Steven Davidoff Solomon writes for The New York Times, July 14, 2015
An unfolding scandal in Northern Ireland has cast a harsh light on what can happen when a private equity firm goes trolling for distressed assets and a big return. It is a toxic mix of money, lawyers, politicians and the continued wreckage of the financial crisis.
Let’s start with the financial crisis. Ireland was one of the countries that ran into a brick wall as its banks toppled mightily under bad property loans and the collapse of the country’s real estate bubble. In the wake of the crisis, the country set up the National Asset Management Agency, or NAMA, as a so-called bad bank, which acquired problem loans and later started to sell them at discounted prices.
Sensing a bargain, Cerberus Capital Management, the private equity firm headed by Stephen A. Feinberg, acquired the agency’s Northern Ireland loan portfolio, which had a face value of 4.5 billion pounds (currently about $7 billion), for £1.3 billion in April 2014.
So far, so good. This all seemed to be just another example of a private equity firm taking advantage of the financial crisis to buy distressed assets with the aim of a quick profit. Cerberus is perhaps one of the more aggressive private equity firms. It owned Chrysler during the financial crisis — not a great move — but has had its fair share of home runs, like the impending initial public offering of the grocery chain Albertsons.
But a bombshell dropped two weeks ago. Mick Wallace, a member of the Irish Parliament, contended that £7 million was put in an offshore bank account on the Isle of Man to pay off an unidentified Irish politician or political party in connection with the Cerberus deal.
He was right, at least as far as the account goes.
Here’s where the lawyers come in. When Cerberus bid for the loan portfolio, it was represented by the American law firm Brown Rudnick, which pitched Cerberus on the deal. Brown Rudnick, in turn, retained the Northern Ireland law firm Tughans to help it work on the transaction and provide local counsel.
In January, the managing partner of Tughans, Ian Coulter, stepped down unexpectedly with little explanation. After Mr. Wallace’s accusation, the reason became clear. The firm disclosed that it had discovered that Mr. Coulter had diverted the £7 million in professional fees owed to the firm to an account in his name without the knowledge of his partners. It said it had retrieved the money and parted ways with Mr. Coulter.
The bank account sum turned out to be part of a £14 million fee paid to Brown Rudnick and Tughans by Cerberus. Lawyers usually bill by the hour, but in this case the two firms were able to charge a finder’s fee for bringing Cerberus into the deal.
Both Brown Rudnick and Cerberus deny any knowledge about the diverted Tughans payment. A Brown Rudnick spokesman said that it had “acted in compliance with applicable law and with the utmost propriety.”
Cerberus pointed out in a statement that it has not been accused of any wrongdoing and that it has “zero tolerance for inappropriate or unethical activities.”
“We insist on the same high standards of conduct from our advisers,” it added. “In this matter, as is our standard business practice, we codified these expectations in our engagement letters with our outside advisers so that there was no room for interpretation.” It said it had received assurances from both law firms that they were in compliance with all laws and regulations.
As far as the second part of Mr. Wallace’s accusation, no politician has been identified as the potential beneficiary of the £7 million, though speculation is rampant. Police in Northern Ireland have opened a criminal investigation.
Turmoil has surrounded the sale of the Northern Ireland loan portfolio from the beginning.
Cerberus was not Brown Rudnick’s first target on the deal. The firm initially approached the bond giant Pimco, which expressed interest.
What happened next is a matter of dispute. According to one version, Pimco planned to pay Brown Rudnick £15 million, which it was to split three ways with Tughans and a third party, who turned out to be Frank Cushnahan. Mr. Cushnahan had been a member of the Northern Ireland advisory board for NAMA and shared offices with Tughans. He quit the board in November 2013 for “family priorities.” Mr. Cushnahan was to be paid as an adviser to the deal, according to NAMA.
NAMA forced Pimco out of the bidding when it learned about the potential payment to Mr. Cushnahan, according to this version.
Pimco has a different account. It said that it was approached by third parties seeking to act as brokers of a potential transaction for the portfolio, and that it was the third parties, not Pimco, that proposed the acquisition fee. Pimco said it did not engage any of them as advisers.
Pimco said that as part of its due diligence process, it identified concerns about the role of the third parties and decided to withdraw from the bidding process. It said it then communicated those concerns to NAMA.
Pimco decided to withdraw “not because of any NAMA decision, but because of the concerns relating to the third parties that Pimco had identified as part of its due diligence checks,” said Michael Reid, a Pimco spokesman. “At no point was Pimco required or asked to withdraw by NAMA, and no such decision was communicated by NAMA to Pimco or relevant to Pimco’s decision.”
Regardless, Pimco was out, but Brown Rudnick was not deterred. Instead, it moved on to Cerberus with Tughans in tow.
As part of the transaction, Cerberus represented that it was paying no one other than Brown Rudnick and Tughans. Brown Rudnick, which directly employed Tughans, received a similar guarantee from that firm. Mr. Cushnahan, the spoiler of the Pimco deal, was supposedly dropped.
The Cerberus negotiations were not without their own after-the-fact dust-up. After Mr. Wallace’s blockbuster claim, reports surfaced about a meeting that took place about a week and a half before Cerberus clinched the deal. It was between Dan Quayle, the former United States vice president, who is chairman of Cerberus Global Investments; Peter Robinson, the first minister of Northern Ireland; and Simon Hamilton, the finance minister at the time. Mr. Coulter was also present.
Cerberus contends that this was simply a due diligence meeting, which is in line with what would typically happen in a billion-dollar deal. Cerberus would want to know that the government would not unduly interfere with its administration of the purchased loans.
However, Martin McGuinness, the deputy first minister, said that the meeting could not have been official because he was not aware of it and that all official meetings must be agreed to by both him and Mr. Robinson.
Whatever happens next, the sale of the Northern Ireland portfolio exposes the machinery behind the hunt for the big score. A law firm pitches a deal from potential client to client in search of a finder’s fee more associated with investment bankers, not lawyers. And Cerberus was more than willing to jump in despite its lawyers’ involvement in a proposed fee arrangement that scuttled the Pimco deal.
It turns out that picking over the bones of the financial crisis leftovers is rarely pretty.
Steven Davidoff Solomon is a professor of law at the University of California, Berkeley. His columns can be found at nytimes.com/dealbook. Follow @stevendavidoff on Twitter.