Altisource (ASPS) – Part 2 – Insider behaviour

This post discusses:

  • Home Loan Servicing Solution / HLSS (which I overlooked)
  • William C Erbey – Chairman
  • Robert D. Stiles – former CFO

Overview of all William C Erbey affiliated stocks

Overall, Erbey’s stock ownership looks something like this:

Altisource Asset Management (AAMC) – 30.1% according to this 13-D filing

Altisource Residential (RESI) – 25.3% according to this 13-D filing

Altisource (ASPS) – 25.4% (5,935,343 shares / 23.36M shares outstanding)

Ocwen (OCN) – 13.2%

Home Loan Servicing (HLSS) – 2.8%

Based on these figures, it seems clear to me that the Altisource family are the stocks to own.  Part 1 of this post explains why I think ASPS is the stock to bet on over RESI and AAMC.  Erbey owns a larger portion of AAMC (than RESI and ASPS) due to unvested restricted shares.  The 3-way split of ASPS/RESI/AAMC may have been designed to be beneficial to Mr. Erbey as he increased his ownership of the most desirable spinoff.  Now that AAMC is publicly traded, its valuation makes it unattractive in my opinion.

Looking at Erbey’s insider trading, he has made small sales of ASPS and OCN while he has been making small purchases of HLSS.  I am not going to read too much into these sales and purchases.  Overall, Erbey’s ownership of ASPS should increase if ASPS restarts its share repurchases.  His ownership of OCN will continue to be diluted as I expect OCN to continue to sell shares.  I expect Erbey’s stake in HLSS to remain very low as its secondary offerings will dilute any minor purchases in HLSS.

Altisource share repurchases and CFO resignation

In the second and third quarters of 2012, Altisource stopped buying back shares.  Instead of buying shares, it accumulated cash and spun out $105M into RESI and AAMC.  I am thinking that it should have avoided the spinoffs altogether and simply used the cash to repurchase shares.  In my opinion, repurchasing shares would make a little more sense as the rate of return or repurchases should be better than rolling the dice on RESI’s untested business model.  I also think that perhaps it would have made more sense to make a smaller bet on RESI’s business model instead of throwing $100M at it.  On the tax front, the split was horribly tax inefficient as shareholders like Mr. Erbey had to pay taxes on the distribution.  This is unusual as all of of Erbey’s companies (except Ocwen in Atlanta) are headquartered outside the US to avoid/reduce taxes.

The timing of these events may or may not have something to do with the resignation of Altisource’s former CFO (Robert D. Stiles) on February 22, 2012.  Stiles was Ocwen’s CFO since March 2009 and became Altisource’s CFO after Altisource spun-off from Ocwen.  I am guessing that he had the brilliant idea to leverage Altisource through Ocwen since the spin occurred half a year after he joined Ocwen.  He also jumped ship to the small Altisource spinoff instead of staying at Ocwen… smart.  The spinoff also reduced taxes as Altisource was headquartered in Luxembourg instead of Atlanta.  Very smart.

Some of the clauses in his separation agreement suggest that he and his bosses had disagreements.  For example there is a clause that states: “The undersigned Managers agree not to disparage Stiles.”  I would note that his resignation happened at around the same time that Altisource shifted gears from share repurchases to hoarding cash for the ASPS/RESI/AAMC split.  Contrary to what I wrote in part 1, perhaps it is Robert D. Stiles (the ex-CFO) who really gets capital allocation and not Mr. Erbey.  I am just speculating here, but it is possible that Stiles resigned because he was tasked with something stupid (the ASPS/RESI/AAMC split) and was frustrated to the point where he and the CEO (Sherpo) would have reason to disparage/insult each other.

(*The reason why I pay a lot of attention to CFO resignations is because sometimes CFOs will resign if there are accounting shenanigans going on.  If a company claims that a CFO resigned for “personal reasons”, it would be a huge red flag to me.  CFOs are typically highly-driven people who worked very hard to get their job and aren’t going to resign for personal reasons.  If a CFO resigns, I want to know why.)

William C Erbey

Perhaps Mr. Erbey simply wanted the ASPS/RESI/AAMC split since he is very passionate about creating and running businesses.  He has decided to move himself and his wife to the US Virgin Islands to work on Ocwen’s new subsidiary there (he has received some negative publicity over Ocwen buying his $6.5M house).  The US Virgin Islands is also where AAMC is headquartered.  Mr. Erbey is 62 and most people his age might slow down, think about retirement, sell some shares, and enjoy their wealth.  What little money he has made from his share sales has mostly gone towards paying taxes and buying shares of HLSS.  He certainly does not seem to be enjoying his wealth and is a huge hoarder (I respect this).  His compensation at Ocwen and Altisource seems reasonable and does not seem to be a red flag for me.

In terms of his capital allocation skills, I don’t think that Mr. Erbey is a Warren Buffett type.  AAMC’s form 10 filing suggests that it will be hiring a third-party asset manager to handle NewSource’s insurance float.  Erbey’s open market purchases of HLSS stock also don’t make that much sense to me considering it recently IPOed and was about to do a secondary offering.

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