4 Questions Annaly and Chimera Need to Answer
Dec 11th 2012 3:36PM
Updated Dec 11th 2012 3:42PM
The executives at Annaly Capital Management and Chimera Investment Corp. owe shareholders an explanation.
It's been over a year since Chimera, a member of the Annaly family of companies, has filed a single financial statement. And if that isn't bad enough, the company is refiling effectively every financial statement it has issued since going public in 2007.
The only bones Chimera has thrown investors' way are intermittent estimates of book value and a cryptic admission that it's returning capital to shareholders. Suffice it to say, investors in both companies deserve more -- Annaly's shareholders are included because of the operational and familial connections between the companies.
What follows are four questions, addressed to Annaly and Chimera's executives, the answers to which shareholders in both companies are entitled to know.
Question No. 1 -- Is nepotism part of Annaly and Chimera's culture?
Is it merely a coincidence that Chimera's CEO Matthew Lambiase is the son of Annaly's director Joseph Lambiase? Or what about Chimera's CFO Alexandra Denahan? Did her hiring have anything to do with the fact that she's the sister of Annaly's CEO Wellington Denahan?
According to Chimera's last proxy statement: "Before joining Annaly and FIDAC in October 2002, [Alexandra] was a business consultant in Fort Lauderdale [and] has an M.B.A. and Bachelors Degree in Accounting from Florida Atlantic University."
Which of these things -- being an undistinguished business consultant in Florida or a graduate of Florida Atlantic University, an internationally acclaimed accounting powerhouse -- qualifies Alexandra to oversee the finances of a $10 billion investment fund?
And while we're on the topic, how much are Matthew and Alexandra paid for their services? The last time Chimera published this information was in 2008, when they received $1.6 million and $1.24 million, respectively. It'd be great to have an update in light of the egregious accounting errors that occurred under their watch.
Question No. 2 -- Why did Annaly's board contradict shareholder votes last year?
At Annaly's annual meeting on May 26, 2011, a majority of the company's shareholders voted against reelecting Jonathan Green to the board of directors, and in favor of holding annual say-on-pay votes over executive compensation. Later that same day, however, Annaly's board reappointed Green and voted to hold say-on-pay votes every three years.
To get to the point, did Green's standing on Annaly's three-person compensation committee have anything to do with the board's decision to contradict the expressed and unambiguous desires of its shareholders?
Two things are important to note. First, the chairman and vice chairwoman of the board at the time were Michael A.J. Farrell and Wellington Denahan, respectively. And second, Farrell and Denahan were both awarded patently outrageous $35 million compensation packages in 2011 -- to say nothing of the preceding years.
Question No. 3 -- Why did Chimera replace its accounting firm?
Why did Chimera's board vote to dismiss Deloitte & Touche, its independent registered public accounting firm, after being informed of the self-described "material" accounting errors mentioned above? Was Deloitte responsible for the errors? Or was it a whistleblower?
I'm aware that companies change accounting firms all the time. Earlier in the year, Netflix fired KPMG in favor of Ernst & Young after a "competitive bidding process." In other words, Netflix was looking for the best value and not simply trying to cover up accounting improprieties. But Chimera's shareholders have been given no explanation, leaving people like me to assume the worst.
Question No. 4 -- Is Chimera liquidating assets?
Beginning in the second quarter of this year, Chimera's board voted to keep its dividend at $0.09 per share, extending at least through the second quarter of 2013. Historically, the quarterly payout has always been a function of taxable income, which necessarily fluctuates through the year.
Why the change?
More specifically, in the most recent current report, filed with the SEC on November 18, Chimera stated that $0.06 of the $0.29 per share in dividends distributed this year is "currently expected to be characterized as a return of capital for federal income tax purposes." How else are shareholders to interpret this other than that Chimera is liquidating -- albeit slowly?
Shareholders deserve answers
If you haven't already gotten the point, these two companies have engaged in behavior that, at the very least, creates a serious appearance of impropriety. As a result, I'd encourage all investors to avoid them until these questions are answered.
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The article 4 Questions Annaly and Chimera Need to Answer originally appeared on Fool.com.John Maxfield has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix and Annaly Capital Management. Motley Fool newsletter services recommend Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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