Re: 4/27/00 - Firm Alleges Its Insurer Engaged in 'Cybersmear' [Creditrust, CRDT]
April 27, 2000
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Firm Alleges Its Insurer Engaged in 'Cybersmear'
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
In most "cybersmear" suits, companies sue individuals for posting defamatory messages on Internet message boards.
But in an unusual twist, a financially troubled collection agency recently filed suit against its own insurer, charging that one of the insurer's executives interfered with its efforts to raise financing by posting "false and disparaging" statements about the agency on a Yahoo! message board.
In its suit, Creditrust alleges that Charles Henneman, and his employer at the time, New York bond insurance firm Enhance Financial Services Group, schemed to defame Creditrust just as the struggling firm sought to raise $230 million through a follow-on stock offering and a bond offering last year. The suit seeks $520 million in damages.
Creditrust, a Baltimore company that buys delinquent consumer debt from lenders, alleges in its suit that Enhance Financial participated in the scheme because it was planning to enter the collections business and compete directly with Creditrust.
Creditrust says Enhance Financial was in possession of confidential information that was referred to in posts on Yahoo Finance (quote.yahoo.com) that allegedly were made by Mr. Henneman, a former senior vice president at Enhance Financial. Enhance Financial is the parent company of Asset Guaranty Insurance, which services and insures Creditrust's privately placed debt against default.
Investor reaction to the posts caused Creditrust to reduce the scope and price of its stock offering, the suit states.
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The case is an unusual twist in "cybersmear" suits, which most often are settled out of court or dismissed on the grounds of free speech.
But in this case, Creditrust not only is alleging defamation, but says Enhance Financial breached its fiduciary duty to keep secret its client's confidential information and thereby violated federal securities laws.
But Creditrust has a tough road to hoe in its suit. Even if Mr. Henneman actually posted the messages he is alleged to have written, Creditrust must prove it was harmed by them. And Creditrust has suffered many difficulties in the past year that have hurt its capital-raising efforts, including an admission that a former employee embezzled money from the company.
"There were many factors in bringing Creditrust to where it is today," says Derek Derman, an analyst at Wedbush Morgan Securities who follows the company.
Ben Rosenberg, a lawyer for Creditrust, says the company is confident it can show that the messages posted are the reason for its financial difficulties.
Bernard Kilkelly, a spokesman for Enhance Financial, says that Mr. Henneman was "terminated" one week before Creditrust filed it suit April 5 in federal court in Baltimore. Mr. Kilkelly wouldn't comment on the reasons for Mr. Henneman's departure. Mr. Henneman, reached at his home in New York, declined to comment.
Mr. Kilkelly wouldn't acknowledge that Mr. Henneman made the posts, but does say "if he did it, he was not acting with the authority of the company. Mr. Kilkelly says that "at no time" did Mr. Henneman have access to the confidential information Creditrust had given to Asset Guaranty, which insures $45 million of debt issued by Creditrust. Asset Guaranty currently is seeking a new servicer.
Mr. Kilkelly says Enhance Financial will seek to have the case dismissed. In an April 19 press release, Enhance Financial called Creditrust's allegations "defective."
But Blake Bell, a New York lawyer who tracks cybersmear cases, says the wording of Enhance Financial's statements suggests Creditrust might have a case. "Calling a suit 'defective' and saying the employee wasn't acting in the firm's name is a far cry from denying the allegations," he says.
Mr. Kilkelly's says Enhance Financial's position is that the suit against it is groundless. "As to Creditrust's claims against our former employee, we have no comment."
According to its complaint, Creditrust says its financial troubles started when Enhance Financial "dispatched" Mr. Henneman to the Yahoo Finance message boards early last year.
Mr. Henneman, using the aliases "mcnooder" and "blowhard2000" posted messages on Yahoo 21 times, starting Feb. 17, 1999, interfering with Creditrust's capital-raising efforts, the company charges.
In a March 12, 1999 message cited in the suit, Mr. Henneman allegedly was responsible for a post that said the arena of collecting delinquent credit-card bills "would get tougher" for Creditrust, because Enhance Financial had said the month before that it would enter the business through a joint-venture with MGIC Investment, a big Milwaukee mortgage insurer.
"I guess if I have to pick a survivor for the long term I'd have to go with the people with the best backing, and that ain't CRDT," the post stated. Mr. Kilkelly of Enhance Financial says the company's credit-card collections business "is doing quite well."
Creditrust says it filed to sell up to $80 million in stock in a follow-on offering shortly before Mr. Henneman alledgedly began posting. But the week after the March 12 message was posted, Creditrust was able to raise only $38 million in its offering. Its chairman, Joseph K. Rensin, had filed to sell 600,000 shares but couldn't find a buyer, according to the complaint.
Creditrust also says that Mr. Henneman's postings, which continued through Nov. 9, hurt its effort to raise up to $150 million in a bond offering marketed from Labor Day of 1999 until year's end, according to its suit.
The company contends that the postings were responsible for driving down the Creditrust's stock price and market value, which made the offering unattractive to investors and so it had to be withdrawn.
Creditrust's stock, which rose to as high as 34 1/8 last July, has skidded over the past few months amid a series of setbacks.
Last December, the company disclosed it learned that a former management employee had "misdirected" about $500,000 by putting money intended for a vendor into his own account in October.
Mr. Derman, the Wedbush Morgan analyst, says investors lost confidence in the company at that time because the company didn't reveal the embezzlement until two months after it was discovered. "That's just not acceptable for a publicly traded company," he says.
Since then, Creditrust has been unable to raise money. It hired Goldman Sachs Group as a financial advisor in December, and in February it said it was in "final negotiations" with an unnamed party for $55 million in financing. But in late March, the company said that the seemingly imminent deal was off. That same month, Creditrust said its chairman, Mr. Rensin, loaned the company $648,000 to pay a creditor.
On April 20, Creditrust said it defaulted on a line of credit and had hired a second advisor, Seneca Financial Group, which specializes in financially troubled companies, according to Seneca's Web site. Creditrust had $11.9 million of cash as of Dec. 31. Creditrust's lawyer, Mr. Rosenberg, says the company has the resources necessary to pursue its suit.
Mr. Derman says the company now is likely to start selling consumer debt from its portfolio in an effort to raise cash.
Creditrust's shares fell 1/32 to 1 17/32 Thursday on the Nasdaq Stock Market, while Enhance Financial shares slipped 3/8 to 9 7/8 on the New York Stock Exchange.
Write to Aaron Elstein at aaron.elstein@wsj.com
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