When is a lawsuit a lawsuit, and when is it a publicity stunt?
In the soap opera that the Battle of Baltimore Bancorp has sometimes resembled, it's an interesting question. For about six weeks now, incumbent managers led by company Chairman Harry L. Robinson and dissident shareholders led by Edwin F. Hale Sr. have taken their battle to different courts, the state ethics commission, the Federal Reserve and the U.S. Securities and Exchange Commission.
At each twist and turn, the two sides have claimed terrible injury and accused the other of callous law-breaking, even law-trampling.
But remember what the Gershwins wrote. No matter what the allegations are -- "it ain't necessarily so."
Proxy fights like this one for control of the Bank of Baltimore's parent company are in some ways more simple than they seem. Many of the complaints that the two sides have aired in court and before federal agencies over the last five weeks may have been made without much real expectation that anyone was going to do anything about them.
Many of the moves weren't made for the benefit of agencies like the Federal Reserve or the Securities and Exchange Commission at all, each of the rival factions says, at least when talking about the other side's moves. They were made by combatants who knew the moves had only a slim chance of success, but could still play well in the newspapers, a critical forum for the two sides to reach out to the estimated 14,000 shareholders who would decide their fate.
"Some of the lawsuits and appeals for federal inquiries in proxy contests can be done for the public relations value, or for negotiating leverage," said David Eisner, senior vice president of Providence Capital Inc., a New York investment advisory firm. "The SEC might not allow someone to say someone has done something wrong unless the other side has filed a lawsuit making the claim."
The reason for the posturing is simple. The point of a proxy contest isn't to win brownie points with judges or regulators. The point is to win. To win, you get a message out. And playing the game aggressively, pushing every complaint through every channel they can find, the parties can keep their side of the story in the news and get their message out to shareholders whose votes ultimately decide who controls the company.
If it makes the whole process look a little like a soap opera, so be it.
"The party that was more effectively able to use the press would win," said Dennis Gingold, a Washington attorney representing the Hale slate, which won a 60 percent vote for six seats on the company's 18-member board of directors and a majority vote for a proposal to expand the board to 28 seats, which could let the Hale group take control of the company.
Mr. Gingold said that his side's announced $500,000 budget for the proxy fight left it especially dependent on getting good press, though, like Baltimore Bancorp's lawyers, he insists that his side wasn't the one making moves for publicity alone.
"We don't have the ability to spend $22,000 a day on newspaper advertisements," he said. "We have to go through newspaper reporters. It was the only way. We don't have a $3 million to $4 million budget."
This proxy fight is especially unusual because it is so local. Baltimore Bancorp is listed on the New York Stock Exchange, but most of its stock is held by individuals in the Baltimore-Washington area. Even the institutions with big positions in the stock are concentrated in Baltimore -- T. Rowe Price Associates Inc., First Maryland Bancorp and Legg Mason Inc. are three of the biggest shareholders.
That has meant that there are no full-page ads and little coverage in The Wall Street Journal or The New York Times, the usual forums where proxy fights are duked out. Instead, it's been fought out in The Sun and The Evening Sun, as well as smaller Baltimore business publications.
Lawyers for both sides are reluctant to admit that they have taken steps for publicity value alone. But they admit that it's at least a side effect of what they do.
The Hale slate in particular is quick to accuse management of playing to the crowd. "I don't think they seriously expected relief on anything they did," Mr. Gingold said.
"We don't file suits that we don't think have a basis in law and in fact," declared Benjamin F. Stapleton III, an attorney for the New York law firm of Sullivan & Cromwell, which is representing management.
But Mr. Stapleton admits, "There are issues that we don't know where they're going to lead. You would hate to say, 'It's less than 50-50, we'll forget it,' and then read six months later about a case in which the [Federal Reserve] did something you weren't sure it would do."
Observers disagree on how much the theatrics moves votes. But at least one close observer of the proxy fight said all the tactical infighting could well move some shareholders' minds.
"Most people only know what they read in the paper," said Steven E. Norwitz, a spokesman for T. Rowe Price Associates Inc., the company's biggest shareholder. "With all the twists and turns, it wouldn't be surprising if people were confused."
