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Side deals raise ethical issues


Executives and board members at some of Maryland's most profitable companies have lucrative side arrangements with the companies they run and oversee.

Edwin F. Hale Sr., the chairman, chief executive and largest stockholder at First Mariner Bancorp, owned the bank's headquarters building in Canton until selling it to his bank earlier this year for $20 million.

Sinclair Broadcast Group Inc., which is controlled by four brothers who own most of the common stock, leases aircraft owned by two of the siblings, David D. Smith and Frederick G. Smith. Last year, the company paid $4.3 million to lease a parking facility, studios, offices and space on broadcast towers from three companies owned by the Smith brothers.

Louis M. Brown Jr., the vice chairman of the board at Micros Systems Inc., earned $427,000 for consulting services he provided to the Columbia provider of computer services and equipment for restaurants, retailers and hotels.

Transactions among insiders such as these are legal if properly disclosed but often raise questions, particularly as public companies have faced greater scrutiny after the accounting fraud found at companies such as Enron Corp., Tyco International Ltd. and WorldCom Inc., experts said.

"One has to read very carefully to determine whether some of these affiliated transactions are truly arm's-length or not," said Edward Nebb, head of the investor relations practice at Euro RSCG Magnet in New York, a marketing and public relations firm specializing in financial communications. "There are some that are probably more benign than they look on paper. There are other cases where clearly someone is being advantaged."

Issues of insider dealing came up in the Tyco accounting fraud trial. Former Chief Executive Officer L. Dennis Kozlowski paid a secret $20 million "finder's fee" to board member Frank E. Walsh Jr. for arranging Tyco's acquisition of commercial lender CIT Inc.

Walsh, who later signed off on Kozlowski's pay package, eventually quit the board rather than heed recommendations by another board member to give the money back.

"There is a potential conflict of interest," said Ross A. Albert, an attorney with Morris, Manning & Martin in Atlanta and a former special counsel for the Securities and Exchange Commission. "That's why there is a legal requirement for them to be disclosed."

"Anytime there is a related party or a situation where an insider stands to benefit from a transaction with its own company, it's appropriate to give that kind of transaction increased scrutiny," Albert said.

The SEC requires companies to report any business dealings over $65,000 done with executives, board members or any of their family members.

Insider leasing deals may raise questions about whether the company got as good a deal as it would have with any other company. If a director is getting paid for consulting with the company, can he make decisions independently?

"If the CEO is doling out lucrative contracts to directors they might be a little bit less likely to discipline the CEO when needed," said James J. Angel, an associate professor of finance at Georgetown University.

Sinclair executives wouldn't comment on the company's business relationships with the Smith brothers, other than to say an independent board made sure it passed legal muster.

"Our outside members of our board of directors approve any related-party transaction," said Barry M. Faber, general counsel for Sinclair, the Hunt Valley owner or operator of 61 stations that reach nearly a quarter of the nation's television viewers.

Sinclair does business with Atlantic Automotive Corp., a holding company that owns automobile dealerships and a leasing company. David Smith, Sinclair's president and chief executive officer, has a controlling interest in Atlantic and is a member of its board.

Sinclair sold $500,000 in advertising time last year to Atlantic on two of its television stations in Baltimore, according to its proxy statement. It also bought $1.1 million in vehicles and automotive services from Atlantic.

Atlantic also leases dealership properties from a partnership in which David Smith owns a 50 percent interest. Atlantic made $4.5 million in lease payments last year to the partnership and expects to make $24.9 million in payments through 2013.

Hale said in a phone interview that any business dealings between himself and First Mariner have undergone great scrutiny. First Mariner paid Hale $1.6 million last year to lease four Baltimore office buildings he owns. In a SEC filing, the company said the leases are "comparable or at least favorable" to market rates.

Hale said he considered three other offers when deciding to sell the Canton headquarters to First Mariner. Joseph A. Cicero, First Mariner's president, has said the bank will benefit because it will no longer have to pay $1.2 million in rent a year, a figure that would likely have risen as the Canton area continues to develop.

First Mariner also pays $215,000 to display banners and sponsor prizes and giveaways at the games of the Baltimore Blast, a professional soccer team owned by Hale. The bank has a $400,000 letter of credit with the soccer team secured by cash.

First Mariner also pays Hale $75,000 a year for the naming rights for the downtown municipally owned arena where the Blast plays. Hale pays the city of Baltimore the same amount. First Mariner also has a $363,217 letter of credit with Canton Crossing, a multiple-use development owned by Hale, secured by cash.

Maryland executives also must report the hiring of family members at the companies they run. Wayne T. Hockmeyer, the founder, chairman and president of MedImmune Ventures, the venture capital arm of MedImmune Inc., has a son, John T. Hockmeyer, who works in the sales and marketing department of the biotechnology company at a salary of $182,000 last year.

James F. Young, the president of research and development at MedImmune Inc., has a brother-in-law who works as a sales representative at the company. The company paid Richard L. Heddens $92,000 in 2004.

In an SEC filing, MedImmune said that Heddens and Hockmeyer are paid commensurate to other employees at the company with similar jobs.

Even if inside dealings are legitimate, companies have to worry about how the public perceives these deals.

"The problem is that it can create the perception of the conflict of interest," said Nebb of Euro RSCG. "At a time when there is increased scrutiny on the part of investors of all public companies and their directors, I think companies have to ask if it's worth the reputation risk."

Companies have become more cautious since the passage of the Sarbanes-Oxley corporate reform law established stricter accountability standards for corporate governance.

"Companies need to be careful and make sure there is a purpose behind these transactions," said Angel, the Georgetown finance professor. "Companies need to maintain a good ethical climate and signal to outside world that they're maintaining a good ethical climate."

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