Sunday, February 28, 2010

Just Conjecturin’, Part 9: The 'Shut Up and Settle, Dammit' Scene

Thanks to the infighting and legal positioning connected to the sale of UltimateBet software owner Excapsa, and that firm's subsequent movement into what's now become a suspect liquidation status, observers are able to get a peek into some of the structure behind the now-infamous firm. More on that one soon; it's on the list. A few posts back I wrote about how the initial sale to Blast Off, an entity owned by Joe Norton's Tokwiro Enterprises ENRG, was not popular with a minority of Excapsa shareholders, who believed -- and posted some of their anger on popular poker forums -- that they were being frozen out of the company.

When the time came for the firm's owners to settle up in the lawsuit brought by Tokwiro et. al. for damages connected to the insider cheating scandal, that was pretty much shoved down their throats as well. While one wave of cheating refunds had already been made at the time Blast Off (Tokwiro) filed against Excapsa, still more cheating accounts had been identified and millions more were needed immediately. The hounds were afoot and UB might have been in danger of folding at that moment, with Tokwiro then seeking an alternate method of recouping its losses from the earlier Excapsa owners. Neither side wanted to derail the gravy train, even a damaged one.

While the damages originally asked for by Tokwiro ($US $81 million) represented the majority of the note the firm still owed to Excapsa (somewhere around $110 million), the actual cheated amounts were, seemingly, somewhat less. The likeliest scenario has Blast Off computing the total of cheated monies cashed out through this second wave of identified accounts, then settling with Excapsa for the majority of that sum, which was $14.625 million, or as it's commonly referred to, $15 million.

Not all Excapsa owners were happy with the proposed settlement, particularly since it was shoved down their throats. The person(s) behind the blind trust named SC Fundamentals expressed a legal concern, according to one document, "that such irrevocable consents" (as needed to sign off on the settlement) "were obtained by misrepresentation or otherwise inadequate disclosure."

Eventually, perhaps through a bit of behind-the-scenes arm-twisting, the person(s) behind SC Fundamentals was or were persuaded to go along with the settlement, a Canada court hearing for which, in October 2008, had been scheduled in a rush-rush manner. But while this trust finally consented, it also left behind its laundry list of complaints about the way the settlement with Blast Off was shoved through. This letter, attached as exhibit A to a document called the "Unofficial Typewritten Version of Endorsement," dates from October 13, 2008 and is worth publishing in its entirety. Note that some of the matters contained herein now seem easy to explain, while others are still out there, hanging in the breeze:

(dated October 13, 2008)

SC Fundamental and its affiliates own approximately 7 million shares of 656059 Canada (the "Company"). We became aware only this afternoon of the possibility that a hearing will be held tomorrow, October 14, to approve a settlement of litigation (the "Settlement") with Blast Off Limited and its affiliate ("BO"). Evidently, the court would approve the settlement on the basis that 2/3rds of the Company's outstanding shares have given it their informed consent. We have concerns that either (i) that consent is not truly informed; or (ii) some or all of the consenting shareholders may have self-serving interests which are not shared by the balance to the Company's owners.

Our concerns can be divided into four separate categories:

1. Failure to disclose motivations and potential conflicts of interest. As is described in greater detail below, shareholders are being asked to approve a very substantial settlement of seemingly weak claims with virtually no relevant information on which to base their decision. It seems difficult to understand why they would do so unless they have some interest in the fortunes of BO. This impression is not lessened by the fact that certain shareholders are willing to forfeit their shares to facilitate the deal, and that others are willing to pledge theirs to guarantee BO's performance under its note to the Company. Who are these shareholders? What common interests do they have with BO? How can we reconcile their behavior with the assertion in the First Liquidator's Report that "there is no evidence of overlapping shareholdings between Excapsa and Blast Off"? Aren't shareholders entitled to a broader disclosure of any and all relationships between any proponent of the settlement including consenting shareholders, inspectors and the liquidator on one hand, and BO on the other?

