I’ve worked with private firms and public firms.  And, it’s always amazing how different things were years ago.  But, now, many “private” firms (yes, I put them in quotes) were public firms that have been purchased by private equity entities, by venture capitalists, or similars.

What makes the private firms of old and these new flavors of private firms different?  The old, truly private firms were run by the folks who built them from zero or who came in shortly thereafter.   Their goals were to grow the firm, perhaps to take it public, but more often than not to develop a (very, very) comfortable living from their efforts.

Now, these private equity firms purchase these companies and sell assets- which then pay the “investors” back for all or most of their investment.   Oh, they also expect the firms they buy to pay them dividends on their original  “investment” (even though they were paid handsomely when they sold the assets),  often saddling these firms with unconscionable debt.

A good example of this sort of deal was Cerberus which bankrupted Chrysler.  Oh, sure, Chrysler wasn’t a great company (only its products were)- but it was made worse when Daimler (Mercedes Benz) bought them in 1998 and stripped away everything it could (Chrysler had great engineering), and then sold them for a $ 50 billion loss a decade later.  Within two years (and the advent of the Great Recession), Cerberus bankrupted Chrysler, the remnants of which were bought by Fiat and the unions (United Auto Workers).  (Fiat has since bought out the unions.)

Or BankUnited, of which I have often written.  This was the second largest bank failure in the history of the US in 2010.   With $ 11 billion in assets (ok, a lot of those assets they were questionable Option ARM mortgages), the Feds took them over and sold them to the Carlyle and Blackstone Groups for $ 945 million.  Oh, the Fed also guaranteed every single loan (95%), so there was no risk to the takeover team.  Because if every loan failed- which was more than highly unlikely- the investors would still make a 10X return on their money.   But, it gets better, because the investors sold stock in the bank, but instead of using that to capitalize the bank, the “investors” paid themselves back $ 500 million of their investment, putting less than $ 90 million of cash into the bank.  Oh, and the “investors” still retain control.

Most of the time, we don’t know how these shenanigans play out.  Because there is no requirement for these private firms to divulge anything to anybody.  Not that public companies tell the truth.  (I’ve written how Apple bamboozles their stockholders with claims of taxes to be paid- and the 6000 public companies are holding $ 2 trillion overseas- not investing it in the future, not paying their employees, not paying dividends to their stockholders.)

We can, occasionally, discern what goes on with these “private” entities when something goes wrong.  And, the judges refuse to seal the court hearings.  Like what happened with the lawsuit between Hellas Telecommunications, Apax Partners, and TPG (formerly Texas Pacific Group).  Not surprisingly, TIM Hellas (the original name of Hellas) was taken private in 2005.  It was a viable company with virtually no debt.  Until the takeover, when Apax and TPG bought it and then saddled it with $ 1.8 billion in debt.  And, then the “investors” tried to sell the firm- and got no takers at their inflated price- so they had the company borrow some $ 1.8 billion (1.4 billion Euros) to “pay back” Apax and TPG’s loans.  Of course, Apax and TPG swear the firm got in trouble because of the financial crisis.

But, the Board of TIM Hellas was almost all comprised of the “investment” firms who approved these ridiculous loans, claiming the company was worth much more.  And, the certificates that were redeemed to pay back Apax and TPG were only redeemable if the firm had profits or assets were sold; it also stipulated that an independent auditor was required to value the firm.  Moreover, if there were no distributable earnings, payouts were never allowed.  You guessed it- none of these were actually true.  Or, that’s what the creditors stipulate.

So, now, the case is in US Bankruptcy court.  Under a special chapter about which most folks never hear.  (You’ve heard of Chapters 7, 11, and 13- they are the common ones.)   This is Chapter 15,  because cross-border (non-US) insolvencies are involved.   Apex and TPG have been working to get the case squashed, but Judge Martin Glenn ruled last month (as of the date this post was written) that was not to be- because of the fraud involved.  (eMails, other materials indicated TPG and Apax knew their actions were jeopardizing TIM Hellas.)

We can expect this case to go to trial in 2016.  And, it will mean other creditors will begin pursuing cases like this.   So, it won’t just be of interest to folks like my brother (one of the great bankruptcy lawyers in New York), but to angel investors, private equity firms, and folks who follow business.  Because we want to stop this sort of “investor” fraud.

In the meantime, the Hellas deal is attracting attention in other jurisdictions besides the US. Tax authorities in Greece and Luxembourg are looking into whether appropriate taxes were paid on the money generated in the certificate redemption, including bonuses paid to senior managers who approved the deal.

“We expect that increased scrutiny of private equity firm practices by the taxing authorities will see the wheels come off on these types of transactions that might previously have passed under the radar,” Andrew Hosking, the European Liquidator for the firm has claimed.

It is only by sheer dint of persistence that the creditors of Hellas II are still fighting. But the passage of so much time may not be all bad. Regulators and investors have grown increasingly concerned about private equity practices recently. That means heightened interest in the Hellas II story is likely to continue.