Wall Street Hedge Fund Tries to Kill the Twinkie

by John M. Curtis
(310) 204-8700

Copyright Nov. 18, 2012
All Rights Reserved.                                         

         Pulling the plug on the 82-year old Irvin, Texas-based Hostess Brands Inc., a Wall Street Hedge fund played hardball with the Confectionary, Tobacco Workers and Grain Millers International Union that went out on strike.  Known generations for “Wonder Bread,” “Twinkies,” “Cupcakes,” “Snowballs,” “Ho Hos” “Ding Dongs,” Holiday time “Fruit Cake,” and more current brands like “Mrs. Cubbison’s Stuffing” and “Natures Pride Bread,” Hostess upper management tried to break the union to keep operations going.  Whatever losses the 82-year-old company racked up, it had little to do with Hostess employees, certainly not its bakers.  With a distribution network second to none, Hostess products are found in every supermarket and convenience store chain in the country, not to mention mass merchandisers like Target and Wall-Mart, even Big Box stores like Sam’s Club and Costco. 

            Filing for bankruptcy Nov 16. in White Plains, New York, Hostess contends the company is $860 million in the red, unable to meet its current pension and loan obligations to Greenwich, Conn.-based Street’s Silver Point Capital.  Hostess’ management team led by CEO Gregory F. Rayburn threatened to lay off all of Hostess’ 18,500 when the union voted in March 2012 to reject the company’s offer of reduced salary and pension benefits.  Rayburn, who took over from Hostess’ former CEO Brian Driscoll March 16, played hardball.  “A widespread strike will cause Hostess Brands to liquidate if we are unable to produce and deliver products.  If that’s the case, the company will move promptly to lay off most of its 18,300 member workforce and focus on selling its assets to the highest bidders.  We urge our employees to remain on the job to rebuild the company,” said Rayburn’s threatening message.

            Because of the history and institutional nature of Hostess Brands Inc., the U.S. government should consider a possible bailout.  Apart from its brands Americans have grown accustomed to, Hostess has nearly 18,500 workers who could wind up on the help wanted lines, boosting the U.S. unemployment rate.  As the White House and Congress debate a fix to the “fiscal cliff,” letting Hostess go Chapter 11 would send the wrong message to consumers.  “Many people have worked incredibly long and hard to keep this from happening, but now Hostess Brands has no other alternative than to begin the process of winding down and preparing for the sale of our iconic brands,” Raburn posted on Hostess’ Website.  Instead of voting themselves 80% pay raises and extravagant bonuses while the company faced challenges, management should stand accountable to civil and possible criminal prosecution.

            When U.S. Bankruptcy Court Judge Robert Drain gets the case in White Plains, he should contact the U.S. Attorney to consider charging upper management with plundering the company.  Whatever compensation committee on Hostess’ board approved pay raises and bonuses for upper management, they should also stand accountable for fraud and embezzlement.  While Hostess is a privately held company, there’s no difference with another former Texas-based company called Enron.  Most folks recall Enron’s late CEO Kenneth Lay telling shareholders how solvent the company was while he and his management team liquidated their stock holdings, sending the company into a death spiral and bankruptcy Dec. 2, 2001.  Judge Drain must ask Rayburn and Driscoll many questions about executive compensation and what happened to the company’s operating capital.

            Incompetent or criminal CEOs aren’t supposed to exploit U.S. Bankruptcy Court.  Bankruptcy proceedings are serious matters, not used by unscrupulous CEOs to loot companies for their own gain.  “Unfortunately, because we are in bankruptcy, there are severe limits on the assistance the (company) can offer you at this time,” said Rayburn, warning employees that they’re about to lose their jobs, “some sooner than others.”  Rayburn’s cavalier statement hints at possible criminal wrongdoing, where upper management fleeced the company, voting themselves hefty pay raises and bonuses, when facing serious economic challenges.  Before upper management insists the company is unprofitable “under its current cost structure, much of which is determined by union wages and pension costs,” upper management must stand accountable for its reckless pay raises and bonuses.

            Unlike General Motors or Chrysler, it won’t take billions to bailout Hostess Brands.  Obama’s Treasury Secretary Tim Geithner should look seriously at preserving one of the nation’s iconic companies.  While upper management likes to point fingers at the union, it’s time for the Board and CEO to stand accountable for why one of the nation’s premier companies faces Chapter 11.  Blaming union wages and benefits is a transparent fig leaf for the plundering done by Hostess’ management team.  Corporate CEOs have a fiduciary duty to their employees not to line their own pockets.  Before any bankruptcy judge rubber stamps upper management, the court must scrutinize the company’s balance sheet leading up to the filing.  Before Rayburn kills the “Twinkie,” he must stand accountable for how he mismanaged the company.  Any wrongdoing must be faced before bankruptcy.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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