No one has filed more challenges to M&A deals since 2011 than Hilary Kramer. She says she’s acting in the interest of shareholders, but they haven’t received a penny. Lawyers, though, have made millions.
A TV stock picker’s other life: leading an onslaught of class action suits
WILMINGTON, Delaware – On June 25, stock-picker and TV commentator Hilary Kramer urged her website subscribers to sell their shares in a medical supply company. The stock had just soared on a buyout announcement.
“Our next move here is to lock in our hefty gains of over 100%,” she wrote.
The buyout of Medical Action Industries Inc came just weeks after Kramer had recommended the stock. She later hailed it as one of her best picks of 2014.
But on June 26, one day after trumpeting the buyout in her newsletter, Kramer had something very different to say about it court: She filed a class action lawsuit against Medical Action, accusing the company of agreeing to a sale price so low that it would cause shareholders “irreparable harm.”
It wasn’t the first time Kramer had sued to stop a buyout. In fact, by the time she went to court to complain about Medical Action, Kramer had already filed more than 40 similar lawsuits against other companies involved in mergers or acquisitions.
That makes her the most litigious of all American individual investors who have sued to block buyout deals, according to a Reuters analysis of court cases dating back to 2011. All told, she has sued to stop about $100 billion worth of corporate deals.
Kramer is in the vanguard of a new type of mass litigation. The kind of class action she brings is booming, with lawyers rushing into court almost as soon as any merger or acquisition is announced to argue that the sale price is too low. The U.S. Chamber of Commerce calls the cases “extortion through litigation.” Plaintiffs' lawyers say the lawsuits are a check on company directors and advisors who may not be watching out for shareholders.
Kramer - who has written for the New York Post, MarketWatch.com and Forbes.com, and has been a regular commentator on Fox Business Network and Reuters - said in an interview that she gets no money from her cases. She said she challenges buyouts to make sure small investors are getting the price they deserve. "Also, to show my subscribers that I’m going to flex my muscles and show strength and lead for them," she told Reuters.
Despite her claims to be demonstrating clout on their behalf, however, Kramer doesn’t appear to have divulged her class actions to her subscribers, a Reuters review of her newsletters found. Nor has she mentioned her role as a repeat plaintiff to her TV viewers. Asked whether she discloses the suits to subscribers, she said she would show Reuters the language she had used, but never provided it.
And as for fellow shareholders: Her cases have never yielded a penny for them.
A search of court records shows only one instance of a payment to Kramer herself: a $2,000 fee awarded by a California judge to compensate her for the 15 to 30 hours she spent on a lawsuit over the buyout of commercial landlord MPG Office Trust.
Her lawyers, on the other hand, got a payout for every settlement. Firms representing all plaintiffs involved in class actions in which Kramer has a leading role have earned at least $14 million, Reuters calculates. That figure does not include fees in seven cases for which records are not available and four cases for which fees have yet to be awarded.
FLOODING STATE COURTS
Buyout lawsuits by Kramer and others have been flooding into state courts in recent years, since Congress and judges made it harder for shareholders to sue in federal court.
According to Cornerstone Research, a consulting firm, 94 percent of all merger and acquisition deals worth at least $100 million were challenged by a class action in 2013. In 2007 the number was just 44 percent.
The lawsuits are often nearly identical. They parrot recent earnings statements or analyst reports as purported evidence that the price of a buyout is too low. They are filed within days of a deal announcement, as the challengers race to be named “lead plaintiff,” entitling them to agree to a settlement on behalf of the class. The role often allows their lawyers to collect the largest share of the fees. Sometimes the lead plaintiff holds only a tiny handful of shares in the defendant company, meaning they have virtually no money at stake.
Kramer, for example, sued to stop the $3.2 billion sale of Transatlantic Holdings when she held only two shares of the reinsurance company’s stock, according to court records.
In most buyout lawsuits, the settlements, too, are almost identical: The defendants agree to disclose a bit more information about the deal negotiations in return for a release from liability. They also agree to pay the plaintiffs’ lawyers a mid-six-figure fee for what is typically just a couple of months’ work.
Shareholders, and the plaintiffs who file a case, almost never get a thing. Of the 77 settlements reached in 2014, only five produced more than $5 million for shareholders, according to Cornerstone Research.
A dozen or so plaintiffs’ law firms file the bulk of the buyout cases, including the well-known class action specialists Robbins Geller Rudman & Dowd of San Diego and Faruqi & Faruqi of New York. A few plaintiffs’ names crop up repeatedly, too. But since her first case in 2011, no one has come close to the volume filed by Kramer. She is always represented by Gardy & Notis, a six-attorney contingency-fee firm with offices in Englewood Cliffs, N.J., and New York City.
