Rothschild, 'bad faith' and a 'bid-rigging' deal

13 April 2012

EVEN the opulent surroundings of Spencer House - the former family home of the Princess of Wales and now London headquarters of Lord Rothschild's fund management group RIT Capital Partners - are unlikely to have helped soothe the multi-millionaire banker's temper when the news arrived from America last Tuesday.

Former business partner David Elias, whose fuel card empire collapsed after a joint venture with RIT, unveiled plans to sue Rothschild, one of the City's most eminent bankers and a former chairman of the National Gallery, and Paul Griffiths, an RIT colleague, for damages worth at least £1.5 billion. And their approach to business was being called into question.

The unexpected news came just weeks after five New York appeal court judges overturned a six-year-old ruling, meaning that RIT and nine other defendants were now heading for a major legal battle that, if proved, might lead to a massive damages payout of at least £140 million. That could be disastrous for RIT, which is worth just over £750 million.

It is also alleged that RIT's American business associate had acted 'malevolently, for its own benefits' towards Elias and his business, which collapsed as a result of their actions.

The battle, which will take place in an American courtroom next year, dates back almost ten years.

Most outsiders assumed it had ended, but a tiny footnote in RIT Capital Partners' latest annual report, setting aside £1 million for legal costs over the next two years revealed that Rothschild and his colleagues knew it had not.

But it said their legal advice suggested that neither the appeal nor an associated action would 'have a material effect on the financial position' of RIT. It was confident that the claims would be dismissed, as they had been before.

They had been waiting for the next move from Elias, who has spent years planning revenge. But they could not have anticipated this. Duncan Budge, chief operating officer of RIT, would not comment last week on the latest twist to the saga.

Singapore-born Elias, who is now believed to live in South-East Asia, has been given new leave to claim £141 million from a raft of defendants, including Ernest Saunders, former chairman and chief executive of Guinness, Lord Rothschild's RIT Capital Partners, and Jupiter, a Wall Street fund management group that has no connection with its English namesake. All reject his allegations and repudiate any suggestion of wrongdoing.

But during last month's appeal court hearing, it became apparent that RIT Capital Partners has indemnified Jupiter against any court proceedings arising from its dealings with Elias and Richbell, his former business.

Oxford-educated Elias approached RIT Capital Partners in 1994. His Richbell empire owned Harpur, a petrol card payment operation which was then worth £100 million. Elias wanted an American partner to help finance the acquisition of its major US rival, Gelco Payments Services.

RIT suggested Jupiter, an operation founded by Wall Street bankers John Sprague and Terry Blumer. A deal was arranged, and Harpur was merged with Gelco to create H-G Holdings. The new company comprised Harpur's equity and a cash balance of about £50 million, which was invested by Jupiter, and in October 1994 was valued at £160 million.

The terms of the deal were complex. Elias and Richbell did particularly well if H-G Holdings grew by more than 41% in a year, while Jupiter would gain extra control of the company if it underperformed this high

target. In certain circumstances, though, such as a flotation of H-G Holdings, Elias and Richbell would receive an even bigger share of the profits.

But, according to the latest writ, there were delays in drawing up the deal's documents. When the final draft was agreed, it included specific clauses that gave Jupiter the right to veto a flotation and the right to seize extra control of H-G if the company underperformed.

The writ adds: 'Before signing it . . . Sprague allegedly assured Elias that Jupiter would never use its veto rights in an unfair or exploitative way, but only for its own protection.'

About 18 months after H-G was founded, investment bankers were appointed to start work on a flotation. They valued it at between £250 million and £380 million.

The sharp increase in its valuation delighted certain investors in Richbell and they cashed in their stakes.

It led to a liquidity crisis for Elias, which, the writ alleges, Jupiter exploited.

Jupiter refused to allow the flotation to proceed unless Elias made certain concessions. He would resign as chief executive and give up 12.4% of Richbell's stake in H-G to Jupiter for free.

RIT then agreed to lend Richbell $30 million over one year, on which, it is alleged, a 25% interest rate was payable and which was secured on the rest of his stake in H-G.

The loan would solve Richbell's liquidity crisis and would be repaid from the proceeds of the flotation. Elias agreed and Saunders took over control of H-G. Interestingly, as Saunders has a criminal conviction, he was unable to enter America so the meetings he chaired had to take place in Canada.

But unbeknown to Elias, Jupiter and RIT had allegedly drawn up a ' bidrigging agreement' in September 1996, which they are accused of discussing in a memo, dated January 31, 1997. His financial partners would act to 'ensure' he would fail.

'Jupiter and RIT allegedly agreed to block any [flotation], and then participate in a collusive foreclosure sale in which they would bid no more than the $30 million loan amount (though the collateral was worth much more) and split the true value of [Elias's] shares.'

It is this alleged agreement that the New York appeal court accepted, if proved, would amount to 'bad-faith targeted malevolence in the guise of business dealings'. Accordingly, there was no option but to allow the matter to be reopened.

Ultimately, it will be for another trial to determine whether 'Jupiter exercised a right malevolently, for its own gain, as part of a purposeful scheme designed to deprive [Elias and Richbell] of the benefits of the joint venture and of the value of their pre-existing holdings in Harpur'.

With such damning accusations, next year's courtroom battle looks certain to be dramatic.

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