One of Spencer Savings Bank's 21 branches, located in Westfield, N.J.
In early November 2020, a hedge fund manager took to the streets of suburban New Jersey in his campaign to win a board seat at Elmwood Park-based Spencer Savings Bank SLA. Armed with a placard and pamphlets, the multimillionaire unsuccessfully stumped for signatures.
The COVID-19 pandemic likely kept depositors away that day, but it would not stop Larry Seidman's quest. He has been pressing to get on Spencer's board for nearly two decades. In what experts believe might be the longest-running proxy fight of all time — one that still has no end in sight — both sides are immovable, convinced their cause is the virtuous one.
Seidman, who opened an account at Spencer Savings in 1988, has repeatedly sued the company. He argues the company's CEO earns far too much and controls a subservient board of directors. He has spent $250,000 and invested thousands of hours over the years, making his case in court, largely successfully. More recently, Seidman has turned to the state Legislature where he has convinced a state senator to take up his cause.
"If the judges said that these guys were honorable, did the best things for the members, didn't waste money, I wouldn't be fighting this thing. But that's not what the judges said," Seidman said in an interview. "That's what this whole thing is about: It's wrong, and it's poor corporate governance. That's it. That's the whole issue."
From Spencer Savings' perspective, Seidman is a corporate raider, eager to take the savings and loan public and ultimately sell it. Seidman does have a history of targeting small, underperforming publicly traded banks and pressing for a sale if profits do not improve.
"[Seidman] is not a reformer. He's a very successful investor who flips banks," said Doug Faucette, Spencer's regulatory attorney, in an interview.
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But Spencer Savings is not a publicly traded bank. It is a mutually held savings and loan, or S&L.
Seidman is a 73-year-old investor well-known in banking circles for both a successful track record and a fiery demeanor that one judge described, in a ruling, as "brash, arrogant and pompous." A lawyer by training who worked at the SEC, Seidman started investing in banks in the 1980s and has been involved in roughly 30 proxy contests. Seidman said he has not pressed a bank to sell in years, and he prefers to be known as a value investor, not an activist.
Seidman does embrace an investing maxim that publicly traded banks need to "earn their right to be independent," meaning management should sell if they fail to deliver adequate returns. But he said he does not hold mutuals to that standard and has never pressed a mutual to sell, including Spencer Savings.
Mutuals represent a quaint corner of banking akin to George Bailey's outfit in "It's a Wonderful Life." Mutuals are owned by depositors, not shareholders. The first U.S. mutuals, formed in the 1800s, acted "more like clubs than banks," according to a history by the Federal Deposit Insurance Corp. Members would pay dues until the mutual had sufficient funds to issue a loan, and loans were typically used to buy homes. Since 1980, the mutual industry has shrunk from more than 2,000 companies across the U.S. to roughly 400.
Depositors used to be deeply invested in how their mutuals operated. If a loan went bad, their money might be at stake. Now, FDIC insurance is widely embraced as reliable and few depositors participate in corporate governance.
From Seidman's perspective, that lax oversight has enabled an irresponsible board that wastes funds. But in Faucette's view, it renders Seidman's fiduciary duty arguments obsolete: There are no equity holders, and depositors are uninterested in the CEO's pay package.
With a court decision still pending, the outcome of Seidman v. Spencer remains unclear. The company will hold its annual meeting on Jan. 21. Seidman will not be on the ballot for a board seat. Seidman said he did not receive legal clarity on how to solicit signatures until mid-December 2020, leaving him less than a week before the deadline for the 2021 annual meeting. He said he plans to start campaigning in February for the 2022 board vote.
'The Larry Seidman bill'
In recent months, Seidman has moved the battle from the courthouse to the state Legislature. He has convinced State Sen. Bob Smith, D-Piscataway, to take up his cause of reforming the governance of mutuals.
Spencer Savings recently pursued a conversion from a mutual S&L to a mutual savings bank. Under current state law, S&Ls must allow depositors voting rights on critical matters, such as the election of board members. Conversely, savings banks are expressly not allowed to offer depositors such voting rights.
Spencer argues it needs to convert to a savings bank to avoid the "qualified thrift lender" requirement, a regulation that caps commercial lending.
Spencer opposes Smith's bill, saying it would limit the company's options and devalue the savings bank charter. Seidman said the bill would allow Spencer to avoid the commercial lending cap and retain voting rights for depositors. The bill would only apply to newly formed savings banks or savings banks holding companies.
Even with a limited scope, the fact that Seidman is driving legislation to achieve his desired outcome has raised some eyebrows.
"It's sort of scary that just one individual, in a sense, has more sway than an industry in terms of legislation," said John Gorman, co-founder of Luse Gorman PC, the top law firm for mutual holding companies. "It's the Larry Seidman bill. He's had this feud with Spencer Savings, and the fact that he can just get legislation that fundamentally alters the way a bank can be governed is a little disheartening."
State Sen. Smith acknowledges that Seidman suggested the legislation, and the lawmaker said he shared the bill's text with the investor to gather his feedback. "That's part of the process," Smith said.
Smith said he holds open office hours and often introduces bills based on input from New Jersey residents, even those who do not live in Smith's district, as is the case with Seidman.
