|Shares Out. (in M):||38||P/E||0.0x||0.0x|
|Market Cap (in $M):||10||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||25||EBIT||0||0|
A quick word of warning - I will spend hardly any time on the actual business of PBS because it's largely irrelevant. With that in mind, PBS makes body armor for law enforcement and the military. They filed for chapter 11 in April 2010. You might remember this company better by its former name, DHB Industries. DHB/PBS was the victim of its CEO, David H Brooks. Short story is that DHB was a glorified pump-and-dump and management sold hundred of millions in stock at the top after years of accounting fraud. Brooks himself is a piece of work, I encourage a quick Google search - the guy is a first-rate pos.
Today, PBS sits in bankruptcy. They have a $25m in DIP and another $40m in other claims. There are 38m shares outstanding after cancelling out the shares still owned by Brooks and his family. PBS as a going concern is maybe worth $10-20m at the most, it's a lousy business. So with a business worth only ~$15m, no cash, and no other hard assets, how did they get a DIP loan for $25m? Why wasn't this a chapter 7?
Give credit to Sarbanes-Oxley. (Incredible I realize, SOX actually helping us out for a change) SOX provision 304 states that if there was a fraud at a company, the CEO and CFO mus repay the company for all bonus comp (stock/option sales, cash bonus) during the time the fraud was ongoing. Interestingly, this can even be applied if the CEO and CFO had no knowledge of the fraud, although in PBS' case they obviously did. Brooks reaped fraudulent gains of about $190m and today most of it's in a seized account at Goldman, just sitting there in "US denominated currency". Brooks has various other seized assets, such as luxury cars and an incredibly tacky pen collection (just goes to show that you cant buy taste) that aren't worth much in relation to the cash. PBS is also in the process of recovering a $35m shareholder lawsuit that was voided. That money is being clawed back because the subsequent management stated they would indemnify Brooks personally against SOX 304 as part of the settlement, even though a judge later ruled they didn't have the authority to do so and rejected the settlement.
So the money is just sitting there but it's owed to shareholders of PBS and here's where things get a little tricky. Debtors proposed a plan that would create a reorganized NewCo and a recovery trust for the SOX 304 assets. The SOX 304 cash isn't in PBS' bank account yet because the SEC has to actually litigate the matter, which cant be done until Brooks is sentenced (coming soon). They wanted to split the recovery trust 70/30 with existing shareholders (which would leave existing shareholders with $.60-70) but that plan is now off the table after they failed to submit an amended disclosure statement with additional details. This is really what this case is about - how are we going to split this money?
I'm not sure if the lawyers on the equity committee are stupid or just lazy, although nothing says those are mutually exclusive. EC has taken the position that because the DoJ theoretically has the power to step in and siphon the SOX 304 recovery, they cant prove its value to a judge and therefore argue that a plan is fair or unfair. Without that proof they are somewhat powerless to receive a more equitable split of the recovery trust, which is for the most part the only thing people really care about in this case. That's their story, at least, it has some truth to it. I say that EC has been lazy because they haven't argued anything in front of the judge regarding this, and they seem to totally ignore the fact that there is NO precedence for the DoJ actually "stealing" this cash a second time from victimized shareholders, not that the SOX 304 list is long (the most notable case was William McGuire from United Health paying $600m - ouch). EC just had some new members appointed and I'm hopeful we'll see a little more grit.
Leading the charge for shareholders, although not part of EC, has been PBS' former general counsel of all people, a guy named David Cohen. Cohen was a whistleblower and has been fighting the good fight against the admittedly creative lawyers from debtors and creditors. Now we wait for another plan to be filed. My guess is it's basically the same as the old plan but with a more favorable split of the recovery trust, say 50/50, enough to get the objectors to shut up. This scenario would leave equity with $2.00 in value after paying off DIP, other claimants, and incurring another $15m in legal expenses. I feel okay about this whole situation because even under the "I get screwed" scenario of the original plan, equity would've been worth ~$.60-70. This is not going to be a zero for us. There are some other aspects of the case I'm glossing over in the interest of brevity, a lot of it having to do with some incestuous relationships between management, creditors, and equity.
There's $35m in clawback from the rejection of the shareholder settlement. The business itself is probably worth $15m. Then there's $190m up for grabs from SOX 304. Against this is $25m in DIP, $40m in other claims, and $15m in future legal expenses. With a 50/50 split of the recovery trust (that's post all claims, btw) PBSOQ is worth a little over $2.00. If the plan is approved with this split the stock probably spikes to $1.00-1.25 and shareholders can exit if they want or wait around for the recovery and distribution, which I'm sure will take an eternity. I think the only way we lose money is the nightmare scenario of the DoJ stepping in and taking the money for whatever purpose they want, otherwise I struggle to think of how equity is a goner.
|Subject||Quite a bounce today|
|Entry||03/28/2011 03:55 PM|
utah, interesting write-up. Apparently your opinion moves markets (or at least micro cap stocks) :)
Wht is the time frame for a decision on this matter? Thanks
|Subject||RE: RE: talked to a lawyer|
|Entry||03/29/2011 12:02 AM|
Great find - how did you come across this??? Weirdest thing I've ever seen though glad to see SOX doing something useful for once (hopefully!).
