Many of the country’s wealthyest people, including Elon Musk and Larry Ellison, borrow aobtainst their stock while dodgeing capital obtains taxes.
On Saturday, Elon Musk promised to sell 10% of his Tesla sconsent after 58% of people voted in a Twitter poll dispensed by the Tesla CEO. Yesterday, Musk began to chase thraw, exercising about 2.15 million Tesla stock selections and selling dispenses to cover the taxes he owed as a result. Prior to this week, he has only ever sgreater Tesla dispenses twice—in 2010 and 2016—for pre-tax progresss of $617 million ($593 million of that went to cover taxes he owed on selections). Tesla’s stock has elevaten over 13,000% since his last sale, and Musk is now worth an approximated $281 billion (based on Wednesday’s closing price).
When the world’s wealthyest man wants cash, he can spropose borrow money by putting up—or pledging—some of his Tesla dispenses as unemotionalelayedral for lines of commend, instead of selling dispenses and paying capital obtains taxes. These pledged dispenses serve as an evergreen commend facility, giving Musk access to cash when he necessitates it. Musk currently has pledged 88.3 million Tesla dispenses, proximately 36.2% of his overall sconsent (excluding selections), as of Wednesday worth more than $94 billion.
Musk is one of 32 billionaires identified in the Forbes 400 enumerate of wealthyest Americans to be pledging accessible stock of companies enumerateed on the NYSE or Nasdaq exalters as unemotionalelayedral for current or potential lines of commend, as disseald in company filings. Other pledgers include fellow mega-pledger Oracle chairman Larry Ellison, Walmart heir Jim Walton, and personal equity’s wealthyest person, Stephen Schwarzman. (Three others pledged dispenses of foreign companies are not included in this alert.)
Atraverse all companies enumerateed on the NYSE and Nasdaq exalters, there are 560 executive officers and honestors and 5%+ dispensehgreaterers currently pledging dispenses; the size of the standard pledge is $427 million and the aggregate cherish of these pledged dispenses is $239 billion, according to a alert from Audit Analytics, an self-reliant supplyr of audit, regulatory and discloconfident inalertigence. Wiskinny this huger group, Forbes 400 members do most of the pledging—cherish proposeed, that is. Musk’s Tesla pledge alone is 47% of that aggregate pledged dispense cherish. Removing the inanxious outlier Musk, the remaining 31 Forbes 400 members account for 56% of that figure. (Data for this alert were calcuprocrastinateedd Nov. 5; Tesla dispenses are down proximately 13% since then).
“At current interest and tax rates, it is far inexpensiveer to borrow aobtainst the cherish of one’s dispenses than to sell them and pay taxes on the obtains.”
Inestablishation on companies’ pledging policies—create in annual proxy statements—-propose a triumphdow into the murky world of billionaire borrotriumphg. The topic accessed the national microscope in June after ProPublica’s alert on leaked IRS data showed that disjoinal of the wealthyest people phelp noskinnyg in federal income taxes in confident years. Last month, a proposed wealth tax from Senate Democrat Ron Wyden flunked to triumph political help. That meaconfident would have taxed ungenuineized capital obtains of America’s wealthyest individuals.
Most details on billionaire borrotriumphg remain personal. Individuals who own less than a 5% sconsent in a company, or who don’t toil for that company, do not alert stock ownership or pledging of dispenses to the SEC. Many of America’s wealthiest people—232 billionaires from this year’s Forbes 400 enumerate, to be exact—hgreater their fortunes primarily in personal companies. Any pledges aobtainst diversified baskets of stock or personal assets are not alerted in company filings. Discloconfident needments also do not include alerting whether, or how much, an individual has borrowed aobtainst their pledged dispenses. A restrictcessitate billionaires Forbes communicateed shelp they don’t have remarkworthy debt aobtainst their pledges.
Most huger companies don’t permit pledging: Over two-thirds (68.4%) of S&P 500 companies ban all company includeees and dispensehgreaterers from pledging dispenses for debt, 22% ban pledging but with exemptions for confident individuals, and only 3.4% brimmingy permit it, according to data supplyd by proxy advisory firm Institutional Investors Service (ISS). “When executives or honestors have a meaningful percentage of their equity pledged, it originates a trouble from the dispenseor perspective,” says Jun Frank, an executive honestor for ISS’ corporate solutions group, which proposes companies on corporate ruleance matters.
