Believes the Board is Still Failing to
Acknowledge and Address Corporate Governance Lapses, Disclosure
Problems, and Related Party Transactions That Have Eroded
Stockholder Value
Highlights Emerging Concerns Linked to
Chairman and CEO Philip Falcone, Including a Court Order Garnishing
His HC2 Compensation and Two Legal Actions Indicating He Owes More
Than $75 Million in Unpaid Debt
Urges the Independent Directors to Spare
Stockholders the Expense of an Unjustifiable Entrenchment Campaign
by Immediately Removing Mr. Falcone From His Leadership
Roles
Warns Against Any Near-Term Reconstitution
of the Board That is Designed to Insulate Mr. Falcone and Undermine
Corporate Democracy
MG Capital Management, Ltd. (together with Percy Rockdale LLC,
the nominating stockholder, and its affiliates, “MG Capital” or
“we”), a significant stockholder of HC2 Holdings, Inc. (NYSE: HCHC)
(“HC2” or the “Company”), which collectively with the other
participants in its solicitation beneficially owns more than 5% of
the Company’s outstanding shares, today sent the below letter to
HC2’s lead director.
We invite stockholders to read more about our case for change at
HC2 and sign up for updates at: A Better HC2.
***
March 30, 2020
Mr. Wayne Barr HC2 Holdings, Inc. 450 Park Avenue, 30th Floor
New York, NY 10022
Mr. Barr:
I write to you on behalf of MG Capital Management, Ltd.
(together with Percy Rockdale LLC, the nominating stockholder, and
its affiliates, “MG Capital” or “we”) in response to the March 27
letter (the “Conclusory Letter”) sent to me by legal counsel for
the independent members of the Board of Directors (the “Board”). I
also want to take this opportunity to follow up on my March 18
e-mail to you, which you have yet to respond to.
We believe the two-page Conclusory Letter, a summary of your
legal counsel’s “review” of accounting and disclosure issues
previously raised by MG Capital, amazingly fails to address any of
our concerns. We believe the Conclusory Letter’s dismissive tone
and utter lack of supporting documentation or underlying analyses
represents an affront to the sensibilities of stockholders of HC2
Holdings, Inc. (“HC2” or the “Company”). It appears obvious to us
that you, HC2’s lead director, and the rest of the directors that
the Company continues characterizing as independent, have failed to
meet your duties to stockholders. We contend that your ongoing
collective mishandling of our concerns will only reinforce to
stockholders that the incumbent Board and management team must be
overhauled.
Without providing a line-by-line response to every aspect of the
Conclusory Letter, we want to emphasize the following:
- Accounting and Compensation Issues – In early March, we
sent the Audit Committee a multi-page letter and more than 60 pages
of exhibits related to Continental General Insurance Company’s
(“Continental General”) acquisition of KMG America Corporation and
other concerns.1 The brief response included in the Conclusory
Letter fails to explain how a $10,000 acquisition could lead to a
$116.5 million “bargain purchase gain.” It also fails to address
our previously stated view that this situation possesses troubling
similarities to the cases that the Securities and Exchange
Commission (“SEC”) brought against Miller Energy Resources, Inc.,
its auditor, and employees following the decision to assign a $480
million value to assets acquired for a couple million dollars.2
Providing a third-party valuation and financial statements audited
by KPMG did not prevent Miller Energy Resources, Inc., its auditor,
and employees from being fined millions of dollars by the SEC.3
Please be advised that we have had your disclosure and our analysis
reviewed by independent audit and tax experts, who share our
concerns regarding the inappropriateness of HC2’s 2018 bargain
purchase gain.
