When is a Director not a Director and When is a Deal Too Close to Home?

Last week, Benzinga covered the Freeport McMoRan Copper & Gold FCX acquisitions of McMoRan Exploration MMR and Plains Exploration PXP. After some more digging along with Kai Petainen, SISU investor, contributor to Forbes and teacher of quant valuation at the Ross School of Business at the University of Michigan, there have been some answers but many more questions.

There were two curious relationships pointed out last week: the status of a Professor at the University of Texas who was an independent director to Plains Exploration and that of B.M. Rankin Jr., who is currently the Vice-Chairman of Freeport and who is listed as a Director at the University's business school on multiple sources, including Factset Research FDS and the Wall Street Journal's Marketwatch. When reached for comment, the University denied that such a position exists but admitted that an internal investigation had been launched into Dr. Groat's dealings.

Dr. Groat has since been fired for his undisclosed conflict of interest in releasing an industry report that effectively stated that fracking and horizontal drilling is safe. Mind you, he was an independent director for an OIL DRILLING COMPANY so that in itself raises many ethical, moral, and legal questions. However, the status of Mr. Rankin is also questionable; the University denied allegations that he is fact a director, but other websites and organizations disagree.

As Petainen wrote earlier this week on his column on Forbes which can be found here, the story gets only more questionable. "It has come to my attention that the CLL Global Research Foundation is linked to the University of Texas, and Rankin is a Director at the CLL Global Research Foundation.

"According to the 2010 Form 990, 501c3 filing, [Dr. Michael J.] Keating is the CEO and President of CLL Global Research Foundation. The address listed on the form is '1515 Holcombe Blvd', Houston TX. Where is 1515 Holcombe Boulevard? According to Google Maps, the dot appears directly over the University of Texas MD Anderson Cancer Center. So, according to the tax filings, the CLL Global Research Foundation home address is at the University of Texas.

And then, listed in the Form 990 filing, we see “BM Rankin Jr Director”.

"Based on what I see in the data, in an effort to provide further clarification – Rankin is a Director at a Foundation, and that Foundation is located (as per tax forms) at the University of Texas."

So, the questions I raised a week and a half ago appear to be more than intriguing. In fact, the intricate web that has been cast amongst these directors and foundations even appears to reach as far as the Boy Scouts of America in Texas. There is no data that says that these directors and executives acted fraudulently, but consider this: Plains CEO James Flores, who is also a Director at McMoRan Exploration, made nearly $20 million on just his Plains stock. Also, he owned 7,597 shares of McMoRan Exploration, whose shares also rallied nicely on the day the deal was announced.

Freeport CEO and McMoRan Exploration Co-Chairman Richard Adkerson made ridiculous sums of money on this deal as well while Freeport shareholders lost more than 10 percent of their investment in the company. In fact, if you go back and look at the times that he has sold shares over the past year, Adkerson should give up running Freeport and get a job trading at a hedge fund. He so perfectly called the top in Freeport shares back in February 2011 that even Steve Cohen would be jealous. Here is a stock chart, courtesy of Petainen, which shows his sales of Freeport stock.

Once again, we are not attempting to raise calls of fraud or illegal doings at the company. We simply want to point out that this deal may not be in the best interest of Freeport shareholders. Remember, Freeport is a copper miner and the acquired companies are oil exploration companies. It's hard to see the synergies in that business model, unless Freeport was ready to admit that the mining boom is dead. However, in the press release of the deal, Freeport CEO Adkerson wrote, "We will not diminish our focus in our mining operations on safe and efficient production, executing our organic growth projects, prudent capital allocation and an entrepreneurial spirit of creating values for our shareholders." So if mining isn't dead, then why do the opposite of what is attractive in the market, divestitures not acquisitions, and move into unchartered businesses?

The fact is that there will probably never be a direct answer from any of the questionable parties. The only thing that can be done now is Freeport shareholders need to step up and ask questions. As a shareholder myself, this is my protest. I'm not saying the deal is terrible and needs to be revoked now, but the executives need to answer these questions to regain the confidence of their loyal shareholders. This story is far from over, and maybe it is time the SEC steps in and starts looking at the relationships between these boards? Maybe it's time that we start limiting the amount of boards people can sit on, since so many boards are interlinked in a giant web of corporate collusion? All I know is that if this deal goes to a vote, I'm voting no with my shares right now, and I implore other shareholders to do their own research to come to a rational thesis on just exactly what is going on.

Disclosure: author is long Freeport McMoRan and is related to an individual who works at a bank that advised on the deal.