I'm a bit confused on this - so there's basically 35+15+190 - 25-40-15 = $160M in net assets to be split between a recovery trust and the existing shareholders. But who owns the recovery trust? Wouldn't that just be the shareholders too or to the DOJ/govt for general restitution efforts (or to pay for the SEC?)?
Also is the $35M clawback already done, how does this work to clawback money from shareholder lawsuits or was it never distributed?
|Subject||RE: RE: investor meeting in a robe in underwear..|
|Entry||03/30/2011 07:19 AM|
Teton, you're not fooling any of us with that "I am guessing" modifier at the end of your post.
Get off that elliptical and put some pants on.
|Subject||RE: Brooks $190 million|
|Entry||04/01/2011 10:20 AM|
I know that in many cases of securities fraud of various forms, the court will come up with a way to get the money to the shareholders who were actually harmed. For example, they may set up a Fair Fund, the judgment money goes into that fund, and then if you can prove you were in the class of shareholders harmed(e.g. you held the stock at the right time) you will get your share of the money. But with this being a SOX claw back, and with the company being in bankruptcy, who knows what might happen. Would be very interesting if anyone could find a past situation that was analogous to this one to see how that played out.
|Subject||Form 15 Deregistration|
|Entry||04/04/2011 01:38 PM|
Does this form 15 deregistration announcement change your thesis at all? I guess it doesn't really matter since this is just a liquidation anyways?
|Subject||EC objects to amended plan|
|Entry||04/18/2011 03:17 PM|
Lots of good reading on the docket today: http://dm.epiq11.com/PBS/docket/Default.aspx?rc=1
|Subject||RE: EC objects to amended plan|
|Entry||04/19/2011 12:45 PM|
In case anyone hasn't read the EC's filings from yesterday, here are some of the phrases contained therein: "Lack of Good Faith", "equitable subrogation", "equitable subordination", "biased advice" from prior counsel, "Rule 60 Motion", "misleading representations", "invalidated liens" "conflicts of interest", "multiple breaches of fiduciary duty", "impermissible sub rosa Plan", "intentional obfuscation of the true value", "bad faith purchaser", "manipulating votes", "void as against public policy", "violation of due process", "breaches of fiduciary duty, self dealing and misconduct", "tainted by less than arms length transactions", "materially misleading and incomplete"
Thursday's Disclosure Statement hearing is going to be very interesting.
|Subject||Disclsoure Statement Hearing Notes 04.21.11|
|Entry||04/21/2011 12:30 PM|
Here are some notes from today's Disclosure Statement Hearing:
|Subject||RE: Business sold|
|Entry||08/29/2011 08:20 PM|
Another question. It appears in reading this opinion of the court re the SOX 304 case that the amount of the "ill gotten gains" from stock sales is in the range of $100 million (with some fine tuning to do). What am I missing? Thanks for posting this idea.
Here is a link to the opinion.
|Subject||RE: RE: RE: Several questions|
|Entry||08/30/2011 05:20 PM|
Thanks, ycomb and utah. Just a couple of points here:
1) 18 U.S.C. 3663A imposes restitution "in addition to... any other penalty authorized by law." It's not the same as the RICO forfeiture provisions of Sec. 318, but it's a good point. There are a number of claims or potential claims against Brooks, including these two sections, private securities litigation, the SEC's securities law litigation, and the SEC's SarbOx claim. Note that SarbOx would apply to bonuses and stock awards, but not to insider trading profits. I don't know what Brooks' assets look like right now (I know that the court did not permit a Sec. 318 seizure of all of his assets), but I'm pretty sure that he couldn't satisfy all of these overlapping claims.
Were he forced into bankruptcy, I don't know of a theory that would let anyone force the US Government to disgorge the funds seized by the court. I don't think it's a fraudulent transfer under Florida's Uniform Fraudulent Transfer Act, since it was for fair value. I don't think it's an avoidable preference under Sec. 547 of the Bankruptcy Code, because the judgment was entered more than three months ago, and Brooks isn't in bankruptcy yet.
This isn't to say that the government couldn't give some of the fund to the various claimants, but if I were at Treasury, I wouldn't be so eager to give up $190 million, particularly to the company that committed the fraud.
2) Good point on the 363 sale impact, and also on the potential for rejecting a larger claim. This one's a bit of a puzzle for me, too. If the settlement agreement is approved on appeal, then its conditions are satisfied, and the remedy for breach upon avoidance would be contract damages, i.e., $35.2 million. If the appeal is rejected, who knows what might happen? But ycomb, you've convinced me that $35.2 million is the likely number.
