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Investor Attempting to Obstruct Accredited Acquisition

Investor Attempting to Obstruct Accredited AcquisitionLawsuit alleges purchase price artificially low

July 24, 2007


A lawsuit has been filed against Accredited Home Lenders in an effort to block the company’s sale to an affiliate of Lone Star Fund. The plaintiff alleges the share price undervalues the true value of the subprime lender.

Accredited’s stock, after reaching a high of $48.47 a year ago, plunged to a low of $3.77 on March 13 of this year but has recently been trading above $13.

The class action suit, filed by Jean Wan “and all others similarly situated,” against Accredited, seven of its officers, including Chairman and CEO James A. Konrath, and Lone Star, specifically seeks to enjoin “defendants, their agents, counsel, employees and all persons acting in concert with them from consummating the proposed Acquisition, unless and until the company adopts and implements a procedure or process to obtain a merger agreement providing the highest possible terms for shareholders or a tender offer that discloses all material information.”

A hearing on the request for a preliminary injunction to prohibit the consummation of the sale is scheduled for August 24 in San Diego County, Calif. Superior Court, a spokesman for the plaintiffs and their suit, who asked not to be identified, told

Accredited and its attorney did not respond to requests for a comment.

“Unless the proposed acquisition is enjoined by the court,” according to the suit — filed on June 29, “the Individual Defendants will continue to breach their fiduciary duties owed to plaintiff and the members of the class, will not engage in arm’s-length negotiations on the proposed acquisition terms, and will not supply to Accredited’s shareholders sufficient information to enable them to cast informed votes and may consummate the proposed acquisition, all to the irreparable harm of the members of the class.”

On June 4, the San Diego-based lender signed a definitive merger agreement with LSF5 , an affiliate of the Dallas-based private equity firm, Lone Star Fund, under which LSF5 would purchase all of its outstanding shares of common stock for about $400 million in cash.

But, because only 21% of outstanding shares had been tendered as of July 17, and Accredited had yet to obtain all of the required state regulatory approvals, the deadline for the merger agreement was, on that date, extended to July 31.

The suit, which is based on a positive outlook of Accredited’s future, notes that the decision to sell was made “at a time when its share price is devalued due to the financial difficulties facing the ‘subprime’ lending market.” The suit also points to a press release issued by Accredited on Feb. 14 that emphasized the company had been able to generate positive net income while other subprime lenders posted losses or exited the business.

It also announced that it had stopped originating some riskier types of loans.

More recently, the suit maintains, the lender has obtained a new $500 million warehouse facility, and renewed a contract for a $600 million warehouse with another investment bank, reflecting the positive light others have regarding the company.

Further questioning the sale, the suit accuses Accredited and Lone Star of self-dealing and breach of fiduciary duty in that they failed to disclose all material information concerning the sale and acquisition, noting that the sale negotiations and sale contract were based on information concerning financial conditions and prospects that were not available to shareholders.

Individual officers with both firms, rather than shareholders, will benefit from Accredited’s sale, “unjustly enriching themselves,” the suit charges, arguing that the officers are “using the sale of the Company to aggrandize their own wealth upon completion of the sale,” and also are “attempting to advance their interests at the expense of plaintiff and other members of the Class.”

Silver Point Capital, a privately owned hedged fund sponsor, has been increasing its holdings in Accredited. It increased its holdings from 950,000 shares to 1.3 million shares during May and in June acquired another 1.3 million shares, bringing its total holdings to 2.6 million shares, more than 10% of outstanding shares.

The plaintiff spokesman pointed to these purchases as further proof of Accredited’s strength and a stock value of perhaps $25 a share. “A big investor buying millions of shares suggests that the offer price is insufficient,” he maintains. “I think this company is poised to reach last year’s height of $50 a share.”

Another 1.7 million of Accredited’s shares are held by San Francisco-based Farallon Capital Management LLC, which also holds warrants for another 3.3 million shares in return for a $200 million loan made last March. Farallon had been interested in acquiring Accredited but, on March 17, Accredited’s board decided to defer Farallon’s proposal, according to the suit.

Accredited originated nearly $16 billion in subprime mortgages last year, according to the company.

Accredited profile

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