Insiders' 10 dumbest stock moves

By Michael Brush

If stock market losses create misery, at least we can take comfort that we all have plenty of company from the "smartest guys in the room."

I'm talking about corporate insiders, those corner-office execs and board members whose moves many investors follow on the logic that their front-row seats make them the savviest market players around.

These days, many of them look instead like the biggest losers -- at least on stock purchases they made last year that now look decidedly boneheaded.

Sophisticated experts at places such as Citigroup (C, news, msgs), Bear Stearns (BSC, news, msgs) and Thornburg Mortgage (TMA, news, msgs) poured millions of dollars into banking and mortgage stocks right before the subprime disaster took those shares down. Those missteps cost insiders millions.

And the biggest loss among the smart-money crowd belongs to billionaire Ronald Perelman, a director of lottery-equipment maker Scientific Games (SGMS, news, msgs). He's down $53.7 million on purchases of that stock last February and in December.

"Do insiders know anything more than anyone else, and can they act on it?" asks Timothy Ghriskey, the chief investment officer of Solaris Asset Management, which manages more than $2.8 billion in assets. "This is evidence that they don't."

Billionaire loser is no novice

Perelman took most of his hit on Scientific Games just this month. The stock was downgraded by analysts after the company lost contracts in Pennsylvania, South Carolina and West Virginia. He's also out $4.6 million on an April purchase of M&F Worldwide (MFW, news, msgs), which provides checking and other services to banks.

His total losses on 2007 purchases: $58.3 million as of Jan. 18, the cutoff date I used when I calculated insider losses with help from InsiderScore.com.

Perelman is no newbie. The chairman of Revlon (REV, news, msgs) made his fortune buying cheap companies in turnaround and leveraged-buyout plays. He learned the intricacies of stock analysis in the MBA program at the Wharton School at the University of Pennsylvania. Not the kind of résumé you'd expect at the top of a list like this.

Perelman is unbowed. He's a long-term investor and not a trader, and the declines in the shares of Scientific Games and M&F Worldwide in 2007 are irrelevant, responds spokeswoman Christine Taylor.

"We look at the performance of companies, not the fluctuation of share price," she says. "These are fantastic, well-managed companies that have performed extremely well over time, creating significant value for their shareholders. We continue to have great faith in their future."

Perelman puts his five-year total return on Scientific Games at 57% and his five-year return on M&F Worldwide at 300%, Taylor says.

Perelman isn't the only Wall Street veteran on my list of the most boneheaded insiders of 2007. Take billionaire Wesley Edens, the chairman, chief executive officer and investment-committee chairman at vaunted private-equity shop Fortress Investment Group (FIG, news, msgs).

As of Jan. 18, Edens was down $23.2 million on 2007 investments in Aircastle (AYR, news, msgs), GateHouse Media (GHS, news, msgs), Brookdale Senior Living (BKD, news, msgs) and Newcastle Investment (NCT, news, msgs). He's the chairman at each of those companies, and his private-equity shop has large positions in each.

Private-equity shops such as Fortress need big infusions of cash from wealthy investors and big institutions to survive. I wanted to ask Edens how his marketing pitch works with potential investors in the wake of that $23.2 million loss. But Fortress Investment Group declined to comment. (So did the other insiders identified in this article, except those I quote.)

Subprime myopia

Many of the most boneheaded insider purchases last year were made by senior executives at banks and companies in the mortgage and real-estate sectors -- executives who should have figured out before everyone else that a subprime meltdown was on the way.

As co-chief executive of markets and banking at Citigroup, Thomas Maheras oversaw the bank's fixed-income division, ground zero for debt instruments known as collateralized debt obligations that contain the toxic subprime loans that have created so many headaches in the financial world. Early concerns about subprime debt last March pushed Citigroup stock down below $50 from above $55 the month before. On the dip, Maheras purchased $3.8 million worth of stock at a price of $51.07 a share.

"At the time that was a great purchase," says Ghriskey, of Solaris Asset Management. "Everyone was saying, 'Yes, subprime is an issue, but it is transitory.'"

The stock recovered to $60 but fell hard as the subprime woes became clear. Maheras would be down 50% on the purchase now -- assuming he still held the stock. He left Citigroup on Oct. 11 and no longer has to report trades.

Continued: 'These are all recognized names'

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