The Distressed Debt Alert

Browndorf to Launch New Distressed Fund

A Newport Beach, Calif., investment advisor expects to start soliciting investment for its first distressed control fund in May.

Browndorf PEM LLC wants to focus the Browndorf Founder's Fund on loan-to-own, turnaround, and debt origination strategies for distressed and undervalued companies, according to a source with knowledge of the matter.

An offering memorandum should be distributed to investors soon.

An initial investment planned for the new fund includes debt and equity into SpeechPhone, a California maker of voice recognition technology. Bethany Group, a distressed real estate turnaround specialist, may also contribute investments to the fund, the source said.

Browndorf PEM founder Matthew C. Browndorf repositioned his company as a distressed private equity firm in 2007. Prior to forming the company in 2002, Browndorf was a Manhattan attorney, most notably at Bryan Cave LLC and Buchanan Ingersoll PC, where he represented securities brokers and private clients in securities and white-collar litigation.

A former managing director of Stanfield Capital Partners will have to wait at least a year to resolve his lawsuit seeking more than $13 million in back wages from the New York-based distressed asset manager.

On April 29, federal Judge John G. Koeltl in Manhattan threw out the lawsuit Richard Johnson filed against Stanfield on a technicality. Johnson filed the suit shortly after Stanfield eliminated his position in its business development area in March 2006.

In June of that year, Johnson joined Citigroup Alternative Investments as the new head of U.S. institutional sales. Sources said Johnson held the title prior to being caught up in a wave of Citigroup's layoffs a few months ago.

Johnson's attorney Todd Gutfleisch, with the law firm of Wechsler & Cohen in New York, did not return calls. Johnson could not be located for comment.

Both Johnson and at least one of Stanfield's principals resided in Connecticut, so his lawsuit against Stanfield had no legal standing in a federal court handling opposing parties that reside across state lines, Koeltl found.

Stanfield's legal representative Kenneth J. Kelly, with the law firm of Epstein Becker & Green, said Koeltl did not buy Johnson's argument that Stanfield principal Stephen Mark Alfieri had actually lived in a New York apartment where he stayed during the work week. Alfieri was not named as a party in the litigation.

Both Johnson and Stanfield have agreed to move the case to New York state court, where it will likely take at least a year to be assigned a judge, Kelly said. "We're not too happy. My client wants this case over," he said.

Stanfield had filed a motion to dismiss the federal lawsuit. Johnson claims he was stiffed on compensation after having originated $1.2 billion in new investments during his four-year tenure at the fund.

Tarpon Industries, a manufacturer of steel racks and tubing, filed for bankruptcy on April 29, after failing to service secured debt provided by Laurus Master Fund.

Tarpon's losses have totaled about $33 million from 2004 through 2007, chief executive James. W. Bradshaw said in filings with the U.S. Bankruptcy Court in Detroit. About half of those losses were generated by a Canadian subsidiary that the company shut down in November, according to Bradshaw.

Tarpon, of Marysville, Mich. has been required twice since December to amend terms of Laurus' loan facilities to avoid default, Bradshaw stated. Tarpon owes $15.8 million on the loans. Under February amendments, the company was required to obtain at least $1 million in debt financing by March 15, and $5 million in new public equity by June 30.

"Although [Tarpon is] generating an operating profit for the first time, the debtors failed to obtain the required financing and faced cessation of operations due to a lack of operating capital," the company said in court filings.

Laurus provided the bulk of its financing to Tarpon in August to refinance loans held by LaSalle Bank.

Tarpon also owes $1.7 million on a junior loan to High Capital Funding, according to Bradshaw.

Tarpon's stock was de-listed by the American Stock Exchange in November.

Laurus has agreed to provide up to $10 million in debtor-in-possession financing.

The U.S. Bankruptcy Court in Delaware approved the bidding procedures last week for bankrupt auto glass replacement company Diamond Glass to sell substantially all of its assets at an auction scheduled for June 5.

Bidders will have the opportunity to best an offer of stalking horse bidder Guggenheim Corporate Funding, or its designee, which is credit bidding $47 million owed on pre-bankruptcy loans to the Kingston, Pa. company.

Guggenheim, a New York distressed fund, has the option of providing the court-approved bidder, if not itself or a designee, a loan of up to $25 million to support the purchase, according to the bankruptcy Judge Christopher Sontchi's order filed on April 25.

Guggenheim expects to continue Diamond's operations if it's the successful bidder.

Outside of the fund's debt, Diamond owes another $13.1 million to trade vendors.

Turnaround specialist Alvarez & Marsal announced on April 29 the hiring of two managing directors: William Fox for the commercial restructuring practice in New York, and Daniel L. Galante for the transaction advisory group in Chicago.

Fox has more than 30 years of senior executive and financial management experience with several companies, including as chief financial officer for cosmetics giant Revlon. Fox last served as executive chairman of Nephros Inc., a medical device research and development company. His experience also includes the role of vice chairman of Barrington Capital, a group of small-cap value investment funds.

Fox will continue to specialize in turnaround and business performance improvement efforts for consumer products, retail, and global manufacturing companies.

Galante will lead the transaction advisory group along with four other managing directors based in New York and Chicago. Galante, who has focused on middle market companies, was formerly a senior managing director of FTI Consulting and a partner with the transaction advisory services practice of Ernst & Young.

U.S. Attorney Mary Beth Buchanan in Pittsburgh appears to have ruled out that Wachovia Bank was complicit in the fraud at defunct beverage maker Le-Nature's.

In her first public statement last week pertaining to her office's investigation into Le-Nature's, Buchanan placed all blame on the company's management for defrauding investors of what may have been more than $500 million.

A pending lawsuit against Wachovia accuses the bank of knowing of the fraud during the period it occurred from 2003 through 2006. Wachovia, as Le-Nature's main bank agent, is alleged to have kept quiet in order to hide its own exposure and to continue collecting fees from Le-Nature's.

The lawsuit was filed in U.S. District Court in New York in September by several fund managers seeking recovery on a $260 million loan that Wachovia syndicated in September of 2006. That was just a few months before creditors forced Le-Nature's to file involuntary bankruptcy.

However, Buchanan repeated what has been Wachovia's media defense to the allegations -- that the bank was also a victim.

Buchanan made her comments as part of an April 24 announcement of the guilty plea of Tammy Andreycak, Le-Nature's former director of accounting, on four counts of bank fraud, wire fraud, conspiracy and aiding and abetting in the preparation of false income tax returns. Andreycak is eligible for a maximum sentence of 58 years in prison and a fine of up to $1.75 million. She is scheduled to be sentenced in July.

"The phony financial data compiled by Andreycak was used by Le-Nature's management to defraud lenders, including Wachovia Bank and AIG Capital Equipment Finance," Buchanan's office said in its statement. "Between these two, losses amounted to approximately $305 million, for which Andreycak accepted responsibility in her guilty plea."

Buchanan said the investigation into Le-Nature's was continuing.

Robert S. Loigman is the legal representative of funds including Harbinger Capital Partners, Latigo Master Fund and BlackRock, who are suing Wachovia. He said that Buchanan's comments would not deter the litigation against Wachovia. Loigman, with the New York law firm of Quinn Emanuel Urquhart Oliver & Hedges, noted that Andreycak agreed to testify against other Le-Nature's officers. That could lead to inquiries of CEO Gregory Podlucky and perhaps others with more direct knowledge of Wachovia's involvement. Loigman said.