3) ECs never have an incentive to overestimate liabilities, but $3.5 million sounds like a reasonable starting point.
|Subject||RE: RE: Several questions|
|Entry||08/31/2011 10:39 AM|
Yes, the DOJ is asking for both forfeiture (which was granted) and restitution to the victims, and if Brooks has enough assets, he'll have to pay both. I doubt that he does. That doesn't mean that the Government intends to turn the money and assets it has siezed under the forfeiture provision back to the company.
Insider trading law recognizes anyone who bought stock from the time a pump-and-dump scheme began to the time the fraud was revealed to be a victim, so restitution for stock manipulation and insider trading would not be limited to the individuals to whom Brooks directly sold. Similarly, under the restitution remedy, the company would be entitled to receive bonuses paid during the years in which the accounting misstatements occurred.
The company could be considered a victim of the pump and dump scheme to the extent it has to pay the defrauded shareholders under the class action lawsuit and with respect to the property Brooks took fraudulently from the company. The company wasn't defrauded by Brooks' inside trading or manipulation, however, so I don't see how it could recover for that. Of course, it can also reclaim bonuses under SarbOx Sec. 304.
Mechanically, I don't see how the company, even if granted restitution and the SarbOx claim, can recover the any of the forfeited property. Those are claims against Brooks, not against the US government. If Brooks doesn't have the money to pay, under what theory could Brooks' bankruptcy estate reclaim the forfeitted property? I'm not a bankruptcy expert, but I haven't been able to find a legal theory that gets that money back.
I'm aware of seven cases in which the SEC sought repayment to a company under SarbOx Sec. 304. Five (SEC v McGuire, SECV v Mercury Interactive, SEC v Shanahan, SEC v. Schroeder, SEC v Nicholas et al.) were option backdating cases in which I'm not aware of DOJ seeking any criminal penalties, including McGuire (the UnitedHealth case). In one (SEC v Jasper), the executive subject to the SarbOx repayment wasn't involved in the backdating scheme, so there is no competing claim. Brooks is the seventh. So I don't think the competing claims issue has come up before.
I would imagine that everyone with an interest in the bankruptcy estate is asking for the government to give the money to the company, but it's difficult for me to see how the government (and in particular, the SEC) would prioritize funds to a company that committed fraud over the innocent victims of that fraud or the payment of criminal penalties for that fraud.
|Entry||08/31/2011 10:43 AM|
Do you have any expectations as to the timeline for the auction, the sale of assets, the resolution of the bankrupcty case, and the resolution of any matters outside bankruptcy?
|Subject||RE: RE: RE: RE: Several questions|
|Entry||08/31/2011 06:20 PM|
You're right, the selling stock part of SOX probably would do that.
|Subject||RE: RE: RE: RE: RE: RE: talked to a lawyer|
|Entry||10/21/2011 12:01 PM|
can you elaborate on this please: "there are still questions about what can be recovered. One of the more important issues is Brooks' ex wife's ability to tie this up in the courts, because she's filed a number of ancillary claims that can take years to resolve."
pardon my ignorance, but are you referring to claims she has filed in the BK case? would you happen to have the docket #s? (I looked but didn't find)
anything else you're worried about? I notice that a judge recently said Brooks doesn't have to forfeit his ill-gotten gains, but I doubt this really has an impact on PBSOQ holders ... they can still go after him for restitution. agree?
|Entry||01/17/2012 10:51 AM|
do the wife's claims make this think uninvestable at this point?
|Subject||RE: RE: RE: Settlement?|
|Entry||02/14/2012 04:30 PM|
sorry but I don't really have anything else. i've had a hard time finding other longs to speak with. I've tried talking to folks on the equity committee, but as expected they couldn't tell me much. their comments were basically (paraphrasing) "unfortunately there's a lot of moving parts here, but fortunately the pile of cash we're all fighting over is large"
|Subject||RE: In Contact with EC?|
|Entry||05/10/2012 06:37 PM|
I spoke to Carmen about a week ago. The proposed global settlement has been submitted to the DoJ and we're waiting to hear back. No idea on when/what the DoJ's response will be.
Brooks is scheduled to be sentenced in June. One might imagine his lawyers are doing all that they can to finalize a deal prior to then in hopes of getting some leniency from the court.
By the way, the recent news about Brooks only being required to forfeit only ~$60 million or whatever is irrelevant here. The DoJ can and will get control of the whole ~$190 million via restitution, not forfeiture
|Subject||Thoughts on Bill Nanovsky?|
|Entry||10/05/2012 11:01 AM|
Wondering if anyone involved here has thoughts on Bill Nanovsky. I see that he served as interim CFO for some period of time starting in 2010. He was recently brought in as CFO to try and clean up financial reporting for a name we are short. Thanks in advance.
|Subject||RE: anyone still following?|
|Entry||12/28/2012 10:27 AM|
I would also appreciate an update. Utah, are you still involved?