Hedge fund manager Leon Cooperman’s battle with the Securities and Exchange Commission, which sued him in September over insider trading allegations, isn’t the only legal headache he has these days.
Cooperman’s Omega Associates is one of several investment firms accused in Delaware Chancery Court of plotting to take over a company in a convoluted boardroom coup that has put the alleged target’s financial health at risk. Carl Grimstad, co-founder of debit and credit card payment processing company iPayment Holdings, as well as a 20 percent shareholder and its CEO until his ouster in August, is suing Omega, along with certain members of iPayment’s board, credit and distressed debt hedge fund manager Chatham Asset Management, and asset manager AllianceBernstein, accusing them of stacking the board with their cronies, then “derailing” efforts to refinance the company’s senior debt so they could take control. (IPayment declined to comment for this story.)
The investors own more than 50 percent of the company’s second lien debt and 41 percent of its equity. They have until December 29 to convert the debt to equity to give themselves majority ownership and control and dilute the current shareholders’ stake, asserts the lawsuit. That’s because an unusual 2014 investor agreement that gives them the right to appoint four directors on the five-member board expires on that date.
“The controlling noteholders’ aim is plain: to appropriate for themselves the economic value of the company, obtain for themselves the vast majority of the company’s shares and secure permanent control of the company before their contractual control rights expire on Dec. 29 — all at the expense of the noncontrolling stockholders,” the complaint says.
Cooperman is a minor player. He owns 4 percent of the shares and an unknown amount of the debt through the Omega Charitable Partnership (which invests money for Cooperman’s various charities), according to the lawsuit.
“I know nothing about it,” says Cooperman, referring a reporter for Institutional Investor to Chatham and adding that “this guy [Grimstad] will sue anything that moves.”
Cooperman has a history of partnering with Chatham, which owns 25 percent of iPayment’s stock and 53 percent of its senior secured notes, according to the suit. Chatham is run by former Morgan Stanley junk bond trader Anthony Melchiorre.
IPayment, a small privately held company, had fallen into bankruptcy and gave the second lien noteholders exchange rights, along with the right to appoint four of five board seats, in 2014. (Grimstad holds the fifth seat.) The noteholders are now on their third set of directors; the first two sets had assented with Grimstad’s decision to try to refinance the company’s senior debt.
The noteholders fired the first set of independent directors following the board’s agreement in 2015 to refinance iPayment’s $368.5 million credit facility, which matures May 8, 2017. Then-CEO Grimstad considered it the company’s most pressing financial need, and its auditors at Ernst & Young concurred, claims the lawsuit.
After the investors named four new directors, this summer the newly constituted board approved a plan to both refinance the credit facility and convert the noteholders’ debt into equity. But the plan was quickly opposed by J.P. Morgan, the company’s financial adviser, and Latham & Watkins, its lawyers, on the grounds that it would be a breach of fiduciary duty. The board changed course and attempted to pursue the senior debt refinancing alone, hiring Jefferies to do the offering, which was slated for August 1. But before the offering could go forward, those board members were also fired and Grimstad was let go, according to the suit.
Four new independent directors were hired August 5; however, iPayment’s attorneys at Latham & Watkins said they were unlikely to pass the New York Stock Exchange’s “bright line” test for independence because they were Chatham employees. That led to Latham & Watkins’s firing, the suit alleges.
As a result, Ernst & Young, iPayment’s longtime auditor, has refused to certify the audited financial statements, putting the company at risk of defaulting on loan covenants. The noteholders’ “activities have materially increased the risk of default,” alleges the lawsuit, which was filed September 29.
Grimstad filed a related breach-of-employment lawsuit over his ouster in Manhattan Supreme Court, which is still ongoing.
Chatham denies the accusations. “This is a desperate attempt by a disgruntled and underperforming former CEO who put iPayment at risk and whose prior attempts to reinstate himself were denied in another venue,” it said in a statement to II. “At all times, Chatham acted appropriately and recommended actions necessary to protect the value of their investments. Any allegation to the contrary is entirely baseless and without merit, and Chatham will defend itself vigorously. Chatham is confident that the new board and management team are strengthening iPayment and positioning the Company for future success.”