The Curious Case of Market Basket

[dcarrigg]

A family feud between one of the richest families in New England, the billionaire DeMoulases, has become a public storm in and around Massachusetts. The DeMoulases run a chain of grocery stores headquartered in Tewksbury, MA called "Market Basket." Local people still call the stores DeMoulas'. The chain started as a Greek lamb shop in Lowell, MA about 100 years ago, but now it is a New England grocery store chain with 71 locations.



Anyways, Boston's eighth richest man, Arthur S. DeMoulas (1958), has the board of directors. But his cousin, Arthur T. DeMoulas (1955), even though he's worth a paltry couple hundred million, functioned as CEO. Recently a split has led to the canning of Arthur T. DeMoulas was a unique company for a grocery chain. They had no consultants, or advertisements outside of newspaper coupons, or rewards programs, or unionized employees, or self-checkout lanes, or updated, modern decor. They simply advertised Market Basket as "more for your dollar" and beat everyone on price. They never even had a website, except for a recent strange attempt that went down as soon as it came up.

Anyways, Market Basket always paid front line employees minimum wage. Often they are young teenagers and they leave as soon as they find something better. But Arthur T. had the reputation of going out of his way to take care of management and their families, even though the stores were non-union in a sea of union Massachusetts grocery stores. By this year, the Stop and Shops and other brands that had expanded to compete with Market Basket had closed up shop and moved out. People in and around Lowell, MA especially were too used to the low price, no-nonsense, no-frills experience.

Recently, the board of directors fired Arthur T. and brought in CEOs that had prepped other grocery chains to be sold to private equity firms. But a strange thing happened. Management revolted. The board responded by sending pink slips by courier to people who had been life-long employees. Everything looked pretty normal.

But then something strange happened. The front line employees rebelled with management and the former CEO. They put together rallies including 5,000 customers at store locations. Delivery drivers went on strike. Stores started to go empty, shelves laid bare.



Rallies caught on with people normally never involved in politics. They wanted the old, cheap, no-nonsense stores they were used to. And curiously for Massachusetts, both some of the very few Republicans and the Democrats in the state called for the company to reinstate Arthur T. Thousands of local people showed up in support of giving one of the richest men in Massachusetts his job back, and his non-union former employees went on strike to try to make it happen.

See a video of the first rally and more story here.

So, anyways, a bunch of non-union, mostly minimum wage or close employees are rallying with a bunch of liberal public to reinstate a CEO who's one of the richest men in the region. Rarely these days do we see such an alignment. But they are also rallying against the prospect that his even wealthier other-side-of-the-family will move to turn the chain over to private equity and damage consumers and higher-up-employees as they seek to maximize revenue and "modernize" the chain, for whatever that is worth.

It's a strange case of a region fighting for its brand, crossing ideological and party lines, and it all stems from a dispute among an extremely wealthy local family. I'm not sure what to take from it. I myself was a bagboy/carriage retriever at 14 years old for minimum wage. I left within a year to make more money assembling six packs at a local package store. But the place does have a sort of uniqueness to it that jives with the regional culture really well. Now they are calling for rallies at all 71 locations, and US Congressmen are weighing in.

Like I said, I'm not sure what to take from this. New trend? One-off case? A case of too fast-and-furious private equity and M&A actions that don't pause for culture to catch up? Consumers defending themselves via boycott? Misguided employees? Local tradition?

What do you all take from it? I'd love to see the opinions of the community here.

[shiny!]

Re: The Curious Case of Market Basket

Thanks for posting this, dcarrigg!

For too long, gigantic, dehumanizing, cookie-cutter corporate chains have been replacing unique, service-oriented businesses, then "modernizing and maximizing revenue" to the point where it seems they suck the souls out of employees and customers alike.

"ANYA: I found one of those 24-hour places for coffee. Remember that bookstore? Well they became one of those books-and-coffee places, and now they're just coffee. It's like evolution, only without the getting-better part."

This story gives me hope that:

A. not everyone has been assimilated into the Borg, and

B. the trend might actually be a pendulum that will swing back.

[Slimprofits]

Re: The Curious Case of Market Basket

I don't have anything to add on the specific topic of the rallies and what not, but MB is great.

Their generally lower prices keep the pressure on Stop & Shop and to a lesser extent Shaw's and Hannafords. Trader Joe's is pretty good too for certain items- I had imagined their prices would be as expensive as Whole Foods.