In addition to the 40 cases Reuters identified that were filed by Kramer, at least six more were filed by either her husband or her hedge fund, Greentech Research LLC. Their total of 46 suits is at least 50 percent greater than that of the individual who appeared second-most frequently in the analysis.
Mark Gardy of Gardy & Notis said in an email that “Kramer is a sophisticated investor who has pursued shareholder advocacy through litigation.” He added: “A lot of well-known activists employ the same law firms to file lawsuits against multiple companies.”
The new M&A class action litigation is reminiscent of the boom in shareholder class actions of the 1990s. Those lawsuits, too, were often brought by investors with tiny holdings, working with a handful of law firms. The lawyers hit companies with cookie-cutter suits and secured settlements that resulted in massive attorneys’ fees.
“My objective is based on valuation and based on fundamentals of the numbers, and not everyone is really interested in talking about cases.”
Back then, the trigger was a drop in a company’s stock price, and the boilerplate allegation was violations of federal securities laws. Corporations suspected that law firms were choosing plaintiffs who were little more than figureheads. In 2006, a leading class action firm then known as Milberg Weiss Bershad & Schulman was indicted for paying kickbacks to plaintiffs to file cases. Four partners were sentenced to prison, and the firm paid $75 million to end the case.
Congress in 1995 passed a law that sought to curtail such abuses. Among other things, it limited each shareholder to serving as a lead plaintiff five times in a three-year period. However, the law didn’t apply to state courts.
The recent surge of state court class actions has so far drawn little scrutiny from lawmakers. The suits haven’t gone unnoticed, to be sure: The settlements and the attorney fees, including those in Kramer’s cases, are reviewed for fairness and approved by judges.
But in Delaware, where most publicly traded U.S. companies are incorporated and most of these cases are filed, some judges have started to examine the settlements more carefully.
Among them is Travis Laster, a judge on Delaware’s Court of Chancery, one of the most commonly used forums for corporate disputes. He has said that real corporate wrongdoing may go undetected: Plaintiffs’ lawyers rush to file rather than investigate potential problems, and defense lawyers would rather pay to settle even a meritless case than delay the closing of a deal.
“The plaintiffs’ law firm gets what it wants: a fee. The defendants get what they want: a release of all claims against them. The defense lawyers get paid, usually by insurers,” Laster said in an email to Reuters. In a 2010 opinion involving the proposed sale of Revlon Inc, Laster derided some plaintiffs’ firms as “Pilgrims,” because, he quipped: “Firms who are early filers are frequently early settlers.”
Another Delaware judge, Leo Strine, learned while presiding over Kramer’s case challenging the sale of Transatlantic Holdings that she held only two shares of the company. In a rare move, Strine rejected the settlement.
“I think that makes plaintiff Kramer not at all typical of any kind of rational investor in a company,” said Strine, then the head of the Court of Chancery, according to a transcript of the 2013 hearing. “I don't have any confidence, unfortunately, that there is a real plaintiff behind this.”
Kramer told Reuters that she was unaware of Strine’s ruling and that she was a valid investor advocating on behalf of other Transatlantic shareholders.
A MILLIONAIRE AT 30
Kramer, who is 50 according to public records, grew up in New Jersey, the daughter of an accountant. A longtime friend of Kramer’s, former U-2 spy plane pilot Cholene Espinoza, described the family as frugal. "They recycled their Ziploc bags," she said.
In her 2011 book, “The Little Book of Big Profits from Small Stocks,” Kramer wrote that she scored her first big investing success in 1987, when she bought shares on the cheap after "Black Monday." By the time she was 30, she has said, she was a millionaire. She worked as an analyst and investment banker at Morgan Stanley and Lehman Brothers, and managed a multibillion-dollar portfolio at the Cisneros Group of Companies, according to resumes she has posted online. She owns two Manhattan condos and co-owns a third.
By 2011, Kramer was the editor of her stock-picking newsletters. She was also affiliated with two New York companies, Finance Scholars Group and VJL Consulting, that provide services such as expert witnesses to law firms, according to her LinkedIn profile and an online resume. She was a contributor for Forbes.com and an occasional TV commentator, as well.
That February, she went on the PBS “Nightly Business Report” with a stock tip: She told viewers that the share price of Animal Health International, a maker of livestock medicine, “could really double” as a result of a commodities boom.
