A Bain Story Worth A Look

Mitt Romney's record at Bain is coming under scrutiny now, by his political opponents and the political press. As it should; praise it or pan it, that record is the bulk of his life's experience.

I would like to immodestly suggest that folks take a look at a cover story I did in August 2007, looking at some of this record and what it means for Romney the Presidential candidate, and potential President. 

There is one episode I recounted in that article that took on additional resonance more than a year later -- when Romney was long gone from the 2008 campaign -- as the country learned of the alleged gaming of credit ratings, in the context of the mortgage-security crisis.

This tale is not about mortgage securities and Standard & Poor's, but the basic activities are the same. Here is how I related it in that article:

....Bain Capital got caught up in a scandal that struck at the core of its success: allegations that stock analysts puffed up their advice on the very companies with which their banking arms were doing business.

According to federal prosecutors, during the mid to late ’90s, firms with both an investment-banking and a research-analysis business — such as Lehman Brothers, which Bain Capital frequently used to finance its buyouts — provided inflated stock ratings from the latter to companies that gave their business to the former. Ten investment firms, including Lehman Brothers, ultimately paid a total of $1.4 billion under a 2003 settlement with the SEC.

In one instance documented by the SEC, a Lehman Brothers analyst admitted issuing a “1-Buy” rating for the stock of Bain Capital–owned DDi, when he believed that the shares were actually overpriced. Lehman Brothers’ investment bankers were handling DDi’s transactions, and, according to federal prosecutors, DDi and Bain Capital managers were “pushing hard” for the positive stock rating from Lehman’s research arm in exchange for the business.

Bain Capital — and Romney personally — made a profit on DDi, selling their shares in 2000. The stock crashed, and was virtually worthless by 2003. Early this year, Bain agreed to pay $4 million to settle a class-action lawsuit alleging that it had deceived the stock purchasers through its prospectus.

Lehman paid an $80 million fine to settle charges that included the DDi case. Romney has also claimed ignorance in that case. But Bain Capital continued to use Lehman Brothers, and still does. Lehman Brothers executives and employees have contributed more than $50,000 to Romney’s presidential campaign, and that number should soon climb: who did the Romney camp just announce will serve as a national finance co-chair for his presidential campaign? Stephen Lessing, a Lehman Brothers director who led the firm’s lobbying effort in response to this scandal.

In this latest round of Bain stories, I have seen DDi mentioned in lists of Bain-acquired companies that ended up collapsing and/or laying off employees. But I have not seen any mention of this aspect. It would be worth shining a spotlight on. I would also be very interested to know whether Bain Capital responded internally in any way to the charges. Did they investigate whether in fact their managers had pushed hard for unmerited stock ratings in the DDi case? Did they investigate whether they had done so in other cases, and whether there was a culture of doing so? Was the company repeatedly hiring Lehman as its investment banker because of these manipulations, rather than for its own merits against other financial institutions? Were directors themselves deceived into signing off on deceptive prospectuses?
All of this would speak not only to Romney's culpability in the DDi incident, but in the corporate culture and practices of the company he personally built and ran. That seems worthy of inspection.
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