Friday, February 22, 2013

Exhibits To Furlong v. Solitron

To anyone who had questions as to the intent of Furlong in regards to Solitron, I just got some more information that may shed some light on the matter. There are a lot of interesting items in the following exhibits, such as how it appears that Furlong is seeking to replace both non-management board members of Solitron, leaving a newly expanded board to include present insider of Solitron Shevach Saraf (CEO, CFO, Chairman, etc) and outsiders Daniel Rudewicz, Ryan Morris (the 28 year old activist), Steven Kiel of Arquitos Capital and two other nominees.

As I eluded to yesterday: judgement should be withheld until more information is available.

Here are the exhibits:

Disclosure/Disclaimer: I and accounts that I manage are long shares of SODI. I reserve the right to change my/our position(s) at any time. This is nothing more than my opinion. You should always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Thursday, February 21, 2013

The Furlong Fund Takes Action Against Solitron.

As the title suggests, Daniel Rudewicz's Furlong Fund has taken legal action to compel Solitron Devices to hold an annual meeting. As has been pointed out on this and other blogs, Solitron had previously said that they would schedule the date at a later time. According to the Pre-Trial Brief, the company finds itself between a "rock and a hard place" due to the auditing of it's financial statements... Even more interesting, though, is that Furlong is seeking some pretty serious changes in regard to the company's poison pill, board, and some other items.

While I don't know much about the altering of the board and such (but am not too keen on upping expenses in the board room), I do think that the shareholder rights plan presently in place is the wrong kind, as it does not correctly protect the company's valuable net operating losses. It is always my hope that shareholders can share ideas with management to have a company that oversees shareholders resources and governance in the most efficient way possible. Previously, I (and others) warned the company that something like this could happen if not addressed (as the company has not had an annual meeting in at least 16 years)- much similarly to how I alerted the company of the bad wording in regard to their backlog in the last 10Q, which resulted in a restatement a few days later. It's not to make a headache for anyone, but to spare the company from embarrassing items that could come or are coming about.

In that same vein, yesterday, I sent an email to Shevach Saraf urging the company to schedule the annual meeting via the release of an 8K, as every second that legal fees mount, it wastes money and resources. While management of the company may not like the idea of expanding the board or altering items about the poison pill through a proxy, that is for all shareholders to decide in their own right, as is called for in the laws regulating legal entities... It is possible that the company would have scheduled the meeting so as to limit the ability for dissent shareholders (such as Rudewicz to make proxy proposals or even run an alternate slate of directors. Fighting the scheduling of the meeting seems petty at best.  The management of Solitron needs to spend it's time running the business, looking to buy back stock, and make an acquisition to make better use of it's NOLs!

Interestingly, in the cases cited by Rudewicz, is a party that readers of Ragnar should be familiar with: Esopus Creek. There is also a mention of another interesting firm called the Newcastle Partners.

At any rate, here is the legal stuff for you to read for yourself... A reader alerted me to it, so a big thanks goes out to them! It will be interesting to see where the various items go and to watch this unfold.

Disclosure/Disclaimer: I and accounts that I manage are long shares of SODI. I reserve the right to change my/our position(s) at any time. This is nothing more than my opinion. You should always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Wednesday, February 6, 2013

Solitron's EPA Agreement.

As was promised a long time ago, here are the results of the request using the Freedom Of Information Act that I filed in regard to Solitron's EPA agreement.

It's a decent read and doesn't restrict the repurchase of shares as had previously been suspected... as is known, the company has since repurchased a not insignificant amount of its shares. Hopefully, there will be much more of that to come in the near future.

Sodi Federal Epa

Disclosure/Disclaimer: I and accounts that I manage are long shares of SODI. I reserve the right to change my/our position(s) at any time. This is nothing more than my opinion. You should always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Sunday, February 3, 2013

Fraud, Bankruptcy, and Ethanex...

Ethanex is one of those companies that has an amazing story. Due to being an investment that requires a ton of digging and has such a wide bid/ask spread, has a super small market cap, and is bankrupt, almost no one would ever think to look at it. Personally, I think that there should be a book written about the legal situation that has and is continuing to unfold... In this post, I talk of the investment I have made in this tiny company with a market cap that is little more than $1 million dollars...

First and foremost, there are risks with this distressed security, however, it seems to be a lottery ticket with limited downside. Even if the stock ultimately goes to zero (which I see as unlikely), for me it's an attractive bet from a risk/reward ratio. Secondly, I want to mention that I was originally alerted to this situation by Thomas Braziel. He now owns just under 10% of the company and I represent a decent chunk of the company as well. Thomas also recently started a small fund that invests in some of the oddest securities that you will ever see and even recently filed a 13D on Winland Electronics (WEX). It's called B.E. Capital- look for them to do some really cool stuff.

For the sake of easy reading, I would suggest that you don't click on any links until you read the whole thing. There are probably more in depth ones here than any other write up I've done.