And they always have a lot of cash registers open and double staffed. In Shaw's & Stop & Shop, you're paying a higher price and you will most likely scan and bag the groceries as well.

[ST]

Re: The Curious Case of Market Basket

What do you all take from it? I'd love to see the opinions of the community here.

Thanks for posting it. From what I understand, he was their George Bailey, and that is rare indeed.

[Lasher]

Re: The Curious Case of Market Basket

For too long, gigantic, dehumanizing, cookie-cutter corporate chains have been replacing unique, service-oriented businesses, then "modernizing and maximizing revenue" to the point where it seems they suck the souls out of employees and customers alike.

That's dead on. I find I expect the worst whenever a PE firm touches a company. You end up with mass employee purges, a lower quality product, and an unpleasant place to visit. It looks like all PE does is ramp up debt and force the store to expand like crazy, then dump it once they can't lever it up anymore.

[don]

Re: The Curious Case of Market Basket

I worked on a couple of successful mom & pop ventures that seem to fit a pattern. Initial foray - bakery or restaurant - proves popular. Second store is opened and does well. Expansion to a half dozen or more, than entertain a buyout. That's considered by many a successful entrepreneurial, doing-it-my-way, venture. EJ's friend's shop reminded me of that experience.

[lektrode]

Re: The Curious Case of Market Basket

I don't have anything to add on the specific topic of the rallies and what not, but MB is great.

+1
was where i did most of my groc shopping - when i was downstate (londonderry/manch) and working in the lowell area - always had The Best Prices - tween them and Star Mkt (tho this was in the mid80's, dunno about recent)

Their generally lower prices keep the pressure on Stop & Shop and to a lesser extent Shaw's and Hannafords. Trader Joe's is pretty good too for certain items- I had imagined their prices would be as expensive as Whole Foods.

And they always have a lot of cash registers open and double staffed. In Shaw's & Stop & Shop, you're paying a higher price and you will most likely scan and bag the groceries as well.

yep - that was always noted as well - kept the HS kids working.

but... once upon a time - shaws was The Leader up in the north country, both price/service - took most of the biz from IGA, who eventually folded the 2 stores in the area - then came hannafords, who really chomped shaws cust base - then came walmart, who chomped em both, and about to finish/open a 50% expansion on that one to a 'super' unit

and rumor (couple years old now, i guess) has it that a marketbasket is next....

[EJ]

Re: The Curious Case of Market Basket

That's dead on. I find I expect the worst whenever a PE firm touches a company. You end up with mass employee purges, a lower quality product, and an unpleasant place to visit. It looks like all PE does is ramp up debt and force the store to expand like crazy, then dump it once they can't lever it up anymore.

Today headed off to the local Market Basket a mile away where we at iTulip headquarters go at least two times a week for sushi lunch takeout. It's the best deal for the price bar none in the same travel radius.

Time is money.

The wife and I shop there for most of our veggies as they are the best there, better than the Whole Wallet a mile away in the other direction.

Out of habit headed over today for sushi and encountered 100 plus enthusiastic "Boycott Market Basket" protesters. They yelled and chanted at me to not stop and buy there.

I should mention that I was driving my blue Ford Ranger pickup that I use for projects and not the BMW 335D that I use for all other travel.

As I drive by the protesters chant and yell and smile. How can I deny them?

I have lived here 15 years and the Market Basket they are defending is still the New Market Basket to me even though the upgrade happened after the collapse of the housing bubble.

During the housing bubble more than half the space that the local Market Basket now occupies was used by a failed housing bubble spinout of Home Depot called Design Expo Center that closed down in 2009.

Market Basket cleverly purchased space vacated by Home Depot I assume at pennies on the dollar and built a modern supermarket. Previously Market Basket was famous for great prices but less than delux store amenities and smells that today you have to go to Boston's Chinatown to experience.

Since 2010 Market Basket is every bit as professionally run as a national chain but with prices far below national chain prices and quality far above.

I'd describe the folks working there as, well, eccentric. That is to say committed to what they are doing, above and beyond what you'd expect from the usual migrant worker population of a national grocery store chain. They recognize you and say hello when you check out. Odd for a gigantic store with a customer base in the thousands. And I never got the feeling that they'd been instructed by management consultants to do so.

But about a month ago there was a change.