A few weeks later, a rival unexpectedly swooped in to buy the company, but the price rose only about 10 percent. Kramer filed a lawsuit against Animal Health’s board in Delaware state court, claiming the buyout price was too low and seeking to halt the deal. “I was so livid,” she told Reuters in an interview.
In late May 2011, however, a little over two months after filing suit, Kramer and other plaintiffs agreed to a settlement that neither stopped the deal nor changed the price. It merely required Animal Health to disclose in securities filings some technical details about the buyout negotiations, such as that its advisor considered “unlevered free cash flow” in determining if the price was fair.
In all, the disclosures added fewer than five pages to Animal Health's 75-page proxy statement. Animal Health denied any wrongdoing and said in court papers that it settled "to avoid lengthy and time-consuming litigation.”
For that, the law firm representing Kramer, Gardy & Notis, along with four firms that represented other plaintiffs, collected attorney's fees of $525,000. In court papers, Gardy & Notis didn’t disclose its portion of the take, but said it worked 416.5 hours of a total 920 hours billed by plaintiffs’ lawyers. Shareholders got nothing.
“I don’t have any confidence, unfortunately, that there is a real plaintiff behind this.”
Kramer said she received no money as a result of the case. Animal Health declined to comment.
The Animal Health lawsuit marked the start of a remarkable litigation campaign by Kramer and Gardy & Notis.
In early May 2011, five weeks after suing Animal Health and before reaching a settlement in the case, they began filing almost identical cases against other companies, sometimes within a day of a deal announcement. They sued over buyouts of companies ranging from California Pizza Kitchen to International Coal Group Inc. In the month of May 2011 alone, Kramer and Gardy & Notis launched four class actions.
Later that summer, Kramer switched to filing suits primarily under her married name, Hilary Coyne. The next year, her husband, Timothy Coyne, a former New York City police lieutenant, filed his first of four cases. Kramer’s hedge fund, Greentech Research, brought at least two cases.
Kramer said she used her married name when she held shares in a joint account with her husband. Coyne could not be reached for comment.
By the end of August 2014, Kramer, her husband and her hedge fund had filed class actions in 17 states, according to court records and data supplied by Cornerstone Research. She and her husband were appointed lead plaintiff or co-lead plaintiff at least 19 times. Most of their cases were brought within six days of a deal announcement and settled within two months of being filed. In all cases, they were represented by Gardy & Notis.
It is unclear exactly what Kramer gained from all this. Fifteen of the 19 cases in which she was appointed lead or co-lead plaintiff settled for more details about the deal negotiations, with no money going to shareholders. The others were dismissed at the plaintiffs' request.
“I feel bad,” Kramer said. “I really did want try to see a valuation paid that is fair to shareholders.”
What is certain is that defendants paid at least $14 million in fees to shareholder attorneys to settle the cases in which Kramer had a lead role. Gardy & Notis stood to collect about $1.5 million of that, based on the share of the billable hours the firm claimed in the cases. The rest of the money went to firms representing other plaintiffs who filed class actions over the same deals.
In her June interview with Reuters, Kramer said she did not receive any money from Gardy & Notis. She said she was referred to the firm by people she knew. "I called lawyer friends and this friend and that friend," she said.
Kramer appears to have made only one reference to an investor class action in her stock-tip newsletters. Bearing titles such as “Game Changers,” “Breakout Stocks Under $10” and “Inner Circle Pro,” the publications carry a list price of as much as $3,500 a year.
Referring to the $116 million sale of Morton's Restaurant Group in December 2011, Kramer mentioned that “an investor has sued” and noted that “these types of suits almost never have any impact.” She didn’t mention that she was the investor.
In a December interview with Reuters, Kramer said she did not discuss her litigation with viewers and subscribers because “my objective is based on valuation and based on fundamentals of the numbers, and not everyone is really interested in talking about cases.”
The most recent class action filed in Kramer’s name came in June. She and another plaintiff, represented by lawyers at Gardy & Notis and Robbins Geller, sued to stop the buyout of surgical-supplies maker Medical Action Industries. Four months later, Medical Action agreed to disclose additional information that it characterized as “immaterial and unnecessary.”
The case ended there - except for a dispute between Medical Action and Kramer’s attorneys over the legal fees, which is ongoing. The two law firms argue they should get $925,000. Medical Action says they deserve zero.
Kramer told Reuters in June she had stopped bringing cases, in part because she thought companies were being sold for fair prices. But she may not be completely out the game. Her fund, Greentech Research, filed a case as recently as August.
Of her lawyers, she said: “It seems like they are doing well.”
Edited by Amy Stevens