Boston Sci founders sell half their stake

The men who built Boston Scientific Corp. into the world's biggest seller of heart stents have sold $484 million in shares to repay loans after other assets were frozen by the Lehman Brothers Holdings Inc. bankruptcy.

Peter Nicholas, 67, Boston Scientific's chairman and founding chief executive officer, and John Abele, 71, a director and co-founder, have sold almost half their stake, or 4.2 percent of company stock, since Oct. 7, according to regulatory filings. The sell-off contributed to a 23 percent decline in Boston Scientific shares over that time, said Bruce Nudell, a UBS analyst in New York.

Boston Scientific, which makes defibrillators, pacemakers and the mesh stents used to prop open diseased arteries, employs 5,300 people in the Twin Cities area.

The men's stock sales helped pay off loans secured with Boston Scientific shares when Lehman's Sept. 15 bankruptcy kept them from tapping other assets, the Natick, Mass.-based medical device maker said in October. After the founders sold 30.8 million shares from Oct. 8-10, the company assured investors that "the majority" of trading was over. Instead, the two have sold an additional 32.3 million shares since then, according to filings.

"You have a lot of investors asking, 'How could they do this to their baby?' " UBS' Nudell said. "A lot of people feel they were reckless."

Nicholas, starting in 1992, borrowed against shares to finance a $100 million investment credit line, an aircraft lease and $900,000 in home renovations, according to filings with the U.S. Securities and Exchange Commission (SEC). Neither Boston Scientific nor its founders will say what the loans linked to the latest sell-off were for, and no documents were available detailing Abele's loan history.

Meeting margin calls

The company's filings blame the trades on margin calls -- orders from a lender to either pay down a loan or to replenish collateral that has lost value. If the borrower can't, a broker sells the existing collateral.

Boston Scientific shares lost one-third of their value in 2008. Since the share sell-off began, the stock has slipped almost four times as much as the S&P Health Care Index, a basket of 54 stocks including rivals St. Jude Medical Inc. and Medtronic Inc.

Nicholas, who was paid $1.84 million by the company in 2007, and Abele, who received $1.33 million, declined interview requests.

Abele, Nicholas and their family trusts sold 63.1 million shares as of Monday, out of the 127 million they owned before the margin calls, regulatory filings show. Nicholas has sold about $302.9 million in shares and Abele about $181.1 million, according to the Washington Service, a data provider.

Nicholas' borrowing dates at least to July 1992, when he pledged the equivalent of 13.1 million Boston Scientific shares for a loan from Goldman Sachs Group Inc., according to an April 1994 SEC filing. Goldman Sachs was an underwriter for Boston Scientific's initial public offering in May 1992.

Under a loan agreement signed in November 1993, Fleet Bank of Massachusetts agreed to provide Nicholas a $17 million credit line, SEC documents show. As collateral, he pledged the equivalent of 14 million Boston Scientific shares, adjusted for a 2003 stock split, as well as investment-grade securities and $2 million in cash.

The Fleet documents show that Nicholas planned to use $12 million from the credit line to partially repay $16 million in Goldman debt, $2.1 million to settle previous borrowings from Fleet and $900,000 for improvements and renovations to his home in Boston's Beacon Hill area. The remaining $2 million would provide cash collateral required by Fleet.

At the same time, Nicholas had the right to borrow as much as $100 million through margin loans or other credit from Goldman, according to the documents. The Goldman loans would be used to build a "diversified portfolio of securities," the filing says.

Nicholas also pledged the equivalent of 1.85 million shares to back an aircraft lease with General Electric Capital Corp. and a borrowing agreement with Société Générale Securities Corp., the documents said.

The stock market collapse after Lehman's bankruptcy turned what might have been routine sell-offs into "catastrophes," said Ben Silverman, research director at InsiderScore.com, a Princeton, N.J., share-tracking firm.

Executives and directors at other U.S. companies also were forced to sell shares, according to Equilar Inc., a company that tracks executive compensation. In October alone, margin calls fueled more than $1 billion in insider selling, Equilar said. Since Sept. 1, Nicholas and Abele were eclipsed only by the $569.3 million in shares moved by Chesapeake Energy Corp. CEO Aubrey McClendon, Equilar said.

Selling was out of the men's hands, Chief Financial Officer Sam Leno told a Dec. 2 conference of investors. Their loan terms allowed lenders to sell shares automatically, and Lehman's implosion left no alternatives, he said.