Tax stuff I think is interesting. It is either copied from my primary blog on forbes.com http://www.forbes.com/sites/peterjreilly/ or stuff that I did not put there because being on forbes is a good gig and they have, you know, standards. Also some guest posts.
Friday, August 15, 2014
WorldCom Stock Losses Not Considered Theft - Court of Claims Rules
Originally Published on forbes.com on September 27th,2011
Donald and Joyce Schroerlucke were suing in the Court of Claimsfor over $2,000,000 in incometax refunds for 1997, 1998, 1999 and 2002. The basis for the suit was that their capital losses from the sale of WorldCom stock were, in reality, theft losses. Mr. Schroerlucke had been a WorldCom executive. He terminated his employment in 1999 at which time all his stock options had to be exercised. He exercised options on over 13 million dollars worth of stock. Some of the stock was sold to pay the exercise price and more for withholdings. He ended up with 7.7 million dollars worth of WorldCom stock in his brokerage account.
The WorldCom stock appreciated in value after these transactions. His holdings were worth over 8 million by the end of the month in which he exercised. He continued to hold the stock until 2002. By then it had declined substantially in value. Sales of stock in 2002 produced net long term capital losses of over 6.7 million. At $3,000 per year it will take a while to use that up. So Mr. Schroerlucke has come up with an alternate theory.
The theory is that the representations made to him by senior WorldCom executives that encouraged him to hold onto the stock constituted theft under the laws of the state of Georgia. Rather than a capital loss in 2002, he maintains he had a theft loss, which can be carried back to five preceding years including 1999, which apparently was his only really big income year. I have to say that as I was reading the case I was rooting for him, even though I was pretty sure that he was going to lose. He did in fact lose. Here is some of the story as related in the decision:
Mr. Schroerlucke alleges that he was informed on a continuing basis that his stock was safe and would hold its value. For example, plaintiffs point out that Bernard Ebbers, then-Chief Executive Officer (CEO) of WorldCom, stated in a 1997 form letter to Mr. Schroerlucke that accompanied the award of stock options, “[t]he value of this reward increases as our stock performs successfully.” Mr. Ebbers further stated, in an undated form letter to Mr. Schroerlucke, “our [WorldCom's] track record for creating shareholder value is unparalleled” and “WorldCom received a letter grade of A for stock market performance over the 10-year period ending December 31, 1997, placing us in the top 20% of the overall ranking.” In an April 7, 1998 memorandum titled “WorldCom Employee Stock Option Program,” the company indicated that employees who chose the “Exercise and Sell Balance” method would “give up future potential stock price appreciation.” The memorandum indicated that employees also could choose to “Exercise and Hold” or “Exercise and Sell to Cover,” and both methods would mean that the employee had “an investment in WorldCom’s future.”
Also, according to plaintiffs, “[j]ust prior” to Mr. Schroerlucke’s exercise of his WorldCom stock options in February 1999, Mr. Schroerlucke spoke with Mr. Ebbers over the phone. During this call, Mr. Schroerlucke “asked Mr. Ebbers about his family and how the company was doing.” Mr. Ebbers replied “everything was fine with the family and the company was doing well.” Additionally, Mr. Schroerlucke indicates that during hisemployment at WorldCom, which ended on January 4, 1999, he had “numerous contacts with various top-level officials at WorldCom, including CEO Ebbers and CFO [Chief Financial Officer] Scott Sullivan.” These contacts, according to Mr. Schroerlucke, were often “one-on-one meetings or meetings with other WorldCom officials, in both business and personal settings.” According to Mr. Schroerlucke, “[d]uring all of these contacts, WorldCom and its officials or agents represented that WorldCom was an exceptional company and could be trusted to run its business in an ethical and honest fashion.” Moreover, according to Mr. Schroerlucke, “[o]n numerous occasions, Mr. Ebbers personally and specifically discouraged Plaintiff from selling any WorldCom shares.”
Mr. Schroerlucke suffered from an exquisitely bad piece of luck in terms of timing:
Mr. Schroerlucke, who had acquired all of his WorldCom stock on or before February 12, 1999, was not eligible to participate in the securities fraud class action lawsuit which was brought against WorldCom on April 30, 2002. Only those who had purchased WorldCom stock between April 29, 1999 and June 25, 2002 were eligible participants in the class action suit.
Generally speaking investors in publically held companies cannot claim a theft loss because they hold onto stock in companies that turn out to be run, if not by thieves, then at least liars. That was the argument of the United States (the defendant in this case):
Defendant argues that this is a straightforward case, and that, “[w]ith respect to the decline in the value of the Schroerlucke’s stock, since WorldCom did not receive anything from Schroerlucke after he exercised his options, the company could not have taken or appropriated any property from Schroerlucke, the prerequisite for theft under applicable state law.”
Mr. Schroerlucke tried to distinguish himself from the public investors on the grounds, that he acquired the stock directly from WorldCom rather than in the market and he had gotten the lies straight from the liar’s mouth rather than just relying on false information filtered through analysts like the general public.
The Court didn’t buy his argument. Even though senior WorldCom executives Ebbers and Sullivan were convicted of multiple crimes, there is no evidence that they were trying to steal from Mr. Schroerlucke:
Although the WorldCom stock, which was in plaintiffs’ control after Mr. Schroerlucke exercised his options, subsequently declined in value, there is no evidence in the record that the WorldCom executives had any specific intent with regard to Mr. Schroerlucke to take or appropriate his stock by devaluation, or by any other means. To the contrary, the goal of WorldCom, including the convicted executives, was to increase the value of the stock, including any stock owned and controlled by Mr. Schroerlucke. There is no evidence in the record of any specific intent by WorldCom executives to deprive Mr. Schroerlucke of his property, as required to prove theft under the Georgia theft statutes.
So there was no theft by “taking”. What about theft by “deception”?
Nor could public general announcements and statements, or even general, private conversations of the type described in the record, qualify plaintiffs for a theft loss under Georgia law. No one but Mr. Schroerlucke was ultimately responsible for monitoring the value of the stock and for managing his stock portfolio. Like any other shareholder, Mr. Schroerlucke possessed the free will to sell, or not to sell, his stock at any time once he had control.
A theft by deception, therefore, cannot be based on a promise of future performance, even if that promise is false or fraudulent
The general, self-promotional and public relations-type statements cited by the plaintiffs, such as the “company was doing well” and that the business is run in an “ethical and honest fashion,” are not sufficient to establish theft by deception in a situation in which Mr. Schroerlucke had full control of his stock, was free to do his own research and exercise his own decision-making power on when to sell his stock.
A “theft of services” argument was also unavailing.