Cold Spring Capital (CDS) is being sued by Ferris Baker Watts, who is seeking $10.6 million. CDS dropped Ferris Baker as it underwriter prior to its offering, upgrading to Deutsche Bank.
Ferris Baker Watts files lawsuit over 'blank check' IPO
By Rachel Sams
Baltimore Business Journal
Updated: 7:00 p.m. ET Jan. 22, 2006
A "blank check" initial public offering that Ferris Baker Watts was underwriting turned out to be just that for the investment bank, the firm claims in a lawsuit.
Ferris sued Cold Spring Capital in Baltimore City Circuit Court in October. Ferris says in court documents that it had agreed with Cold Spring to underwrite the firm's initial public offering. But months into the agreement, Cold Spring dropped Ferris and hired international giant Deutsche Bank to underwrite the deal, the Ferris suit claims. Cold Spring filed a counterclaim saying it never signed an agreement with Ferris, and claiming Ferris officials threatened the firm.
Ferris, with offices in Baltimore and Washington, has attracted interest locally with its recent work on so-called "blank check" deals. Investors in such IPOs are essentially writing a blank check to a newly formed firm. The firm is supposed to use the cash to buy a successful company that will generate proceeds for investors. Dozens of blank-check companies have filed to go public in the past year, and Ferris is underwriting offerings for at least three other blank-check companies.
Connecticut-based Cold Spring Capital filed papers with the Securities and Exchange Commission to register an IPO in June, listing Ferris as the proposed underwriter. On Oct. 19, it amended its registration, listing Deutsche Bank as the proposed lead underwriter. Cold Spring completed the $120 million offering in November, selling shares at $6. The stock was trading at $5.25 on the American Stock Exchange at press time.
In court papers, Cold Spring says it grew concerned because Ferris had never completed a blank check IPO, and Ferris had said its other blank-check deals were having trouble attracting investors. Cold Spring says it linked up with Deutsche Bank after an unsolicited inquiry by the banking giant, and offered Ferris a piece of the deal, which Ferris declined.
Cold Spring claims in court papers that Ferris' capital markets head, Steven Shea, threatened to "do everything he could to derail" the Cold Spring IPO, and that a lawyer for the company said Ferris might do some things that would be "show stoppers."
Venable attorney G. Stewart Webb, who is representing Ferris, said this week: "We have a very different view of what occurred with Cold Spring on all these issues." Cold Spring did not make a definitive offer to Ferris that would have given the firm a significant role in the Deutsche Bank deal, Webb said.
Officials at Ferris, which seeks $10.6 million in damages from Cold Spring, could not be reached for comment.
Cold Spring president Joseph Weingarten declined comment, as did the firm's lawyer, Brett Ingerman of DLA Piper Rudnick Gray Cary US.
Merger and acquisition activity is at its highest level in years. Most such deals are backed by private equity firms or investment banks, who reap a portion of the deal's proceeds. Blank-check companies are sprouting with promises to give individual investors a piece of the M&A action.
In 2005, 61 blank checks filed initial public offerings, according to Adam Steinhauer, senior editor at the Reverse Merger Report, a DealFlow Media publication. Nine actually completed IPOs. Two of those bought a company, as did two others that went public in 2004.
Blank check companies often provide few details about what they might acquire, so in evaluating the investment opportunity, investors must rely heavily on the background of the people running the deal. That's a red flag for many financial experts.
Asked why blank checks are proliferating, James J. Angel, an associate finance professor at Georgetown University's McDonough School of Business, quoted P.T. Barnum: "There's a sucker born every minute."
But it appears Wall Street may be warming up to the deals, although slowly. Deutsche Bank spokesman Ted Meyer confirmed that the Cold Spring deal was the firm's first blank-check IPO -- and the first for any of Wall Street's top underwriters. Another investment banking giant, Citigroup Global Markets, led the December IPO of blank-check Boulder Specialty Brands.
"We're an active underwriter in the equity capital markets," said Meyer, and blank-check deals are "a small but growing part of it." He declined comment on Ferris' suit against Cold Spring.
Blank checks do face certain restrictions. If a blank-check firm does not buy a company within a specified amount of time, it must return investors' money.
Cold Spring seeks to acquire either a business or a portfolio of financial assets or real estate assets, according to SEC filings. Cold Spring's two principal executives work with Developer Finance Corp., which finances real estate acquisitions.
If the company liquidates, its principals are responsible for large claims, including any damages from the lawsuit, SEC filings show.
Houston-based JK Acquisition, whose deal Ferris is underwriting, seeks to sell 10 million shares at $6 per share. It is headed by James P. Wilson, a founder of private equity firm RSTW Partners.
Ferris is also leading blank-check deals for Harbor Acquisition of Boston, which wants to raise $60 million, and India Globalization Capital Inc. of Bethesda. Ram Mukunda, the firm's leader, also wants to raise $60 million to acquire businesses in India, according to SEC filings.
© 2006 Baltimore Business Journal
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