Stock Margin Calls: CEOs New Scourge

Last Updated Oct 13, 2008 3:08 PM EDT

A scary new scourge is haunting the hallways of the C-Suite: stock margin calls.
With stock markets tanking, a number of stocks bought on margin are being called in. Typically, an individual may take out a loan to buy stock, but if the value of the stock sinks below preset levels, the borrower must either liquidate the stock or come up with more cash to back it up.

Buying stock is, of course, popular for well-compensated CEOs and many show their commitment to their corporations by buying stock in their own firms on margin.

The nightmare scenario is when stock tanks, a margin call is made, and the cash-short CEO or other executive must sell thousands or millions of his company's shares, driving the company stock price down even further.

Some CEOs have on occasion resorted to a form of blackmail in which they go to their board and ask for a personal loan at the company's expense so they can bolster their margin accounts. If not, they threaten to sell off their company's shares which will drop the stock price even lower. It is akin to putting a pistol against someone's temple and asking for a loan.

This isn't always the case. Apparently it was not when Aubrey K. McClendon, founder, chairman and chief executive of natural gas producer Chesapeake Energy Co., last week had to sell 31.5 million shares or 94 percent of his 5.8 percent stake in the company, to meet a margin call. Those shares had been worth $2.2 billion when McClendon bought them on margin on July 2, but they brought only $569 million when sold last week. Analysts say the company won't be affected.

Some pre-meltdown examples of margin calls messes include Ivan Ross, founder of a Connecticut-based hedge fund, Tequesta Capital Advisor, who was forced to pony up cash for a margin call this February. After he was unable to come up with the money, lenders sold off his $150 million fund.

More recently, Bahram Akradi, CEO of Minnesota-based Life Time Fitness Inc., was forced to sell 582,000 shares of his firm for about $11 million earlier this month.

As extreme market volatility continues, more of the same can be expected. And it isn't even Halloween yet.