H.S. Grace & Company, Inc.
Case Studies
Case Studies

Representative HSG Cases by Type of Action

H.S. Grace & Company, Inc. (HSG) has served as a consulting and testifying expert on liability, causation and damage issues in a variety of complex commercial cases involving corporate governance, complex business judgment, and management and board practice and process issues. These actions have included breach of fiduciary duty; corporate waste; securities violations; commercial fraud; breach of contract; aiding and abetting claims; tortious interference; antitrust; corporate, M&A and divestiture issues; and bankruptcy-related litigation. Set out below is a summary of representative HSG cases.

 

 

Bankruptcy Related Actions

 

 Unsecured Creditors Committee for Major Bankruptcy

Overview: HSG was named financial advisor and real estate consultant to the unsecured creditors committee in a major international bankruptcy involving large retail chains and significant commercial, retail and residential real estate holdings. Work involved sale of various business units, including the parent company, and of individual real estate holdings. HSG also advised on the creation of partnerships in connection with certain real estate holdings and advised regarding tax planning in connection with the dissolution.

 

Result: Successful disposal of company holdings and creation of ongoing entities in which the bankruptcy estate continued to participate.

 

Offshore Bankruptcy: Appointment by Examiner

Overview: A court appointed examiner selected HSG to assist in the review of a number of complex commercial issues and transactions arising from an offshore energy related bankruptcy. These issues included analysis of corporate structures, financing, inter-company agreements, sale and buyback transactions among related parties, payments to owners, related party loans, going concern and consolidation accounting, valuation, solvency concerns and refinery construction issues.

 

Result: HSG raised a number of issues for the examiner to include in his report and as a result, both the major creditor and the United States Trustee entered motions to request that the bankruptcy court appoint a trustee to manage the debtor’s affairs. In response to the motion, the debtor paid the major creditor in full and made an initial payment to other creditors of 70 cents on the dollar.

 

Action Against Healthcare Plans by Litigation Trustee

Overview: The trustee of a litigation trust relating to a bankrupt physician practice management company sued HSG client, a group of related healthcare plans, under various bankruptcy laws for sums withheld by the plans prior to the bankruptcy when the management company fell behind in payments to medical care providers. When the company fell behind, the plans had made payments directly to the medical care providers and also ceased paying the full capitation and other payments to the company. HSG’s review demonstrated that the direct payments to the medical care providers were authorized and that the plans had made all payments due to the company.

 

Result: Counsel for the plans used HSG’s report to negotiate a favorable settlement.

 

Bankruptcy Court: Lease Rejection

Overview: HSG’s analysis on behalf of debtors (defendant) pointed out serious areas of mismanagement by the landlord (plaintiff) and errors in landlord’s damage calculation of its claim for rejection of the lease. HSG’s analysis led to the discovery of a document claimed to be non-existent by landlord, for which the judge invited a motion for sanctions from our client.

 

Result: Material reduction in landlord’s claim.

 

Trustee Action Against Directors and Officers of a Failed Dot Com

Overview: The bankruptcy trustee of a failed dot com sued the former directors and officers of the dot com company (HSG clients) contending they had wasted corporate assets, engaged in insider trading, and breached their fiduciary duties to creditors while the company was in the zone of insolvency. HSG’s analysis showed that the defendant directors and officers had acted appropriately and that outside economic factors, including the virtual drying up of the venture capital funding market for dot com's in 2000, caused the failure of the company.

 

Result: The case was favorably resolved at mediation.

 

 

Breach of Fiduciary Duty

 

Independent Directors' and Officers' Role in Decision Making and Oversight

Overview: The liquidating trustee of a creditor trust sued the independent directors of a twice-bankrupt energy company asserting that they had breached their fiduciary duties by pursuing excessively risky business strategies and had abdicated their corporate governance responsibilities and engaged in self-dealing. Drawing on their experience in oil and gas and as board members, HSG found that the independent directors were well-informed and appropriately interacted with and relied on management and exercised experienced and reasonable judgment in addressing their responsibilities in an effort to make the reorganized entity a success. HSG also found that plaintiff’s loss of value damages were speculative and not based on any evidence.

