Durham insider deal sparks outcry

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Greg Andrews
Tim Durham is facing allegations of self-dealing after a publicly traded company he helps run in Dallas acquired assets from a finance company he owns in Ohio.

The Dallas firm, CLST Holdings Inc., disclosed in a regulatory filing March 2 that one of its directors, Manoj Rajegowda, resigned last month. A letter Rajegowda's attorney sent the company said he "was not informed of this transaction and most strenuously objects to it."

Also on March 2, CLST shareholders owning more than one-quarter of the company's stock sued CEO Robert Kaiser and the other remaining directors, Durham and David Tornek, alleging self-dealing, breach of fiduciary duty, waste of corporate assets, and unjust enrichment.

Durham, 46, an Indianapolis businessman, did not return calls, but Kaiser called the suit "frivolous" and defended his and other directors' stewardship of the business.

CLST was a cell-phone distributor known as CellStar Corp. until about two years ago, when the company sold off its business units to several buyers, including locally based Brightpoint Inc. Soon thereafter, Durham won election to the board, in part by pledging to dissolve the company quickly and distribute remaining cash to shareholders.

Since then, the Dallas company has made two distributions to investors and cut its work force to three. But it hasn't taken concrete action to dissolve. And it now says in regulatory filings that the board is evaluating "strategic alternatives" and might conclude shutting down is the wrong course.

That CLST was lingering on had stirred unrest among shareholders, in part because Kaiser continues to collect a $240,000 annual salary, and directors have received grants of hundreds of thousands of shares of restricted stock.

But what set them off — and took them by surprise — were recent regulatory disclosures that CLST has acquired receivables — such as installment sales contracts from home-improvement stores — in three separate transactions for tens of million of dollars, much of it borrowed. The last deal, cut in February, was a $3.6 million purchase of receivables from Akron, Ohio-based Fair Finance Co. — which Durham co-owns. Shares issued as part of the purchase price boosted his ownership stake in CLST from 5 percent to 15 percent.

A March 2 CLST regulatory filing says the company received an opinion from Texas-based Business Valuation Advisors that the terms of the deal with Durham's company were fair to other shareholders. But some other current and former shareholders are unswayed, in part because CLST hasn't disclosed enough information about the Fair receivables for them to make their own assessment.

"How much was paid for these receivables when Fair Finance bought them?" asked Erich Riesenberg, an Iowa investment adviser who recently sold his shares. "Did Fair Finance make a big profit on them? That is the number one question."

Riesenberg added: "This company is supposed to be in liquidation. The fact they are buying receivables, period, is very strange."

New York-based Red Oak Partners, the lead plaintiff in the shareholder lawsuit, said in court papers that instead of winding down the business, the remaining directors are "engaged in an elaborate scheme to line their own pockets."

But Kaiser, 55, the company's CEO and chairman, said critics have failed to recognize the time and complexities involved in shutting down a business with operations scattered around the globe.

Kaiser said CLST has been able to add millions to its coffers by collecting on accounts that had been written off, as well as resolving tax claims and business disputes in a favorable way. Other matters remain open, such as an indemnification agreement in Sweden that expires later this year.

"Obviously, what Red Oak does not understand is you can't all of a sudden push a button and dissolve a company," he said.

Kaiser said that back when shareholders approved the liquidation, management wasn't aware of the tax benefits the company could garner by remaining an operating business. Because CellStar struggled in its final years, it racked up $125 million in "tax loss carry-forwards," which can be used to offset taxes until 2020.

Kaiser said buying the receivables should generate a good investment return. And he said the foray into receivables doesn't box CLST into remaining in business, since it could turn around and sell them again.

"With cash earning less than 1 percent, some of these other portfolios will prove to be more valuable than holding cash," he said.

But Rajegowda, 28, the director who resigned, thinks the board is plotting to stay in business, even though that is "antithetical to the expressed wishes of the majority of stockholders," according to the resignation letter from his attorney.

He also is smarting because the full board didn't have the opportunity to vote on the Fair Finance purchase. In a regulatory filing, CLST acknowledges as much but says excluding Rajegowda was justified because other members of the board had become concerned he was sharing confidential information with his employer, the hedge fund MC Investment Partners.

According to a CLST regulatory filing, the three other board members cut him out of the picture by creating an executive committee composed of only them and giving it the same powers as the full board.

On Feb. 3, the full board voted 3-1 to form the new panel, with Rajegowda casting the dissenting vote. Ten days later, CLST purchased the Fair Finance receivables.


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