The Japanese vendor, a couple, who made the sushi stopped saying hello and didn't look up from their work.

They became distant and looked uninterested in their work and their customers.

So as I passed by the protesters today I honk and continue on and grab lunch at the local Chipolte.

But then I need to head out again for a meeting late this afternoon. This time I take the BMW diesel. It's not the fuel hog my truck is and I have no load to carry.

As the Market Basket is on my way by way of social experiment I drive by the same route past the protesters, expecting a different response because it is later in the day and I am not driving an everyman vehicle.

The response from the protesters is even more vociferous.

I guess this makes sense.

Maybe the BMW represents the vehicle driven by the nemesis of the owner/labor/consumer business that had been built over decades. The PE firm is the force of ruin of it, and the BMW symbolic of that force, and one whose driver appeared to side with them was a win.

What the employees have figured out is that the old CEO is about the owner/labor/consumer contract and the PE firm is trying to exploit the division between this man and his backers and the part of the family that want to cash out, customers and employees be damned.

Without disinterested outside intervention all parties in this conflict will lose.

Happens all the time.

[don]

Re: The Curious Case of Market Basket

Thanks for posting it. From what I understand, he was their George Bailey, and that is rare indeed.

George Himself

[lektrode]

Re: The Curious Case of Market Basket

all the politix of this aside - methinks it has more to do with economies-of-scale factors that the hyper-competitive grocery biz has had to contend with ?

i mean, the sector talks about 1-2% profit margins on billions in volume ? (and then accepts ccards as payment...)

in my comment/example above - regarding the 'parade of supermarkets' that eye witnessed in NH - and how the bigger fish have been gobbling up the smaller/slower ones - forgot to mention another now (locally) long-gone player who also had a fairly dominant position in a market/locality that i'm intimately familiar with - and before IGA got chomped by Shaws et al, they had chomped ole A&P, who had a much better/more visible main st location - that ended up a ski shop after A&P shutdown (and the skishop got burned out of their prev loc)

[dcarrigg]

Re: The Curious Case of Market Basket

Thanks for posting it. From what I understand, he was their George Bailey, and that is rare indeed.

What a prescient comment, steveaustin...because there I was reading an article about this on the front page of MSN today, and your words were coming out of an employee's mouth...

Family feud sparks revolt at grocery store chain


Thursday, July 24, 2014, in Haverhill, Mass.


A decades-long family feud, which brought about the ouster of Arthur T. Demoulas as CEO of the privately held company, led to a worker revolt, customer boycotts and empty shelves in the grocery chain's stores in Maine, Massachusetts and New Hampshire.: Market Basket employees Rees Gemmell, far right, and colleagues acknowledge passing supporters as they picket in front of the supermarket in Haverhill, Mass.


A workers' revolt at the Market Basket supermarket chain has led to empty shelves, angry customers and support for a boycott from more than 100 state legislators and mayors.


Industry analysts say worker revolts at non-union companies are rare, but what's happening at Market Basket is particularly unusual because the workers are not asking for higher pay or better benefits. They are demanding the reinstatement of beloved former CEO Arthur T. Demoulas, whom they credit with keeping prices low, treating them well and guiding the company's success.


The New England grocery store chain is embroiled in a family feud featuring two cousins who have been at odds for decades.


While earlier squabbles between Arthur T. Demoulas and Arthur S. Demoulas were fought in courtrooms, this dispute has spilled into the stores.


For the past week, warehouse workers have refused to make deliveries to Market Basket stores, leaving fruit, vegetable, seafood and meat shelves empty. Workers have held huge protest rallies and organized boycott petitions through social media, attracting thousands of supporters.


Customers are defecting to other grocery stores. In some cases, customers have taped receipts from competitors to Market Basket windows.


"We are going to go somewhere else from now on," said Soraya DeBarros, as she walked through a depleted produce department at the Market Basket in West Bridgewater this week. "I'm sad about it because of course I want to keep the low prices, but I want to support the workers."


Despite threats by new management to fire any workers who fail to perform their duties, 300 warehouse workers and 68 drivers have refused to make deliveries. Eight supervisors have been fired.


The new executives have assured workers they are not planning drastic changes in the way the company is operated and have urged them to return to work.


On Friday, the company again appealed to workers to return, saying they won't be punished or face any change in compensation and benefits.


"We welcome back associates who are committed to Market Basket's customers," it said in a statement.