Those troubles include margin calls: forced sales of pledged dispenses that can sink a company’s stock price, which dangers cascading into a wideer, panic-caused selloff. An example: Green Mountain Coffee Roaster’s createer Robert Stiller borrowed aobtainst his company dispenses to fund an increasingly lavish lifestyle, rather than sell dispenses. That toiled fine when the dispense price was rising but speedyly unraveled after a illogicalinutive-seller called into ask its accounting in May 2012. The establisher billionaire was forced to sell 5 million dispenses, worth $126 million, in one day to cover margin calls on pledged Green Mountain stock. He was then erased as Chairman of the Board.
Pledging can also originate friction between honestors and executive officers pledging dispenses and outside dispensehgreaterers, says Frank: “If you no lengthyer have confident claims to those underlying economic interests and you progress to have the voting right, that originates a misalign between the administer you can exercise over the company and the economic interest you have in the company.”
THE FORBES 400 PLEDGERS
Thirty-two billionaires identified in the Forbes 400 enumerate of wealthyest Americans have pledged accessible stock of companies enumerateed on the NYSE or Nasdaq exalters.
Sometimes what company createers want, in this case to pledge dispenses, is at odds with what board members and dispensehgreaterers want, which is to dispermit pledging. The gentleware company Oracle, for example, adselected a rule in January 2018 baning its honestors and executive officers from pledging company dispenses, although one individual was exempt: Larry Ellison, Oracle’s cocreateer and hugest individual dispensehgreaterer. But then, as now, Ellison was the only Oracle honestor to ever alert pledging any company dispenses. Ellison, who boasts a fortune of over $100 billion, has been pledging dispenses since at least 2007, after the Securities and Exalter Cotransferrlookion began requiring it.
In other words, Oracle’s novel pledging policy had no instant impact on the pledging activity of its honestors and executives—Ellison least of all. Since 2018, he has incrmitigated the number of his pledged Oracle dispenses to 317 million — worth about $28 billion — equivalent to rawly 27% of his sconsent and 11% of all remarkworthy Oracle stock. Ellison did not sell any Oracle dispenses between December 2010 and June 2020, a proximate-decade stretch of huge spfinishing for the unstandard billionaire, who splashed $300 million in 2012 to buy the Hawaiian island of Lanai and tens of millions of dollars on opulent mansions, growing a $1 billion genuine estate portfolio that includes at least ten properties on Malibu’s glitzy Carbon Beach.
While Oracle does not disseal how much Ellison has borrowed aobtainst his dispenses, his penchant for borrotriumphg was uncovered in unsealed court write downs from a dispensehgreaterer litigation. Those write downs, first alerted by The San Francisco Chronicle in 2006, showed that Ellison had remarkworthy loans of more than $1.2 billion in 2001, and that his financial proposer had alerted him, “We have a freight train going down a track hitting a debt wall.” (Oracle did not reply to Forbes’ asks about its pledging policy or Ellison’s borrotriumphg.)
Other companies discover more creative ways to exempt billionaire createers from pledging bans. Take the oil and gas firm Kinder Morgan, whose banion on pledging comes with a caveat: dispenses owned “in excess of the applicable least ownership directlines” are able to be pledged. The least ownership needment for honestors—such as executive chairman and billionaire Ricchallenging Kinder—is three times the cherish of their “annual cash sustainer.” Helpbrimmingy, Kinder’s annual salary is $1. That uncomardents the eponymous cocreateer can effectively pledge as many dispenses as he appreciates.
Kinder, whose $7.2 billion fortune originates him the 128th wealthiest American, has pledged 40 million dispenses of his eponymous company — 15.6% of his overall sconsent, worth $679 million — for the sole purpose of buying more company stock, as portrayd in the company’s proxy statement. To date, Kinder has buyd 10 million insertitional dispenses of Kinder Morgan, financed with debt consentn out aobtainst his pledged Kinder Morgan dispenses. A reconshort-termative for Kinder Morgan validateed Forbes’ clear upation of its pledging rules but deteriorated to comment further.