With respect to your assertion that Philip Falcone’s
compensation was not impacted by this treatment, we ask that you
once again review HC2’s 2019 Proxy Statement:
“For fiscal year 2018, the named executive
officers’ Corporate Bonus, if any, was based on the change in the
Company’s “Net Asset Value” (as defined below) from the beginning
of the Company’s 2018 fiscal year to the end of the Company’s 2018
fiscal year end (“NAV Return”), in excess of a threshold NAV Return
level established by the Compensation Committee at the beginning of
the 2018 performance year (the “Fiscal Year 2018 Threshold NAV
Return”), as well as an assessment of how well the named executive
officer was able to adapt to changes and obtain overall financial
results in the Company’s businesses and industries and contribute
to the NAV Return.”4
That language—your language—clearly suggests to us that the net
result of the bargain purchase gain was a direct financial benefit
to the management team, including Mr. Falcone. It also seems clear
to us that as quickly as the value of HC2’s insurance assets
increased, the value subsequently dropped in 2019. In its earnings
release for the fourth quarter of 2019, HC2 noted that “the Company
recognized a non-cash goodwill impairment charge of $47.3 million
at our Insurance segment attributable to several factors that
occurred in the quarter.”5
- Disclosure Issues Related to Harbinger – We still fail
to see how it has ever served stockholders’ best interests for the
Company to pay millions of dollars per year to Mr. Falcone’s hedge
fund firm, Harbinger Capital Partners, LLC (“Harbinger”).6 We
believe all stockholders should be extremely concerned that the
Board has permitted any services to be provided by Harbinger, which
(along with Mr. Falcone) entered into a settlement with the SEC in
2013 over “serious misconduct that harmed investors.”7 We believe
such history should give all stockholders pause about trusting Mr.
Falcone and Harbinger with any business function or need. We renew
our call for you to disclose the full, unredacted services
agreement with Harbinger. Until you do so, we suspect that
stockholders will ignore any of your explanations.
- Disclosure Issues Related to Harbinger Lease – The
Conclusory Letter refers to our concerns as “unfounded” while also
denying the Company is Harbinger’s guarantor. We refer you to HC2’s
10-Q filing from November 5, 2019:
“In September 2018, HC2 entered into a 75 month
lease for office space. As part of the agreement, HC2 was able to
pay a lower security deposit and lease payments, and received a
favorable lease terms as consideration for landlord required cross
default language in the event of default by Harbinger Capital
Partners, a related party.”8
Nothing in the Conclusory Letter explains the “cross default
language” and the potential risks to HC2’s stockholders.
- Regulatory Orders – Even if HC2 intends to finally
disclose additional details about regulatory orders involving its
insurance industry restrictions, the fact is that Mr. Falcone is
still banned from the sector in several states, and for whatever
reason you are not giving stockholders the full disclosure to allow
them to completely understand the situation and the risks.9 We also
believe the Conclusory Letter mischaracterizes the limits
regulators have placed on the Company by indicating that only
HC2—as an entity—faces limits. Based on our review, Mr. Falcone and
the current Board are specifically banned from managing HC2’s
insurance subsidiaries.10 In addition, we understand from
Continental General’s statutory filings that the Texas insurance
regulator is in the process of investigating the corporate
governance practices and related party transactions related to HC2
and its insurance business.11
- Garnishment Order – In March 2019, Mr. Falcone and his
affiliates were ordered to pay New York City approximately $2.69
million in unpaid taxes.12 A court ultimately needed to require HC2
to garnish Mr. Falcone’s wages to satisfy unpaid obligations.13 We
remain deeply troubled by the impact that Mr. Falcone’s apparent
financial distress and legal issues may have on HC2. Keep in mind
that he is a fiduciary of a public company with insurance holdings,
which heightens the need for stockholders to understand risks and
increases the obligation of the other sitting directors to
guarantee to those stockholders that they are fully discharging
their duties of care and loyalty by absolutely ensuring that Mr.
Falcone’s publicly-reported troubles do not adversely impact
investors in any way. We know of no chief executive officer and
chairman experiencing this wave of lawsuit losses and documented
allegations of misconduct. Unfortunately, MG Capital and our fellow
stockholders are not seeing bold action from the directors who are
inextricably linked to Mr. Falcone and his affiliates.
Based on Mr. Falcone’s well-documented financial, legal and
regulatory issues, MG Capital—and presumably other
stockholders—remains perplexed by the incumbent Board’s focus on
preserving HC2’s status quo. This is why we asked you earlier this
month and are asking you again now to facilitate the removal of Mr.