 

Result: After extensive discovery, including expert depositions, the case was dismissed on defendants’ motion for summary judgment.

 

Directors’ and Officers’ Role in Mortgage Company Bankruptcy

Overview: A large mortgage company with a subsidiary that acted as a clearinghouse for other mortgage companies entered into bankruptcy for the second time. Plaintiffs claimed that certain senior management and directors had mishandled investments and hidden risks through use of speculative interest rate swaps. HSG analysis showed that the investment activities were appropriate, that the losses were market driven and that management had kept the board properly advised of actions and associated risks.

 

Result: Favorable settlement for defendant following mediation.

 

Commodity Exchange: Board Oversight and Fulfillment of Duties

Overview: The old board of a commodities trading exchange was sued by the new board alleging negligence, self-dealing and misconduct in its oversight of the market. HSG was brought into a specialized consulting assignment to review the board’s actions. HSG found significant problems with the board’s actions and that its responsibilities were not satisfied.

 

Result: The matter was satisfactorily resolved.

 

Appropriate Board Oversight of Separation of Ownership Interests

Overview: Plaintiffs (major shareholder, banks and other shareholders) charged that another majority shareholder and his two sons, who had served as CEO and COO of the company, unfairly influenced separation of interests in the company in a way that enriched them and damaged the other interests. HSG examined the situation and found that the board did not have appropriate checks and balances in place to insure fair treatment of all parties, allowing family members to manipulate the process in their favor over a two-year period.

 

Result: Plaintiffs were awarded a nine-figure settlement.

 

Executive Compensation

Overview: Shareholders sued Walt Disney Company alleging that the amount of compensation paid CEO Michael Ovitz, who was terminated after just over a year, was excessive. HSG was hired to analyze the business case behind the decisions. HSG’s report found that the company followed appropriate governance processes in the hiring process and that the contractual arrangements were justifiable based on the circumstances and similar executive pay plans.

 

Result: An appellate court ruling validated these findings.

 

Pension Fund Bondholder Claims Against Bank Indenture Trustee

Overview: State Pension Fund (plaintiff) sued HSG client bank (defendant) in connection with its role as indenture trustee for the bondholder (State Pension Fund) asserting damages approximating $200 million. HSG’s analysis demonstrated that the indenture trustee’s actions did not cause the damages. HSG’s participation in key depositions and the mediation identified breakdowns in pension fund investment operations and material conflicts of interest regarding its board of trustees not discovered by the State Attorney General’s investigation.

 

Result: Defendant bank, although the primary target among a number of defendants, paid nothing in settlement of the lawsuit. Payments from other defendants approximated nine digits.

 

Bank Role as Bond Indenture Trustee

Overview: During bankruptcy proceedings of a major telecommunications firm, bondholders with $500 million in exposure sued the bank saying it failed in its duty as the bond indenture trustee. In its analysis, HSG analyzed the role of an indenture trustee, finding its scope much narrower than the plaintiff was claiming. HSG also found that the company issuing the bonds conducted itself appropriately but was caught in a market situation that caused it to fail and its failure to repay the bonds was not related to the trustee bank’s action or inaction.

 

Result: Satisfactory settlement during trial.

 

Mismanagement of Significant Real Estate Assets Held by Trust

Overview: HSG analysis and testimony on behalf of the plaintiff focused on defendant trustee’s mismanagement of real estate assets over 20 years. HSG showed that the defendant trustee’s failure to understand building codes and the means and options that were available to remediate a parcel of land according to building codes resulted in a significant devaluation of the property and therefore the assets of the trust.

 

Result: Jury verdict estimated at $150 million for our client.

 

 

Complex Commercial Issues: Fraud

 

Financial Institution’s Role in Failed Ponzi Scheme

Overview: Investors sued a financial institution (HSG client), which had provided custodial account services in connection with a bankrupt investment limited partnership. The investors claimed that the financial institution had made fraudulent representations, provided false financial reports, allowed investors’ funds to be commingled with the promoter’s funds, and vouched for the promoter. Investors sued for fraud, negligent misrepresentation, breach of fiduciary duty and aiding and abetting breach of fiduciary duty and fraud. HSG’s analysis showed that the financial institution generally played no part in the investors’ initial decision to invest and that the financial institution’s role with respect to the investors was very limited. HSG also determined there was no causal relationship between the investors’ losses and any actions of the financial institution.

