4 Questions Annaly and Chimera Need to Answer

The executives at Annaly Capital Management (NYSE: NLY  ) and Chimera Investment Corp.  (NYSE: CIM  ) owe shareholders an explanation.

It's been over a year since Chimera, a member of the Annaly family of companies, has filed a single financial statement. And if that isn't bad enough, the company is refiling effectively every financial statement it has issued since going public in 2007.

The only bones Chimera has thrown investors' way are intermittent estimates of book value and a cryptic admission that it's returning capital to shareholders. Suffice it to say, investors in both companies deserve more -- Annaly's shareholders are included because of the operational and familial connections between the companies.

What follows are four questions, addressed to Annaly and Chimera's executives, the answers to which shareholders in both companies are entitled to know.

Question No. 1 -- Is nepotism part of Annaly and Chimera's culture?
Is it merely a coincidence that Chimera's CEO Matthew Lambiase is the son of Annaly's director Joseph Lambiase? Or what about Chimera's CFO Alexandra Denahan? Did her hiring have anything to do with the fact that she's the sister of Annaly's CEO Wellington Denahan?

According to Chimera's last proxy statement: "Before joining Annaly and FIDAC in October 2002, [Alexandra] was a business consultant in Fort Lauderdale [and] has an M.B.A. and Bachelors Degree in Accounting from Florida Atlantic University."

Which of these things -- being an undistinguished business consultant in Florida or a graduate of Florida Atlantic University, an internationally acclaimed accounting powerhouse -- qualifies Alexandra to oversee the finances of a $10 billion investment fund?

And while we're on the topic, how much are Matthew and Alexandra paid for their services? The last time Chimera published this information was in 2008, when they received $1.6 million and $1.24 million, respectively. It'd be great to have an update in light of the egregious accounting errors that occurred under their watch.

Question No. 2 -- Why did Annaly's board contradict shareholder votes last year?
At Annaly's annual meeting on May 26, 2011, a majority of the company's shareholders voted against reelecting Jonathan Green to the board of directors, and in favor of holding annual say-on-pay votes over executive compensation. Later that same day, however, Annaly's board reappointed Green and voted to hold say-on-pay votes every three years.

To get to the point, did Green's standing on Annaly's three-person compensation committee have anything to do with the board's decision to contradict the expressed and unambiguous desires of its shareholders?

Two things are important to note. First, the chairman and vice chairwoman of the board at the time were Michael A.J. Farrell and Wellington Denahan, respectively. And second, Farrell and Denahan were both awarded patently outrageous $35 million compensation packages in 2011 -- to say nothing of the preceding years.

Question No. 3 -- Why did Chimera replace its accounting firm?
Why did Chimera's board vote to dismiss Deloitte & Touche, its independent registered public accounting firm, after being informed of the self-described "material" accounting errors mentioned above? Was Deloitte responsible for the errors? Or was it a whistleblower?

I'm aware that companies change accounting firms all the time. Earlier in the year, Netflix (NASDAQ: NFLX  ) fired KPMG in favor of Ernst & Young after a "competitive bidding process." In other words, Netflix was looking for the best value and not simply trying to cover up accounting improprieties. But Chimera's shareholders have been given no explanation, leaving people like me to assume the worst.

Question No. 4 -- Is Chimera liquidating assets?
Beginning in the second quarter of this year, Chimera's board voted to keep its dividend at $0.09 per share, extending at least through the second quarter of 2013. Historically, the quarterly payout has always been a function of taxable income, which necessarily fluctuates through the year.

Why the change?

More specifically, in the most recent current report, filed with the SEC on November 18, Chimera stated that $0.06 of the $0.29 per share in dividends distributed this year is "currently expected to be characterized as a return of capital for federal income tax purposes." How else are shareholders to interpret this other than that Chimera is liquidating -- albeit slowly?

Shareholders deserve answers
If you haven't already gotten the point, these two companies have engaged in behavior that, at the very least, creates a serious appearance of impropriety. As a result, I'd encourage all investors to avoid them until these questions are answered.

To learn about three more serious risks threatening Annaly Capital Management, download our in-depth report on the company by clicking here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2012, at 9:15 PM, tedwarrenlives wrote:

    Excellent job on reporting and actually showing the world TMF is not just an arm of manipulation!!!

    I have to be honest a few circles where I cited your site they started laughing at me and embarrassed me to the point I had to excuse myself.

    Regardless though, unfortunately it would have been even more spectacular if such critical write-ups had come out before the dozens of NLY and AGNC write ups were showering these REITS, but its a start. Better late then never, if TMF can start reporting like this it may actually start being taken as a serious and TRUSTWORTHY source.

    Heck TMF might actually beat the moniker of being pseudo-journalist which is being whispered all over the net along with a few of others mainly with the acronyms "SA".

    Keep up the fine reporting.

  • Report this Comment On December 14, 2012, at 2:23 PM, plange01 wrote:

    cim turned down a offer to sell the company last spring for over $4 a share and as it turned out it was due to their extremely poor record keeping.now their is talk of a lawsuit by investors who bought in at that price range only to be caught in a fraud by cim's management or lack of it!

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