Ethanex was founded in 2006 as a company that was to produce ethanol with a cheaper and more efficient process. In 2007, they entered into an agreement to buy an ethanol plant with a 26 million gallon capacity that was in the process of almost tripling that amount, with further expansions in the future. In 2008, Ethanex was bankrupt after not being able to secure financing for the deal that was in excess of $200 million dollars, and filed for liquidation. All members of the Board resigned and the company had been screwed by an attorney who was supposed to represent them in raising various forms of capital through "PIPE" transactions. In addition, this attorney was the corporate secretary and used various firms that he controlled to sell shares of the company at some pretty in-opportune (and very illegal) times. He sold unrestricted shares of stock, that should have been restricted shares, before the securities were even registered... Interestingly, he had already written a legal opinion stating that all issued shares should have a restricted legend, but as mentioned, managed for his to be unrestricted. As a result, the company was thrown into liquidation and Louis Zehil went to jail after reaping over $17 million in illegal profits... You can read some more of the specifics here, here, and here.

Given that Ethanex is liquidating, there are a whole host of legal issues involved, and at the bottom of their website there is now a link for a "cougar" hookup site... what could possibly be attractive about it?

At last report (view at Scribd), the estate is more or less solvent, with most all liabilities having been paid (except for some accruing legal expenses). There has already been one fat check cut to the estate from the government, and there is a good likelihood of another one coming from another branch (here is the docket, see item 32). Other than the ongoing legal fees and any new claims that may come in, that seems to be it. Alone, the remaining shell or the company seems attractive at a certain price, based on your own analysis of various items and such. I for one, started buying shares around 5 cents a piece and have averaged my cost up a bit... Thomas got all of his shares in the single digits.

Somewhat ironically, the accruing legal fees, that on the face of things seem to hurt the estate, are the part of the investment thesis that makes EHTE so interesting (both in terms of a lottery ticket and how interesting I find reading the case). The reason being that there is a outstanding lawsuit against Zehil's former law firm that is set to go to trial on May 6, 2013... It has already been delayed several times for various reasons, and could hypothetically be delayed again. However, the overall case seems pretty promising and most of the fees have already accrued  for example, all the discovery, the costly part of a lawsuit, is finished.

As is with any legal action there is risk, however, here are the items that I like about the lawsuit:

1) Zehil has already pleaded guilty to conspiracy and fraud. He went to jail and is presently residing in a halfway house at time of publication, due to being "helpful in the investigation..."
2) Zehil was a partner at the legal practice presently being sued by Ethanex at the time he undertook the illegal activities.
3) Overall, it seems pretty easy to prove that the law firm didn't have the oversight of Zehil they should have.
4) This all looks REALLY bad for anyone defending the case (jokingly, it seems to make Goldman look like an altar boy...)

Normally, a large lawsuit bankrupts a practice, even with insurance. If they were to settle, it could nearly destroy many. However, this is a special case, as the firm should have some pretty deep pockets and probably will want to avoid any more negative publicity.

This probably leaves you with a few questions...

"The defendant in the case?"

McGuire Woods... a multinational law firm with over 900 employees...

"The amount being sought?"

Well in excess of $50 million dollars...

What makes this interesting, is that Louis Zehil didn't just do this to Ethanex... he engaged in similar company-wrecking actions to 6 other companies. So, if McGuire Woods were to settle, then it seems that they would also need to settle with a bunch of other firms. To me, this leaves it up in the air if they will push for a settlement or take their chances in front of a jury- after all, if they lose this case, then what more are they subject to? Either way, I really like the odds for Ethanex, especially since they are represented by the Edgar Law Firm, which has a really good record of delivering for it's clients- once negotiating a settlement from Squire Sanders & Dempsey LLP for $43 million in a case that doesn't seem all that different from the one involving Ethanex.

Below is the original complaint, followed by the most recent, which is the third amended complaint. I think that it's interesting to read both of them, so that you can get an idea for how the case has progressed. As an interesting side note, there have been "clawback" issues related to the case which has made for some interesting discussions and references in other lawsuits. This said, the defendant is being represented by Wachtell, Lipton, Rosen & Katz, which also has a reputation for being effective and a lawyer at the firm even invented the poison pill... Not exactly something that gives a whole lot of comfort.

Both sides have motioned for summary jedgement and responded to each other. There is some pretty interesting and steamy stuff in the various court documents. Zehil had a love interest in the office who set up some of the entities he used to commit fraud and she even used her 5th amendment rights in her testimony... In fact, one of the lawyers at McGuire Woods apparently suspected that Zehil wasn't even admitted to the bar in Florida during the time that he practiced- for something like 5 years! He even mentioned this to him over wine on numerous occasions. Tons of juicy stuff.

If one is betting on this lawsuit, rather than the solvent estate, the question is this: is a law firm liable for the acts of its employees? Should the company have to make a payout when it's acts/it's employees acts were the cause of a company declaring bankruptcy, because said acts not only starved it of needed capital, but also kept it from acquiring the assets it needed to make money in the future? Also, how does one value those loses, pegging an actual amount? Wouldn't this be easier for both sides to just settle on before a trial, avoiding all these unknowns?

As always, time will tell...

Disclosure/Disclaimer:  I own and represent shares of Ethanex. I reserve the right to change the positions at any time. This post is my nothing more than my thoughts/opinion. Always do a ton of your own research before so much as contemplating anything that I say, do, write, or even think about.