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Barry Friedberg answers Hurley's theory of the acrimonious dispute case point by point and makes counterclaims
November 15, 2017 — 9:38 PM UTC by Barry Friedberg
Brooke's Note: After receiving this letter Monday, we briefly considered simply going ahead and publishing it. But we wanted the story to tell both sides so we also wrote this article: After 'thinking changed' Emigrant Bank hires new CEO to either take Mark Hurley's spot at Fiduciary Network or to head new unit that will compete head-on It includes viewpoints from Fiduciary Network clients and third party observers, and hopefully, soon, Mark Hurley.
To the Editor,
I am writing to provide additional detail in response to your article of November 8, 2017, regarding the relationship between Emigrant Bank, which owns 75% of Fiduciary Network (FN), and Mark Hurley. This is a complex situation, and we feel it is important that the industry understand the circumstances surrounding the dispute. We also want to reinforce our bank's ongoing commitment to the future of Fiduciary Network (FN), and to providing financing to independent advisory firms for internal succession, growth, and other strategic transactions.
There is general agreement about most of the facts we rely on in this matter. They can all be found in the transcripts of the recent arbitration, and in the bank’s filings with the federal court in New York. This record shows that Mr. Hurley, apparently deliberately, concealed important information from the FN board and Emigrant Bank at the same time he requested the bank waive its call option (as described in a section of your article that is quite appropriately entitled “SHH”). See: Mark Hurley battles to end his relationship with his billionaire investor.
Mr. Hurley was quoted in your article as saying “this was just a normal dispute between two partners,” thereby giving new meaning to the word “normal.” As described below, Hurley was in the market with a brochure we knew nothing about, trying to sell the bank's 75% ownership position. He apparently deliberately concealed the brochure and the details of this effort (any information he did give us was misleading and deceptive when compared to what he actually was doing). The arbitration panel effectively acknowledged that he was not disclosing these facts when, surprisingly, it concluded that under Delaware law, Emigrant Bank somehow bore the responsibility to extract more details from Hurley.
Consider the following: Mr. Hurley, at the expense of Fiduciary Network and without the authorization of the Fiduciary Network board, diverted substantial corporate resources to seek a partner to back him personally to buy Emigrant Bank’s ownership in the company. This initiative was undertaken without the bank’s knowledge or consent. In this undertaking, he apparently deliberately concealed his activities, including the preparation of a 70-page offering document, seven years of projections, and the proposed term sheet for a new employment agreement for himself. He then proceeded to call on Abu Dhabi Investment, Mubadala, Cranemere, Blackstone, Cynosure, Temasek, Pritzker Organization, and others, attempting to sell the bank’s 75% ownership. We did not know he was in the market offering the bank’s ownership, as he neither told us nor showed us the offering memorandum.
Separately, Mr. Hurley received an unsolicited inquiry from Invus, a Belgian family office, about their possible interest in investing in Fiduciary Network. Without informing FN’s board, Hurley seized what was clearly a corporate opportunity for, in my opinion, his personal benefit to negotiate a possible deal with a new contract for himself, without advising the Fiduciary Network board that he had received this unsolicited call. In the corporate world that I have served for 45 years as an investment banker and advisor to many boards, it is my opinion that chief executive officers are subject to dismissal for this behavior.
The arbitration panel, with knowledge of these facts, concluded that Hurley had no duty under Delaware law to share with the Fiduciary Network board the information that he had collected at the expense of Fiduciary Network, and that the burden was somehow on the board to ask questions that might have revealed his secret plan. Hurley, for example, was telling the bank consistently that he was getting no traction with potential investors. In order to penetrate this stonewall, we would have had to ask Hurley: “Have you seen any of these investors with whom you are getting no traction three or more times?” or "Have any of these investors with whom you are getting no traction been discussing the possibility of doing due diligence and visiting our portfolio companies?”
Hurley had received a limited mandate from me to educate a small group of sovereign wealth funds and family offices about the company in the event that there was to be an auction. I made it clear in writing that we would not be receptive to a management-led buyout and Hurley had committed to me in writing that he would show me in advance any management buyout proposals that he might use. In this context, apparently, I would have been required to ask a strange question: “Notwithstanding the fact that I told you that we were not receptive to a management buyout proposal and the fact that you agreed to show me in advance any proposal before you used it, have you, in violation of our understanding, prepared a management buyout proposal and shared it with potential investors?”
