A CEO was affected by the fallout from a failing leveraged buyout. Another is trying to make his business profitable after years of losses. And one founder is in a bitter dispute with his lenders after he was recently stripped of all leadership roles.
What do these people have in common? They were forced to sell their struggling U.S.-listed shares after pledging them as collateral for personal loans.
The practice of pledging stocks has boomed over the last decade as stock markets soared amid record low interest rates. Nearly half of U.S. business leaders have used this technique to secure loans, giving them access to cash without reducing their stake in the business they run.
But when things go wrong, it can backfire spectacularly. Take Tellurian Inc. co-founder Charif Souki, once America's highest-paid executive. Last year, the former billionaire's lenders seized 25 million shares of the Houston-based natural gas company that he pledged in 2017 to secure loans for real estate investments. At the time of the pledge, they were worth about $250 million and sold for just $37 million after Tellurian's stock hit a three-year low following news that virtually all of Souki's stake had been seized.
“The whole thing can unravel pretty quickly,” Jason Zein, a finance professor at the University of New South Wales business school, said of stock pledges, which are often sensitive to fluctuations in interest rates. “If you made commitments at market peak levels, you could still be underwater.”
According to data compiled by Bloomberg, Souki accounts for the bulk of at least $50 million in U.S. stock sales committed since the start of last year, with the latest transactions filed in recent weeks. A spokeswoman for Tellurian declined to comment, while a representative for Souki did not respond to a request for comment.
The most devastating thing about pledged stock sales for executives is that they are often forced to dump their shares at exactly the wrong time: when they are trading at multi-year lows. In total, the shares sold were worth more than $330 million at the time the commitments were first disclosed, the filings show.
“Huge impact”
Souki, 71, was left with less than a 1% stake in Tellurian after lenders led by Wilmington Trust sold most of his shares, filings show. He later sued his lenders, claiming they fueled a stock sell-off for Tellurian after they called the shares. He also claimed they sold his custom sailing yacht at a bargain price and illegally foreclosed on an 813-acre ranch that he had filed for bankruptcy.
He was then ousted as Tellurian's CEO in December and stripped of all executive roles as the company struggled to stay in business.
For Andy Moore, CEO of Investment Banking Division E.g. Riley Financial Inc., its forced sale came in the form of a margin call. His broker sold about $1.3 million worth of shares in November when B. Riley's stock hit a three-year low. The financial services company had recently reported a large quarterly loss and faced questions about its involvement in the acquisition of Franchise group and ties to its former CEO, who is linked to a hedge fund fraud case.
And Nima Ghamsari, CEO of Blend Labs Inc., has dumped about $1.5 million worth of shares in the fintech company through trading plans since the start of last year. According to the documents, he had pledged most of his stake to an undisclosed lender, with the last sale taking place in January. Shares of the San Francisco-based company have fallen about 88% since its initial public offering in 2021 as the company struggles to generate profits, underscoring the risk of pledging shares if their value falls.
“When the market fluctuates like it did during the financial crisis, it can have a huge impact,” said Jihun Bae, assistant professor at the Erasmus School of Economics in Rotterdam.
Pledging stocks typically helps executives diversify their assets. oracle Corp. Chairman Larry Ellison has invested company shares to finance a luxurious lifestyle that includes trophy properties, America's Cup sailing teams and the Indian Wells tennis complex in California. Phoenix Suns owner Mat Ishbia has mortgaged more than half of the mortgage giant UWM holdings Corp.'s outstanding shares last year to secure loans before buying the NBA team for a record $4 billion.
Lending against individual stocks or a portfolio of listed holdings is often easier and quicker for banks to process because the value of the collateral is more easily verifiable than with less liquid assets such as real estate, art or superyachts. However, it can also lead to additional security being required more quickly to cover the loan costs if the value of the pledged assets falls.
Rising interest rates
Axos Financial Inc. CEO Gregory Garrabrants sold pledged shares in August to pay borrowing costs as the financial company's shares fell, posting their longest daily losing streak in nearly a year.
Although his lenders did not force these sales through a margin call, he more than doubled the shares pledged to secure his margin loan a year after his disclosure in September 2021. In the U.S., the interest rate has risen from near zero to over 5%, putting pressure on applies to borrowers who have not secured fixed monthly repayments for their loans.
According to the most recent public filings, Garrabrants still owns about a 2.7% stake, worth about $80 million.
“Pawn loans usually have variable interest rates,” said Zein. “Rising interest rates mean that the monthly obligation to repay the interest increases. This makes pledging less attractive.”
Some U.S. executives also pledge stocks to buy additional shares in their company, even if they already make up the majority of their assets. According to a 2019 research paper by Kornelia Fabisik of the University of Bern, the average loan value for U.S. executives who pledge stocks is $65 million.
This was the case for Blend co-founder Ghamsari, a Stanford University computer science graduate who worked at Palantir Technologies Inc. before setting up the lending platform about a decade ago.
According to a statement from the company, he used his Blend share for a personal loan, which he used primarily to purchase additional shares prior to Blend's IPO. He remains sympathetic to the long-term perspective of Blend, the board and other shareholders, but will continue to sell shares from time to time to repay the loan, the company said.
Ghamsari began disclosing sales of pledged shares in late 2022, when the company's shares had fallen 94% below the July 2021 IPO price, with its stock holdings valued at about $200 million at the time. His stake in Blend Labs has fallen at least 25% since he began dumping shares, although he is expected to receive new stock options this year. Without those options, his current stake is worth less than $35 million.
On Friday he applied to sell another share of the shares Charles Schwab Corp.