B2| Saturday/Sunday, February 29 - March 1, 2020 **** THE WALL STREET JOURNAL.
THE SCORE
THE BUSINESS WEEK IN 7 STOCKS
MICROSOFT CORP.
The coronavirus epidemic is roiling some of the
biggest names in tech. Microsoft said Wednesday
it expected sales in its personal-computing seg-
ment to fall short of expectations. This warning
came after Apple Inc. lowered its earnings outlook last
week due to limited iPhone production. Earlier in February
chip maker Nvidia Corp. also predicted a $100 million earn-
ings hit. Microsoft sharesfell 7.1% Thursday.
MSFT
7.1%PERFORMANCE OF TECH STOCKS THIS PAST WEEK
Source: FactSet0- 18
- 16
- 14
- 12
10
%MicrosoftAppleNvidiaMon. Tues. Wed. Thurs. Fri.A Hollywood Drama at a BlackRock Fund
The investment giant fires a fund manager whose daughter got a part in a movie he financed
THE INTELLIGENT INVESTOR|JASON ZWEIG
Take a break from
the market turmoil to
ponder the drama at
a little fund run by
the world’s biggest
asset manager. It in-
volves allegations of
fraud and forgery, not to mention a
fund manager’s daughter landing a
part in a movie the fund financed.
We’re talking about the Black-
Rock Multi-Sector Income Trust. In
2017, the fund, which at that time
had $750 million in net assets, lent
a tenth of that to a small, privately
held movie company, Aviron Capital
LLC. It was an unusually aggressive
bet. By late 2019, the fund said the
loan wasn’t worth anything, for a
nearly $75 million loss. In Decem-
ber, it filed a lawsuit against Aviron
and its owner, William Sadleir.
Mr. Sadleir denies committing
fraud. He does, however, admit
copying-and-pasting signatures of a
BlackRock fund executive onto doc-
uments to accelerate the sale of
$3.2 million in movie-revenue re-
ceivables on which the fund had ex-
clusive claim.
“I should not have done it,” Mr.
Sadleir said in an interview this
week. “It was bad judgment on my
part. I know better.”
Why did the mighty BlackRock
lend so much money to a small
movie venture in the first place?
That question matters because
giant investment firms should have
fail-safe procedures in place to pre-
vent conflicts of interest and to
prevent fund managers from mak-
ing arbitrarily big bets.
It also matters because inves-
tors buy a bond fund to earn
steady income, not to risk losing
their principal. Multi-Sector In-
come Trust has lost 3% in the past
three months, while the bond mar-
ket has earned a positive 3% re-
turn, according to Morningstar.
The fund was outperformed by
more than 99% of its peers over
the past year, largely because of
the failed bet on Aviron.
And BlackRock charges an arm
and a leg for this fund—total man-
agement expenses of 1.4% in 2019—
in part to cover the costs of care-
fully researching its investments.
That’s 22 times as much as the
firm’s cheapest exchange-traded
bond funds, which don’t bother re-
searching individual holdings at all.
What’s more, BlackRock, under
Chief Executive Laurence Fink, has
set itself out in recent years as an
arbiter of corporate conduct.
In a twist right out of a Holly-
wood screenplay, Aviron, the
movie company financed by this
BlackRock fund, cast the daughter
of one of the fund’s managers in
one of its films.
As a result, the firm fired the
manager, Randy Robertson, earlier
this week after an extensive inter-
nal investigation, according to a
BlackRock spokesperson.
In a statement, BlackRock said its
fund was “a victim of fraud perpe-
trated by Aviron and its principal.”
The firm added that it is taking
“vigorous steps” to recover value
for the fund’s shareholders and is
moving to “enhance the level of
oversight and due diligence related
to these types of transactions.”
FROM TOP: PAUL BRUINOOGE/PATRICK MCMULLAN/GETTY IMAGES; AVIRON/EVERETT COLLECTIONBoeing Supplier Plans
To Resume ProductionThe biggest supplier of parts
for theBoeingCo.’s 737 MAX
plans to restart limited produc-
tion in March, regardless of the
plane maker’s ability to win back-
ing from regulators for the jet to
resume commercial service.
Spirit AeroSystems Holdings
Inc. plans a gradual resumption
of making fuselages, engine py-
lons and other parts for the jet.
Spirit, based in Wichita, Kan.,
derives more than half of its rev-
enues from the MAX, and last
month announced plans to cut al-
most 3,200 jobs. Spirit’s plan to
resume production comes along-
side a raft of financial support
from Boeing, which has said it
could resume assembling MAX
jets some two months before the
hoped-for receipt of regulatory
approval for the plane by “mid-
year.”
—Doug Cameronlearned his daughter would have a
speaking role in the film.
