SEC, Would-be Hedge Fund Mogul Settle Bogus Takeover Offer Case

by Dorsey & Whitney LLP
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A would-be hedge fund mogul’s plan to acquire a NYSE company with little more than a wish and a shell company ended with an SEC consent fraud judgment and a fine. Before the saga concluded, however, the bogus offer sent the stock price soaring after it was posted on Bloomberg, causing at least one short hedge fund to liquidate its position at a loss. SEC v. Mascioli, Civil Action No. 314-cv-00325 (D. Conn. Filed March 13, 2014).

Alexander Mascioli wanted to acquire all of the outstanding shares of Winnebago Industries, Inc., a New York Stock Exchange listed company. In June 2011 he formed North Street Capital L.P. He also created a website for his new firm. Northside specialized in leverage buyouts the site noted. The firm’s core markets, it went on to state, were automotive, consumer retail and business services. In fact the firm had not engaged in any business.

On April 10, 2012 Mr. Mascioli telephoned the General Counsel of Winnebago. During the call he made an offer on behalf of Northside to acquire all of the outstanding shares of the firm. He followed-up the telephone conversation with a offer letter. It stated that Northside would purchase the outstanding shares of Winnebago at $10.25 per share. The total purchase price would have been almost $300 million. The letter represented that a copy was forwarded to several people including Christina Stark at a Northside Capital email address. Ms. Stark and the address do not exist, according to the Commission.

The General Counsel responded to the offer letter with a series of questions regarding the ability of Northside to complete the transaction. Mr. Mascioli did attempt to secure financing. He contacted a major bank. An effort was also made to enlist the interest of a major competitor of the firm. Both efforts failed.

Northside responded to the inquiries. The General Counsel was informed that Northside is a progressive investment firm that acquires interests in middle-market companies; that it partners with talented management teams; that it manages a global hedge fund; and that financing was already arranged for the deal. Each statement is incorrect, according to the SEC. The General Counsel rejected the offer.

Northside would not be deterred. A second offer letter with improved terms was sent on May 9, 2012. The letter represented that the offer was not conditioned on financing and stated that Northside was prepared to move forward.

On May 17, 2012 Mr. Mascioli and Northside sent a copy of the May 9 offer to Bloomberg. At the time no response had been received from Winnebago. Bloomberg posted the offer on its website. The next morning almost 700,000 shares were traded in the pre-market. In the four previous trading days there had been little volume.

Winnebago notified the Exchange prior to the open. Trading was halted until the firm issued a press release. When the stock opened it was up at $9.81 after closing the night before at $8.51. Over 3 million shares traded on May 18 compared to the prior three days during which volume had ranged from 129,000 to 180,000 shares per day. As trading continued a New York hedge fund covered a large short passion in the shares, incurring a loss. The Commission’s complaint alleged violations of Exchange Act Section 10(b).

To resolve the case Mr. Mascioli and Northside consented to the entry of permanent injunctions based on Exchange Act Section 10(b). The two defendants also agreed, on a joint and several basis, to pay a civil penalty of $100,000. In addition, Mr. Mascioli agreed to the entry of an order barring him from serving as an officer or director of a public company. See Lit. Rel. No. 22941 (March 13, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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