summarize each article briefly (they average two full newspaper pages each):
  1. Despite the relatively poor performance of the bank's stock over recent years, Fumo's compensation has been significantly out of scale with that paid by other banks of similar size to officers of the same title.
    The PSB board doubled Fumo's compensation for last year to $709,800, though he had given up one of his posts. He stepped down in 2003 as chief executive, staying on as board chairman.

    In contrast, $30,000 is the average pay for chairmen of comparable banks. The average for chairmen who also serve as chief executive is less than half of Fumo's pay.
    They also awarded him millions in stock options. The impressive bit here is the list of bank Board members, which reads like a Who's Who of Fumo pals, from Councilman Kenney (received $225k in donations from Fumo over the last 4 years) to James Eastwood (runs a couple of Fumo-linked nonprofits) . . .

  2. When First Penn bank was considering acquiring a smaller bank (IGA) in order to expand, Fumo and several other board members bought up the target bank's stock in large quantity, putting themselves in direct position to profit mightily from the takeover. This isn't strictly forbidden, as is similar stock trading on inside knowledge, but third parties are supposed to be alerted, and nobody was filled in.
    [Former SEC lawyer] Frenkel said that, in general, when a corporate executive buys stock in a firm that his company has targeted for takeover, "It smells because the clear implication is an insider had material nonpublic information that nobody else had and that insider used it for personal advantage and gain."
    A number of other state legislators (including House Speaker John Perzel) somehow had the insight to get in on this deal too...

    [There's also a side story here about a foundation that IGA had and that First Penn inherited -- it's not clear what they use any of their money for, or that they are giving away the minimal amount that the IRS requires...]

  3. The third piece is the strangest to me, as we readers are clearly missing some critical piece of information to make the story cohere. It has to do with a Vice President of First Penn Bank and an investor friend of his who were stripped of over a million dollars worth of stock options. There were charges of fradulent activity, quickly dropped, and various attempts to intimidate the two men into letting go of these assets. They in turn sued to regain their rights, and a U.S. District Judge agreed that there was no problem with the options. Fumo's testimony in this matter was contradicted by his own bank lawyer, who said he had advised Fumo that the options were legally valid. The judge in the case said that there were "no genuine issues of material fact," but the case has now been appealed on the basis of venue (whether it should have been tried in federal rather than PA court).

    Hmmph. This one is a bit perplexing. The best explanation offered by the reporters here is that the bank officers wanted to free up these options so that it could offer better incentive plans to Fumo and other board members -- almost an identical amount was part of the new deal announced a few months later. Certainly a conflict of interest, but that they thought it would work (probably without ever seeing court) testifies to the hubris of a Big Man who's used to getting his way.
The improprieties covered in these articles are all a little technical and in the grey areas of the law. When combined with Fumo's apparent connection of utility agreements to donations to his pet charity (the focus of a current federal investigation), however, one could imagine a pattern in which there is a financial quid pro quo for his exercise of political clout -- get a legislative break, donate to my little charity; get career support politically, see that I get a good compensation package at the bank; be a longtime supporter, get tips on no-lose stock deals. It's all inference and allegation for the time being, but it sure doesn't raise the image of how deals get done in Philadelphia . . .


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