Ex-board member of MedQuist cites disagreements for resignation

Activist investors who agitate for change at public companies sometimes make a splash. Other times, they get dunked.

Charming Shoppes Inc. was the target of activist investors in 2008. They demanded and got board representation and a change in strategy at the Bensalem women’s apparel retailer. Over the last year, the owner of the Lane Bryant and Fashion Bug chains has restructured.

Looking at which local stocks have done the best since the S&P 500 index hit a low on March 9, I was surprised to see Charming Shoppes at the top of the list. Its shares, which closed at $5.71 on Friday, have rallied 1,090 percent. Not shabby for a member of the beaten-down retail sector.

An activist investor has had considerably less influence on MedQuist Inc. Its shares are up 296 percent since March 9, but Mark E. Schwarz, who was added to the board of the Mount Laurel electronic medical-transcription company in December 2007, now finds himself back on the outside looking in.

Schwarz is general partner of Newcastle Partners L.P., a Dallas investment group that owned 1.15 million shares, or 3.1 percent of MedQuist, as of July 8.

He resigned as a member of the board Tuesday. But he little choice because MedQuist’s majority owner, CBay Inc., had been seeking to remove Schwarz and another investor from the board since early July.

Schwarz did not go quietly. He sent a letter to the board in which he discussed several disagreements with MedQuist. That letter was filed with the Securities and Exchange Commission Aug. 20.

“It is particularly offensive to have received a cursory, one-minute phone call from Peter Berger, whereby I was informed that CBay intended to remove me as a director,” Schwarz writes.

(Berger, a MedQuist board member, is a managing director of S.A.C. Private Capital Group L.L.C., which is a major investor in CBay, a holding company with investments in several medical companies.)

“There was not one solitary reason offered as to why this action was being taken,” writes Schwarz, whose firm has owned MedQuist shares for more than five years.

In his letter, Schwarz makes reference to “many related party transactions” between MedQuist and CBay, including certain fee arrangements. The fees would, in effect, provide CBay a “special dividend” that no other MedQuist shareholder would receive, according to Schwarz.

“This whole affair is reflective of the inherently problematic nature of the convoluted ownership structure between CBay and MedQuist,” he writes.

For its part, MedQuist says in the SEC filing that it “elects not to comment on the allegations made by Mr. Schwarz in his letter.”

But here’s a clue why CBay might have wanted Schwarz and Brian O’Donoghue off the board: Both had sued MedQuist’s previous majority owner, Royal Philips Electronics N.V. in June 2008, objecting to the sale of its stake to CBay for $8.25 per share.

The lawsuit was ultimately unsuccessful. Philips closed the sale of its MedQuist stake to CBay Aug. 6, 2008.

MedQuist shares fell 15 percent during Schwarz’s tenure as a director. Shares are up 99 percent since CBay’s purchase.

Annual meeting

Shareholders of Wayne-based Safeguard Scientifics Inc. will gather at the Dolce Valley Forge hotel, 301 W. DeKalb Pike, King of Prussia, Friday at 8 a.m. for its annual shareholders meeting.

Besides the usual election of directors and approval of its choice of KPMG L.L.P. as independent accounting firm for 2009, Safeguard is asking its shareholders to approve increasing the number of shares of common stock reserved for its equity compensation plan by 7 million, to 13 million shares.


Wednesday: Charming Shoppes

Thursday: Dollar Financial, Toll Bros.