2. Failure to analyze the legal merits of BO's position. The company proposes to pay almost $15 million in settlement of what are presumably very credible claims. Shareholders, however, are provided with virtually no analysis demonstrating that credibility, or even that the Company made a serious effort to evaluate BO's case. For instance, wouldn't the fact that the software be sold on an "as-is" basis, provide a very strong defense? Wouldn't the Court-ordered extinguishment of all pre-filing claims similarly forestall BO's demands? Documents provided to the Court and shareholders provide no analysis of these issues, or, for instance, of BO's assertion that the software "tool" which permitted cheating was known to, and not disclosed by, the Company. Indeed, the Liquidator's report provides no descripotion of any rigorous consideration of the relative merits of BO's case and the Company's defenses.

3. Failure to disclose BO's wherewithal. One purported benefit of the settlement is that it will induce BO to resume payments on its note to the Company. Even before discovery of the cheating scandal, however, BO had defaulted on the note. BO has asserted that it subsequently suffered tens of millions in unreimbursed losses, but nevertheless promises that, if the Company will only give it $15 million, this time it will really meet its obligations. Our skepticism about this is only heightened by BO's insistence that its financial statements not be made available to the Court or Company shareholders. It seems both incredible and alarming that Company shareholders should be asked to, in essence, lend more than $100 million to BO without being allowed to make an informed judgment about its ability to pay them back.

4. Other matters:

• According to the First Liquidator's Report, the original principal of the BO note was $125 million. It appears that approximately $13 million was paid between October of 2006 and the summer of 2007, during which time interest was accruing at 1% per month, or at a rate faster than the principal was being repaid. No payments have been made since the summer of 2007, during which time interest was presumably also accruing. According to the liquidator's report, the current principal of the note is less than $109 million. How can this be?

• The report says that the settlment will result in certain tax benefits for the Company. No further discussion of the magnitude of these benefits is provided, nor is explained how a company structured as a mutual fund with a view toward not paying taxes could even realize such benefits.

• There is no disclosure of who used the "tool" to cheat UltimateBet's customers, or what efforts have been made to recoup that person's ill-gotten gains. These questions would seem to have a bearing on both the merits of BO's case, and on the amount of damages it could claim from the Company.

• We're unclear (i) what the "declaration of shareholders" referred to in section 27.4 of the First Liquidator's report is, and (ii) why BO's owner would be unwillimg for the Company's shareholders to know its contents.

• We have been concerned about the prospect of a settlement with BO since we first became aware of the possibility. In this regard we attempted to initiate a dialogue with the company and its liquidator some number of weeks ago. Our attempt has not been an unqualified success. By way of example, Company inspector Melissa Gaddis refused to disclose the identity of the persons who solicited consents for the removal of the former liquidator (who was seen as impeding a settlement). In discussions with the current liquidator, we were assured that no settlement would be approved until at least 30 days after a detailed proxy settlement had been provided to shareholders. We were accordingly startled to discover that a hearing to approve the Settlement might be held as soon as tomorrow.

In closing, I should stress that we are not asserting bad faith on the part of any party to the proposed settlement. everyone may be acting in accordance with their duties and the best interests of Company shareholders. On the other hand, there are reasons to think that they may not be. At a minimum we lack the information to make a sensible judgment in this regard, and we respectfully request that no settlement be approved until that information is provided to the Court and all Company shareholders.

Peter Collery

SC Fundamental

. . . . .

Within a day Collery, the owner(s) he represented, and their law firm had been put back in line, and the settlement with Blast Off by Excapsa proceeded without further interruption. Nonetheless, the letter dropped in at least a handful of nuggets worth chewing on at a later date.


Anonymous said...

It's interesting, actually. I wouldn't say I know, but I definitely "know of" Collery through a restaurant.

I am not really familiar with these things, but would it be possible or legal to set up a trust who's member was either an investment fund or a feeder? I guess my question is, would it be possible with the laws in place to shield a funds participation. Could Collery as a investment manager shield the participation of something as large as a fund by creating a blind trust who's member was the fund?

I am pretty sure that he places investment $.

Steve Kammerman said...

In this industry, you're always going to have shady players who don't play by the same rules as everyone else. Just a reminder to try to investigate and research who you're doing business with whether you're a company or just a lone gambler trying to choose your casino.

Anonymous said...

Loving the blog, gr8 job and ty for your efforts!! Can't wait for Part 10