The LPL stock buyback that launched a lawsuit

LPL chairman and chief executive Mark Casady downplayed the timing and execution of a share buyback program that allowed an insider to sell 4.3 million shares of stock back to the company shortly before the shares went into a tailspin. LPL, Mr. Casady and chief financial officer Matthew Audette were named in a shareholder suit last month that claims they made “false and misleading” statements that misrepresented the company's financial situation at an investment conference on Dec. 8. Two days later, insider TPG Capital sold its stock for $43.27 a share, realizing proceeds of $187 million. Shortly after TPG sold its stake, LPL shares began a near-steady decline of 62% over the next nine weeks, a time period when the S&P 500 was down 9.6%. More than half of LPL's decline — 35% — occurred on Feb. 12, the day after it reported poor fourth-quarter earnings. If LPL had waited until after its fourth-quarter earnings had been announced to buy the TPG shares, it could have saved shareholders $115 million, according to the suit.

"DOES NOT MAKE ECONOMIC SENSE"

LPL declined to comment on the shareholder suit because it is a pending legal matter. But in an interview with InvestmentNews before the suit was filed, Mr. Casady defended the stock buyback and said it was undertaken with a reasonable set of expectations in mind. The buyback was announced on Oct. 29, about a month after an activist investor, Marcato Capital, revealed it had purchased a 6.3% stake in the company. LPL borrowed $700 million the next month, earmarking $500 million for the stock repurchase and hired investment bank Goldman Sachs, to handle the buyback. Mr. Casady claimed the buyback was not the result of Marcato buying a stake in the company. “We are buying back shares because they are cheap,” he said at the time. Analysts criticized the debt transaction. One lowered LPL's stock price target and another wrote that the transaction “does not make any economic sense,” according to the suit. But Mr. Casady said that increasing debt also shored up the balance sheet and got the company more favorable loan covenants. He also said the company's prospects looked better at the time. He pointed out that when the buyback was completed in December, the market was widely expecting four interest rate hikes in 2016. Securities firms like LPL benefit from rate increases because they hold billions of dollars of client cash. “This business responds very well to interest rate increases,” Mr. Casady said.

UNEXPECTED SHARP DECLINE

As for the sharp decline in LPL stock after its fourth-quarter earnings, it was unexpected. He said companies that miss their projected earnings by the amount that LPL did usually take a 10% to 15% hit to their share price. “It's easy to say today that I wish we had done it later, because it is,” Mr. Casady said. “But I've also faced situations where we have done buybacks and the price was significantly higher later. In the end, we made a reasonable set of decisions in a reasonable period of time.” TPG is one of two private equity firms that bought a majority stake in LPL in 2005 and took the company public in 2010. Two former TPG partners serve on the board of LPL, and LPL has identified TPG as a “related party” in SEC filings, according to the suit. TPG is not named as a defendant in the suit. At the investment conference, Mr. Casady and Mr. Audette gave a near-end-of-quarter financial update for LPL that painted a rosy picture of its business, prospects and financial results, according to the suit. The defendants said LPL had an “earnings stream that was quite steady,” and the company had been “executing it all well” over the last two months, when in fact quarterly adjusted earnings would be down 46% year over year, the suit charges. As a result of those and other positive statements, the lead plaintiff in the suit, the Clinton, (Mich.), Police and Fire Retirement System, bought shares along with other shareholders of LPL and suffered damages, according to the suit.