The farce continues; Paolo pleads stupidity:
Credit Suisse Sued by Log on America Over `Death Spiral' Loans
Providence, Rhode Island, Jan. 12 (Bloomberg) -- Log on America Inc., a Providence, Rhode Island-based Internet access provider, sued Credit Suisse First Boston Inc., accusing the investment bank of advising it to enter loans it said led to an 80 percent decline in its stock price.
Log on America accused Credit Suisse of ``gross negligence'' and ``material conflicts of interest'' after the company borrowed $15 million last February from Marshall Capital Inc., a CSFB subsidiary, and two other lenders.
Log on America claims it was sold a ``death spiral'' or ``toxic convertible'' loan, and that the lenders then sold shares short in order to drive down the stock price and collect more shares. Terms of the loan called for the lenders to be repaid in stock, and the farther the stock price fell, the more shares the borrowers must pay.
``CSFB was grossly negligent in recommending a Toxic Preferred Stock financing to LOA,'' the complaint said. ``It knew or should have known . . . such a financing would result in financial devastation for LOA and its shareholders.''
A spokesman from CSFB wasn't immediately available to comment.
Log on America borrowed $15 million last February from Marshall and two other lenders, and in August after its shares fell more than 80 percent. CSFB wasn't named in that suit, though Log on America Chief Executive David Paolo said that CSFB was its financial adviser at the time.
In its response to the suit, Marshall Capital and Promethean Asset Management Inc., a New York-based hedge fund that was part of the group that lent Log on America the funds, denied they had shorted the stock. Citadel LP, a Chicago-based convertible loan issuer also named in the suit, said at the time it believed the suit had no merit.
The lawsuit centers around a type of financing known as a ``floating'' or ``floorless'' convertible loan. Under typical terms of the loan, the lenders are paid a set interest rate, but are given the right in certain circumstances to be repaid in stock.
The loans also include terms that say the farther a company's stock falls, the more shares it must give the lenders. Log on America claims its lenders purposefully shorted the company's stock in order to force the company to give it more shares, which it could use to cover those shorts and profit.
The suit, Log on America Inc. v Credit Suisse First Boston Corp., was filed in the U.S. District Court, Southern District of New York.
Jan/12/2001 16:02 ET |
