In an unprecedented move that some are comparing to gambling on the legal system, a $4.6 billion lawsuit is being packaged as the sole asset of a special-purpose company that is preparing an initial public stock offering.
In an unprecedented move that some are comparing to gambling on the legal system, a $4.6 billion lawsuit is being packaged as the sole asset of a special-purpose company that is preparing an initial public stock offering.
The company, R Holdings Inc. of Linthicum Heights, Md., is using the IPO strategy as a way to provide liquidity for the suit's 2,500 individual claimants, 2,000 of whom are older than 65 and concerned that they may not live to see the suit settled.
The legal action, which was filed in July 2007 and has a history dating to 1996, involves racketeering charges against half a dozen hedge funds and money managers.
The planned initial public offering "will give the claimants a vehicle to hopefully generate some funds for themselves," said John Baker, president of VR Holdings, which is a creation of the plaintiffs and claimants in the lawsuit.
The offering essentially is a way to sell stakes in the suit's eventual payout. VR Holdings plans to register its shares with the Pink Sheets market, an electronic-quotation system operated by New York-based Pink OTC Markets Inc., and conduct an IPO early in 2009.
"For investors, the shares will be like an option that sells for around $1 but has a potential upside of $12 or $14," Mr. Baker said.
The question remains, however, as to whether the market will have any appetite for such an unorthodox stock offering.
"The idea leaves me a little cold because it is basically betting on the legal system, and that's not very appealing to me," said Jim Kennedy, president of Marathon Capital Management LLC in Hunt Valley, Md.
"Who am I to know what's on the mind of a judge or a jury? And if the issue was black and white, it wouldn't be in court to begin with," added Mr. Kennedy, who manages $175 million for his clients.
ASSET MANAGERS NAMED
According to the group action lawsuit, which includes 27 plaintiffs, including The Cancer Foundation Inc. in Owings Mills, Md., the defendants conspired to takeover, liquidate and bankrupt a concert T-shirt maker, Winterland Concessions Co. of San Leandro, Calif.
Winterland at that time was a subsidiary of MML Inc., a Baltimore-based company whose current dormancy is a result of the "domino effect" of the failure of all four of its subsidiaries, according to Morton Lapides, MML's former president and a 79-year-old plaintiff in the lawsuit.
Currently, plaintiffs are still fighting to get the lawsuit into court. Earlier this year, the U.S. District Court of Northern Illinois dismissed the case, based on the expiration of a four-year statute of limitations.
"Our appeal right now is based on whether the case should have been dismissed," said Curtis Blood, an independent Chicago lawyer.
He has until Nov. 14 to file a brief arguing in favor of bringing the suit to trial. The court could respond with either a ruling or a hearing on the appeal.
Either way, the defendants — multibillion-dollar investment firms including Cerberus Capital Management LP; Gordon Brothers Group LLC; the Third Avenue Value Fund, offered by Third Avenue Management LLC; and Carl Marks & Co. Inc. — all based in New York — appear to have placed the issue on the back burner.
"This lawsuit was previously dismissed with prejudice. We are confident the appellate court will affirm court's decision," according to a statement from Cerberus Capital, a private-equity firm listed as the lead defendant in the case.
Third Avenue refused to comment. Gordon Brothers and Carl Marks did not respond to requests for comment.
If the suit does find its way to court, the issue will likely boil down to how and why a six-month $23 million bridge loan made to Winterland in 1996 by some of the money management firm defendants was allowed to lapse, giving lenders an 80% ownership stake in the company.
Mr. Lapides is alleging that the lenders' intention all along was to drain Winterland's assets and liquidate the company in a "classic vulture fund" strategy.
CHARITABLE GIVING DENIED
The ultimate domino effect brought down the MML parent company and disrupted a 1998 commitment to donate $80 million to The Cancer Foundation, which is why the non-profit organization is involved, he said.
Meanwhile, the plaintiffs are moving forward with their IPO plans.
"My challenge is to file a registration statement that uses the lawsuit claim as the basis of the business," said Norman Reynolds, a Dallas-based attorney for Glast Phillips & Murray PC in Houston.
The strategy is unheard of, according to R. Cromwell Coulson, chief executive of Pink OTC Markets, whose platform links 260 broker-dealers that trade the shares of more than 5,000 companies listed on the system.
"A lot of times, litigation will get spun off as part of a liquidation process, because it is difficult to value, but I have never heard of a company that goes public as a lawsuit," he said. "I'm a natural skeptic, and there is no precedent for something like this, but you never know."
According to Mr. Lapides, a similar strategy was employed during the savings and loan crisis 20 years ago when a few of the thrifts included claims to potential lawsuit payouts in the company stock.
But VR Holdings is unique in that it is nothing more than a lawsuit.
The plan, however, is to set aside some of the proceeds from the stock offering to buy at least one company in order to add a tangible asset, according to Mr. Baker.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
