Costa Brava wins Telos case

The litigation strategy seems to have worked for activist investor Costa Brava Partnership III LP. Late Monday, the Boston-based hedge fund won a civil suit it launched in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense.
According to a Costa Brava release, a seven-member jury returned a verdict Monday in the Circuit Court for Fairfax County, Virginia, in favor of Costa Brava’s claim that the Norfolk-based public accounting firm “aided and abetted a breach of fiduciary duty by Goodman’s client, Telos Corporation.”
"Costa Brava is pleased that there now has been a public finding by an impartial jury that Goodman aided and abetted a breach of fiduciary duty by Telos and its directors,” said Costa Brava managing partner Seth Hamot in a statement.
The activist hedge fund alleged in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centered on Telos’ 2004 annual filing audited by Goodman.
It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol

Activist focuses on Emageon

Activist investor Oliver Press Partners LLC on Monday hiked its insurgency at Emageon Inc., a Birmingham, Al.-based medical information services technology company.
Oliver Press Partners reported Monday in a government filing that it informed Emageon that it plans to nominate director candidates to the compan's board and will consider bringing other proposals for consideration at the company's next annual meeting.
The hedge fund also reported Monday that it had raised its stake in the IT company to 14.2%, up from the 12% it reported July 30 when it first made a filing with the Securities and Exchange Commission. In that filing, Oliver Press Partners reported that it thought the company was undervalued and that it had preliminary discussions with Emageon's management to see about the possibility that one of its principals might join the IT compan's board.
OPP intends to work with the company to explore all available strategic options for increasing the value of the Shares. OPP intends to exchange views with the Company's management and board and possibly other shareholders concerning the strategic direction of the company, Oliver Press Partners wrote.
Another fund, Accipiter Life Sciences Fund LP, on Nov. 29 reported owning an 11.9% Emageon stake.
Emageon has a $95 million stock market capitalization.
Ron Orol
See Schedule 13D filing from SEC Edgar

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Luby's, Ramius continue to spar

Dissident activist investors Ramius Capital Group LLC and Luby's Inc. intensified Thursday their dispute over the future of the Texas-based cafeteria-style restaurant operator.
In the latest series of letters to shareholders, Luby’s argues that Ramius’ nominees have fast-food restaurant experience that isn’t relevant to Luby’s “casual dining concept.” The company also lashed out at Ramius, arguing that it has “little to no experience in the restaurant business.”
The Luby’s effort was in response to a Ramius letter arguing that its candidates are better qualified to represent the best interests of Luby’s shareholders, in part, because they have 73 combined years of restaurant industry experience and “a 50-year combined track record in corporate finance.”
The hedge fund managers plan to nominate Stephen Farrar, a senior vice president at Wendy's International Inc.; William Fox, a consultant and formerly a chairman at an investment fund; Brian Grube, former chief executive of Fresh Enterprises Inc.'s Baja Fresh Mexican Grill; and Matthew Pannek, who served as CEO of Magic Brands LLC and Fuddruckers Inc. between May 2006 and August 2007.
Ramius also complains about Luby’s decision last month to grant Christopher Pappas, Luby’s president, and Harris Pappas, his brother, an exemption from Luby’s poison pill, allowing them to own a larger percentage of the company’s shares, instead of the 15% allowed for each other shareholder. While the Pappas brothers argue that increasing their personal financial stake in the company demonstrates their commitment to making sure the company’s share price improves, Ramius is concerned that the greater ownership will mean more votes for management-backed directors (and less for them) at the contentious meeting.
Another point of contention: The Ramius group also expressed concern about the privately owned Pappas restaurant entity owned by the two brothers. “As shareholders of Luby's, we are extremely concerned that the time commitment associated with running the Pappas restaurant entities, which are privately owned by you and your brother Harris, is preventing Luby's management from taking the steps necessary to unlock value at Luby's,” the Ramius group wrote. “While we are sympathetic to the difficulty of managing both businesses, the shareholders of Luby's are not interested in the Pappas restaurant chain.”
But Luby’s contends that the Pappas brothers’ stake in the business means they are committed to improving share value. “No one has more at stake in Luby’s than Chris and Harris Pappas, and your board is extremely pleased with the company’s progress under their leadership and with their continued commitment to Luby’s,” Luby’s Oct. 31 filing reported. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