The bank’s legal advisors -- and our common sense -- disagreed with the panel’s application of Delaware law in this case, and we have appealed the decision. Whatever the outcome of this issue, Mr. Hurley‘s standards for dealing with his sole source of capital stands as described above.
Some other points to consider:
- The 2016 Compensation Dispute: Mr. Hurley wanted bonuses for himself and the employees, which we agreed to. But Mr. Hurley insisted that he would not agree to make the payments he was requesting if those payments were deducted in accordance with the LLC agreements from profits when computing the bank’s purchase option price. He attempted to strong-arm us to amend the original deal with threats that the employees would quit unless payments were made in the fashion just described. The original LLC agreement provided for a carried 25% profits interest and equity interest for the employees. Therefore, the only constraint on the value of the carried interest was the ability of the management team to originate good loans. In round numbers, the bank provided $235 million of cash to Fiduciary Network, of which only $150 million has been invested as of this date, leaving $85 million on hand. The Investment Committee of FN, of which I am a member, has approved every single transaction presented by Mr. Hurley. We have, therefore, done nothing to limit his ability to build Fiduciary Network and increase the value of his carried interest.
- Hurley’s claim that he needed “a larger investor”: Mr. Hurley, in explaining why he had put Fiduciary Network, its people, and its portfolio in play told RIAbiz, “we need a larger investor.” Allow me to put that comment in context. Mr. Hurley and his Fiduciary Network team have made $145 million in loans over the last 11 years, including both independent financial advisor and next generation loans. The board of Fiduciary Network, on which I serve, has approved every loan that Mr. Hurley has proposed. Therefore, the board cannot possibly have been an impediment to the growth of the company. The largest loan in the portfolio is $23 million, and the legal lending limit of Emigrant Bank is more than 10 times that size. Emigrant Bank has more than $1 billion in capital, $7 billion in assets and a tier one ratio of approximately 20%, which ranks the bank as one of the most conservatively capitalized banks in the country. Moreover, the bank has a robust Internet deposit platform on which we have been able to raise several hundred million dollars per month when it was attractive for us to do so. If Mr. Hurley were to originate $1 billion of loans over the next 12 months (versus $145 million over the last 11 years), Emigrant has more than enough capacity to finance this growth. Hurley’s claim that “we need a larger investor” is simply absurd.
- Emigrant’s Willingness To Pay A Premium to Resolve the Issue: In November 2016, we estimated that the auction value of Fiduciary Network was $70-$80 million. This represented more than a 50% premium to the book value of the loan portfolio, the yield of which was sensitive to changes in the public securities market. This would have valued management’s ownership at $18-$20 million. We offered to pay to management the bank’s call option price of $24-$25 million at that time and told Mr. Hurley that we were prepared to pay that premium to avoid legal, investment banking, and break up fees. Emigrant was also contemplating that any dispute might disrupt the business for a year or more.
With respect to the comment in your article that Mr. Hurley has outsized control, it should be noted that all of the options are in the hands of Emigrant Bank. Emigrant Bank controls Fiduciary Network’s board, with five of seven board seats. The board serves as the investment committee reviewing all new loans and amendments. If the highest cash bid for 100% of the company is attractive to us we could elect to sell our ownership and still remain active in the IFA space by capitalizing a new finance company. If the bid is not high enough, the bank will exercise its right of first refusal to match the bid and buy out Management’s ownership. As a result, Emigrant has control of events until such time as the bank might choose to sell our ownership.
Whether Emigrant sells Fiduciary Network or starts a new finance company, Karl Heckenberg, who has spent his professional life in the Wealth Management industry and has been a Fiduciary Network director since October 2017, will be the chief executive officer of this category of business for us.
While we are shocked and disappointed by Mr. Hurley’s conduct, Emigrant remains committed to its IFA Partners and helping them grow their businesses any way that we can.
Barry S. Friedberg
Fiduciary Network Board Member
Chair of the Finance Committee, Emigrant Bank
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