“I can’t tell you that he made the
decision purely because his daugh-
ter was in the movie,” says Mr. Sa-
dleir, “but I can tell you BlackRock
approved that financing after turn-
ing down the opportunity to fi-
nance several earlier movies.”
Under Mr. Sadleir, Aviron has re-
leased seven films—six financed by
the BlackRock fund—including
some notable successes. “Kidnap,”
with Halle Berry, released in 2017,
grossed an estimated $35 million
at the box office worldwide. Al-
though Mr. Sadleir says “A Private
War,” released in 2018, hasn’t yet
earned a lot of money, it was criti-
cally acclaimed.
Mr. Robertson, a 10-year veteran
of BlackRock, was the firm’s head
of securitized assets, as well as co-
manager of this fund. His conduct
in relation to the Aviron investment
violated BlackRock’s conflict-of-in-
terest policy, the firm said.
The BlackRock fund’s investment
in Aviron was unusual.
First, the commitment was ex-
traordinarily large. In July 2017,
the fund put 10% of its net assets
into Aviron. No other single corpo-
rate issuer accounted for nearly as
much of its assets at the time. No
other BlackRock fund has ever in-
vested in Aviron, says a BlackRock
spokesperson.
Then there’s Mr. Sadleir.
He served as a special assistant
to the president and a deputy sec-retary of state under
President Ronald Rea-
gan. He founded Dayna
Communications Inc.,
a networking-technol-
ogy company that was
acquired by Intel Corp.
in 1997. He has been in
the movie business for
a decade.
However, Mr. Sa-
dleir has had prior dis-
putes with creditors.
A nonprofit he ran
was sued in a Norwe-
gian court in 2002
over allegations of un-
paid bills and debt.
The action was later
settled by an unrelated
third party.
A 2015 lawsuit in
California alleged Mr.
Sadleir had “misappro-
priated more than $
million in collateral,”
and that court in 2019
entered a judgment
against him personally
for $2.7 million.
Mr. Sadleir had his
own explanations for
these cases, telling me
there was no misap-
propriation of monies.
With these disputes
in the public record,
why did the Black-
Rock managers regard
Mr. Sadleir and Avi-
ron as a good credit
risk and a plausible
bet for a tenth of the
fund’s assets?
One explanation:
The debt was not only
collateralized by Avi-
ron’s assets, but CBL Insurance
Ltd. of New Zealand also guaran-
teed full payment of principal and
interest, according to Mr. Sadleir
and BlackRock.
What’s more, motion-picture rev-
enues tend not to move in tandem
with the stock market or other fi-
nancial assets, making the Aviron
debt a potentially good diversifier.
Unfortunately, CBL Insurance be-
came insolvent and was liquidated
by the New Zealand government
late in 2018, voiding its guarantee
of the Aviron loan.
Mr. Robertson drove the deci-
sions about the Aviron investment
all along, according to Mr. Sadleir,
who says the fund manager brought
his daughter to the earliest busi-
ness meeting between BlackRock
and Aviron at the movie company’s
offices in Los Angeles back in 2015.
Proponents of so-called alterna-
tive assets say that such non-traded
investments offer the potential for
lower risk and higher return. As the
private loan to Aviron demon-
strates, alternatives also offer
greater potential for conflicts of in-
terest that can be difficult to detect
before it’s too late.
Investors should always be wary
whenever a fund puts more than a
few percentage points of its assets
into an obscure investment that
doesn’t trade, where the sunlight
can take so long to reach.
If something like this can hap-
pen at BlackRock, it can happen
anywhere.Mr. Robertson couldn’t be
reached for comment. His daughter,
actress Rebecca Lee Robertson, de-
clined to comment.
BlackRock first invested in Avi-
ron with a $12 million loan in 2015.
Soon after, “we arranged for [Ms.
Robertson] to meet with casting
agents and managers,” says Mr. Sa-
dleir. “Anytime there was an oppor-
tunity to put her in a movie, we
considered her.”
Mr. Sadleir told me this week
that Mr. Robertson agreed to re-
lease $10 million in financing for
“After,” a 2019 movie from Aviron,
after the BlackRock managerRandy Robertson, above left, and William Sadleir at a screening of Aviron’s ‘Serenity’
last year. Mr. Robertson’s daughter got a small role in ‘After,’ another Aviron film.BEST BUY CO.
Unlike many traditional retail-
ers, Best Buy had a happy
holiday shopping season. The
company said Thursday that
sales rose during the critical
period, citing strong demand
for phones and appliances. Best Buy has
undergone a turnaround in the past six
years, avoiding the fate of Sports Au-
thority, Toys ‘R’ Us and other retailers
that tend to stock goods focused on a
single category. The retailer is matching
prices to competitors, adding services to
reduce the company’s reliance on new
product releases and using its stores to
fulfill online orders. Still, sharesfell 4.7%
Thursdayamid a broader market selloff.
