Shareholders weigh options at Wachovia

The odds are against individual Wachovia Corp. shareholders gaining anything more than principled satisfaction by voting against the Citigroup Inc. deal.

After all, the Federal Deposit Insurance Corp. brokered the $2.2 billion deal on Monday to prevent a total collapse of the bank earlier this week. And 72 percent of Wachovia is owned by institutional investors, most of whom likely won't show their cards until the day of the shareholders vote -- which hasn't been set yet.

Yet some individual shareholders said yesterday that not only does their vote count, but it could compel a better return than essentially the $1 a share that they would get now. Wachovia's share price closed up 36 cents to $3.91 yesterday, primarily based on investor speculation that the company will sell its two remaining subsidiaries, Wachovia Securities and Evergreen Asset Management.

"Really, what have we got to lose at this point?" asked Mark Beck, a Charlotte businessman who said he has lost more than $60,000 on his Wachovia stock holdings. He has set up www.wachoviavoteno.com to protest the deal.

A shareholder protest has four potential outcomes, Beck said:

□ Citigroup still gains control of Wachovia without having to raise its bid.

□ Wachovia institutional shareholders force Citigroup to spend more on the deal to gain their approval.

□ A third party, attracted by the cheap price for Wachovia, makes a counteroffer, especially if it believes that it would benefit from the proposed $700 billion bailout before Congress.

A variation of this proposal is that Wachovia will itself benefit enough from the bailout to reject the Citigroup offer and remain independent.

□ Shareholders reject the deal, and Wachovia declares bankruptcy.

"The way this deal is structured, Wachovia is selling its biggest asset, the bank, for practically nothing," Beck said.

"The shareholders of Wachovia get nothing in return, and we are left holding shares of a much, much smaller Wachovia without its biggest asset," he said.

Beck said that some shareholders plan to oppose the deal "because of its adverse impact on the active and retired employees of Wachovia and on the communities in which Wachovia operates."

Other shareholders said they are considering individual or class-action lawsuits focusing on statements made by top Wachovia executives this year that aimed to bolster investor confidence in the struggling bank. The shareholders said that those statements could be considered as misleading or fraudulent.

Noelle Talley, a spokeswoman for the N.C. Attorney General's Office, said that the office has not been asked to investigate those issues. Securities regulators from several states are investigating Wachovia Securities' auction-rate securities-sales practices.

Shareholders point to former top executive Ken Thompson's declaration in January that Wachovia was not going to cut its dividend, which was worth 64 cents a share in February. The bank has cut the dividend twice since that statement, all the way down to 5 cents in July.

"I bought 2,000 shares of Wachovia stock at $36 a share based on that statement because it helped restore my confidence in a Wachovia rebound," said Thomas Cunningham, a shareholder from Raleigh who said he has lost about $150,000 on Wachovia shares in the past year.

Another point of criticism is the statement that Robert Steel, the bank's chief executive, made on Sept. 26 -- the day before he went to New York to sell the company after the Washington Mutual collapse -- that read in part, "Our core franchises are extremely valuable and continue to operate well relative to our competition."

A securities-arbitration law firm in Coral Gables, Fla., said it already has received more than 500 inquiries from Wachovia shareholders wanting to take individual legal action.

Andrew Tramont, a partner in Tramont Guerra & Nunez, said that any case would have to prove that Wachovia management purposely withheld critical information from the public or negligently misrepresented the company's financial health.

"Even if is a waste of time, it would be worth it if it ties up Ken Thompson, Robert Steel and other Wachovia management people who caused this debacle to happen and makes them spend some of their severance or executive pay on lawyers," Cunningham said.

Jonathan Duchac, an accounting professor at Wake Forest University, said that the leverage of the Wachovia shareholders "is limited in this case."

"The deal was approved by their board, and the negotiations over the weekend were being monitored by the regulators." Duchac said. "This is very similar to the situation with Merrill Lynch, in that if Wachovia had not agreed to the deal, it would have faced a credit downgrade on Monday," he said.

"At the same time, some of their debt issues were coming due. As a result, the downgrade would have put them in a situation where the regulators would have had to take them over, or tried to find a willing buyer, if they hadn't found a buyer by Monday morning."

Several analysts have warned against a "spoiler vote" by shareholders, saying that rejection of the deal and a Wachovia bankruptcy would have repercussions beyond their holdings.

"I know people are comparing Wachovia to the Bear Stearns deal where Bear's shareholders forced JP Morgan to pay $10 rather than $2 by threatening to balk at the deal," said Tony Plath, a finance professor at UNC Charlotte.

"Wachovia really isn't the seller here; the FDIC is," Plath said.

"If Wachovia's shareholder base votes down the deal, then I suspect the Office of the Comptroller of the Currency would immediately declare the bank insolvent, transferring control to the FDIC as the receiver of the failed bank."

■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.