Activist investor Ramius hounds A. Schulman

Ramius Capital Group LLC on Thursday followed up on the activist effort of another investor and launched a proxy contest to nominate four candidates to the board of paint and plastics company A. Schulman Inc. The New York-based activist investor argues in a letter to investors that A. Schulman violated its settlement and commitment to another activist investor, Barington Capital Group LP.
The Akron, Ohio-based company announced on Nov. 16 that it formed a special committee to consider strategic alternatives such as a sale. A. Schulman also announced that its chief executive, Terry Haines, was stepping down.
After launching proxy contests to elect directors to A. Schulman’s board in both 2005 and 2006, Barington settled with the company by adding either candidates put forward by themselves or agreeing with company directors and executives to bring on other independent directors. In 2006, Barington chief executive James Mitarotonda, a member of A. Schulman’s board, became a member of a special committee with other independent directors to follow through on a business plan that would cut costs and seek to improve the long-term prospects of the business. Mitarotonda and other directors on the special committee are involved in the selection process for the company’s new CEO. The new CEO has been chosen, but his or her name hasn’t been disclosed yet, according to Ramius’ filing.
But after A. Schulman’s announcement in November, Ramius, a 7.4% shareholder, has begun to expedite its agitation campaign. “We believe these settlement agreements are nothing more than a 'smokescreen' for management’s and the board’s failure to maximize stockholder value and have created a long history of broken promises,” Ramius partner Mark R. Mitchell stated in a letter to management. — Ron Orol
Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

SuttonBrook takes an interest in United Rentals

Faced with a deal that has fallen through, a large hedge fund said Tuesday it will be taking on an activist role at equipment rental company United Rentals Inc.
Last month, buyout shop Cerberus Capital Management LP, backed out of its planned $7 billion (including debt) acquisition of the Greenwich, Conn.-based equipment rental company. Since then United Rentals has filed a lawsuit seeking to pressure Cerberus to complete the deal.
Now, on Tuesday, SuttonBrook Capital Management LP reported with the Securities and Exchange Commission a 5.83% United Rentals stake and may consider a “extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the company or any of its subsidiaries,” among other options such as board changes or dividend policies. These are boiler plate comments, but indicate that SuttonBrook doesn’t plan to be a passive investor in United Rentals. “[SuttonBrook] review on a continuing basis the investment in the company,” the filing said. — Ron Orol

Costa Brava's revenge against Telos

Activist investor Costa Brava Partnership III LP may be getting close to a big payout, as it pursues a two-pronged litigation approach to extracting share value.
The Boston-based hedge fund launched a civil lawsuit in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense. That suit may soon come to a conclusion — the trial began last week on Nov. 26.
The activist hedge fund alleges in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centers on Telos’ 2004 annual filing audited by Goodman. The accounting firm, Goodman, has denied any wrongdoing. It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.

More Activists Converge on Brinks

An activist hedge fund manager on Friday stepped up its five-year effort to effect share improvement change at Brinks’ Co. by launching a proxy contest to put four candidates on the Richmond, Va.-based armored car transport company’s board.
Clay Lifflander, portfolio manager at MMI Investments LP of New York, wrote in a Securities and Exchange Commission filing that the hedge fund is seeking to install director candidates because he believes the armored car company lacks industry experience on its board.
“We believe the director slate we’ve nominated is well qualified, with a breadth and depth of business experience to maximize value for all Brink’s stockholders,” Lifflander wrote. “We are not seeking control of the board. We simply believe that the board as currently composed has demonstrated that it lacks the security industry perspective, strategic alternatives acumen and stockholder representation necessary to protect and maximize the value of Brink’s stockholders’ investment.”
MMI Investments, which has an 8.4% Brinks stake, is seeking to nominate John Dyson, the chairman of MCM Capital Management; Peter Michel, former chief executive of Brink's residential security monitoring unit; Robert Strang, the CEO of Investigative Management Group; and Exide Technologies director Carroll Wetzel.
“Our nominees fill major gaps in the experience and skill set of the current directors, particularly as the board has limited direct Wall Street experience and no expertise in the security industry, other than chairman, CEO & president Michael Dan,” he added.
MMI Investments has been engaging Brink’s since 2003 and has lately pushed for a sale of the company. In 2005 the hedge fund began publicly agitating for Brink’s to sell its marginally profitable BAX Global subsidiary, an international heavy freight and logistics operator, which was subsequently sold for roughly $1.1 billion. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.