 

Result: A satisfactory settlement was reached after extensive discovery.

 

Bank Lender Liability

Overview: The subordinated sellers (plaintiffs) of a large tract of land sued the defendant bank (HSG client) alleging that the bank had colluded with the project developer to financially damage the subordinated sellers. HSG’s analysis indicated that the subordinated sellers’ damage claims were incorrect, and without foundation, and that the bank’s actions had actually worked to the financial benefit of the subordinated sellers rather than to the contrary.

 

Result: Favorable out-of-court settlement for our client.

 

Financial Institution Liability for Providing Information

Overview: Seller of a major league sports team sued a financial institution (HSG client) for fraud and negligent misrepresentation for allegedly providing false information regarding the financial capability of a client of the institution, who had negotiated for the purchase of part of the team but failed to close. A few months later, seller sold 100% of his interest in the business. Subsequent to the sale, the value of the business rose. Seller contended that the financial institution’s actions had caused him to sell the entire business rather than the 50% he had originally intended to sell and deprived seller of the appreciation in the minority interest which was to be retained. HSG’s analysis determined, among other issues, that the seller’s inability to fund his share of financing responsibilities for the team would have likely resulted in a step-down of the seller’s interest to zero. HSG also determined that seller’s damage model was inappropriate.

 

Result: A satisfactory settlement was reached after extensive discovery.

 

 

Complex Commercial Issues: Breach of Contract

 

International Multi-Billion Dollar Structured Finance Transaction

Overview: An oil-rich developing company had planned a major infrastructure project and HSG client (plaintiff) arranged financing through a large, financially sophisticated entity. Defendant backed off its obligation to provide financing at the last minute, asserting the financial structure was too complex. Plaintiff sued for bad faith breach of contract. HSG’s analysis demonstrated the economic viability of the transactions and broke down a highly complex series of transactions to a simple analogy that the jury was able to understand.

 

Result: Substantial eight-digit jury verdict for our client.

 

Real Estate Partnership Dispute

Overview: The partner controlling an entity which managed several large multi-family residential complexes brought multiple arbitrations and lawsuits against the managing general partner (HSG client) and others in a group of partnerships which owned the residential complexes. Plaintiff challenged both the authority of the managing general partner and his decisions in connection with the operation of the partnerships and the potential sale of several of the complexes. Utilizing a team with extensive experience in negotiating and operating complex real estate partnerships and in the construction, marketing and sale of large real estate projects, HSG analyzed the relationships and performance of the parties under the agreements, and specifically the governance of the partnerships by the general partner in accordance with normal and customary fiduciary standards. HSG concluded that the managing general partner had acted appropriately under the circumstances.

 

Result: The parties resolved their differences, and the sales of the multi-family residential complexes went forward.

 

Fraud-Derivatives Scheme

Overview: An insurance firm hired HSG to examine a set of claims between the insurance company and a bank pertaining to a fraudulent insurance derivatives scheme perpetrated by a third party insurance agent. HSG’s analysis demonstrated various breakdowns in the bank’s operating practices and established that the client insurance firm had taken the appropriate steps throughout the course of the various transactions.

 

Result: Favorable out-of-court settlement for our client.

 

Breach of Contract: Drilling Rig Fabrication

Overview: HSG was hired by its defendant client, a drilling rig operator, who was being sued by a contractor as a result of the operator choosing not to proceed with the construction of certain drilling rigs. HSG drew upon its knowledge of customary and normal practice in the purchase and construction of such equipment to analyze the business practices applicable to the purchase cancellation. HSG’s analysis also challenged the plaintiff’s damage claims and pinpointed weaknesses in the plaintiff’s position regarding certain contractual issues.

 

Result: Favorable out-of-court settlement for our client.

