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Stockholder lawsuit could destroy Amtrak

A federal district court in Cincinnati has become involved in a dispute involving the future of Amtrak -- a dispute that has ties to Chiquita bananas, the Cincinnati Reds baseball team, a huge insurance company, a billionaire Republican-Party fundraiser, and the defunct Penn Central.

An adverse decision could bankrupt Amtrak.

To understand, you have to return to 1970, when Amtrak (formally, the National Railroad Passenger Corp.) was created by Congress through the Rail Passenger Service Act to relieve freight railroads of the financial burden of operating money-losing passenger trains.

In creating Amtrak, Congress provided substantial tax credits to the freight railroads in exchange for their transferring to Amtrak what was, mostly, decrepit passenger equipment. Four of the freight railroads were, at the time, unable to make use of the tax credits.

So Congress created 9.4 million shares of Amtrak common stock, with a $10 per share par value, calling it an equity interest in Amtrak, and distributing those shares to Burlington Northern (now BNSF Railway), Chicago, Milwaukee St. Paul & Pacific (now part of Canadian Pacific), Grand Trunk Western (now part of Canadian National), and the bankruptcy trustees of Penn Central (which became Conrail, and then was split in a sale to CSX and Norfolk Southern).

Since Penn Central donated the most passenger equipment, it was given 53 percent of Amtrak’s common stock.

Congress also created preferred shares in Amtrak, all of which were given to the U.S. Department of Transportation to ensure federal control of the passenger railroad.

Few really expected the Amtrak common stock ever to have value -- except billionaire financier Carl Linder, who, at the time, was chairman of Chiquita Brands, part owner and CEO of the Cincinnati Reds, owner of 42 percent of insurance conglomerate American Financial Group (AFG), and a major contributor to the Republican Party. Lindner also had (and has) a reputation for turning financial cats and dogs into show horses.

When Penn Central was liquidated, Lindner, on behalf of AFG, purchased its 53 percent of Amtrak common stock, or 5.2 million shares, with a total par value of $52 million. Lindner has sat on the stock since; and was quiet until now.

In its lawsuit, AFG accuses Amtrak of not becoming profitable, and thus eroding the value of the common stock. It is unlikely that AFG will have difficulty proving that.

However, if the $52 million AFG paid for its 53 percent of the Amtrak common stock is revalued based on the consumer price index since 1971, the new value would be $277 million -- or some $550 million for 100 percent of the outstanding common stock. That is about half of Amtrak's current annual federal subsidy.

This is what makes the lawsuit serious, because were the court to rule in favor of AFG, it is unlikely Amtrak could pay a court award of that magnitude without becoming insolvent.

In fact, AFG is demanding that the court order Amtrak to return its $52 million investment, plus interest and unspecified damages. As interest generally tracks the inflation rate, plus provides an additive for risk, the cost to Amtrak -- even without considering damages -- could be well in excess of the $550 million for 100 percent of the outstanding common stock.

AFG’s lawsuit says Amtrak wrongfully subsidized passenger train travel rather than focusing on operating at a profit. AFG says "Amtrak officials permitted political pressures to initiate, expand and retain unprofitable routes, which eroded the value of the common stock." And when former Amtrak President David Gunn "attempted to negotiate new labor agreements that would give the company greater flexibility in reducing costs, Amtrak’s board forced him out of office," says AFG.

Moreover, says AFG in its lawsuit, when Congress passed the Amtrak Reform and Accountability Act of 1997, it directed Amtrak to shift its focus and orientation "back toward profitability" and redeem all of its outstanding common stock for fair market value no later than Oct. 1, 2002.

Amtrak’s initial offer to AFG, of 3 cents per share, was rejected by AFG as "ridiculously low and arbitrary," lacking "adequate analysis and supporting documentation." In January 2008, says AFG, Amtrak "insisted" that the stock was “worthless," and AFG broke off talks with Amtrak. The lawsuit was filed May 19.

AFG contrasts the activities of Amtrak with those of Conrail, which also was created as a nationalized railroad by Congress in 1973. "The goal of both Amtrak and Conrail was the same," says AFG: "To modernize and rationalize rail operations, make them more efficient, and return them to profitability."

Unlike Amtrak, says AFG, Conrail turned a profit in 1987, and the government sold its ownership interest "through what was then the largest initial public stock offering in the nation’s history," producing $1.9 billion for the U.S. Treasury.

"Unlike Conrail, which was managed and operated as a business for profit and for the benefit of its shareholder owners," says AFG, "Amtrak was, through a continuous process over the last 37 years, converted into a company not managed for profit, but instead operated to provide government-subsidized public transportation."

BNSF, Canadian Pacific and Canadian National, which still hold their shares of Amtrak common stock, are not parties to the lawsuit, but were AFG victorious, they could similarly demand similar treatment.

May 28, 2008

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