#$fig

The financial stocks have played an interesting role in the market resurrection from the 2009 lows.  There have been 3 distinct movements.  First a quick brief rise out of the depths.  This only took 4 months.  If you were looking for a Dead Cat Bounce this was a distinct possibility.  Then the second piece was a long consolidation over 3 years.  This piece is interesting because the broad market rallied, and gave rise to the meme that financials were not participating.   And how long could the market rise without them.

With all good memes, the ones that are actually true (the few of them) get held too long and repeated well beyond their lifespan.  This was the case with the 'financials are not participating' meme.  Financials started moving higher in mid 2012 and continued to do so for 2 and a half years until making a top at the end of 2014.

Since the start of 2015, the price action (not the meme) has shown consolidation.  In fact if you look back to the October low in 2014, it sets up an ascending triangle pattern.  This is usually a continuation pattern, so there is no reason to think at this point the move higher has ended.  But think about the timing of the long run higher and then the pause.

The run higher came out of the depths of the sell off in bank stocks and after the stress tests.  They showed, like everyone knew would be the case, that the banks would not fail in another crisis.  It was time to catch up once they were pronounced healthy.  You can't blame investors for waiting for the proclamation.  But the stop of the run is very odd timing.  Right when the Federal Reserve Open Market Committee proclaims that it is time to consider raising rates.  

Aren't higher rates supposed to be good for banks?  Yet for 7 months the Financial Sector ETF has consolidated.  It is like it is waiting for that first rate hike before continuing higher.  I see two paths to take from this point.  Realize that rates are rising and just buy the financials now.  Or wait for that ascending triangle to trigger and then buy the financials.  Either way......

I hold long positions for clients and family in AIG, BAC, C, FIG, IAT, JPM, NWBI, OZRK, and WFC at the time of this writing.

A major institutional shareholder in Home Loan Servicing Solutions is contemplating a lawsuit over an acquisition by New Residential that exploited a loophole in Cayman Islands laws.

by Dan Freed

Companies linked to mortgage debt collector Ocwen Financial Corp. (OCN) and asset management giant Fortress Investment Group (FIG) may face a lawsuit over a $1.4 billion acquisition that exploited a loophole in Cayman Islands laws to bypass a shareholder vote.

The potential legal threat comes as several market watchers are expecting litigation over a stock sale by Nationstar Mortgage Holdings Inc. (NSM), another Fortress-controlled mortgage company.

At issue in this case is the sale of substantially all the assets of Home Loan Servicing Solutions Ltd., a Caymans Islands-based company that had just 14 employees before the deal, to New Residential Investment Corp. (NRZ), a REIT managed by Fortress.

HLSS and New Residential had initially agreed to an outright sale on Feb. 22, but on April 6 they changed the structure of the deal to a sale of substantially all the assets of HLSS. The change was designed to get past large investors who were opposed to the deal, according to a major HLSS institutional shareholder who said he is considering bringing a lawsuit accusing HLSS and its management of breach of fiduciary duty.

The original transaction would have required that a super-majority of HLSS shareholders approve the deal, according to a regulatory filing. However, the way the deal was restructured no longer requires a shareholder vote for the asset sale.

The asset sale valued HLSS at slightly more than $17 per share, roughly where it traded the day before the deal was announced and below the $18.25 price originally agreed upon between the two companies. HLSS had spent much of 2013 and 2014 above $22 while paying a dividend that yielded in the high single digits. Shares of New Residential are up nearly 12% since the deal was announced compared to a gain of roughly 2% for the S&P 500.

The institutional shareholder considering litigation said the asset sale significantly undervalued HLSS, and the company's management and board should either have let the company remain independent or given more serious consideration to other bidders described in a May 1 proxy. Ocwen is the only bidder identified out of the five described in the proxy, but according to four people familiar with the deal three of them were Credit Suisse (CS), Apollo Global Management LLC (APO) and Fidelity National Financial Inc. (FNF).

Spokesmen for Credit Suisse and Apollo declined to comment. Fidelity National Financial did not respond to a call or an email message. A spokesman for Citigroup, which advised HLSS, declined to comment. An Ocwen spokesman declined to comment. Calls and email messages to executives at Fortress were not returned.

Had HLSS been incorporated in the state of Delaware, as most U.S. companies are, it would have required a shareholder vote. However, because HLSS was based in the Cayman Islands, shareholder approvals weren't necessary.

In an interview, John Van Vlack, CEO of HLSS, acknowledged U.S. companies have different rules. Still, he said, "our analysis was we were a company based in Cayman and we were looking at options given how we were domiciled."

