MIAMI (CN) – Hedge fund managers staged a hostile takeover of Smart SMS Corp. and “guided Smart toward financial ruin through a series of nefarious and foolish acts that could lead to only one result: the insolvency of Smart and destruction of any shareholder value,” shareholders claim in a class action in Federal Court.
They say the “greedy and self-serving” managers loaned them $26 million at “usurious and commercially unreasonable” rates, acquired a significant ownership in the company and then assumed absolute control of it before running it into the ground.
“While it is not unusual for lenders to assume one or more positions on the board of directors of a debtor corporation to which they advance funds,” the lawsuit states, “the defendants have misbehaved in a manner demonstrating a complete disregard for their fiduciary duties, committing gross negligence contrary to the business judgment rule.”
Hedge fund directors Scott A. Stagg and Amir Khan allegedly allowed the former owners of Smart’s subsidiaries to run the companies with no supervision and without a formal management agreement. One of the former owners was a convicted felon who used an alias and fake Social Security number on his job application, shareholders say.
The managers also renegotiated Smart’s joint ventures without CEO approval and denied shareholders opportunities to gain equity in the company by making equity financing impossible with inflated stock prices.
The shareholders cite several other ways in which the defendants drained company resources, including paying ghost employees; entering into contracts motivated by a desire to take over Smart, such as hiring their own director of finance as Smart’s, even though he worked from the defendants’ offices and acted in their interests; appointing Brian Trainor as the board’s “sole officer,” despite shareholder objections; withholding funding; and eventually firing all of Smart’s employees.
Shareholders seek an order blocking the hedge fund managers from illegally negotiating in Smart’s name or withholding access to capital, and directing Smart’s subsidiaries to halt payments of accounts receivable.
They also demand actual and punitive damages, and are represented by Richard Friedman.
Defendants are Stagg, Khan, Trainor, Stagg Capital Group, Distressed High Yield Trading Opportunities Fund, SV Special Situations Fund and SV Special Situations Master Fund.