Suit blames hedge fund for shares' decline
Boston Partners Asset Management's short sales and
other acts were illegal,
ABFS trustee claims.
By Todd Mason
The Philadelphia Inquirer
January 18, 2006
A Boston hedge fund participated in an illegal scheme to drive down the share price of American Business Financial Services Inc., according to the bankruptcy trustee who is liquidating the former Philadelphia mortgage lender.
Boston Partners Asset Management L.L.C. sent anonymous letters and posted Internet comments in a "vicious pattern of conduct" to damage ABFS, Trustee George L. Miller alleged in a civil lawsuit filed Dec. 30 in federal court in Wilmington.
Cynthia Perl, a spokeswoman for Boston Partners' parent, Robeco Investment Management Inc., would not comment on the lawsuit.
The suit seeks unspecified compensatory and punitive damages, plus the profits that Boston Partners earned in short sales of ABFS stock. In a short sale, investors borrow shares and then sell them, hoping to replace them later at a lower price.
Miller's lawsuit alleges that Boston Partners made illegal "naked" short sales, in which nonexistent shares are sold to put pressure on the share price, even though the transaction ultimately falls through.
Boston Partners' broker had short positions in January 2001 amounting to 30 percent of ABFS shares available then to be bought and sold, the lawsuit alleges. Legitimate short positions of that magnitude are unlikely, the lawsuit says.
The pressure applied by shorting that many shares "would be huge," said Robert Shapiro, an economist in Washington who has studied naked shorting.
"You put in sell orders on 30 percent of a company's outstanding shares, it's going to drive down the share price," he said.
In addition, Boston Partners wrote anonymous letters to regulators, the news media, and ABFS's investment bankers alleging that the company was engaged in a pyramid scheme, according to Miller's lawsuit.
The bankers withdrew from a sale of securities in June 2003, triggering a cash crisis that ultimately claimed ABFS.
ABFS filed for bankruptcy protection last January owing $521.6 million to purchasers of unsecured investment notes and $98.1 million to investors who exchanged their unsecured notes for secured notes.
Miller hired a law firm last year to explore litigation against ABFS officers and directors, who are not blameless in his view.
"I wouldn't have hired counsel to investigate them if I thought they were pure victims," Miller said in an interview last week.
ABFS had maintained that it fully disclosed the risks involved in buying its notes.
Litigation is the only hope for unsecured creditors to collect a "significant distribution," Miller said. The liquidation process, slowed by difficult dealings with secured creditors, could take two years, Miller said.
Meanwhile, the trustee said he had fielded 8,800 calls and e-mails from concerned note holders. The volume of calls is a major drain on his time, Miller said. He said he was not able to tell callers any more than he has posted on his Web site, http://www.abfsonline.com.
"It is a very frustrating case," he said.
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