For Value Line chief, a dishonorable end to a 21-year reign

A day after she turned 75, Value Line Inc. chief executive Jean Bernhard Buttner got a most unhappy birthday present from the federal government.

The Securities and Exchange Commission ruled Nov. 4 that her venerable firm, which bills itself as “the most trusted name in investment research” — its core newsletter has been endorsed by no less an authority than Warren E. Buffett — had been fleecing customers for nearly 20 years by overcharging for mutual fund trades. Value Line agreed to pay $45 million in penalties, and Ms. Buttner was barred from running the company she inherited from her father.

It was an ignominious end to the 21-year reign of one of Wall Street’s most tyrannical chief executives.

Ms. Buttner paid herself lavishly, while penny-pinching when it came to employees. She would wait by the office door to see whether they arrived at work on time.

Eating and drinking at desks was banned; Ms. Buttner even threatened to fire workers who failed to keep their desks clean. When employees criticized her in online forums, she sued.

Ms. Buttner stacked her board of directors with her three children, a cousin and various cronies, such as the headmaster of the private school where she is a trustee.

What’s more, she failed to expand the business founded by her father, Arnold Bernhard, in 1931. Value Line’s revenue in fiscal 2009, which ended April 30, was identical to the revenue posted in 1987, the year her father died.

Best known for its respected weekly newsletter, a public-library staple called the Value Line Investment Survey, the company has been eclipsed by rival financial publishers such as Morningstar Inc. and by offerings on the Internet. Value Line, which made money every year for decades, posted a $42 million operating loss in its fiscal first quarter.

“She took what had been a pillar of Wall Street and made it an obscurity,” said Herbert Blank, a former Value Line employee who is organizing an alumni party next month to celebrate Ms. Buttner’s departure. Mr. Blank, now a senior vice president at investment research firm Rapid Ratings International, said he left Value Line of his own accord in 1994, after four years.

Mercer Bullard, a former SEC official who is now a mutual fund industry watchdog, suspects that the outcome of the federal case ultimately will mean the death of Value Line. “The settlement may very well be a nail in the coffin,” he said.

Ms. Buttner, who declined to be interviewed or to answer written questions, has her defenders.

Among them is Value Line board member Marion Ruth, 74, a Los Angeles real estate agent. She acknowledged that the company’s future is “very much up in the air” but called the SEC settlement “overkill” and insisted that it was “not at all” warranted.

Ms. Buttner grew up in Connecticut comfort and graduated from the posh Choate Rosemary Hall boarding school. She graduated from Vassar College in 1957 with a philosophy degree and the following year got a certificate from the Harvard-Radcliffe program of business administration, a one-year course that was offered before women were permitted to earn a Harvard master’s degree in business administration.

Ms. Buttner married and raised a family in California’s Bay Area, where she taught for a semester at a Montessori school, according to a former senior Value Line employee. She later joined her hometown school board, where she battled the local teachers union.

Ms. Buttner’s business experience before Value Line comprised primarily working at an interior-design business with her husband.

She was appointed president of Value Line in 1984 by her father, who had looked in vain both inside and outside the family for a successor; she became chief executive upon his death three years later.

Ms. Buttner’s father had taken the company public in 1983, and at that time, she was given a slightly larger piece of the family’s 80% stake than her twin brother, Van. Their father reportedly explained to him, “I think she would take better care of you than you would of her.”

The company that Ms. Buttner inherited was one of Wall Street’s most respected financial publishers, with a sideline in money management. Using a formula that rates stocks based on earnings trends, debt levels, price momentum and other factors, Value Line devised an investment strategy that proved successful over many years.

“I don’t know of any other system that’s as good,” Mr. Buffett said at a Berkshire Hathaway Inc. stockholders meeting in the late 1990s. The quote is still proudly displayed on Value Line’s website.

Investors who are much less famous also value the newsletters.

“In Hackensack, N.J., there’s a sign by the library’s reference desk: “If patrons keep tearing out pages of Value Line, the library will end its subscription,’” said Warren Boroson, a personal-finance writer.

Value Line was a training ground for scores of Wall Street executives, including money manager David Dreman and research expert Sanford Bernstein. Goldman Sachs’ Abby Joseph Cohen worked there one summer as a customer service representative. Mr. Bernhard lost this parade of future stars since he relied more on the firm’s investment formula than on famous analysts and paid much less than other Wall Street firms.

Ms. Buttner was equally reluctant to spend money on people: Compensation costs were capped at about 25% of revenue — half the typical rate on Wall Street. She did, however, spend time thinking about keeping the office clean.

In a 1994 memo that later appeared in a court filing, she told staff members that the cleaning crew would no longer clean the staff’s “very dirty” computers and keyboards. “From now on, we expect you to keep your equipment clean,” she wrote.