Management used several themes in advertisements aimed at shareholders trying to decide how to vote. Two primary thrusts: Baltimore Bancorp said that Mr. Hale's group needed permission from the Federal Reserve before seeking control of the bank, and that the failure to seek that approval raised questions of whether the challengers understood banking well enough to run the company. And management said that Robert A. Pascal, a member of the Hale slate of director candidates and Gov. William Donald Schaefer's appointments secretary, and three other candidates on the Hale slate might not be able to serve legally on the board because of conflicts of interest.
The newspaper ads called the Hale slate's comparisons of Baltimore Bancorp to other banks deceptive because they compared the company only to top performers rather than to a more representative sampling of banks that might include straggling firms such as Provident Bankshares Inc. or Riggs National Corp.
The SEC challenged those ads and forced parts of them to be changed. Baltimore Bancorp dropped an assertion linking Richard E. Fasold to Baldwin-United, a financial services conglomerate that went bankrupt in 1983. In fact, Mr. Fasold was a high-ranking executive on a turnaround management team that successfully led the company out of Chapter 11 and sold it. He was only in a lower-ranking position before the bankruptcy.
"I think it was a combination of the SEC saying we didn't have enough facts" and other factors that led to the decision to drop the Baldwin-United reference in later ads, the company lawyer said. "It was hard to really tie it down 100 percent."
The SEC also scolded the company in a May 16 letter for ads discussing the dispute before the Federal Reserve, ordering the company to disclose that "neither a court nor the Federal Reserve necessarily agree" with the bank's position. The SEC also demanded that the company support allegations that loan losses rose at Union Trust Co. (now Signet Bank/Maryland) while Charles H. Whittum Jr., a member of the Hale slate, was that bank's chief credit officer.
The bank ran the ads anyway, infuriating the SEC, according to an SEC letter to Mr. Stapleton.
"Notwithstanding your firm's receipt of these comments, your client published an advertisement in the May 17, 1991, issue of The Baltimore Sun containing those very statements with which the staff took issue," Gregory Corso, an SEC attorney, wrote on ** May 18.
"In an action that compounded the seriousness of the issues raised by the initial publication of the advertisement, your client published a slightly modified advertisement, ostensibly responding to the [SEC] staff letter, in today's edition of the same newspaper which once again repeated many of the statements with which the [SEC] staff took issue.
"The repeated publication of the advertisement . . . raises significant issues under the Securities and Exchange Act of 1934," the Corso letter said.
Mr. Gingold said the ads sparked lots of questions to the Hale camp from shareholders who began to question the qualifications of Mr. Hale's team.
The federal lawsuit brought by Baltimore Bancorp still is pending, but U.S. District Judge J. Frederick Motz is scheduled to hear it only after he hears all the issues the insurgents have raised in their own federal lawsuit.
In state court, the state attorney general's office has asked for the dismissal of the Pascal suit, saying that ethics complaints have to go through the ethics commission before they can be heard in court.
The Federal Reserve turned down management's challenge virtually flat. Contradicting the company's advertising, the Fed said that no law required the insurgents to get the Fed's clearance for the proxy contest. The Fed also said that two of the three directors the bank challenged -- Mr. Hale and J. Richard Leon -- had no conflict of interest. The third challenged candidate, Mr. Fasold, would have to prove he was entitled to an exemption from laws barring interlocking management positions at different banks, the Fed said.
Worst of all, the Fed made its ruling May 21, the day before the company's annual meeting. According to an amended lawsuit filed by the bank last week, that led the SEC to force the company to hold the polls open until shareholders could learn of the Fed's ruling. That also forced Mr. Robinson to explain at the meeting that the most of the company's challenge had been shot down.
"The Fed isn't known for reacting quickly," said Mr. Gingold, who had accurately predicted not only the Fed's action but also the reasons the regulators would cite for taking it. "I think they got caught on that one. They [the Fed] responded in days, which shocked us. It probably surprised the hell out of them."
But some of the insurgents' moves haven't worked on any level (( other than public relations either. The SEC has taken no action on Mr. Hale's May 19 request that the SEC void management's votes, claiming that they were solicited with ads like the ones that said not getting the Fed's clearance for the proxy fight showed that the Hale group was ignorant of banking.
The commission doesn't comment on particular proxy battles, but an SEC attorney said the commission rarely, if ever, throws out votes.