Investing in a company that is managed by the person who controls it is a bit of a mixed bag for investors. It's great when management has skin in the game, but not-so-great when management abuses its control at the expense of minority shareholders. Consider what happened in the case of NewLead Holdings (NASDAQ:NEWL), where management not only controls the equity, but also has a significant stake (in fact, larger than its equity stake) in the company's debt.
CEO Michael Zolotas not only effectively controlled NewLead's equity, but also a large portion of its debt. This is a clear conflict of interest, and here's why: Zolotas just converted his debt to equity, issuing himself shares at a 40% discount to the market price of the equity. This caught the market off-guard last Monday, causing several circuit breakers to trip as the stock fell by 60% at one point during the day.
The company is bleeding red ink and has defaulted on some payments already, so such a conversion may have been necessary anyway. But the key issue here is that any negotiation between equity and debt holders is tainted by this conflict, which may have resulted in a conversion price that ripped off minority equity holders.
Be sure you know what you're getting into when you buy into a company that is controlled by one person or group!
Disclosure: No position.