Falcone. We believe that taking this step can reduce the risks
associated with HC2’s unstable leadership and enable us to have a
productive discussion with the independent directors about both
Board refreshment and the implementation of a credible strategy
that finally creates enduring value for all stockholders.
However, if the Board continues to stand by Mr. Falcone or seeks
to implement superficial changes to help insulate him, it will only
reinforce our current view regarding the need to remove and replace
all of the incumbent directors. We question how the Board can
maintain its current stance in light of the following issues (which
exist on top of HC2’s long-term financial underperformance):
1. Mr. Falcone’s wages being
garnished. We suspect that stockholders will find it deeply
troubling that HC2 has been directed by the Supreme Court of New
York to garnish Mr. Falcone’s wages and seize his shares and
options. We saw no public disclosure by HC2 of this obviously
important order, leading us to raise to the Audit Committee and
also note that Mr. Falcone’s own 13-D filing was not yet adjusted
to accurately reflect his share ownership.14 Given Mr. Falcone’s
past SEC issues related to misusing investor funds, we cannot help
but be alarmed by the current situation. We
cannot find any other instance of a public company chairman and
chief executive officer encountering these types of wage
garnishment issues.
2. Lawsuit seeking more than $65 million
from Mr. Falcone. We were alarmed to learn last month that Mr.
Falcone is being sued for approximately $65.8 million following
allegedly defaulting on a series of loans and improperly selling
underlying collateral.15 Melody Business Finance LLC is claiming
that Mr. Falcone and certain affiliates reneged on obligations to
repay loans spanning from 2013 to 2017. These loans were apparently
taken out during a period in which Mr. Falcone was earning sizable
compensation at HC2. We believe all
stockholders should be alarmed by the allegations in this lawsuit,
which suggest Mr. Falcone’s personal financial issues have led him
to violate agreements and shirk obligations to financial
stakeholders.
3. Mr. Falcone’s asset freeze and use of
stockholder resources for personal benefit. We were also
alarmed to learn earlier this month that Mr. Falcone has failed to
pay more than $13 million in fees to his long-time attorneys at
Dontzin Nagy & Fleissig.16 Unsealed documents connected to the
dispute reveal a litany of troubling actions and contradictions
perpetuated by Mr. Falcone, including his acknowledgement that
HC2’s general counsel—who is paid by the Company—handled personal
legal matters for him.17 The fact that he misused stockholder
resources for his personal benefit appears to have gone unpunished
by the Board. Additionally, the possibility that Mr. Falcone cannot
or will not pay his lawyers signals to us either an alarming level
of financial duress or very poor judgement unbecoming of a public
company executive. We believe stockholders
will view Mr. Falcone’s latest issue and potential misuse of
Company resources as further of evidence of why he must
go.
4. Mr. Falcone’s uncorrected material
misstatements. In response to MG Capital’s criticisms and
probing questions, Mr. Falcone and his allies on the Board have
insinuated that we either do not understand HC2’s businesses or
lack valid concerns. We believe it is actually the reliability and
veracity of HC2’s disclosures that stockholders should continuously
call into question. Notably, Mr. Falcone stated on a 2019 earnings
call that:
“As a reminder, this is a highly regulated
industry and the liabilities are ring-fenced. Consequently, holdco
does not guarantee the long-term liabilities.”18
Based on the July 2018 consent order
that approved the sale of Kanawha Insurance Company to Continental
General, Mr. Falcone’s statements appear to be contradictions:
“The acquiring party must maintain a minimum
RBC ratio of the combined companies of 450% for two years after
closing. The acquiring party and its parent, HC2, will infuse
capital necessary to maintain an RBC ratio of 450% as stated
above.”19
We fail to understand
how this business could possibly be “ring-fenced” and why Mr.
Falcone would soft-pedal such a significant open-ended liability to
HC2’s stockholders.
