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2 Lessons Annaly Capital Management, Inc. (NLY) Can Learn From the NBA Scandal

In other words, when Annaly’s board says that it “considered” the results of the vote, it should probably have included a disclaimer explaining that it also decided to reject them.

Beyond this and perhaps more alarming, Annaly’s practice of nepotism puts Billy Hunter’s to shame. While we’re limited with respect to how much information we have in this regard — as publicly traded companies are only obligated to reveal information about their most senior leaders — we know that relatives of Annaly’s board members currently occupy the CEO and CFO positions in Chimera Investment Corporation (NYSE:CIM), a separately traded mREIT controlled by Annaly’s wholly owned subsidiary FIDAC. We also know that each executive was paid in excess of $1.2 million in 2008, the last year Chimera reported these figures, according to S&P’s Capital IQ.

One could argue, of course, that Chimera CEO Matthew Lambiase and CFO Alexandra Denahan simply used connections to get positions they were otherwise qualified for — to say nothing of their seven-figure compensation packages. However, at least in the case of its Denahan’s resume, there’s little tangible support for this.

In the company’s first proxy statement, filed in 2008, her bibliography provided only that Denahan — the sister of Annaly’s current CEO and then-COO — got her MBA and bachelor’s degree in accounting from Florida Atlantic University and was a “business consultant in Fort Lauderdale” before joining Annaly in 2002 at the approximate age of 30. Thus, as far as we know, she became the CFO of a multibillion-dollar company with simply an MBA and four years of pertinent experience. That’s not exactly something that happens every day.

And this is not just a theoretical problem. Since the end of 2011, Chimera has been embroiled in an accounting mess, which obviously falls under the CFO’s purview. The company is now in the process of restating effectively every meaningful financial statement that it’s published since going public. One of the few things we know in this regard, as Chimera has been otherwise tight-lipped about the whole matter, is that its net income between 2008 and 2011 is estimated to fall by 66%. In addition, Chimera has now failed to file its quarterly financial statements with the SEC for over a year now.

While these problems and Denahan’s inexperience could certainly be a coincidence, it’s hard for me to accept this possibility at face value. Instead, this appears to serve as a cogent example of the dangers of nepotism. Of course, like Hunter above, it won’t be Denahan who genuinely suffers here, since she’s already been paid an inordinate amount of money and can put “CFO” on her resume irrespective of the eventual outcome. The people who have lost out are the shareholders. And that’s inexcusable.

What Annaly should learn from the NBA
The lessons that Annaly should take away from this are twofold. First, as the media and public’s reaction to the NBA Players Association scandal have demonstrated, nepotism and enriching oneself at the expense of your employer are unacceptable business practices. And second, when these things are unearthed, there should be consequences for the offending parties.

The article 2 Lessons Annaly Can Learn From the NBA Scandal originally appeared on and is written by John Maxfield.

Fool contributor John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management.

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