Philip Goldstein: The Man Behind The Bulldog

Oct 5 2007 | 11:04am ET

In January, Massachusetts Secretary of the Commonwealth William Galvin sued activist hedge fund manager Philip Goldstein for soliciting unqualified investors.

The always-quotable founder of Bulldog Investors let loose: “I’m not going to let some pompous ass sitting in Boston tell me I can’t talk to somebody or give somebody information when they ask for it,” he said in February. “This is not really about hedge funds; it’s about the First Amendment, and I think Galvin is just trying to get a trophy.”

In the intervening months, his ire has not subsided.

“He’s not a pompous ass,” Goldstein now says. “He’s a pompous windbag and a bully. He just doesn’t like to be called a bully.”

“When somebody blindsides us,” Steve Samuels, Bulldog’s co-founder, says, “Phil will fight fire with fire. He takes it as a personal attack on our credibility.”

And there is more than enough vitriol to go around. Galvin’s case centers on a request by one Brendan Hickey of Quincy, Mass., for information from Bulldog’s Web site. After registering and agreeing to Bulldog’s terms and conditions, including an assurance that he was a qualified investor, he received an e-mail from Samuels with information about Bulldog’s funds. But Hickey was not simply a naïve Web surfer: He apparently made the request at the behest of the RMR Hospitality and Real Estate Fund, a closed-end fund targeted by Bulldog.

In July, a Massachusetts Securities Division hearing officer found that Samuel’s e-mail to Hickey constituted an illegal offer of securities, and recommended a cease-and-desist order and a $25,000 fine. Goldstein, as one might imagine, rejects the findings of what he calls a “show trial,” seeking to bring the case into a “real court.” Galvin’s office today is set to make its filing in response to Bulldog’s motion to dismiss all of the charges.

“The idea that small investors could invest with guys like James Simons [of Renaissance Technologies] or even us is ridiculous,” Goldstein says. “That’s why the enforcement action by Galvin is so silly, because our minimum is $500,000. We’re not after the guy making $60,000 a year! We can’t take him. It’s such a stupid case. I guess they don’t have enough fraud in Massachusetts.”

The run-in with Galvin is, of course, not Goldstein’s first scrape with regulators. He first made headlines in 2005, when he took on the Securities and Exchange Commission, and won.

At issue was the SEC’s highly controversial hedge fund manager registration requirement, which was passed despite the vociferous objections of two commissioners by outgoing Chairman William Donaldson.

“When the rule was first promulgated,” Goldstein says of his battle, “it was primarily a matter of principle.” The self-proclaimed “amateur lawyer” was offended by what he calls the agency’s “end-run around Congress.”

“Regulatory agencies all the time are doing things that are beyond their authority. In this country, that’s a very scary thing, because they are not really accountable. You’ve got to sue them!”

Last year’s Goldstein v. SEC decision by the U.S. Circuit Court of Appeals for the District of Columbia Circuit—arguably the second-most important court in the land—found that the SEC had overstepped its authority, and that hedge funds are not subject to SEC regulation under the Investment Company Act of 1940. It also left the regulator scrambling to close a fraud loophole opened by the decision and looking to demonstrate its relevance with regard to the growing hedge fund industry.

Goldstein—who is quick to note that he didn’t pick his fight with Galvin—acknowledges that his status as SEC-slayer may have put a target on his, and his firm’s, back.

“One person told me, you have to understand: When Bill Galvin gets up in the morning and looks in the mirror, he sees Eliot Spitzer,” he says, referring to the former New York attorney general dubbed “the sheriff of Wall Street, now the state’s governor. “I think the same is true of [Connecticut Attorney General Richard] Blumenthal. This is the way to get into the governor’s office.”

Before Bulldog

The newly-minted champion of hedge fund manager rights was not destined from the beginning for his current role. The Brooklyn, N.Y., native studied engineering at the University of Southern California and City College of New York before going to work for his hometown, initially in highway construction, and later in capital construction.

He would end up working for the City of New York for 25 years. But by the early 1970s, he had found a hobby: investing.

“I was never a very good engineer, although the training did serve me well,” he says. The self-proclaimed “home-taught value investor” was immediately attracted by closed-end funds. So by the time he met Samuels in 1989, the civil servant already had 15 years of experience investing. And Samuels immediately liked what he saw.

