Falcon Investors: What Are You Releasing?
Citigroup’s Falcon and ASTA/MAT hedge funds have previously been reported on in this space. (For further background, see articles on our subprime coalition’s website here). As noted therein, Smith Barney brokers marketed these hedge funds to their best customers as low-risk, conservative funds, a municipal bond fund alternative. They were anything but.
Citi has taken the unusual – if not nearly unprecedented – step of offering investors in these funds an opportunity to recoup some of their losses. It does so through a complicated tender offer (“Offering Memorandum” or “OM”) that involves investors tendering their shares and executing a release of claims in return for 45 cents per share and 75% of the liquidation value of the portfolio over 45 cents per share, less Citi’s “cost of capital” (whatever that is). (To be more precise, Citi is making this tender offer to investors in Falcon Two, Falcon Two B, Falcon Three, Falcon Four, and Falcon Plus2. We are only reviewing OM materials for Two B and Four investors but believe them to be the same for other Falcon funds. Also, the “tender price” may vary from fund to fund. As of April 18, it was 45 cents for the first three funds and 54 cents for Falcon Four).
We have recently received and have begun to review carefully the Falcon tender offer documents. (Investors wanting to accept the tender offer have until June 30 to do so). We have not yet finished that review. In the course of our initial review, however, we have developed serious concerns about the scope of the release that Citi is asking Falcon investors to sign. In particular, we are concerned about the potential impact of the release upon Falcon investors who also invested in MAT/ASTA funds.
We understand that Smith Barney brokers have told Falcon investors that accepting the tender offer and signing the Release in question would only release investors’ claims with respect to Falcon. But such verbal representations are meaningless in light of the oft-expressed prohibition in the OM against any investor relying upon any representation not contained therein.
Two areas presently concern us the most about the Release. These areas are not the guts of the Release, they are the penumbra and the invisible. Put another way, what concerns us the most is, first, what lies at the periphery of the released claims and second, what is nowhere to be found in the Release.
The core of the Release appears to be (and hopefully is) straightforward, set out in 4 parts. First, Falcon investors accepting the tender offer release any claim arising from (i) their investment in the Company (meaning Falcon Strategies Four LLC or Falcon Strategy Two B LLC for the two sets of documents we are reviewing). No problem there. These investors also release any claim arising from (ii) their acceptance of this tender offer. This is an understandable attempt by Citi to try to ensure that any claim of “fraudulent inducement” is gone. (Please note -- the whole issue of "valuation" and how one is supposed to verify that Citi is in fact offering 25 cents on the dollar more than what the assets are valued at is beyond the scope of this post).
Falcon investors accepting the tender offer also release any claim arising from (iii) “the operation, management, supervision, or investment of any of the assets of the Company….” Again, no problem there. Finally, investors release any claim arising from “any actions taken or [not] taken by any of the Releasees in connection with or otherwise relating to or affecting in any way the Company.” One might justifiably become somewhat nervous about the breadth of this last phrase. But let’s put aside that nervousness for, after all, everything is still tied to action or omissions “relating to or affecting” the Company.
But now we must dissect what we have called the penumbra, the shadows, the periphery. Falcon investors accepting the tender offer are not releasing only claims arising from those 4 subject areas. They are also expressly releasing claims “relating to or in any manner connected with” those 4 subject areas.
This choice of language is most unfortunate. Is a MAT or ASTA claim “in any manner connected with” an investor’s Falcon purchase because the investor bought the investments from the same broker? At the same time? For the same reasons? Were Citi’s actions or inactions with respect to Falcon “in any manner connected with” its actions or inactions with respect to MAT/ASTA? The list can go on and on.
But it is the absent provision, the missing clause, that is the most troubling to us. If, as we are told, entering into this Falcon Release will have no affect on a MAT or ASTA claim, why doesn’t the Release simply say that? We can’t find it in the Release and we are very troubled by its absence.
To be fair, we have learned that Citigroup has stated unequivocally that this Release will have no effect upon a MAT or ASTA claim AND that they will make this representation in writing. IF this is true, much of our concern is put to rest. But we have not yet seen evidence of any such written commitment/representation. To be even fairer, we are also aware that, at least with respect to Falcon Two, Citi had released “supplements” to the OM (dated May 15 and May 23) that inform of certain pending litigation and further state that an investor’s release does not release claims relating to equity interests “in any other Falcon Fund.” It may therefore be obvious to Citigroup that the release does not extend to any other Citigroup investment either. For the benefit of MAT/ASTA investors who are accepting the Falcon tender offer without receiving anything further in writing from Citi, let’s fervently hope so.
What we have also discovered, however, is an Affidavit filed by James O’Brien, Co-Head of Citi’s Global Fixed Income Group, on or about May 28, 2008, in the lawsuit filed in the Southern District of New York by a Falcon Two investor that seeks to enjoin the tender offer from taking place. Ferguson Family Trust v. Falcon Strategies Two LLC et al., Civ. No. 08 CIV4723. In that Affidavit, Mr. O’Brien states as follows: “To obtain the tender offer consideration, investors must release all legal claims against the Company, CAI, Citigroup, its affiliates, and other individuals and entities.” (Emphasis added).
We sure wish Mr. O’Brien had been more precise with his sworn testimony. Did he really mean all claims?
As readers of this blog know, posts here are expressions of opinion only of general or particular interest and cannot be relied upon in the absence of an attorney-client relationship. Any reader’s access to or reading of this post (or any other one on this site) does not create an attorney-client relationship. Page Perry, LLC does urge all Falcon investors to consult with counsel of their choosing before deciding to accept or reject the Citigroup Falcon tender offer.
