Still Keeping An Eye on Trouble in Boardroom

Richard C. Breeden, securities watchdog turned hedge fund manager, advocates on shareholders' behalf.
Richard C. Breeden, securities watchdog turned hedge fund manager, advocates on shareholders' behalf. "I've yet to come across public companies that had problems you couldn't fix," he says. (By Yoni Brook For The Washington Post)
By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, June 14, 2007

GREENWICH, Conn. -- In Washington, he is known as the former Securities and Exchange Commission chairman who backed shareholders in corporate boardrooms and pushed for tougher enforcement against Wall Street delinquents.

Now, outside the Beltway spotlight, in a converted farmhouse in this tony town 30 miles from Manhattan, Richard C. Breeden is reinventing himself as head of an exclusive investment fund bearing his name.

That a former securities watchdog would turn money manager may seem unusual. After all, Breeden Capital Management, which requires a minimum $5 million investment, is frequently referred to as a hedge fund -- a lightly regulated industry criticized for its opacity.

But Breeden's $1 billion fund, which last week marked its first anniversary, is part of a growing pool of investment money set up to agitate executives at companies thought to be undervalued and inefficiently run. These so-called relational investing funds generally acquire substantial stakes in companies and wield their power as shareholders to press for changes in management or corporate strategy, sometimes by gaining seats on boards of directors.

"If your performance is weak, make it strong. If you're balance sheet is weak, make it strong," said Breeden, who has also worked at an accounting firm and has served as outside monitor to such scandal-ridden companies as WorldCom. "I've yet to come across public companies that had problems you couldn't fix."

Applebee's International became Breeden's inaugural target, when he nominated himself and three others late last year to run against management's candidates for the board. A months-long fight ensued, during which the restaurant chain portrayed Breeden as a stubborn activist, and Breeden criticized the company for "bloated expenses" and "unhealthy governance practices."

With a proxy fight looming before its annual shareholders' meeting in May, Applebee's agreed to give Breeden and one of his nominees, Laurence E. Harris, a Washington lawyer, seats on the board and on key committees. The deal with Applebee's restricts Breeden and his fund from engaging in further proxy contests and from putting forth shareholder proposals.

His work with Applebee's may have quieted the skepticism of some in investing and corporate governance who were surprised that Breeden, with virtually no money-management experience, launched a fund, and moreover, was able to raise $1 billion in one year.

"A lot of people were skeptical about his getting into this area. . . . It's legitimate to question what relevance [his background] had to running an activist hedge fund," said Gary Lutin, an investment banker at Lutin & Co. who advises shareholders on corporate control matters.

And while a year is not enough time to judge a fund's success, Lutin said, "so far, Breeden's proven to be much more effective than the general run of screaming activistas."

Breeden said that what he is doing -- "engaging with companies to fix problems" -- is not really new to him.

He was the court-appointed monitor at telecommunications giant WorldCom after its accounting scandal and recommended changes in its corporate governance. He was also tapped by the board of Hollinger International, a newspaper publisher, to investigate corporate abuses. Breeden's report accused former managers, including Conrad Black, now on trial for racketeering and other charges, of running a "corporate kleptocracy."

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