Van Vlack pointed to disclosures in HLSS's 2011 registration statement prior to its public listing which notes, among other things, that "the rights of shareholders under Cayman Islands law may differ from the rights of shareholders of companies incorporated in other jurisdictions."

Nonetheless, Van Vlack disputed the assertion that the deal was switched to an asset sale to avoid a shareholder vote.

"We were told by our auditors we would not receive a clean audit opinion based on the merger. Filing our financial statements as needed for the merger with a qualified audit opinion would have resulted in defaults in our financing facilities," he said.

A spokesman for HLSS's auditor, Deloitte and Touche, declined to comment on the grounds that "profession standards prohibit us from discussing client business."

HLSS struck the deal under severe pressure from regulators, lenders, investors, and ratings agencies. A Dec. 19 settlement between Ocwen and the New York Department of Financial Services (NYDFS) had upset a delicate ecosystem of five interrelated companies including Ocwen, HLSS, Altisource Portfolio Solutions (ASPS), Altisource Residential (RESI) and Altisource Asset Management (AAMC) Bill Erbey, Chairman and de facto leader of all five companies, was forced to resign from those positions. The California Department of Business Oversight was threatening to suspend Ocwen's license in that state. That put pressure on HLSS because its business and Ocwen's were so closely interrelated.

Following the NYDFS settlement, hedge fund Mangrove Partners, one of HLSS's 10 largest shareholders, first pressured the company to terminate its relationship with Ocwen and then, meeting resistance from the Board of Directors, vowed to replace it. Another hedge fund, Blue Mountain Capital Management, argued HLSS was in default on certain debt securities and announced it was shorting shares of both Ocwen and HLSS. Ratings downgrades were making financing more expensive, perhaps prohibitively so. Calls to Mangrove were not returned. An attorney representing Blue Mountain, Erik Hass of Patterson Belknap Webb & Tyler, wrote via email, "thanks for the inquiry and opportunity to comment, but [we] are not in the position to do so at this time in view of pending matters."

After HLSS and New Residential announced the sale of HLSS Feb. 22, Kingstown Capital, owner of 5.1% of HLSS shares, stated in a filing the following day it opposed the deal, which valued HLSS at book value compared to a historical value of 1.2 to 1.3 times book value. Luxor Capital, another hedge fund, disclosed March 12 it had acquired a 9.8% stake in HLSS to become its largest shareholder. While Luxor did not publicly disclose its position on the proposed sale, Piper Jaffray analyst Mike Grondahl contended in a March 13 note he believed Luxor was concerned New Residential would transfer debt collecting contracts from Ocwen to Nationstar. That would have hurt Luxor's stake in Altisource Portfolio Solutions. Calls and email messages to executives at Luxor and Kingstown weren't returned.

Another detail disclosed in the proxy that has received scant attention is the disclosure of a Securities and Exchange Commission subpoena requesting HLSS "provide information concerning communications between HLSS and certain investment advisors and hedge funds. The SEC also requested, among other things, documents relating to HLSS's structure, certain governance documents and any investigations or complaints connected to trading in HLSS's securities," the proxy states. HLSS CEO Van Vlack declined to elaborate on the SEC inquiry and an email to the SEC press office produced no response.

Further opposition to the original proposed sale of all of HLSS came from a lawsuit filed by a retail investor, David Rattner, arguing the transaction undervalued the company. In an argument also made by the anonymous institutional shareholder who is contemplating a lawsuit, Rattner's suit argued the HLSS board rushed to get a deal done with New Residential because they feared losing their jobs in the event Mangrove succeeded in replacing them. Rattner had sought to block the proposed sale or, if it could not be stopped, recover damages from HLSS, New Residential and Van Vlack, among other defendants, for alleged violations of their fiduciary duties. A call to the law firm representing Rattner, Faruqi and Faruqi, was not returned.

Once the sale of the entire company was changed to a sale of substantially all its assets, however, Van Vlack said he heard no complaints.

"My sense was, prior to hearing from you that there was not any concern, really, about the asset sale," he said.

Compass Point analyst Jason Stewart was less surprised to hear of lingering shareholder discontent. Still, he argued HLSS had to act quickly as a major debt refinancing was imminent, and the company was under severe stress.

"I can see how shareholders are upset about how the whole thing happened, but they really had no other choice. Yeah, they had deals that were maybe for a higher price contingent on financing but they didn't have something they could act on quickly that had no contingencies, that was all cash," Stewart said.