LONDON--A major shareholder in investment vehicle Tetragon
Financial Group Ltd. (TFG.AE) is suing the company's board for
allegedly mismanaging last year's takeover of hedge-fund group
Polygon Management LP and helping divert funds to two Polygon
principals who sit on TFG's board.
Omega Partners, part of Leon Cooperman's New York-based Omega
Advisors Inc., claims in the suit that Polygon co-founders Patrick
Dear and Reade Griffith profited at the expense of TFG shareholders
in TFG's October purchase of Polygon. The suit alleges that the two
men made tens of millions of dollars by timing the transaction
before a share repurchase by TFG that boosted the value of TFG
shares.
TFG agreed to pay Mr. Reade and Dear and other Polygon
employee-owners 11.7 million in TFG shares worth around $97 million
in exchange for Polygon and stakes it held in two other asset
managers, according to the October announcement of the
acquisition.
Omega in the lawsuit says TFG "was fleeced by the deal" and
could have used far fewer shares to pay for it if the share buyback
had happened before rather than after the purchase was
announced.
"The structure and timing of these transactions underscores the
fact that they were designed by defendants to benefit the
principals to the detriment of TFG and its shareholders," Omega
said in the suit, filed Tuesday in the U.S. District Court for the
Southern District of New York.
The investment firm said it wants TFG to alter the terms of the
Polygon transaction and replace the Polygon affiliate that advises
TFG on its investments. It is seeking unspecified damages from the
defendants on behalf of TFG.
TFG in a statement Wednesday said it and its board believe "that
the [suit] action is factually and legally without merit and intend
to seek to have the action dismissed as quickly as possible." A
spokesman for Tetragon Financial Management, the investment adviser
of TFG that is controlled by Mr. Dear, Mr. Griffith and a third
former Polygon partner not named in the suit, said the claims are
specious, "with no basis in fact or law" and come nearly eight
months after the Polygon acquisition was announced and after a 27%
increase in TFG's share price since then.
Mr. Dear and Mr. Griffith declined to comment.
Polygon floated TFG on Euronext Amsterdam in 2007 to invest in
credit instruments. It went on to expand its mandate to include
taking stakes in asset managers and now has about $1.7 billion in
assets and a market cap of $1.38 billion. Mr. Dear and Mr.
Griffith, Polygon's principals, control TFG through voting shares,
and serve on TFG's board along with three executives at the Polygon
affiliate that is TFG's investment adviser and four non-executive
directors.
"The web of interrelated entities with overlapping boards,
ownership and management was designed by defendants Dear and
Griffith to obscure the full extent of the manipulative and
self-interested transactions involving TFG, Polygon and related
affiliates," the Omega suit claims.
TFG shares traded up 1.3% Wednesday, to $10.44 a share, after
having sunk as low as $0.57 when Tetragon Financial Management
wrote down the value of TFG's assets in the financial crisis. It
went on to write them back up as the crisis subsided, raising the
ire of shareholders by collecting around $200 million in
performance fees on the paper gains.
TFG shareholder Daniel Silverstein filed a suit against the
Polygon principals and TFG's other directors in 2011 to try and win
back those fees, but the case was dismissed last year in the same
Manhattan court where the Omega suit was filed. The judge on the
Silverstein case, Jed Rakoff, said the claim didn't have merit
because Mr. Silverstein bought his stock after the compensation
plan was put in place and publicly known.
Omega Partners has held stock in TFG since September 2009 and
estimates that it is TFG's largest shareholder, with more than 5
million shares. Mr. Cooperman in January told CNBC the stock was
one of his top tips for 2013. Mr. Cooperman is based in the U.S.
and couldn't immediately be reached for further comment early
Wednesday.
Analysts at Liberum Capital said TFG's "structural issues," such
as having shares that don't come with any voting rights, mean the
company's stock will likely continue to trade at a sharp discount
to the value of its underlying assets.
Shares in investment companies can trade at a discount or
premium to the value of their assets, depending on investor
sentiment.
The analysts said the way the company calculates performance
fees is also weighing on the stock price. In contrast to most hedge
funds that must regain any losses before collecting performance
fees, TFG's performance is assessed each quarter, and Polygon
collects 25% of any gains.
The TFG purchase of Polygon didn't include the affiliate that
collects management and performance fees on TFG's investments.
Shareholders had no vote on the deal, which TFG said was conducted
without the involvement of Mr. Dear and Mr. Griffith after it got
independent advice.
-Write to Margot Patrick at margot.patrick@dowjones.com
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