Back in March 2012, I posted about an unusual shareholder lawsuit. There have been a few developments worthy of an update.Brief synopsis of the lawsuit:1. Lyondell Chemical went through a Leverage Buyout in 2007.2. In 2008, the company went bankrupt, in large part due to high debt taken on in the buyout.3. In 2010, the bankruptcy trustee sued all investors that owned >=$100k of stock the day the buyout was consummated. There were >2,000 shareholders, of which Yoda was one.4. The trustee used a “fraudulent transfer” argument saying the shareholders should have known that the stock was not worth the buyout price. The trustee has asked the court to order stockholders to forfeit some amount of the stock price, regardless of when it was purchased.Current status:1. The bankruptcy case is still active in the ‘Southern District of New York” aka New York City.2. The bankruptcy judge has NOT ruled on the many requests to dismiss the claims against shareholders.3. The large shareholders like Vanguard, Merrill, and Fidelity have NOT settled. They are able to amortize the legal fees over a much larger base, like hundreds of million $’s. 4. MANY SMALLER SHAREHOLDERS HAVE SETTLED THE CASE, PAYING “NUISANCE MONEY.” Let’s say you owned $100k of shares back in 2007. Lord knows what your financial position is in 2012. The legal fees for a small shareholder can easily run into the tens of thousands. Plus there is a monthly burn rate for legal fees that can run into the several thousands.Some of these shareholders have decided to cut their losses and write a check to the trustee to stop the bleeding. The exact amount or percentage it takes is confidential, so every negotiation is handled as an independent event.5. There is NO end in sight to the case. The judge has given no indication of when he will rule. The large shareholders filed their request for dismissal in early 2011, so it is going onto two years waiting for a ruling.6. Clearly, the bankruptcy trustee set the cutoff too high at $100k. With the success he has had, it would not surprise me to see him amend the case to go down to say $25k shareholders. He has to weigh the incremental cost of adding the additional shareholders versus how many will settle for “nuisance value.” I do not know the time limits on how long he can add additional stockholders to the case. Possibly, the cutoff window has already passed.7. DUE TO THE SUCCESS OF THIS CASE, I HEAR THAT SEVERAL MORE CASES HAVE BEEN FILED FOR DIFFERENT LBO’S. I have not spent the time to investigate which companies were involved, but there have been at least a few LBO’s that did not work out. I am confident that the bankruptcy trustee will go after smaller shareholders; say down to $25k given the success in the Lyondell case.8. Stockholders stand ZERO chance of recovering any legal fees spent defending their case. There is NO upside, only downside.9. BOTTOM LINE is that you might want to set up a “reserve” account if you owned any stocks that fit this pattern. Since it is after the fact, there is nothing you can do short of deceasing that would limit your liability for past ownership. I guess you could file personal bankruptcy to limit the damage, but that is not exactly cost free. Going forward, you should avoid investing in any company that might be put into this situation. Don’t ask me how to do that. My crystal ball failed to detect this liability in 2007 and I don’t think it has gotten any better in 2012.10. The good news is that many shareholders are helping grow GDP by employing all of these bankruptcy lawyers. The last I heard, the Lehman tab is greater than $1 billion. The American Airlines tab just passed $200 million. Yoda, wanting to do his part supporting the economy, has NOT settled and is continuing to support the bankruptcy bar.Painful to type this. . .Yodaorange Yodaorange METAR post: Own a stock and get suedhttp://boards.fool.com/own-a-stock-and-get-sued-29924569.asp...
1. Lyondell Chemical went through a Leverage Buyout in 2007.2. In 2008, the company went bankrupt, in large part due to high debt taken on in the buyout.These are the only two relevant facts posted. The big question I do not see being answered is *why* they went bust. If a significant reason was due to the collapse of the US financial system (reasonably expected funding sources disappeared), then the lawyers are simply fishing. And suing people for something beyond their control is not the purpose or function of the legal system. The law firm should be sued for abuse of the legal process, filing a frivolous lawsuit, and compelled to pay real AND punitive damages.Document the problem could not be reasonably predicted or avoided--or that reasonable actions WERE taken and they failed due to circumstances beyond the business's control (i.e. Lehman went bust--NOT predictable. So did Bear Stearns--NOT predictable). If those were expected future funding sources that disappeared and could not be replaced given the economy....