Massachusetts Attorney General Martha Coakley, who is running for governor, and New Hampshire Gov. Maggie Hassan have publicly supported the employees.


"If you had told me that workers at a grocery store would walk out to save the job of a CEO, I would say that's incredible. There is usually such a gulf between the worker and the CEO," said Gary Chaison, a professor of industrial relations at Clark University in Worcester.


Market Basket stores have long been a fixture in Massachusetts. The late Arthur Demoulas — grandfather of Arthur S. and Arthur T. and a Greek immigrant — opened the first store in Lowell nearly a century ago. Gradually, Market Basket became a regional powerhouse, with 25,000 employees and 71 stores in Massachusetts, New Hampshire and Maine.


The feud dates back to the 1970s, but the most recent round of infighting began last year when Arthur S. gained control of the board of directors. Last month, the board fired Arthur T., sparking the current uprising.


Workers are fiercely loyal to Arthur T.


"You know the movie, 'It's a Wonderful Life.' He's George Bailey," said Tom Trainor, a district supervisor who worked for the company for 41 years before being fired last weekend over the protests. "He's just a tremendous human being that puts people above profits. He can walk through a store, and if he's met you once, he knows your name, he knows your wife, your husband, your kids, where they are going to school."


Earlier Friday, board members said they will consider an offer Arthur T. made this week to buy the company.


"Consistent with its fiduciary obligations, the Board will evaluate and seriously consider this proposal, along with any other offers previously received and to be received," the board said.


The board also decried what it called the "negative behavior" of some current and former employees.


"It is now clear that it is in the interests of all members of the Market Basket community for normal business operations to resume immediately," it said.


As the board met, up to 10,000 employees, customers and supporters attended another protest rally at a Market Basket store in Tewksbury.


Employees said they believe the fight between the family members loyal to Arthur T. and Arthur S. is largely over money and the direction of the company. They say Arthur S. and his supporters have pressed for a greater return to shareholders.


Arthur T. and his supporters have focused on keeping prices low.


Many employees are distrustful of Arthur S. and two co-chief executives who were brought in from outside the company: Felicia Thornton, a former executive of the grocery chain Albertsons, and Jim Gooch, former president and chief executive at RadioShack Corp.


The company statement Friday acknowledged "the strain this change of leadership has placed on our associates."


Valerie Burke, a worker in the West Bridgewater store, said she's worried about her job.


"It's a great company to work for now, but we are worried it won't stay that way," she said as she picketed outside the store Tuesday.


Arthur S. has not spoken publicly, while Gooch and Thornton have communicated only through prepared statements.


Steve Paulenka, who started in 1974 as a bag boy and rose to facilities and operations manager before being fired last weekend, said he sees no end to protests unless Arthur T. is reinstated.


"A big part of me doesn't like what's going on — it's like breaking your favorite toy on purpose," he said. "But we'll get through this."

[Polish_Silver]

Re: The Curious Case of Market Basket

Truly fascinating post, no wonder it got Ej's attention. I think the problem is that corporations are too vulnerable to PE.
There should be something in the legal definition of a corporation to make it more difficult. In Germany, there is an employees representative on the board of directors, who is supposed to control alignment of incentives and things like that. Logically, all the stake holders (customers, investors, employees) should have some say in what goes down. Hard to know how to do that, though.

[don]

Re: The Curious Case of Market Basket

Private Equity’s Free Pass

By GRETCHEN MORGENSONJULY 26, 2014


For thousands of hobbyists, the localMichaels Stores outlet is a must-stop shop for scrapbooks, dried flowers, crochet hooks, sewing notions and dozens of other do-it-yourself paraphernalia.

In these essentials, Michaels, the nation’s largest arts-and-crafts retailer, has remained unchanged for years. But behind the scenes, the company has been refashioned by two financial giants — Bain Capital and the Blackstone Group — which have effectively controlled Michaels since 2006, when they took the chain private in a$6 billion leveraged buyout. Since then, Bain and Blackstone have profited from scrapbookers and needlepoint artists in part through an array of sophisticated financial techniques, most recently by selling shares in Michaels in an initial public offering in June.

In some ways, the practices used at Michaels by Bain and Blackstone — and by other private equity firms at other companies — closely resemble those employed by investment banks like Goldman Sachs and Morgan Stanley. For example, all of these financial firms advise corporations on mergers and acquisitions, on issuing debt and on how to rejigger their financial structures. And they are exceedingly well paid for these services.