Although we have no personal quarrel with Mr. Falcone, we will
not stand by as he continues to preside over what appears to be a
decaying corporate culture and sustained value destruction. The
directors being characterized as independent, who have thus far
failed to hold Mr. Falcone to account for the Company’s issues and
poor performance, can finally begin to take action that benefits
all stockholders. This means not helping Mr. Falcone entrench
himself by misusing the corporate machinery to reconstitute the
Board with new individuals as a means of prolonging his tenure or
your own.
In our view, stockholders deserve a clean choice between the
current directors and our slate of highly-qualified nominees. That
clear choice is what our consent solicitation will give them.
We stand ready to engage in a constructive one-to-one dialogue
with you and the other directors once Mr. Falcone has been removed.
Given our past attempts to engage with Mr. Falcone and the Board
this winter, and in light of the numerous troubling points laid out
in this letter, we believe our position is entirely reasonable.
Sincerely, Michael Gorzynski
***
FORWARD-LOOKING STATEMENTS
Any statements contained herein that do not describe historical
facts, including future operations, are neither promises nor
guarantees and may constitute “forward-looking statements” as that
term is defined in the U.S. Private Securities Litigation Reform
Act of 1995. Such forward-looking statements may include words such
as “may,” “might,” “will,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential” or
“continue,” the negative of these terms and other comparable
terminology. Any such forward-looking statements contained herein
are based on current assumptions, estimates and expectations, but
are subject to a number of known and unknown risks and significant
business, economic and competitive uncertainties that may cause
actual results to differ materially from expectations. Numerous
factors could cause actual future results to differ materially from
current expectations expressed or implied by such forward-looking
statements, including the risks and other risk factors detailed in
various publicly available documents filed by the Issuer from time
to time with the Securities and Exchange Commission (SEC), which
are available at www.sec.gov, including but not limited to, such
information appearing under the caption “Risk Factors” in Issuer’s
Annual Report on Form 10-K filed with the SEC on March 16, 2020.
Any forward-looking statements should be considered in light of
those risk factors. The Reporting Persons caution readers not to
rely on any such forward-looking statements, which speak only as of
the date they are made. The Reporting Persons disclaim any intent
or obligation to publicly update or revise any such forward-looking
statements to reflect any change in Issuer expectations or future
events, conditions or circumstances on which any such
forward-looking statements may be based, or that may affect the
likelihood that actual results may differ from those set forth in
such forward-looking statements.
CERTAIN INFORMATION CONCERNING THE
PARTICIPANTS
MG Capital Management, Ltd. together with the other participants
named herein (collectively, “MG Capital”), has filed a preliminary
consent statement and an accompanying consent card with the
Securities and Exchange Commission (“SEC”) to be used to solicit
votes for the election of its slate of director nominees for the
Board of Directors of HC2 Holdings, Inc., a Delaware corporation
("HC2" or the “Company”).
MG CAPITAL STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO
READ THE CONSENT STATEMENT AND OTHER CONSENT MATERIALS AS THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
SUCH CONSENT MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S
WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN
THIS CONSENT SOLICITATION WILL PROVIDE COPIES OF THE CONSENT
STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST.
REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’
PROXY SOLICITOR: SARATOGA PROXY CONSULTING LLC (TEL: (888) 368-0379
OR (212) 257-1311; EMAIL: INFO@SARATOGAPROXY.COM).
The participants in the solicitation are anticipated to be MG
Capital Management, Ltd., a Cayman Islands company limited by
shares (“MG Capital”), Percy Rockdale LLC, a Michigan limited
liability company (“Percy Rockdale”), Rio Royal LLC, a Delaware
limited liability company (“Rio Royal”), Michael Gorzynski, a
natural person, (“Mr. Gorzynski,” and, together with MG Capital,
Percy Rockdale and Rio Royal, the “MG Capital Participants”),
George Brokaw, a natural person (“Mr. Brokaw”), Kenneth Courtis, a
natural person (“Mr. Courtis”), Robin Greenwood, a natural person
(“Mr. Greenwood”), Liesl Hickey, a natural person (“Ms. Hickey”),
and Jay Newman, a natural person (“Mr. Newman” and together with
Mr. Brokaw, Mr. Courtis, Mr. Greenwood, Mr. Gorzynski and Ms.