 

Wrongful Termination

Overview: HSG was engaged by a company to defend against a wrongful termination claim brought by a former CEO. Plaintiff asserted claims for breach of contract, tortious interference with contractual relationship and slander. HSG evaluated circumstances related to the plaintiff’s hiring, tenure as CEO and termination. HSG determined that the actions of the defendant company were appropriate and that the company followed normal and customary business practices throughout the course of its relationship with the CEO.

 

Result: The company achieved a satisfactory settlement out of court.

 

 

Complex Commercial Issues: Breach of Contract – Damages

 

Intellectual Property: Breach of Commercial Contract & Related Damages

Overview: HSG client (plaintiff) contracted with the defendant to create an interactive CD-ROM based upon a book and characters owned by defendant. Defendant failed to publish and distribute the CD-ROM. HSG analysis established plaintiff was entitled to both monetary and non-monetary compensation and HSG calculated appropriate damages. The report also pointed out certain organizational changes initiated by the defendant that contributed to the defendant’s failure to deliver the required non-monetary compensation.

 

Result: Favorable out-of-court settlement for our client.

 

Going Concern Valuation

Overview: HSG client (plaintiff) was a wholesale electric supply company. Its principal competitor responded to client’s market penetration by undertaking a negative campaign to undermine client’s credibility. Competitor instituted litigation, the expense and settlement of which ultimately caused client to cease operation. The client’s insurance company (defendant) failed to defend client in the stated litigation and client filed a lawsuit for recovery. HSG was retained to examine the business issues associated with the conflict and to quantify client’s actual damages from insurance company’s failure to defend.

 

Result: Favorable out-of-court settlement for our client.

 

Breach of Letter Agreement and Operating Agreement

Overview: Plaintiff oil company sued defendant operator (HSG client) under a letter agreement and operating agreement contending that the operator had intentionally hindered plaintiff’s efforts to participate in field development. Plaintiff claimed that the resulting delay in field development had injured plaintiff by lowering its stock price in a subsequent public offering. Drawing on their knowledge of the oil and gas industry and financial experience, the HSG team determined that plaintiff was not capable of financing the proposed development program. HSG also determined that plaintiff’s expert’s stock pricing model damage calculation violated generally accepted valuation techniques and ignored accepted factors used in valuation, e.g. the timing and amount of future cash flows.

 

Result: A satisfactory settlement was reached after extensive discovery.

 

Breach of Loan Agreement and Agreement to Provide Remediation Services

Overview: Private investor sued HSG client, U.S. oil company, the owner of a major oil field in Indonesia, for moneys allegedly due under a loan agreement. U.S. oil company counterclaimed contending that private investor had materially breached the loan agreement by failing to fund and provide remediation services for the field. HSG calculated the damages suffered by U.S. oil company as a result of the breach, which included both lost production revenues through the date on which U.S. oil company sold a majority interest in the field to a third party and the diminution in the sale price of the field upon the sale to the third party. Using private investor’s estimates of increased production from the field to be achieved by the remediation operations, HSG calculated a range of damages at various production levels, oil prices and capital costs.

 

Result: A satisfactory resolution was reached after expert reports were filed.

 

 

Complex Commercial Issues: Negligence, Bad Faith and Conspiracy

 

Embezzlement Scheme

Overview: HSG client (defendant bank) was sued for direct and consequential damages of approximately $12.5 million stemming from an embezzlement scheme in which two plaintiff employees colluded and deposited/wired funds into a fictitious corporate bank account opened at the defendant bank. HSG’s analysis demonstrated that plaintiff’s financial reporting and internal controls were deficient, resulting in a lack of oversight of the two employees. HSG also challenged the business basis for plaintiff’s consequential damages claim stemming from alleged actions by defendant bank.

 

Result: Highly favorable for HSG client. Jury found no consequential damages. Regarding direct damages, which were substantially reduced by the jury, the jury found the plaintiff liable for 95% of the remaining direct damages and our client responsible for 5% (or approximately $6,000).

 

 

Complex Commercial Issues: Antitrust and Restraint of Trade

 

Restraint of Trade: Healthcare Devices

Overview: A small manufacturer of healthcare devices sued HSG client, a major manufacturer, claiming that defendant had restricted plaintiff’s entry into the hospital market allegedly through defendant’s support of buying groups. HSG found that plaintiff’s failure to meet its business plan goals resulted from operational and manufacturing problems, including inability to meet potential demand in the market. Acceptance of plaintiff’s products was mixed and other competitors, who did not sell through buying groups, had much stronger revenue growth.