But there is a crucial difference.

The investment bankers are generally designated as broker-dealers — entities that perform crucial functions in financial markets. This lucrative status comes at a cost: Broker-dealers are subject to Securities and Exchange Commission regulations aimed at reining in excesses and requiring that the advice they provide is appropriate. When this so-called suitability standard is violated, brokers face regulatory and legal penalties.

But while private equity firms often operate like Goldman and Morgan Stanley, they are not uniformly subject to the same broker-dealer regulatory regime. Blackstone, for example, registered as a broker-dealer in 2007, a year after it participated in the Michaels buyout. But to this day, Bain has not done so, and the S.E.C. has not required it or many other private equity firms to comply with broker-dealer requirements. Nor has the S.E.C. clamped down on buyout firms for marketing private equity funds to endowments, pension funds and wealthy investors. These activities, too, are usually the purview of broker-dealers.
This inconsistent treatment reflects an internal debate in the S.E.C., several people close to the agency said. And it has caused consternation in the private equity industry.

A spokeswoman for the S.E.C. declined to comment on the issue. “There appears to be growing confusion among private equity firms, the legal community and perhaps even among S.E.C. staff as to conduct by private equity firms and their consultants and employees that subjects them to broker-dealer registration requirements,” said Marlon Q. Paz, a partner at the Locke Lord law firm and a former senior S.E.C. official, who has advised his private equity clients to become broker-dealers. “Investors and market professionals are best served when we’re all singing from the same hymnal.”

How the agency resolves this issue could have costly implications for private equity firms that have collected billions of dollars in fees without registering as broker-dealers. Clearer rules, too, would cast a spotlight on potential conflicts of interest inherent in private equity deal-making. And documents show that investors in many private equity firms’ funds may not be receiving a complete picture of the risks posed by the firms’ financial advice.

A Regulatory Muddle

The acquisition of Michaels Stores by Bain and Blackstone helps illustrate the bewildering state of private equity regulation.
The two private equity firms each received $30 million for structuring the original 2006 deal and contracted to receive additional fees for providing merger advice to the retailer after the acquisition. Had the firms been registered and regulated as broker-dealers at the time of the buyout, that advice and fee might have been examined for potential conflicts of interest. The management agreement negotiated with Michaels also entitled the two firms to share fees of $4.7 million for the I.P.O. last month.

At the time of the buyout, Blackstone was preparing to become a public company itself, and the next year it registered its capital markets unit as a brokerage firm. Bain, on the other hand, remains unregistered, even though it has earned hundreds of millions of dollars in fees generated by activities that appear to require broker-dealer regulation.

A spokesman for Bain declined to comment.

For decades, the private equity industry was almost completely unregulated. Private equity firms use borrowed money to set up partnerships that acquire companies that they hope to resell later at a profit. The firms sell interests in the partnerships to endowments, pension funds and wealthy individual investors. In 2010, Congress stepped in with the Dodd-Frank Act, which required private equity firms with more than $150 million in assets to register in the category of investment advisers. That registration process began in 2012.

As regulatory regimes go, however, oversight of broker-dealers is much stricter than it is for investment advisers. Brokers receive more frequent audits and examinations — only 9 percent of investment advisers are examined annually, compared with 55 percent of broker-dealers — and face capital requirements and greater legal liabilities.

The American private equity industry, which manages $3.5 trillion in assets, wants less regulation, not more. Steve Judge, president of the Private Equity Growth Capital Council, the industry trade group, characterizes the financial work provided by these firms as investment advisory services. “Layering broker-dealer regulations on private equity will be of no meaningful benefit to investors and would levy significant costs on private equity firms,” he said in an emailed statement. “We will continue to work with the S.E.C. to ensure that private equity investment advisers are not inappropriately miscategorized as broker-dealers in the future.”


Yet there is a compelling argument that many if not all such firms are, in fact, broker-dealers. The Securities Exchange Act of 1934 states that “any person engaged in the business of affecting transactions in securities for the account of others” should register as a broker and submit to heightened oversight intended to ensure that its customers are treated fairly.


S.E.C. guidelines say much the same: Firms may have to register as broker-dealers if they participate in “important parts of a securities transaction, including solicitation, negotiation or execution of the transaction” and if compensation or participation in the deal depends on the outcome or size of the transaction.