BBY
4.7%proved by regulators in coming
months, aim to improve aviators’
knowledge of the MAX’s flight-con-
trol systems and related flight-
deck commands, as well as restore
confidence in the jet.
An FAA spokesman said the
team of employees in Seattle fo-
cused on training “is comprised of
professionals who are trained to
do highly specialized jobs” with an
unwavering commitment to safety.
Boeing and the FAA, however,
first need to resolve differing ap-
proaches on the content of train-
ing. The company initially pro-
posed that pilots practice a
handful of maneuvers. The FAA fa-
vors more expansive training that
highlights longer scenarios featur-
ing the interplay of different emer-
gencies, according to the officials.
Meanwhile, airlines generally
are reluctant to commit to any
training curriculum before soft-
ware fixes to the MAX are formally
blessed by regulators.
“We’re very encouraged to see
Boeing signal the importance of
simulator training,” said Nicholas
Robinson, director general of civil
aviation at industry regulator
Transport Canada.
Simplicity was part of the sales
pitch to airlines when Boeing was
developing the MAX. Carriers
wanted a plane that would fit
seamlessly into their existing fleets
of 737 jets, and they were eager to
avoid having to put pilots through
costly simulator sessions. Boeing
had promised to refundSouthwest
AirlinesCo. $1 million for every
MAX that required additional sim-
ulator training, according to a
company sales brochure released
by House investigators.
But Boeing reversed course ear-
lier this year when it said it would
recommend simulator training.
The manufacturer’s change in
thinking surprised FAA leaders and
some carriers.
—Kim Mackrael
contributed to this article.Continued from page BINTUIT INC.
The maker of TurboTax is
nearing a deal to buy per-
sonal-finance portal Credit
Karma Inc. The purchase for
about $7 billion in cash and
stock, reported by The Wall
Street Journal Saturday, would give the
bookkeeping-software giant a stronger
foothold in consumer finance. It would
mark Intuit’s largest acquisition by far in
its 37-year history and the first sizable
transaction under Chief Executive Sasan
Goodarzi, who took over a little more
than a year ago. Credit Karma was val-
ued at roughly $ 4 billion in a private
share sale about two years ago. Intuit
sharesfell 3.7% Monday.
INTU
3.7%WALT DISNEY CO.
There is a new ruler of the
Magic Kingdom. Robert Iger
stepped aside as chief execu-
tive of the entertainment
conglomerate Tuesday, and
longtime insider Bob Chapek
took over the top job. Current and for-
mer Disney executives say Mr. Chapek’s
experience heading key Disney units like
parks and resorts put him ahead of
other potential successors such as
streaming service head Kevin Mayer. Mr.
Iger will retain significant power over
the company as executive chairman,
overseeing the company’s creative en-
deavors through the end of next year.
Disney sharesfell 3.8% Wednesday.
DIS
3.8%MARRIOTT INTERNATIONAL INC.
Companies that depend on
tourism are tearing up their
202 0 expectations as the
new coronavirus spreads. The
latest alert is from Marriott,
which said Wednesday that
fee revenue will take a hit in 202 0. The
world’s largest hotel company could see
a$ 2 5 million reduction in that revenue
per month this year compared with its
outlook. Marriott’s CFO said the com-
pany has about 8 00 hotels in the Asia-
Pacific region. Of those, 8 9 hotels in an
area that includes mainland China, Hong
Kong, Macau and Taiwan aren’t accept-
ing reservations. Marriott sharesfell
0.1% Thursday.
MAR
0.1%GILEAD SCIENCES INC.
The pharmaceutical company
is hoping to produce the first
medicine specifically approved
to treat the new coronavirus.
Gilead said late Wednesday
that in March it will conduct
two studies of its drug, remdesivir, with
a total of 1,000 patients across mainly
Asian countries, as well as other nations
with high numbers of diagnosed pa-
tients. The first patients will be evalu-
ated on whether their fevers normalize
and oxygen in their blood increases. If
successful, Gilead’s studies would help
contribute to a larger data set needed
to win regulatory approval for the drug.
Gilead sharesfell 2.7% Thursday.
GILD
2.7%SALESFORCE.COM INC.
Marc Benioff now has the
corner office all to himself.
Salesforce announced Tues-
day that Co-Chief Executive
Keith Block would be step-
ping down just 1 8 months af-
ter taking the job, ending its experiment
with dual CEOs. Mr. Block joined the
business-software provider in 2 013 and
became co-CEO in 2018 in an unusual
setup that paired him with Mr. Benioff,
a Salesforce co-founder. Mr. Block had
oversight of day-to-day operations while
Mr. Benioff led Salesforce’s vision and
innovation. Salesforce sharesfell 1.3%
Wednesday.
—Francesca Fontana
CRM
1.3%Tension
Risks Delay
For MAX