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Maximizing Shareholder Value when the FBI Raids Your Office

SPECIAL VALUE INVESTING CONGRESS NOTES FOR THE IRREGULARS

Phillip Goldstein of Bulldog Investors talked this afternoon about his experience with Imperial Holdings (IFT), which is in the life settlements business. The business is and was pretty compelling — lending money to wealthy senior citizens against their life insurance — even as it’s been very controversial.

Bulldog invested in them by buying debt with a 15% coupon several years ago, and later IFT went public to get cheaper funding in February 2011. All was fine and dandy for a short while, but then the FBI went in and raided the company about seven months later in 2011 — as a result, the bank canceled their credit line and the company almost shut down and had a cash crisis. The book value was reported in September 2011 at almost $10, but the stock fell below $2 and they also had tons of shareholder lawsuits. But the Bulldog Investors folks had enough confidence in the CEO and the actual operations of the company to buy the stock based on their judgement of his character and the business model.

It seems like the President of the company may have been the target, he resigned and the lawsuit complaint seems to be that IFT was inducing their potential clients to lie on their applications, but there have been no indictments. They had plenty of cash on the books, with death benefits of over a billion dollars, but they had to pay the premiums until “cash flow becomes positive” and people start dying, so the balance sheet looked good but they were in a cash crisis. The company was being drained by legal fees and getting to the point that they would have trouble paying the premiums on the life insurance policies.

The SEC followed the FBI, and then Imperial paid a fine in April 2012 for a non-prosecution agreement (in which they admitted doing nothing wrong), which drove the stock higher … but they were still bleeding cash and the Directors were not protecting the shareholders. Bulldog and other hedge fund investors settled with the Board and put three hedge fund guys on the board — in what they described as a very atypical proxy fight that had them fighting to oust independent directors and back the CEO. After that went through, with effective board control, they finally got their reporting current, and investors backed the company with a $45 ...

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