(Filed Under Financial and General Interest News). A “consortium” of shareholders owning about 70% of the outstanding common shares of Frederick’s of Hollywood Group Inc., a public company, has sent the company’s board of directors a “non-binding proposal letter” offering to purchase the remaining shares and take the company private.
Frederick’s has suffered significant losses in recent years and the possibility of a sale has been discussed by the firm for several months. Since August of 2008 combined losses have totaled just under $90 million. In March Frederick’s sold $10 million of preferred stock to one member of the consortium, acknowledging that the transaction could give the purchaser, under certain circumstances, the ability to take control of the company.
At the time of the announcement, Frederick’s noted the offer “represents a 26% premium to the then trailing ten day average closing price of the Company’s common stock.”
In its announcement, Frederick’s stated, “on September 26, 2013, its board of directors received a non-binding proposal letter from HGI Funding LLC (“HGI Funding”), TTG Apparel, LLC (“TTG Apparel”), Tokarz Investments, LLC (“Tokarz Investments”), Fursa Alternative Strategies LLC (“Fursa”), and Arsenal Group LLC (“Arsenal”) (the “Consortium Members”), pursuant to which the Consortium Members proposed to acquire all of the outstanding shares of common stock of the Company not currently owned by them at a proposed price of $0.23 per share as part of a going private transaction, subject to certain conditions.”
According to Frederick’s, “HGI Funding is an affiliate of Five Island Asset Management, LLC and the current holder of the Company’s Series B Convertible Preferred Stock; TTG Apparel is the holder of the Company’s Series A Convertible Preferred Stock, and together with Tokarz Investments, own approximately 25.9% of the outstanding shares of the Company’s common stock; and Fursa and Arsenal are controlled by William F. Harley, a director of the company [Frederick’s], and own, in the aggregate, approximately 43.5% of the outstanding shares of the Company’s common stock as of September 26, 2013.”
“The Company’s Board of Directors has appointed Milton Walters, its sole independent director, to serve as the lead director in connection with the full Board’s review and consideration of the proposed transaction and the lead director must approve any proposed transaction. The Board of Directors cautions the Company’s shareholders and others considering trading in its securities that the Board of Directors has just received the non-binding proposal from the Consortium Members and that no decisions have been made by the Board of Directors with respect to the Company’s response to the proposal or the fairness of its terms. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated.”
Coincidentally, HGI affiliate Harbinger Capital Partners and HGI principal Phillip A. Falcone reached a settlement with the Securities and Exchange Commission in mid-September, a few days before the proposal was sent to Frederick’s. In announcing the details of the arrangement, the SEC reported that Falcone and Harbinger Capital Partners “have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing. Falcone also agreed to be barred from the securities industry for at least five years.”
“The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company. In the settlement papers" filed with the SEC, "Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.”
The SEC statement continued, ““Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” said Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement. “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry.””
The settlement, “requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty. The Harbinger entities are required to pay a $6.5 million penalty. Falcone has consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years. The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.”
“Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court: Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.”
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