Unlike his future partner, Samuels was an investment professional. The New Yorker got his start in Southern California, working for Dean Witter, later founding his own brokerage, Samuels Chase. After reading Thomas Herzfeld’s and Robert Drach’s High-Return, Low-Risk Investment, he had his own closed-end fund epiphany.

“I gave Goldstein a call and said, ‘have you ever thought about managing money?’” he recalls. “And Phil said, ‘Who’s going to give me money?’” They scraped together $700,000, and Opportunity Partners was born. But for Goldstein, it remained a part-time job.

In the summer of 1993, Goldstein retired as an engineer, Samuels returned to the East Coast and Bulldog Investors got underway in earnest.

Activist Before It Was Cool

Best-known for Goldstein’s regulatory battles, Bulldog is also a noted activist hedge fund, a strategy the firm has employed since 1996. But Goldstein and Samuels are uncomfortable with being lumped together with their activist peers.

“It’s very trendy to be an activist now,” Samuels says. “Anybody who writes an angry letter is an activist. We think that’s kind of silly.”

“Take Pirate Capital,” he says of the noted Norwalk, Conn.-based activist firm headed by Thomas Hudson. “I have no comment on what they’ve done, but I think they got very involved in the whole pirate image.”

Goldstein, contrary to his public persona, concurs. “I don’t particularly agree with the Bob Chapman-Dan Loeb approach, where you’re going for the jugular right off the bat,” he says. “I used to do that, but I’ve backed off. Once you’ve proven that people have to take you seriously, it’s like being a great athlete. I don’t think that Tiger Woods has to prove that he’s a good golfer.”

Goldstein estimates that Bulldog has undertaken some 25 proxy contests over the past decade—“actually soliciting the proxies, mailing them, spending the money.” He proudly notes, “I’m pretty sure that’s more than anybody in the country.”

“We’re not turnaround guys,” Samuels says. “We’re looking for overcapitalized, underleveraged, sleepy businesses where management is just not taking advantage of any financial engineering.”

Currently, roughly 60% of the firm’s assets are in closed-end income funds and real estate investment trusts.

The firm, based in Saddle Brook, N.J., manages eight funds, five as general partners—including its first fund, Opportunity Partners, its flagship Full Value Partners, Income Plus and an offshore fund—and three under a submanagement arrangement.

Despite its outsized impact on the hedge fund industry, Bulldog is a small operation: Just a half dozen staffers and four partners. Goldstein focuses on the firm’s activism, while Samuels is the main investor contact and keeps a one-step-back, big-picture view of the firm’s investment operations. Andrew Dakos, who joined the firm in 1999 and became a partner in 2005, is responsible for the roughly one-third of the firm’s portfolios outside of closed-end funds, while newly-minted junior partner Rajeev Das—who’s been with Bulldog since its earliest activist days—deals with daily trading and hedging.

Bulldog may be better known for Goldstein’s sharp tongue than its investing, and Samuels admits, “I think that overshadows the good work we try to do.” But he believes the old adage holds: There’s no such thing as bad press.

“You become a twenty-year overnight sensation,” Samuels jokes of the firm’s recent asset growth; it now manages about $500 million, up from about $100 million seven years ago. “We started getting some publicity with the SEC stuff, but the main thing was, in the early 2000s, when the markets were doing so poorly, people started taking notice of us as managers.”

During the market’s lean years at the start of the decade, Bulldog consistently put up meaningfully positive returns even while the broader markets plunged by double-digits. The current market troubles, which have affected the firm, have fortified the partners’ belief in building a relatively low-risk, low-volatility product.

And as the firm grows, Samuels says, it gets better. For Goldstein, more assets mean more options. The firm, which for the past eleven years has relied on proxy contests to force fund managers’ hands, recently launched its first tender offer.

“We couldn’t really afford, until recently, to do a tender offer,” he says. “A successful tender offer guarantees enough shares for victory in a proxy contest. It forces the issue, it makes it happen very quickly. Once those shares go into your hands, you’re in the endgame. You control the timing, rather than management. That’s why I envy guys like Carl Icahn. They don’t have to wait for a proxy contest.”

And there’s no shortage of potential targets. “There are very few closed-end funds that, in my opinion, deserve to exist,” Goldstein says.

