(Adds details on lawsuit, effort to reach Steel Partners)
By Svea Herbst-Bayliss
BOSTON, Jan 14 (Reuters) - Activist hedge fund firm Steel Partners is being sued by Bank of America (BAC.N) and ACF Industries on charges that the company committed fraud by not properly advising investors of its plans to go public, according to court documents.
Steel Partners is trying to turn its largest portfolio into a publicly traded partnership.
The lawsuit charges that the hedge fund was not in compliance with its obligations to investors as it pursued its plan to become a publicly traded partnership because it failed to give ample notice of the plan or an opportunity to vote on the proposal.
The lawsuit was filed in Delaware Chancery Court on Tuesday, and Reuters obtained a copy on Wednesday.
Bank of America, acting as master trustee for ACF Industries’ employee benefits plan, charged in the lawsuit that Steel Partners and its manager, Warren Lichtenstein, “pulled off a classic ‘bait and switch’ by stripping investors of what they had purchased and replacing it with something entirely different.”
ACF, which manufactures railcars and railcar components, and which, according to the documents, is affiliated with billionaire investor Carl Icahn, invested $15 million in 2005 with Steel Partners Offshore Fund Ltd, which became Steel Partners II (Offshore) Ltd.
Bank of American referred calls to attorney Keith Schaitkin at Icahn Associates, who referred Reuters to the court documents.
Steel Partners’ Warren Lichtenstein did not immediately return a call seeking comment.
The court documents said that while Lichtenstein had originally promised to invest in cheaply valued small companies and put no more than 25 percent of the fund’s assets into illiquid investments and special situations, he acknowledged in December that things had changed.
According to the lawsuit, 38 percent of Steel’s investors demanded their money back late last year, but Steel Partners suspended redemptions.
The lawsuit said that instead of selling assets to raise cash to meet clients’ demands to get their money back, Lichtenstein considered turning the portfolio into a public company to deal with withdrawal notices.
The lawsuit said Lichtenstein spoke with Icahn on December 24 about “his plans for the Fund and how to satisfy the redemption requests.” According to the documents, Lichtenstein told Icahn there would be advance notice of the proposed plan and meetings with investors in early January and that no action would be taken to implement the plan until February at the earliest.
The lawsuit also claims that by December 31, the Fund had transferred all of its investments to a non-SEC reporting ‘public’ shell company and that all of this had been done “without the knowledge and consent of investors.” (Reporting by Svea Herbst-Bayliss; Additional reporting by Megan Davies in New York; Editing by Toni Reinhold)