"I didn't know Larry Seidman from anybody else, but he did send in some information and as I looked into it, I said, 'This isn't right,'" Smith said in an interview. He said depositors should retain their voting rights if a mutual converts from an S&L to a savings bank.
The New Jersey Bankers Association, an industry group representing the state's banks and mutuals, opposes the bill, as does Spencer Savings. Michael Affuso, legislative director for NJBankers, said the group is concerned the legislation could encourage activist investors to target mutual savings banks.
"We're concerned that this in and of itself would hasten what was already a natural economic process," Affuso said in an interview.
The courts
According to Seidman, this saga begins in the early 2000s, when he had a chance encounter with one of Spencer's board directors, Gerald Bedrin. Seidman said Bedrin bragged about the luxuries of the position, which included a $50,000 annual salary and fully paid retreats, including a trip to Spain. Bedrin wrote in a Jan. 8 email to S&P Global Market Intelligence that he had no recollection of the conversation.
Seidman also took exception to CEO Jose Guerrero's pay package, at the time reported to be $1 million.
"I call Jose. He knew who I was," Seidman said. "I say, 'Jose, I have this information. I just want to know if it's true about the trips, the salary.' He says to me, 'Larry, this is my bank. I don't answer questions to anybody. I do what I want. And I'll never answer your questions.'"
Tony Cicatiello, a spokesman for Spencer Savings, said Guerrero does not recall the conversation. In a 2007 decision, a judge included the conversation in her ruling and said Seidman testified in court that Guerrero failed to provide an answer.
A judge's ruling in 2019 put Guerrero's pay package at $2.1 million a year in salary and bonuses and director pay at $75,000 per year.
Crowe LLP, an accounting and consulting firm, regularly conducts executive compensation surveys. At S&P Global Market Intelligence's request, Crowe provided data for 21 New Jersey banks with total assets of less than $5 billion; Spencer Savings has roughly $3 billion in assets.
The Crowe data showed average CEO total compensation, including options and bonuses, is $770,000 this year. For directors, the Crowe data put average total compensation for outside directors at roughly $48,000 per year.
Cicatiello said the company does not comment on salaries. Faucette said he does not know Guerrero's salary.
"I'm sure it was arrived at very carefully by the independent board of directors and furthermore, I'm pretty sure those numbers for a $3 billion institution are not out of line. I don't quite understand why it's relevant," Faucette said.
As for the trip to Spain, Faucette said it was likely cheaper than board retreats that many banks take to locations in Arizona or California. Cicatiello said board travel in recent years has been limited to industry conferences for education purposes.
Emboldened by Guerrero's defiance in their phone call, Seidman sued Spencer Savings in August 2004. Seidman alleged two fiduciary breaches: the Spain trip, which he called an extravagant waste of funds, and the adoption of a bylaw amendment that made it more difficult to win a board seat. After three years of litigation, the judge issued a split decision in 2007. She found the bylaw to be a fiduciary duty breach. She called the Spain trip "unwise" but ruled there was insufficient evidence showing the trip to be a waste of funds.
After three more years on appeal, an appellate judge affirmed that ruling. About a month after that decision, Seidman sued Spencer again, alleging that the adoption of two other bylaws, passed in 2007, represented fiduciary duty breaches. The judge again sided with Seidman.
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Over the last eight years, there have been four more court decisions, most recently a July 31, 2020, ruling that blocked Spencer from converting to a mutually held savings bank from an S&L. Spencer Savings has asked the judge to reconsider that ruling, and the parties are awaiting a decision.
The court record is clearly tilting strongly in Seidman's favor. Time and time again, judges have found Spencer Savings breached its fiduciary duty by taking extraordinary measures to keep Seidman off its board. And in 2017, a judge explicitly supported Seidman's primary complaint: that Guerrero controlled Spencer's board.
"From the evidence it is quite clear that the Directors are all beholden and defer without exception to Jose Guerrero," the judge ruled.
Faucette said that Spencer's losses in court derive from a fundamental misunderstanding of the nature of mutuals. Today, depositors no longer care about mutual governance. Their only interest is the safety of their deposits, Faucette said, and the judges have failed to understand that mutuals do not really have shareholders.
The outlook
As the litigants await a judge's reconsideration of the July 31, 2020, ruling, State Sen. Smith plans to discuss the bill in committee in January 2021.
Smith is unconvinced by the activist investor-as-corporate raider argument: "If it allows corporate activists to get involved, I'm not seeing that as a bad thing. I look at America and our capitalistic system, we've had activist shareholders who have improved the earnings of corporations and the value. What's the harm?"
Smith is unsure if a vote on his bill will come in the current legislative session. The only thing that seems clear is this 16-year legal battle is far from over. Seidman is unwilling to back down until the S&L's board is overhauled.
"I don't stop when I find something wrong," he said.
And Faucette said the S&L has every right to continue its defense, even if it has already cost the company $3 million — a figure mentioned in a court ruling that Faucette calls into question. "So what? If someone attacks me and I have to spend a bunch of money to defend myself, is that a vice? If it were $3 million, it's because of Larry."
Seidman and Spencer will continue to rack up legal bills, the mutual industry will continue to consolidate and most of Spencer Savings' depositors might very well be oblivious to it all.