Then, in all-capitalized bold type, she directed staff members to clean in the following manner: “Spray a small amount of Formula 409 onto a clean rag (not the computer) and wipe the plastic surfaces, being careful not to get the Formula 409 near the screen or mahogany.” In lower-case letters, she added: “We also remind you that nothing is to be left on the floor.”

Ms. Buttner’s zeal for cleanliness might have been considered a forgivable quirk had she run the company better. Sources said she had a shrewd business sense — outsourcing work to India long before the practice was popular, for example — yet she had difficulty making decisions that could have helped Value Line grow.

She turned down a chance to sell Value Line mutual funds through The Charles Schwab Corp. early on, because she didn’t want to sign an indemnification agreement. She nixed an effort to sell a fund based on an index of stocks drawn from Value Line’s proprietary database after the executives who generated the database balked.

‘Paranoia’ about risk

“The level of paranoia and fear from her was amazing,” Mr. Blank recalled. “She always wanted to come out 10 cents ahead, no matter what the issue. She worked hard, but working smart eluded her. And she just hated taking risk.”

A Value Line spokesman wrote that Ms. Buttner “has received a great deal of recognition as a business leader,” citing achievements such as being named one of New York’s 100 most influential women by Crain’s New York Business in 1999.

He noted that Ms. Buttner and her team “streamlined operations” and recently launched products that generated more than $75 million in operating profit through April. She launched a division to copyright and license financial data, which produced more than $18 million in revenue over the past three years.

When Ms. Buttner did spend big, it was to buy out her twin brother.

Van Bernhard sued his sister in 1996, charging that her “inexperience and autocratic manner” was damaging the business, according to an article in The New York Times. Ms. Buttner tried to keep the dispute quiet, refusing to disclose the suit to shareholders. In the end, she directed Value Line to issue a special dividend of $149 million to acquire his stake.

Meanwhile, employees grew more frustrated as the firm missed the 1990s stock boom. Revenue reached nearly $100 million in 1999, but some staff members thought things would be better if Ms. Buttner didn’t run them.

A former Value Line portfolio manager named Christopher Bischof, using the pseudonym Matt Drudge, took out his frustrations on Ms. Buttner via a Yahoo message board in 1998, calling her a “village idiot,” an “old dodo” and a “leading member of Wall Street’s “Lucky Sperm Club.’”

Ms. Buttner, bent on finding who was ridiculing her, filed suit and was able to identify Mr. Bischof. He settled by apologizing and removing the offending messages.

Meanwhile, business languished. The technology boom wasn’t kind to Value Line’s decades-old stock-picking method. Subscriptions fell to around 100,000 by early in this decade, from 134,000 in 1987.

The firm responded by expanding into areas such as mutual fund analysis but had difficulty making significant inroads at the expense of nimbler players such as Morningstar.

Value Line also tried to build up its money management unit, which it started in 1950 based on the in-house formula. Yet the funds often have been duds.

Value Line found another way to profit from its mutual funds, according to the SEC — overcharging customers. Starting in 1986, when Ms. Buttner was president but not yet CEO, the company began what the SEC called a “fraudulent practice” of sending mutual fund trades to brokers who charged inflated commissions and then kicked back a portion of the commissions to Value Line.

The SEC said that Ms. Buttner “misled” the mutual funds’ independent directors into believing that the commissions paid for legitimate services and that she continued to authorize and monitor the scheme until it was halted in 2004 when an employee tipped off the feds.

While the investigation simmered, Value Line’s business, like other publishers’, plunged. Revenue declined from the high-$90-million range this decade to $69 million last year.

In the past two years, print circulation revenue has fallen by 30%, and online revenue hasn’t risen nearly enough to offset the decline. Based on last year’s revenue figures, Value Line appears to have about 70,000 subscribers to its investment survey and other publications. As subscribers vanish, so do employees. At187, the staff is half what it was a decade ago.

The company’s spokesman wrote that Value Line has no debt and generated “excellent” operating margins during Ms. Buttner’s tenure.

During the company’s decline, Ms. Buttner fattened her wallet with hefty dividends. Last year, for instance, the company paid out $15 million, equal to about two-thirds of its net income; Ms. Buttner got $13 million of that amount, thanks to her 100% stake in Arnold Bernhard & Co. Inc., the entity that owns 86.5% of Value Line. In 2005, she oversaw the issue of a special dividend of $175 million that paid her $150 million.

In the SEC settlement with Value Line, Ms. Buttner and her longtime deputy, David Henigson, none of the parties admitted wrongdoing. The Value Line spokesman noted that the commissions under SEC scrutiny amounted to less than 1.5% of the company’s total revenue during the period covered by the settlement.

Under its terms, she was fined $1 million and must sell her stake in Value Line within a year, put it in a blind trust or otherwise arrange matters so that she no longer controls it.

Aaron Elstein is a reporter for sister publication Crain’s New York Business.