Hickey, each a “Nominee” and collectively, the “Nominees”; the
Nominees and the MG Capital Participants collectively, the
“Participants”).
As of the date hereof, Percy Rockdale is the direct owner of
2,422,000 shares of common stock of the Company, $0.001 par value
(“Common Stock”). As of the date hereof, Rio Royal is the direct
owner of 10,000 shares of Common Stock. MG Capital Management Ltd.,
as the investment holding company of Rio Royal, may be deemed the
beneficial owner of the 10,000 shares of Common Stock owned by Rio
Royal. Mr. Gorzynski as the sole Manager of Percy Capital and the
sole Director of MG Capital Management Ltd., may be deemed the
beneficial owner of (i) the 2,422,000 shares of Common Stock owned
by Percy Rockdale and (ii) the 10,000 shares of Common Stock owned
by Rio Royal. As of the date hereof, Mr. Brokaw is the beneficial
owner of 40,000 shares of Common Stock. As of the date hereof, Mr.
Courtis is the beneficial owner of 237,336 shares of Common Stock.
Except as described herein, no other Participant beneficially owns
any Common Stock as of the date hereof.
1 Letter from MG Capital to Warren H.
Gfeller, Chairperson of HC2’s Audit Committee, dated March 2,
2020.
2 Securities and Exchange Commission press
release dated August 6, 2015 (link here) and Securities and
Exchange Commission press release dated August 15, 2017 (link
here).
3 Securities and Exchange Commission press
release dated August 6, 2015 (link here) and Securities and
Exchange Commission press release dated August 15, 2017 (link
here).
4 HC2’s 2019 Proxy Statement.
5 HC2 press release disclosing fourth
quarter and full year 2019 results dated March 16, 2020 (link).
6 HC2’s Form 10-Q for Third Quarter
2019.
7 Securities and Exchange Commission press
release dated August 19, 2013 (link here).
8 HC2’s Form 10-Q for Third Quarter
2019.
9 Letter (including exhibits) from MG
Capital to Warren H. Gfeller, Chairperson of HC2’s Audit Committee,
dated March 2, 2020.
10 Final decision and conditional order
provided by the South Carolina Department of Insurance, dated July
12, 2018.
11 Continental General Insurance Company’s
Annual Statement for the year ended December 31, 2019.
12 Verified petition, for a judgment
pursuant to CPLR § 5227 extending the time in which to transfer
property not capable of delivery or pay debts to the sheriff
pursuant to an execution and levy served on May 10, 2019, to and
including December 31, 2020, filed by New York County Clerk on
August 7, 2019.
13 Verified petition, for a judgment
pursuant to CPLR § 5227 extending the time in which to transfer
property not capable of delivery or pay debts to the sheriff
pursuant to an execution and levy served on May 10, 2019, to and
including December 31, 2020, filed by New York County Clerk on
August 7, 2019.
14 Letter (including exhibits) from MG
Capital to Warren H. Gfeller, Chairperson of HC2’s Audit Committee,
dated March 2, 2020.
15 Reuters, Lawsuit in NY says ex-hedge
fund manager Falcone reneged on loans, wrongly sold a Warhol,
February 21, 2020.
16 Financial Times, New York judge freezes
hedge fund manager Philip Falcone’s assets, March 9, 2020.
17 Deposition of Philip Falcone in the
matter of Dontzin Nagy & Fleissig vs. Philip Falcone and
Harbinger, filed as of January 24, 2020.
18 HC2’s August 2019 earnings call
transcript (link).
19 Final decision and conditional order
provided by the South Carolina Department of Insurance, dated July
12, 2018.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200330005339/en/
For Investors: Saratoga Proxy Consulting LLC John Ferguson / Joe
Mills, 212-257-1311 jferguson@saratogaproxy.com /
jmills@saratogaproxy.com
For Media: Profile Greg Marose / Charlotte Kiaie, 347-343-2999
gmarose@profileadvisors.com / ckiaie@profileadvisors.com
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