In your opinion, would this have been avoided if, like Berkshire, there were A and B (non-voting) shares. This is a first for me. My condolences!Bob
Jerryab asked: The big question I do not see being answered is *why* they went bust.Jerryab, recall the times pre credit crash when this deal went through. Money was flowing like water. Just when you thought you had seen the craziest deal ever go through, something came out and topped it. There were several deals done that I EXPECTED to go BK after the fact. This is why I would NOT and did NOT buy any of the LBO bonds at the time. The BK lawsuit against shareholders has a lot of detail that alleges this particularly LBO was doomed from day one. They claim that the investment banks and management ignored any analysis that questioned the deal. Apparently they kept upping the share price which meant they had to take on more debt. IIRC correctly, the claim is that the debt could not be serviced, even up “nominal” circumstances. Stated differently, they claim is that Lyondell would have survived the downturn and NOT gone BK if they had not taken on the additional debt burden.I have no problem suing the officers and directors that approved the deal, plus the investment banks. All of those folks have “D&O insurance” (Directors and Officers) which was paid for by the company. The insurance will cover all legal fees up to the limits of the policy. And if the officers lose, the policy will pay damages up to the policy limits. (Certain caveats apply, like not covering criminal activity.) Unfortunately, private investors do NOT have any insurance that covers this. Umbrella liability policies do NOT cover it.TMFHockeypop: In your opinion, would this have been avoided if, like Berkshire, there were A and B (non-voting) shares.Hockeypop, I don’t know the answer to this question. I think the main advantage of two share classes is to PREVENT any hostile takeovers or LBO’s in the first place. You would hope that any shareholders that did NOT vote for approval would not be sued. My guess is that they would still be sued. The logic is that the investors should reasonably have been expected to know that the company was not worth the buyout price. This is kind of similar to the Bernie Madoff case where they have “clawed back” monies that were paid out along the way.‘Fradulent conveyance” is a well established part of bankruptcy law. A simple example is that I know I am going to file for bankruptcy next month, so I sell my house/car/boat to a friend for $1 when its fair market value is $1 million. The BK court can and will undo that transaction on a fraudulent conveyance principal. This case is the first one where arms length shareholders were sued. In my particular case, I owned the stock for ~30 days! I was doing some merger arbitrage investing at the time. I was pleased with the return in 2007 on this stock. It continued to look good until the legal bills arrived in 2012. The legal bills are many times higher than the gain I had. And they are still growing every month.Thanks,Yodaorange
I am very sorry to hear about the trouble and stress you are going through, Yoda.Also, I am concerned what the outcome of this case could mean for common stock ownership. If owners of common stock take the risk, as we do, of having nothing in the case of bankruptcy, that is one thing. If we also take the risk of being sued due to fradulent conveyance, that is quite another. As I think of the risk this has opened you up to, and of the potential loss far beyond any gain, this whole thing becomes quite odd and disturbing. I wonder if the SEC has been looking at this. Given the additional risks of common stock ownership this would establish -- and the countless lawsuits that would follow -- I should think this suit would be of particular interest for the common good.David
I hate Wall Street even more this morning than I did yesterday.
The large shareholders like Vanguard, Merrill, and Fidelity have NOT settled. They are able to amortize the legal fees over a much larger base, like hundreds of million $’s.4. MANY SMALLER SHAREHOLDERS HAVE SETTLED THE CASE, PAYING “NUISANCE MONEY.” Let’s say you owned $100k of shares back in 2007. Lord knows what your financial position is in 2012. The legal fees for a small shareholder can easily run into the tens of thousands. Plus there is a monthly burn rate for legal fees that can run into the several thousands.1. Yoda, commiserations.2. I went through a situation with a REIT where point 4 was the crux, except they could NOT settle; they were trapped. Horrible. I became very close with some of the other investors, including some elderly retirees who (due to all eggs in what had seemed a safe conservative basket) lost everything.3. The civil side of our legal system is increasingly skewed-towards/owned-by/run-for-the-convenience-of large corporations with lawyers on staff and legal firms using the system for what, to my mind, amounts to extortion. The legal culture is increasingly isolated from individuals and lives off corporations, and even ethical lawyers lose perspective. Then they become judges or legislators! Costs of paying extortion from corporations gets passed on to customers and government as cost of business. Costs of paying extortion to individuals spells wipe out and destruction. Worse, and the macro angle, is that the perception and reality of this situation seems to me to be an ENORMOUS drag on the economy.david fb
