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WSJ Misleads On Harbinger Capital “Insider Information” Story
Teri Buhl is an investigative financial news reporter who has written for the New York Post, Trader Monthly, Housingwire, and Dealbreaker.
(Update 3)
Despite the sensationalized headlines in today’s Wall Street Journal, Harbinger Capital Partners was not sued for using material non-public information to secure a winning bid for appliance maker Applica Inc. in 2006, but rather breach of contract.
The case centers on Ohio-based NACCO Industries, whose bid for Applica was eventually bested by Harbinger. Harbinger manages $8 billion and is run by Philip Falcone. What NACCO is really suing Harbinger for is breaching its no-shop contract with Applica.
That claim is a far cry from getting ‘insider info’—as headlines across the internet spewed out after the Journal story was published. Some of those headlines, such as ‘Harbinger accused of tapping insider information for bid’, run by Financial News, have now been corrected.
A spokesperson for Harbinger says, “There is no claim in the case that rests on the misuse of confidential information.”
The Journal cites decisions made “in a preliminary ruling in the Delaware Chancery Court”— which is technically misleading. According to legal documents reviewed by Hedge Fund Implode, this was only an opinion issued by the judge on a motion to dismiss from Harbinger. A motion to dismiss does NOT address facts. Instead it addresses only a one-sided pleading and assumes its assertions to be true. Upon further review, Hedge Fund Implode has found that four of the seven claims made by the scorned suitor were thrown out. In what appears to be a smear campaign in an effort to get Harbinger to settle, NACCO had also tried to claim equitable fraud and conspiracy, but the Delaware judge dismissed them.
Harbinger has yet to present its own evidence to the judge. After Harbinger's evidence is reviewed, a motion for summary judgment could result in a dismissal because there are no material issues of fact to decide, or, the case could go to trial.
Once the judge reviews the evidence, he or she can then set an actual trial date. Therefore, no one knows yet if the investor-friendly courts of Delaware actually believe that NACCO’s claims are strong enough to merit a trial within a year’s time.
Hedge Fund Implode has also learned that one of the writers for the Wall Street Journal article, Jenny Strasburg, was given numerous legal explanations about the actual claims in the case along with detailed statements from Harbinger explaining why the claims by NACCO Industries had been thrown out in other courts. Yet, that information isn’t spelled out in her story, with which she shares a byline with colleague Mark Maremont.
In 2006, NACCO tried to bring an injunction to stop Harbinger from buying Applica in an Ohio court. That attempt that was dismissed. Additionally, NACCO had threatened before to take legal action in the Delaware courts, but backed down.
NACCO has yet to state a dollar figure on how much it thinks the company lost due to Harbinger’s winning bid, and is playing rough in its legal filings. According to the WSJ, in emails cited in the judge's ruling, Mr. Falcone instructed a broker to "START ACCUMULATING [Applica] QUIETLY. SIZE." The next trading day, Feb. 27, he sent the same broker a message "I CAN USE MORE [Applica] TODAY."
“The e-mail excerpts quoted in the Journal’s article were selectively and misleadingly quoted by NACCO in its submission to the Court,” says a spokesperson for Harbinger. “Indeed, they were plucked by Harbinger’s adversaries from more than a hundred thousand pages of documents that Harbinger produced in the litigation.”
As far as how investors in Applica fared, it looks like they made out just fine. Applica paid Nacco $6 million to terminate the deal in late 2006 after they received a better offer from Harbinger. According to people involved in the transaction, NACCO was only offering a stock-for-stock bid—one that would give them 75 percent of the economic interest in the deal along with controlling 94 percent of the voting rights. A deal like that, they explain, could have enabled NACCO to pay a dividend to itself instead to investors. Harbinger then came in with a cash offer which included paying off around $150 million of debt and did not pay itself a dividend. Applica’s stock, which was trading just under $4 a share, was eventually bid up to $8.25 per share—a pretty sweet premium for Applica investors. Applica shareholders approved Harbinger's offer in early 2007. A Harbinger spokesperson said, “In this bidding contest, Harbinger won and delivered good value to the Applica shareholders—far greater than what NACCO was prepared to pay—and Harbinger will continue to deliver good value to its investors playing fair and square.”
According to people familar with Harbinger, Falcone is expected to close out with earnings of 40-45% on his two main funds this year.
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