 

Result: The action was satisfactorily resolved.

 

 

Corporate, M&As and Divestitures

 

Corporate Divestiture, Valuation & Structure Issues from Spin-off

Overview: A litigation trust funded by six banks (plaintiff) sued certain directors and officers (defendants) of a corporation and their advisors, alleging that a spin-off had been intentionally structured to benefit the defendants. Attorneys for the plaintiff litigation trust hired HSG, which had worked for opposing parties in another complex commercial matter. HSG’s analysis identified numerous areas in which the designated directors and officers and certain of their advisors had operated outside of customary and ordinary business guidelines and determined that the board did not have appropriate checks and balances in place to insure fair treatment of both parties.

 

Result: The client attained a nine-digit settlement from the specified directors and officers, the surviving company and certain of its advisors.

 

Special Purpose Entity: Undeclared Dividends

Overview: Employees (plaintiff) holding a controlling interest in a “special purpose” corporation sued the defendant parent corporation (HSG client), asserting that funds upstreamed through the special purpose corporation were undeclared dividends. HSG’s analysis identified errors in the plaintiffs’ underlying business model and in their damage calculations. Our analysis demonstrated that the payments were not dividends and that the employees who were the majority owners of special purpose entity were not entitled to a portion of those cash flows.

 

Result: Favorable out-of-court settlement for our client.

 

Shareholder Derivative Action

Overview: HSG was engaged on behalf of minority shareholders of a small capitalized company to determine whether the value of their investment was intentionally devalued over the course of a seven-year period by the senior management of the acquiring company. HSG found governance problems in the financial, operational, and management practices of the defendants.

 

Result: A settlement was reached that was favorable for the plaintiffs.

 

Tracking Stock Repurchase by Company: Shareholder Class Action

Overview: Shareholders owning tracking stock in a division of a biotech company (HSG clients) sued the company and its directors and officers for securities fraud under Rule 10b-5 and for breach of fiduciary duty under state law in connection with a repurchase of the tracking stock by the company. The shareholder class asserted that defendants had intentionally manipulated the timing of the repurchase and related disclosures and the earnings of the division to reduce the price at which the repurchase occurred in order to benefit the shareholders of the dominant division of the company. HSG’s analysis showed that the board had failed to employ customary and usual corporate governance practices and processes in assessing the fairness of the transaction.

 

Result: The case was settled favorably.

 

 

Securities Violations

 

SEC Fraud Claim: Rule 10b-5

Overview: HSG was selected to represent a defendant in a financial reporting fraud matter filed by the SEC against three senior executives of a software company. The SEC alleged that three members of senior management misreported $1 billion dollars of revenue over a three-year period. HSG established that the allegations against our client were beyond his responsibilities and outside of his area of expertise.

 

Result: The case was settled favorably.

 

Section 11 Shareholder Class Action: Pharmaceutical Company

Overview: Shareholders of a pharmaceutical company sued the company for securities fraud under Section 11 of the 1933 Securities Act for investment losses allegedly resulting from the company’s failure to disclose risks affecting the company’s financial situation. The company had only one drug in the testing phase and when that drug did not receive final FDA approval the stock value dropped significantly. HSG’s analysis established that the company in its public filings had disclosed numerous risk factors relating to the fact that it had only one potential product which could only be sold after successful FDA trials and approval and that it might have no future revenue.

 

Result: The case was dismissed on summary judgment in favor of the company.

 

Section 11 Shareholder Class Action: Retail Company

Overview: A shareholder class of a retail company sued the company’s directors and officers (HSG client) for securities violations under Section 11 of the 1933 Act for investment losses allegedly resulting from the company’s failure to disclose risks affecting the company’s marketing of its products and distribution channels and the company’s financial situation. HSG’s analysis showed that the defendants had diligently investigated the representations in the prospectus and where appropriate had relied on qualified experts in making certain representations in the prospectus.

 

Result: The case was satisfactorily resolved.