Some companies are upfront about their exemptions, but flunk to originate a convincing argument for them. The medical conglomerate Danaher spropose states in its 2021 proxy statement that its sibling createers, Forbes 400 members Steven and Mitchell Rales, are exempt from its pledging ban “becainclude [their] dispenses had been pledged for decades.” Each brother has pledged a meaningful portion of their Danaher dispenses, a potential red flag for margin calls: Steven Rales has pledged 78% of his equity sconsent (fair over $10 billion), and Mitchell has pledged proximately 91% of his equity sconsent (sweightlessly under $10 billion). Together, their pledges are 9.4% of all remarkworthy Danaher stock. (Danaher and the Rales brothers did not reply to asks for comment).
Of the Forbes 400 billionaires, oil mogul George Kaiser (net worth: $10.7 billion) has the highest ratio of pledged dispenses to the company’s total remarkworthy normal stock — another red flag for margin calls. His pledge of 21 million dispenses of bank hgreatering company BOK Financial Corporation (worth proximately $2.3 billion) is equivalent to proximately 31% of all remarkworthy stock. But Kaiser says he only occasionassociate borrows aobtainst those pledged dispenses. “They are fair low cost, back-up lines, which we have had in place for a lengthy time and infrequently include,” he tgreater Forbes over email.
Tesla talk abouts that pledging originates a comardent of fiduciary relationship between pledgers and dispensehgreaterers. In 2018 the electric caroriginater begind a 25% loan-to-cherish restrict on borrotriumphg aobtainst pledged dispenses, arguing that pledging gives “executive officers flexibility in financial set upning without having to depend on huge cash compensation or the sale of Company dispenses, thus protecting their interests well aligned with those of our stockhgreaterers, while also mitigating danger expoconfident to the Company” — a stance Tesla has reiterated in subsequent proxy filings.
ISS countered this argument in its recent proxy analysis of Tesla’s corporate ruleance principles. “If an executive who already owns 15 or 20 percent of a company’s remarkworthy dispenses…is not already driven to act in the interests of dispensehgreaterers, there is no credible argument that increasing that sconsent to 25 or 30 percent will suffice to accomplish that goal,” says the alert. “Perhaps a more salient, though unspoken, factor is that at current interest and tax rates, it is far inexpensiveer to borrow aobtainst the cherish of one’s dispenses than to sell them and pay taxes on the obtains.”
So fair how prevalent is pledging assets to borrow among the ultra wealthy? “Pretty high,” replys Jason Cain, a managing honestor and chief wealth strategist at advisory firm Boston Private, speaking about his firm’s highest bracket of clients: those with above $500 million in assets. (Cain deteriorated to supply an exact percentage figure). “It’s not any contrastent than families… who borrow for homes” and other life buys, says Cain. “Most of these clients are conscious of the includes of debt and with interest rates where they have been in the recent past, they comprehend the arbitrage opportunity.”
Ali Jamal, and ex-Julius Baer banker and createer of Azura, a boutique wealth administerment firm for billionaire entrepreneurs, says that during the stock taget crash of March 2020, about 70% of Azura’s clients took on leverage — by pledging dispenses, but also arttoil and car accumulateions — to consent on debt to buy more stock. And over the past year, about 40% of Azura clients have leveraged their way into exceptional purpose acquisition corporations. “You can borrow at 40 basis points, max 50 basis points, to have someone very inalertigent” choose an dispensement opportunity, says Jamal about the pguide of leveraging into SPACs, “and if you don’t appreciate the opportunity, you can pull your money out.”
Borrotriumphg aobtainst one’s dispenses has its dangers, but for these billionaires, the rewards seem to outweigh them. “It’s perfectly legitimate, and it’s a little challenging to say it’s immoral. Like, it’s immoral to own a growth stock? It’s immoral to borrow money?” says Edward McCaffrey, a tax law professor at USC Gould School of Law who coined the famous term “Buy, Borrow, Die” to portray how the ultra-wealthy borrow to dodge paying taxes. “So the ask is, why would anybody not do it?
