Shareholder complaint shaved $4 million+ from Beneficial directors’ $17M payday

For most of the 165 years since it was founded under the aegis of Bishop (later Saint) John Neumann — as a bank run by trusty Catholics so his priests wouldn't be called on to guard the wages of Irish immigrant refugees from the Great Famine — Beneficial Savings Bank was owned by its depositors.

That idealistic mutual structure, shared by the former PSFS and a few other East Coast banks, looked antiquated by the late 20th century. While free-spending commercial banks were grabbing customers, mutuals had a hard time raising capital or hiring ambitious executives, since they couldn't sell shares on the stock market or award fat share bonuses.

That changed in 2016, when Beneficial was the last of the local mutuals to complete a years-long conversion to private stock ownership. The board promptly rewarded its nine members with shares worth around $17 million.

In a court filing, Beneficial said the directors were to be paid "following their successful overseeing and guidance of Beneficial through a decade-long process of converting Beneficial Bank from a mutual to a stock company," and "to align the economic interest of the directors with other shareholders," as endorsed by a compensation consultant, McLagan Partners Inc., which compared the payout against 11 other mutual conversions. And shareholders rubber-stamped the director pay plan in the 2017 annual meeting vote by crushing margins.

The payout was equivalent to more than four months' profits for the slow-growing bank. It was to be paid in three yearly installments.

Half the shares would go to chief executive Gerard P. Cuddy. The rest would be shared by his fellow directors, mostly Philadelphians: $1.3 million for chairman Frank A. Farnesi, a former KPMG accounting partner, and just over $1 million each for Edward G. Boehne, who retired as president of the Federal Reserve Bank of Philadelphia in 2000; Karen Dougherty Buchholz, a Comcast executive; Michael J. Donahue, adviser to firms backed by NewSpring Ventures, the Radnor investment firm;  Donald F. Gayhardt Jr., former CFO of Berwyn-based payday lender Dollar Financial Group; Elizabeth H. Gemmill, a former Tastykake vice president who also sat on the boards of area insurance, utility, and tech companies; investor Thomas J. Lewis; and Roy D. Yates, a Rutgers University professor whose previous bank Beneficial bought.

But what did those prominent Philadelphians do to deserve more than a million dollars each? asked Cody Laidlaw, a New York bank investor who held Beneficial shares. The directors were already paid $138,000 to $198,000 each last year, in cash and stock, for running or showing up at meetings.

To Laidlaw, it looked like the board was paying itself millions that belonged to shareholders like him, and mutual, pension, and hedge funds, and small investors. (He didn't challenge $13 million paid to four full-time Beneficial executives for their merger work.)

Laidlaw sued in Maryland, a financial-law haven where Beneficial is based for legal purposes. In his lawsuit, Laidlaw accused Beneficial of giving the directors "unfair and excessive" payments at other shareholders' expense. He accused them of "unjust enrichment" and a "breach of fiduciary duty."

By the time retired Judge Diane M. Welsh held a daylong mediation session between the two sides in March, directors had already gotten two of the three yearly payments.

Meanwhile, something else was going on that would profoundly affect Beneficial and its overseers: The previous winter, Cuddy had met with the boss of a larger and far more profitable former mutual, WSFS Financial Corp. chairman Mark A. Turner, over beers at the Union League to talk informally about WSFS's buying Beneficial. On May 30, the Wilmington bank sent Cuddy a formal merger proposal.

A week later, on June 7, the board agreed to a settlement with Laidlaw: Cuddy would get the rest of his $8.6 million in stock. But the other directors would be deprived of their final payments (worth around $3 million at the time.) And the board members, including Cuddy, would repay $1.4 million in cash to the bank. (Laidlaw and his lawyers are asking the court to make the bank pay them a million dollars to cover the costs of suing it.)

So, Laidlaw had saved his fellow Beneficial investors from giving away shares worth over $4 million. Board members got to keep more than half of what they were originally awarded, and Cuddy got most of his award. Each side stipulated in the settlement that it still believed it was right, but both agreed it wasn't worth a costly court fight.

Through one of his lawyers, Laidlaw didn't respond to a request for comment. Brian P. Flaherty of Cozen O'Connor, a lawyer for Beneficial, sent me a post-settlement memorandum justifying Beneficial's actions.

The pact was signed June 7, and for the next 10 weeks Cuddy turned his attention to selling his bank to WSFS, for $1.5 billion. That deal calls for him and two as-yet-unnamed Beneficial directors to join the WSFS board.

But that might not be the end of the story for the soon-to-be former Beneficial directors. "Nothing in the settlement," according to the June 7 agreement, will prevent the board from paying itself more — maybe millions more — in case of "a future extraordinary corporate event." Such as the sale of the company.

WSFS and Beneficial plan to disclose terms of the sale, including payments to insiders, in a future filing with the SEC.

I expect that watchful shareholders like Laidlaw will be counting every dollar.