Changing the rules…

September 28, 2005

A special place in investor hell should be reserved for the companies that change the rules of the game as they go along. Did SOX outlaw sweetheart loans to top executives? Just give the money away instead as I wrote in June for Slate. Stock options underwater? Do an option exchange!

Take this proxy filed by Penn Octane (POCC) yesterday. Though the proxy has to do with the sale of some assets, there’s some interesting disclosures about former Chairman and CEO Jerome Richter, who stepped down in mid-May. Richter, who owns about 25% of Penn Octane’s common stock and about 25% of Rio Vista, one of the assets being sold, had a loan for $3.19 million that was due in July. Under an employment contract signed back in 2002, the loan would have been forgiven if the stock price hovered around $6.20 for 90 days. But since then, the stock has been in something of a freefall.

So what did Penn Octane do? It simply extended the loan for another two years and wiped away 50% of the balance. Under the new agreement, the loan is due in 2007 and Richter now owes $1.69 million. How does this get around the SOX rules that prohibit a company from modifying an existing loan? No clue. But if anyone else does, I hope you’ll share it with footnoted.org readers.

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