Goldstein Unplugged

That sort of outspokenness has a downside. “Most of the time, it frustrates me,” Samuels says, “because I think that the image you get of Phil is so different than the real Phil.” However, Samuels admits that he is amused by the public perception of his partner.

“Phil lives a very modest life for a man who has accumulated the wealth he has,” Samuels says. “He’s a very simple guy. He’s a good poker player—loves to go to Las Vegas. But he’s not a big stakes player. He’ll stay at hotels off the Strip. When I ask, ‘Why didn’t you stay at the Bellagio?’ he’ll say, ‘What, are you crazy? $400 a night? I paid $70, and they included breakfast.’”

Goldstein acknowledges a certain frugality. “I like to do everything on a shoestring,” he says. In fact, Bulldog didn’t have an office until two years ago. Goldstein prepares the firm’s proxies without legal counsel. And he battled the SEC—again—for the right to commence a tender offer without spending tens of thousands of dollars on a safe-harbor advertisement in The New York Times or The Wall Street Journal.

“Sometimes, you have to pay lawyers, but generally, I like to do things on the cheap,” Goldstein says.

But the battle with SEC certainly wasn’t cheap, and Bulldog has refused to take the cheap way out of its fight with Massachusetts’ Galvin by simply paying the $25,000 fine. The partners themselves pay for the efforts out of their own pockets.

“This is his avocation and vocation,” Samuels says. “It is such an important part of who he is. Phil spends nights and weekends on it. But it doesn’t detract from the managing. The thing with Massachusetts, I guess we could have just paid the fine and gone away. It’s going to cost Phil and I a lot of money, personally. But it’s part of the deal.”

Goldstein says he was disappointed that his fellow hedge fund managers, who he says supported him in the fight against the SEC behind closed doors, did not have “the guts to put their names on the complaints,” which he says is evidence of “the SEC’s intimidation factor.”

Goldstein savages his critics on the SEC case, calling the argument that he should have had no truck with the relatively innocuous rule “appeasement.”

“That’s stupid,” he says. “If something’s wrong, it’s wrong. That’s not an argument that an American should make.”

In any event, while the practical implications of the SEC rule worried him, self-described  libertarian Goldstein opposes the sort of oversight and regulation that central bankers and regulators, particularly in Europe, demand.

“No one is arguing that fraud shouldn’t be punished,” he says. “Sam Israel [of the collapsed hedge fund Bayou Group], he should rot in hell. People who commit fraud should be punished, for sure.” But the SEC rule “detracted from what you should be doing. And it’s not going to stop fraud.”

Nor does he have any time for commentators and others who call hedge fund regulation inevitable, noting that many had said he couldn’t win his battle with the SEC.

“I don’t like stupid predictions,” he says. “People called Amaranth the tip of the iceberg, but it wasn’t. It was a blip, as far as markets were concerned. It didn’t affect anybody I know. And now they are saying it about subprime.”

“People ask [regulation proponent Sen. Charles Grassley (R-Iowa)] if they had regulation, would it have prevented Amaranth? And he says, ‘I don’t know.’ Well, if you don’t know, why are you pushing regulation?” he asks incredulously.

Goldstein’s opposition to regulation extends to the SEC’s limits on who can invest in hedge funds, which he calls “discriminating against people because they’re relatively poor.”

“I don’t believe it’s up to the government to tell people what they can invest in,” he says. And besides, he argues, hedge funds are not a high-risk investment.

“You want to talk about risky stuff? Anyone can buy penny stocks, puts and calls, commodity futures leveraged to the hilt. You can go to Atlantic City. What the hell’s so risky about hedge funds? Because some of them go broke? So did Enron and WorldCom. You want to limit all risk? Close down the stock market.”

Goldstein, a grandfather of two, says he doesn’t have many hobbies. He calls himself a reader, but when asked what he likes to read, he says, “legal stuff.” Before starting Bulldog, he says, he was an avid writer of letters to the editor. And his next venture may by the contemporary equivalent.

“I’d like to set up a blog,” Goldstein says—a prospect that makes hedge fund reporters everywhere salivate. “I think it’d be fun. Making money’s great. I like the challenge of performing well, and we have a great team, but I like to express myself and communicate…I like provocative discussion.” And there is no doubt that he has plenty to say.

by Jonathan Shazar

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