The issue seems clear to some securities lawyers.

“Common sense and good judgment would seem to mandate that firms engaging in these types of fee-generating transactions register,” said Lewis D. Lowenfels, a specialist in securities law in New York.

While some large private equity firms have registered as broker-dealers in recent years — including Apollo Management, Blackstone and Kohlberg Kravis Roberts, which are now public companies, as well as TPG — many firms have not. Among the biggest are Apax Partners; Bain; Clayton, Dubilier & Rice; and Thomas H. LeePartners.

Thomas Franco, a spokesman for Clayton, Dubilier & Rice, said the firm has not registered as a broker-dealer “because it is not required to do so.” He said the firm characterizes the financial services it provides as investment management rather than brokerage services. The other firms declined to comment.

Collecting Fees, Avoiding Costs

Firms that conduct broker activities on behalf of their own portfolio companies win in at least two ways: They generate fees for themselves and save money by not farming out the business to third parties.

In their lobbying, private equity firms that have not registered as broker-dealers say their essential business is managing funds and investing in portfolio companies, not engaging in securities transactions on a regular basis.

But a whistle-blower submission filed with the S.E.C. last year by a former senior private equity executive casts doubt on this view. The submission provides details on more than 200 cases of broker-dealer activities that have generated fees to buyout firms over more than a decade. The former executive, who is not identified in the filing, says these activities should have subjected the firms to broker-dealer oversight.

The submission, reviewed by The New York Times, contends that the 57 largest firms received more than $3.5 billion in fees from 2002 to 2013 while engaging in unregistered broker-dealer activities. If the S.E.C. decides that those fees were improper, the commission could recover some of the money in what is known as disgorgement.

It is unclear what, if anything, the S.E.C. will do about the whistle-blower complaint. In a successful case, the agency offers whistle-blowers bounties of 10 to 30 percent of the money that it collects in excess of $1 million.

Jordan A. Thomas, a partner at Labaton Sucharow in Washington and a former assistant director in the enforcement division of the S.E.C., represents the whistle-blower. “For more than a decade,” Mr. Thomas said, “many leading private equity firms in the country have collected billions of dollars in illegal fees for engaging in unregistered broker-dealer activities for things like M.&A. advice and debt offerings. By design, this failure allowed the industry to escape the oversight, limitations and expenses of the required broker-dealer regulatory scheme that all other market participants were subject to.”

For some investors, who pay handsomely to participate in private equity funds, the additional fees that the firms collect from client companies are troubling for the potential conflict that they pose. For example, a private equity firm may have an incentive to recommend a large debt offering to a portfolio company in order to generate greater fees. And these extra costs — plus the debt that private equity firms load onto portfolio companies — can make it harder for these businesses to serve their customers.
Lapses Are Common

S.E.C. officials have openly identified significant lapses among private equity firms. Andrew J. Bowden, director of the S.E.C.'s office of compliance inspections and examinations, said in May that his unit had found violations of law or material failings in the way private equity firms handled fees and expenses more than “50 percent of the time.” That is far higher than at other money managers, he said.

Mr. Bowden’s examiners turned up numerous examples of broker-dealer payments going to unregistered private equity firms. Before proceeding further, the examiners asked for guidance from the agency’s division of trading and markets, which establishes standards for fair and orderly markets and regulates broker-dealers, Mr. Bowden said.

David W. Blass, chief counsel in the S.E.C.'s trading and markets unit, has publicly said that when a firm acts like a broker-dealer, it should register as one. In a speech that caused a stir at the American Bar Association last year, he said, “Unless prepared to register as a broker, a person should not engage in activities that trigger registration.” He added, “It does not appear difficult to me for a private equity fund adviser to change its practices so it is not engaging in activities that raise broker-dealer status questions.”

But Mr. Blass’s views may not carry the day. Early this month, he announced that he would join the Investment Company Institute, the lobbying group for the mutual fund industry, in September as its general counsel. He declined to comment further.

The agency has come down on only one private equity firm for what it said were unregistered brokerage activities. In March 2013, the agency contended that a consultant hired by Ranieri Partners, a New York private equity firm, solicited investors and received compensation — activities that required broker-dealer registration. Ranieri and the consultant settled without admitting to or denying the allegations.

