(Bloomberg) -- The F-word has helped trigger a 14-year legal tussle between a banker and a shareholder activist.
To Lawrence Seidman, the gadfly investor, the clash began in 2004 when he phoned Jose Guerrero, head of Spencer Savings Bank, to challenge him on his compensation and a rumor that the lender paid for a trip to Spain for its directors. Go f--- yourself, the banker replied, Seidman said.
Guerrero recalls the conversation differently. He merely snubbed Seidman’s proposal to merge with a rival, according to court filings.
The phone exchange -- whatever it involved -- unleashed a torrent of legal fees. Seidman has sued Spencer Savings three times and won concessions. The bank has countersued. One appeal is pending.
According to the activist, the Elmwood Park, New Jersey-based bank is a textbook example of bad governance because its bylaws make it difficult for depositors to have a say. He said its directors are beholden to Guerrero, who’s also chairman, and rubber-stamp his $2 million annual pay packages. At Columbia Financial Inc., based in nearby Fair Lawn, with more than twice the assets, the CEO’s 2017 pay was about half that.
“It’s a disgrace,” Seidman said in an interview at his office in Parsippany. “The whole board reeks of entrenchment.”
Spencer Savings said in court filings that Seidman, 70, is a hostile depositor who wants to take the firm public and sell it, only to enrich himself. Bob Zito, a Spencer spokesman, called the activist’s memory of the 2004 call a “self-serving recollection” and said the bank’s board takes its fiduciary duty to depositors seriously. He said Guerrero’s pay was reasonable.
“Mr. Seidman has waged a costly, time-consuming, 14-year battle purely for his financial gain,” Zito said in an email. “Spencer Savings Bank will continue to put the interests of our members and communities first, and defend itself against Mr. Seidman’s predatory attacks.” The bank declined to make Guerrero available for an interview, citing the pending litigation.
Like many activists, Seidman sees his role as helping shareholders and customers -- and his fund’s investors -- by pushing underperforming institutions. He said he tries constructive discussions with bank leaders, and only takes on proxy fights if they refuse to talk. A sale of the bank to a larger rival is never the default solution, he said, although most of his targets have done just that.
Seidman listed about 50 banks he’s been involved with. They include Westbury Bancorp Inc. in West Bend, Wisconsin; Asheville, North Carolina-based ASB Bancorp Inc. and Sussex Bancorp in Rockaway, New Jersey. Each of them had less than $1 billion in assets last year. His firm, Seidman & Associates, manages about $227 million, according to regulatory filings.
Spencer Savings is a mutual savings bank, which means it’s jointly owned by depositors, not shareholders. The model was designed two centuries ago to give regular workers access to banking and provide services such as low-cost mortgages. Spencer has about 20 branches across New Jersey, $2.7 billion in assets and more than 60,000 depositors as of last year.
The bank is governed by seven directors, usually nominated by the board and elected at annual meetings. Any account holder can submit a nominee, but the person must first gather signatures of several thousand of the bank’s depositors. Because Spencer Savings keeps personal information of its account holders confidential, the challenger must pay the bank to contact them, which could cost as much as Seidman said in court testimony.
Those requirements are at the heart of the conflict. According to Seidman, they’ve stripped the bank’s depositors, who are primarily blue-collar workers and immigrants, of a reasonable chance to influence director elections and resulted in an entrenched board. But Spencer Savings said the nomination threshold is in place to protect account holders, not disenfranchise them.
Following the sweeping deregulation of the banking industry in the 1970s, scores of mutuals converted into publicly traded companies. That process can be lucrative for depositors and executives, who are entitled to buy shares at a price that’s usually below where the stock ends up trading. In his book “Beating the Street,” legendary investor Peter Lynch called conversions “the can’t-lose proposition.”
Converting to a public company has its own challenges, such as investors demanding improved profitability and a decent stock return. Those interests can sometimes conflict with giving customers a fair shake.
In court filings, Spencer Savings said Seidman wants to put the bank through a conversion. The board, saying it wanted to defend the firm’s status as a mutual, raised the nomination threshold in 2004 after Seidman’s inquiries. The bank has said that if the directors sought only to get wealthy, they’d support a conversion and reap the gains from buying underpriced shares.
Seidman denies pushing for a conversion. He said he seeks a board seat only to help the bank improve its performance.
Courts have more than once sided with Seidman by ordering Spencer Savings to lower its nomination threshold -- decisions that have been closely watched by mutuals around the U.S. who may face similar pressures. In the latest decision, a New Jersey Superior Court judge said in October the required number of petitioners should be the lesser of 500 account holders or 1 percent of depositors.
In his opinion, the judge wrote that it’s “quite clear” the board is beholden to Guerrero and that the bylaws disenfranchise average bank depositors. Spencer Savings disputed this characterization in court papers and appealed. The judge also sympathized with the bank’s dislike for Seidman “since he comes across as brash, arrogant and pompous.”
“Larry is a pit bull,” said Richard Lashley, co-founder of PL Capital, an activist fund focused on small banks. “He engenders fear into some of these boards and CEOs. If people just work with him, he’s a stand-up guy and can do a lot of good. But if you lie to him, he’s gonna get a bulldozer and run the fence down.”
Seidman said he doesn’t intend to back down.
“Because I’m right.”
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