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Steel Partners faces lawsuit over transformation of fund into public holding company

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New York-based activist hedge fund manager Steel Partners is facing legal action from investors after announcing plans to merge Steel Partners II fund into an industrial holding company an

New York-based activist hedge fund manager Steel Partners is facing legal action from investors after announcing plans to merge Steel Partners II fund into an industrial holding company and list it on the New York Stock Exchange or the Nasdaq Stock Market through a transaction that apparently has already taken place, at least on a provisional basis.

The complex restructuring would have the effect of turning the former open-ended fund into a permanent capital vehicle from which investors could exit by selling their shares on the stock market, but would prevent further loss of capital from the fund through redemptions.

The fund lost 39 per cent of its USD2bn value last year, its first year of losses since it was established in 2003. This prompted investors to seek to withdraw 38 per cent of its remaining value through redemptions, according to the Wall Street Journal. Steel Partners froze redemptions in December.

Under the proposal, fund investors would receive shares in the holding company, known as WebFinancial, which has stakes in companies in the industrial products, energy, aerospace, and other sectors. If investors approve the plan, investors could be in a position to sell their holdings by June, the company says.

According to Bloomberg, WebFinancial had a book value of $44 million as of November 30 and converted to a publicly-traded limited partnership on December 31. Steel Partners II held 85 percent of WebFinancial’s shares before the switch and would increase this to 99.5 per cent by exchanging the fund’s private partnership units for public units. As part of the deal,
Steel Partners would buy back up to USD200m worth of WebFinancial shares.

However, ACF Industries, a railway equipment manufacturer, and Bank of America, which acts as master trustee for its employee benefits plan, filed suit in Delaware on Tuesday on the grounds that Steel Partners committed fraud by failing to advise investors of the plans to turn the fund into a public company with sufficient notice and by transferring the fund’s investments without giving investors the opportunity to vote on the proposal.

ACF invested USD15m in Steel Partners II in 2005 through an offshore feeder fund, according to Reuters. The lawsuit also claims that the fund’s manager, Warren Lichtenstein, had failed to adhere to its stated strategy of investing in cheap small companies and putting no more than 25 percent of assets into illiquid investments and special situations.

In a statement issued on December 31, WebFinancial announced that it had become a publicly-traded limited partnership completed through a merger transaction and that the partnership would receive the entire limited partnership interest of Steel Partners II Master Fund in Steel Partners II the following day.

According to the statement WebFinancial Corporation stockholders voted to approve the transaction on December 29. However, it says the transaction is subject to confirmation by Steel Partners II Master Fund by June 30, otherwise the whole deal will be unwound at that date.

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