Confidence Game - Christine Richard [17]
There was one other moving piece. Ackman and Berkowitz had entered into a deal to merge one of their struggling investments, Gotham Golf, with First Union Real Estate Equity and Mortgage Trust, a Cleveland real estate investment trust that Ackman took control of in the late 1990s. They wanted to use cash-rich First Union as a platform for making private-equity investments, separating Gotham’s long-term investments from Gotham’s holdings of public securities. They also expected to use First Union cash to repay a loan that Gotham’s hedge fund had extended to the golf course company.
The cash generated by that transaction would help smooth the way for meeting redemptions. The only stumbling block to the proposed merger was a lawsuit by First Union preferred stockholders, who wanted to be cashed out ahead of the merger. Gotham’s advisers at one of the top merger and acquisitions law firms in the country, Wachtell, Lipton, Rosen & Katz, were confident the deal would go ahead despite the lawsuit. In fact, everyone at Gotham was counting on it.
Chapter Three
The Question
Just bear in mind that the goal is to make the stock fall and the credit spreads widen. It’s no more complicated than that.
—JAY BROWN, MBIA’S CHIEF EXECUTIVE OFFICER, DECEMBER 2002
ON NOVEMBER 21, 2002, the day of Bill Ackman’s meeting with Jay Brown and MBIA’s general counsel, attorneys for Gotham Partners and First Union gathered at the New York Supreme Court in lower Manhattan. They were expecting to hear that the lawsuit seeking to block the merger of First Union and Gotham Golf had been dismissed. They were in for a surprise. There was a new face in the courtroom. Jerome Tarnoff (with the law firm Morrison, Cohen & Singer) had joined the team representing the First Union preferred shareholders.
Better known for his work in municipal bonds and family law, Tarnoff wasn’t familiar to First Union’s and Gotham’s lawyers on the mergers and acquisitions circuit. He was also a force in New York politics, having served as vice chairman of the New York County Democratic Party for more than 30 years. Tarnoff was certainly an influential figure in any courtroom in a state where judges are selected by the party leadership.
Tarnoff greeted the judge warmly and took a seat directly opposite the judge’s bench, positioning himself in front of the plaintiff’s table rather than behind it with the other lawyers.
In July 2002, lawyers for First Union and Gotham had filed a motion to dismiss the preferred shareholders’ suit, arguing that it had no merit. Judge Charles Ramos had appeared to support Gotham’s view and enjoined any discovery proceedings until the decision to dismiss was finalized. Gotham’s camp viewed Ramos’s decision as a clear sign that he saw the preferred shareholders’ case as a nuisance suit. The Gotham and First Union lawyers turned up in court on November 21 expecting Ramos to sign dismissal papers.
But on that day, the day on which Tarnoff joined the plaintiff’s team, the preferred shareholders seemed to have the judge’s ear for the first time since the suit was filed. They contended that Ackman was effectively liquidating First Union so that the cash could be used to bail out a bad investment. Now Judge Ramos was voicing similar concerns about the health of Gotham Golf: Was the golf business “a pig in a poke”? Was the company “going into the crapper”? No dismissal papers were signed that day.
Ackman joined the others in court the next day as the First Union hearings got under way. The scene in the courtroom that day and throughout the week-long session was bizarre. Tarnoff said nothing during the proceedings, but he assumed expressions of surprise and indignation when witnesses for the defense, including