No other actions have followed. “The Ranieri Partners enforcement action, a case that dealt with conduct that has become common in the private equity industry, sparked a debate that thus far has added little clarity on the applicable rule book,” Mr. Paz, the former S.E.C. official, said.

The S.E.C.'s reluctance to bring such cases against private equity firms stands in contrast to actions it has taken against other kinds of unregistered firms. In 2009, for example, it sued Ram Capital Resources, a financial firm that marketed securities to investors without having registered as a broker-dealer. The firm and its principals reached a $600,000 settlement without admitting to or denying the allegations.

While the agency debate over private equity firms centers in the S.E.C.'s trading and markets unit, the arguments bubbled to the surface in March at an investment management conference in Orlando, Fla.

Andrew J. Ceresney, the S.E.C.'s chief of enforcement, was asked if private equity firms would receive an exemption from the S.E.C. on broker-dealer oversight. Wouldn’t that be unfair, the questioner asked, since mutual fund managers and other firms must submit to broker-dealer rules?

“I hear you, I hear you,” Mr. Ceresney said, according to a recording of the session. “But it’s not an area I have anything to do with. Once they make the rules, I enforce them.”

Seeking Clearer Rules

The whistle-blower who came forward last year has provided the S.E.C. with documentation that unregistered private equity firms have facilitated mergers, structured and negotiated debt and provided financial analyses of transactions — classic broker-dealer activities that generate hefty fees. Details about such services and fees can often be found in the private equity firms’ management agreements, but not, generally, in the main proxy materials associated with these private equity deals.

One example provided by the whistle-blower was the $31 billion Bain deal that privatized HCA, the health care giant, in 2006. In its management agreement, Bain disclosed that it received $48.6 million for structuring the initial transaction and providing M.&A. advice. Yet Bain did not disclose the fee in the proxy.

A pattern of inconsistent disclosure exists, depending on the type of regulatory filing the firms have made. According to their investment adviser filings with the S.E.C., private equity firms have generally maintained that they are not actively engaged in broker-dealer activities. But in their management agreements, they often have disclosed activities that are the hallmark of broker-dealers.

In its $15 billion buyout of Hertz in 2005, for example, Clayton, Dubilier & Rice noted that it had provided financial and investment banking advice related to the initial transaction, for which it earned $25 million. Thomas H. Lee Partners stated in its management agreement related to the $13 billion buyout of Univision in 2007 that it had received $50 million for financial advisory services.

Yet none of the firms’ investment adviser filings say they conduct broker-dealer activities.

The whistle-blower says it is urgent that the S.E.C. set clear rules and take action now. “The S.E.C. cannot build confidence in the markets,” the complaint said, “if it allows major, well-funded, politically connected industries like private equity to evade enforcement for widespread, systematic and flagrant violations of the securities laws.”

Understandably enough, the industry says the agency should leave well enough alone: Private equity is a very profitable business.

Andrew J. Ceresney, the S.E.C.’s chief of enforcement, said he had nothing to do with who was subject to broker-dealer oversight, adding, "I believe I have a job waiting for me when I conclude my government service."

[thriftyandboringinohio]

Re: The Curious Case of Market Basket

Truly fascinating post, no wonder it got Ej's attention. I think the problem is that corporations are too vulnerable to PE.
There should be something in the legal definition of a corporation to make it more difficult. In Germany, there is an employees representative on the board of directors, who is supposed to control alignment of incentives and things like that. Logically, all the stake holders (customers, investors, employees) should have some say in what goes down. Hard to know how to do that, though.

A corporation can protect itself in advance with "poison pill" arrangements. 20 years ago I was hired into middle management at a Fortune 50 company, at a level just high enough to be part of the poison.
Should a takeover occur, me and many like me got outrageously expensive rights that the new owner would need to deal with.

[GRG55]

Re: The Curious Case of Market Basket

A corporation can protect itself in advance with "poison pill" arrangements. 20 years ago I was hired into middle management at a Fortune 50 company, at a level just high enough to be part of the poison.
Should a takeover occur, me and many like me got outrageously expensive rights that the new owner would need to deal with.

And once the takeover payout clauses are in place in the employment contracts isn't that when management starts to maneuver to make exactly that happen...no matter what is in the shareholder's best interests?

[Seen it too many times, and am of the personal opinion that any Board compensation committee that allows such a thing should be summarily turfed. Immediately]