Peter Nicholas is scheduled to deliver 102,722 shares of his Boston Scientific Corp. (NYSE:BSX) stock to an unidentified commercial bank today, making good on his end of a year-old transaction and completing another step in liquidating a $72 million stake in the company he helped launch.
Nicholas, a long-time director and the former CEO of the Natick, Mass.-based medical device giant, has been making a lot of deliveries in recent months. During December alone, he’s slated to transfer up to 1.4 million BSX shares to the bank, nearly all in the same 102,722-share increments. The final tally may differ slightly, depending on the stock’s price performance the next few weeks, but this much is certain: Nicholas has had free use of the $8.6 million paid for all that stock for almost a full year.
Nicholas began his systematic sale of shares in August, 2008, setting up a string of forward-sale contracts with the bank (most likely Bank of America, after a series of recent consolidations folded other commercial lenders into B of A). To date, those deals have allowed Nicholas to pare nearly 4.5 million shares from his BSX holdings, turning shares into cash on his own terms while avoiding possible accusations he is trading on inside information on operations at the company.
Officials at Boston Scientific had little comment on any of the stock sales and attempts to contact Nicholas directly were unsuccessful.
“There’s not much more that we can say beyond what’s in the Form 4s,” BSX spokesman Paul Donovan told MassDevice, referring to the ownership documents that have been appearing like clockwork for 15 months.
Under the plan, known as a 10b5-1 sale for the Securities and Exchange Commission rule authorizing them, Nicholas was paid in the form of a loan from the bank for stock he pledged to sell to the institution at a later date. On the settlement date, typically one year after the original deal, Nicholas can either deliver the shares to the bank, keeping the money and completing the transaction, or simply repay the interest-free loan.
For example, back on Dec. 9, 2008, Nicholas and the bank agreed to a deal for him to sell 102,722 Boston Scientific shares to the bank for about $614,000. The $5.98-per-share price works out to a 19-percent discount on the stock’s year-ago value and a 29 percent markdown from the opening price Dec. 9 — a seemingly steep penalty, except that Nicholas has had free use of the money for a year and there also were several protections in place to limit his down-side risk.
Chief among those safeguards were provisions allowing Nicholas to pro-rate the number of shares he delivered if Boston Scientific stock was trading above a set price, in this case $7.343 a share. With the stock now trading at $8.45 a share, he only had to deliver about 87,200 shares, 15,500 fewer than the 102,722 shares slated for delivery if the stock was at or below the contract price. Nicholas also had the option to just walk away from the original deal by repaying the $614,157 loan.
He got a similar break last week. Nicholas put up 500,000 shares Dec. 3 — by far his largest individual 10b5-1 transaction — with a $6.69 floor. When the $2.9 million contract matured, Boston Scientific stock was trading at roughly $8.47 and Nicholas only needed to pony up 421,000 shares, retaining possession of the other 79,000 shares worth about $670,000.
Nicholas has settled forward-sale contracts, for a total payout of $40.2 million, in exchange for 4.6 million shares over the past 15-plus months. He’s slated to deliver another 4.4 million shares through September, 2011, for loan proceeds totalling $31.7 million. The bulk of the shares sold were held in a trust benefiting his wife and children, but also included stock under Nicholas’ direct control.
John Abele, Nicholas’ partner in launching Boston Scientific 30 years ago, likewise has been busy queuing over 11.5 million BSX shares for upcoming sales, as part of his own 10b5-1 plan. At least eight other company directors or executives have also used 10b5-1 plans at various times since 2003, according to Securities and Exchange Commission records.
The agency established the 10b5-1 program in 2000 and has generally allowed plenty of flexibility in how the plans are used. In fact, there really are only two concrete rules: Participating executives can’t have material inside information about the company while they’re creating their plans and they have to set the dates and a price for the trades in advance.
Use grew steadily earlier in the decade, with studies by a prominent executive-benefits consulting firm finding that more than one-third of the companies in the S&P 500 had at least one executive using a 10b5-1 program between 2004 and 2006. Participation has tailed off in more recent years, the Equilar Inc. researchers report, citing increased SEC oversight as one possible factor, along with the hard market slide last year that removed much of the potential profit from executive stock sales.
Both Nicholas and Abele, however, have been piling up BSX stock for nearly three decades. They appear to be using the pre-arranged sales primarily as a way to diversify their respective estates. The two have also been burned in recent years, having to dump millions of shares into falling markets to meet margin calls or to cover losses on stock used as collateral for other loans.
The pair took well-publicized hits last year when they were forced to sell stock in the free-fall triggered by the collapse of Lehman Brothers and other market turmoil. Over a two-day period in mid-October, Nicholas had to sell over 10.7 million of his BSX shares; Abele lost 11.1 million shares in forced trading, according to securities documents.
Their market-related woes largely receded by the end of the month, although Abele continued to be hit with occasional margin calls late into November, 2008. Nicholas, meanwhile, had about 650,000 of his Boston Scientific shares pushed into the market as recently as last month, when a bank lender needed to cash out a portion of the stock he put up as collateral on a loan with the trust partnership, sparking another involuntary sale of Nicholas-held stock.