Worse, and the macro angle, is that the perception and reality of this situation seems to me to be an ENORMOUS drag on the economy.david fbSpeaking of which, look what just popped up? http://allthingsd.com/20121118/regulators-take-look-at-paten... The civil side of our legal system is increasingly skewed-towards/owned-by/run-for-the-convenience-of large corporations with lawyers on staff and legal firms using the system for what, to my mind, amounts to extortion. The legal culture is increasingly isolated from individuals and lives off corporations, and even ethical lawyers lose perspective.This bit is exactly why diplomat lady left the corporate lawyer career where she had a promising lucrative career and went to work for Foreign Affairs at a much reduced salary. She hated the work and felt she was on the wrong side, now she loves her job. Tim
This really serious as stock holders protections, even thought they are supposedly "ownerners," against being rliable in corporate malfeaance is one of the big government "gifts" (a la Romney) to investing (which actually is just another form of gambling). The same applies to limited partners too, of course. Until now, you can own stocks without any fear of being sued if a company goes kaput and stiff the creditors. Take that away, and I wounder how many people will take the risk of owning stocks.brucedoe
3. In 2010, the bankruptcy trustee sued all investors that owned >=$100k of stock the day the buyout was consummated. There were >2,000 shareholders, of which Yoda was one.Firstly - my condolences that you have to go through this. At first blush, I agree with others that it seems abusive to the former shareholders.I am curious, though. Did you hold the shares until the buyout was consummated? So you effectively sold to the LBO group?If so, I'm wondering if things would have been different if you had sold in the open market just a day or two earlier. I see two groups of shareholders: the group that voted for and agreed to the LBO. And the group that owned shares to the bitter end. If there were any time lapse between these two (and I can't imagine that there wasn't some time lapse), those who voted for the LBO could have sold their shares on the open market before the final close of the purchase.Thank you for the updates on the case. It is quite fascinating to follow.--Peter
Ptheland asks: I am curious, though. Did you hold the shares until the buyout was consummated? So you effectively sold to the LBO group?Ptheland, I held until the buyout was consummated. The stockholder does not have to do anything. Your brokerage automatically puts the funds into your account and removes the shares. Had I sold the shares one day earlier, I would NOT have been sued as I understand it. It was only the folks that received the funds from the LBO group. And I am sure that some folks bought shares the day before the close. If they ended up owning >=$100k shares, they got sued. As I mentioned, I owned my shares for about 30 days. I cannot remember if I voted to approve the deal or not. The deal might have already been approved by the Lynondell shareholders before I bought them. My reply to the court stated that I had no knowledge of the Investment Bank reports, nor the board level discussions and I only owned the stock for 30 days. There is a lot of legalize also. In sum, all of the arguments by all of the stockholders have NOT persuaded the BK judge to dismiss any of the claims against stockholders. The only shareholders that have been released are the ones that agreed to pay the BK trustee some amount.As a background, here is the strategy I was using at the time for these purchases.1. I tracked all announced mergers, in total 488 companies over a few years.2. For each company, I assigned a probability of a successfully completed merger, plus a target date, plus a “final” price if I thought the buyout price might go up.3. Some deals like Lyondell were all cash deals. Others involved receiving stock in the buying company.4. I updated the prices every day and calculated a risk adjusted internal rate of return for all of the issues.5. At the time, money market funds were paying ~5.0%. Since I was overall bearish on equities, this was the benchmark. If the calculations showed IRR’s greater than 5% plus margin, I bought the shares.6. In general if the IRR went below ~ 5%, I sold the shares before the deal closed. I cannot remember exactly why I did not sell Lyondell in advance.7. I would have to go back to get an exact number, but I bought many of these issues. Most of the time, the IRR’s were NOT attractive because the Wall Streeters were on top of them. Maybe 5% to 10% of the issues made sense for investment.8. The strategy was hitting for singles, instead of home runs. I was able to hit quite a few singles, until this Lyondell lawsuit came up. It was NOT a perfect strategy though and I did strike out on one deal. The buyout was an American company being bought by a foreign company. Essentially local racism killed the deal. Something to the effect of “we don’t trust them foreigners to buy our fine American company.”9. I knew this strategy had a limited life. It was clear to me that the LBO’s were a massive bubble. That is why I would never have bought any of the debt aka bonds they issued. My mistake was thinking that once the buyout funds hit our accounts, the book was closed for life.As I described in the original post, this was a “black swan” to me. . . Thanks,Yodaorange
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