MINNEAPOLIS (CN) - Insiders at subprime lender CompuCredit stripped the company of $25 million by handing out the money out as bonuses, though the Georgia-based company is in "severe financial distress" and owes its noteholders hundreds of millions of dollars, 21 plaintiffs say in Federal Court.
The 21 plaintiff investment managers and funds hold about $204 million in convertible senior notes issued by CompuCredit, which are due in 2025 and 2035, according to the complaint. They say insiders are looting the company, and will leave its creditors "holding the bag."
CompuCredit has approximately $390 million in outstanding notes; more than $231 million are due to be repurchased at face value in 2012, according to the complaint. In November this year, the company announced it was in financial trouble, with "plunging asset values," "increasing losses" and a "disturbing lack of liquidity," the noteholders say.
CompuCredit "declared that it had lost $239 million in the last quarter, and a total of $487 million in the last year to date," and that as of September, shareholders had only $238 million in equity. The plaintiffs say the company is under water by around $186 million and approaching insolvency.
CompuCredit's ability to pay its debts is doubtful without "extreme, unexpected and immediate improvement in its operations," the noteholders claim.
The plaintiffs say CompuCredit has announced that it is not in a position to pay back its debts and that it shamelessly intends to shortchange noteholders by paying out $25 million in dividends to shareholders, starting on Dec. 31.
The company, which is largely owned by CEO David Hanna, his brother and "corporate insiders," has a "stated policy not to pay dividends," which it advertised on its "Investor Relations" Web site, the complaint states.
The noteholders say that "CompuCredit is admittedly hemorrhaging cash and facing a liquidity crisis." The company stated in a press release that the noteholders will be pressured to convert their notes, receiving $74.79 or $61.46 for every $1,000 in face value, depending upon the series, and based upon the closing stock price on Dec. 2.
The noteholders say that CompuCredit also announced that it is "considering a tax-free spinoff of its U.S. and U.K. micro-loans businesses," which is the "only portion of the business that had been generating revenue."
The plaintiffs add: "The message to noteholders is clear: convert your notes, because the company's management has no interest in leaving the company with enough assets to pay you what you are due."
The named plaintiffs are Whitebox Advisors, Whitebox Combined Advisors, Whitebox Convertible Arbitrage Advisors, Whitebox Hedged High Yield Advisors, Akanthos Capital Management, Pandora Select Advisors, Kingstown Partners, Galileo Partners Fund, Aria Opportunity Fund, AQR Absolute Return Master Account, CC Arbitrage, CNH CA Master Account, Kamunting Street Master Fund, KBC Financial Products, Highbridge International, Parsoon Opportunity Fund, Tenor Opportunity Master Fund, GLG Investments, GLG Investments IV, GLG Global and GLG Market Neutral Fund.
They want CompuCredit barred from the spinoff and from paying dividends or transferring corporate assets without the court's permission, plus damages for fraudulent transfer and Georgia Corporate Code violations.
Their lead counsel is Bernard Nodzon with Ross & Orenstein.
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