A CEO was caught up in the aftermath of a soured leveraged buyout. Another is trying to make his business profitable after years of losses. And one founder is in a bitter dispute with his backers after recently being stripped of all executive roles.
The thing these individuals have in common? They were forced to sell their US-listed shares after pledging them as collateral for personal loans.
The practice of pawning stocks has exploded over the past decade as stock markets have risen amid record-low interest rates. Nearly half of U.S. CEOs have used this technique to obtain loans, giving them access to liquidity without reducing their stake in the business they run.
But when things go wrong, things can backfire. 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. Worth around $250 million at the time of the promise, they sold for just $37 million after Tellurian shares hit a three-year low following notification that virtually all of Souki’s stake had been seized .
“This whole thing can unravel quite quickly,” Jason Zein, a finance professor at the University of New South Wales business school, said of equity commitments, which are often sensitive to interest rate fluctuations. “If you committed to market highs, you may still be underwater.”
Souki makes up the bulk of at least $50 million in promised U.S. stock sales since early last year, with the latest transactions filed in recent weeks, according to data compiled by Bloomberg. A spokesperson for Tellurian declined to comment, while a representative for Souki did not respond to a request for comment.
The most devastating aspect of promised stock sales for executives is that they are often forced to sell their shares at precisely the wrong time: when they are trading at multi-year lows. Overall, the shares sold were worth more than $330 million when the commitments were first made public, filings show.
“Huge impacts”
Souki, 71, was left with a less than 1% stake in Tellurian after lenders led by Wilmington Trust sold most of his shares, filings show. He later sued his financiers, claiming they fueled a stock fire for Tellurian after recalling the shares. He also alleged that she sold his custom sailing yacht at a reduced price and that she improperly foreclosed on an 813-acre ranch that he had bankrupted.
He was then ousted in December as Tellurian’s president and stripped of any executive roles as the company struggled to stay in business.
For Andy Moore, managing director of B. Riley Financial Inc.’s investment banking division, the forced selling came in the form of a margin call. His broker sold about $1.3 million worth of shares in November, when B. Riley shares hit a three-year low. The financial services company had recently reported a steep quarterly loss and was facing questions about its involvement in the acquisition of Franchise Group and ties to its former CEO, who has been linked to a hedge fund fraud case.
And Blend Labs Inc. CEO Nima Ghamsari has offloaded about $1.5 million worth of the fintech company’s stock through trading floors since early last year. She had pledged most of her stake to an undisclosed lender, with the last sale in January, filings show. Shares of the San Francisco-based company have fallen about 88% since its 2021 initial public offering as it struggles to turn a profit, underscoring the risk of pawning the shares if their value declines.
“If the market fluctuates like at financial crisis levels, the impacts can be huge,” said Jihun Bae, assistant professor at the Erasmus School of Economics in Rotterdam.
Stock pledging typically helps executives diversify their wealth. Oracle Corp. Chairman Larry Ellison has invested in company stock to finance a luxurious lifestyle that includes trophy properties, America’s Cup sailing teams and the Indian Wells tennis facility in California. Phoenix Suns owner Mat Ishbia last year pledged to secure more than half of the outstanding shares of mortgage giant UWM Holdings Corp. to secure loans before buying the NBA team for a record $4 billion.
Loans against individual shares or a portfolio of listed shares are often easier and quicker for banks to process as the value of the collateral is more easily ascertainable than for less liquid assets such as property, art or superyachts. But it may also result in a quicker requirement for additional collateral to cover finance charges if the valuation of the pledged asset falls.
Rising rates
Axos Financial Inc. Chief Executive Gregory Garrabrants sold pledged shares to help pay borrowing costs in August, when the financial company’s shares were falling, posting its longest streak of daily losses in nearly a year .
While its lenders did not force such sales via a margin call, it more than doubled the pledged shares to secure its margin loan a year after disclosing it in September 2021. Since that first filing, the benchmark interest rate for federal funds in the United States the rate has risen from near zero to more than 5%, putting pressure on borrowers who are not guaranteed fixed monthly repayments on their loans.
Garrabrants still owns a roughly 2.7% stake worth about $80 million, based on the latest public filings.
“Pawn loans are generally variable rate,” Zein said. “Rising rates mean that the responsibility you have each month to repay interest increases. This makes the promise of commitment less attractive.”
Some U.S. executives also pledge to buy additional shares in their business, even if they already make up the bulk of their fortune. According to a 2019 research paper by Kornelia Fabisik of the University of Bern, the average loan value for U.S. executives pledging equity is $65 million.
That was the case for Blend co-founder Ghamsari, a computer science graduate from Stanford University who worked at Palantir Technologies Inc. before creating the lending platform about a decade ago.
According to a company statement, he leveraged his stake in Blend for a personal loan that he primarily used to acquire extra shares ahead of Blend’s IPO. He remains aligned with Blend’s long-term prospects, the board of directors and other shareholders, but will continue to sell shares from time to time to repay the loan, the company said.
Ghamsari began disclosing committed stock sales in late 2022, when the company’s shares had fallen 94% below its July 2021 IPO price, valuing his stake at the time at about $200 million . His stake in Blend Labs has fallen at least 25% since he started selling shares, although he is due to receive new stock options this year. Excluding these options, his current holding is worth less than $35 million.
On Friday, it filed to sell an additional stake through Charles Schwab Corp.