Former Babcock & Brown chief executive Phil Green and other executives of the failed merchant bank breached corporate law by putting the company's desire for millions in fees ahead of the interests of investors, a court has heard.
Babcock & Brown pressed ahead with a billion-dollar deal to buy US coin laundry operator Coinmach in 2007, despite the worsening global financial situation, according to a writ filed in the Victorian Supreme Court. The writ, filed by a fund that invested $25 million in the deal, names 33 defendants, including Mr Green and former senior Babcock & Brown executives Rob Topfer, who was global head of corporate finance, and Trevor Loewensohn, who was global head of capital markets.
Others named as defendants include Sydney Swans director Lynn Ralph and former Victorian Funds Management Corporation chairman Bob Officer, who sat on the board of Babcock & Brown funds management company.
The writ was filed by Babcock & Brown DIF III Global Co-Investment Fund (DIF III), which was formerly controlled by Babcock & Brown but since 2009 has been in the hands of boutique group Accretion Investment Management.
Taking in four jurisdictions - Australia, US states Delaware and New York and tax haven the Cayman Islands - the lawsuit harks back to the heady days of the pre-global financial crisis boom and the period in mid-2007 when credit markets first began to freeze.
In June 2007, Babcock & Brown agreed to buy Coinmach from owners including private equity group GTCR.
The highly leveraged share purchase deal, allegedly masterminded by Mr Topfer and Babcock & Brown's US head of special products, Richard Umbrecht, was to be financed by Coinmach's existing debt, an additional $US400 million of bank finance and $US336 million of equity provided by the Babcock & Brown group and RBS.
DIF III alleges the team putting together the deal assumed revenue at Coinmach, which provides laundries for apartment buildings, "would increase by between 5 per cent and 6 per cent per annum every year".
However, it alleges that over the previous five years Coinmach's revenue had, on average, grown by just 0.6 per cent. At this lower figure, the $US1.22 billion debt in the deal could not be sustained, DIF III alleges.
"The Coinmach deal was inherently a deal that no reasonable investor would have undertaken after consideration of the financial model," it said in the writ.
Under the terms of the agreement, the investors were liable to pay a $US17 million fee if they cancelled the takeover, but if the deal went through Babcock & Brown would collect a $21.8 million transaction fee. As credit market conditions worsened in November 2007, RBS allegedly told Mr Topfer and others putting the deal together it would pay the cancellation fee if the investors walked away.
However, Babcock & Brown said it would not agree to withdraw unless it was paid its transaction fee.
DIF III, which is incorporated under Delaware partnership laws, claims neither it or its manager, Cayman Islands incorporated DIF GP Limited, were told of the RBS offer.
The fund claims to have lost its entire investment as Coinmach's financial position worsened in 2008.
DIF III claims executives involved in the deal acted contrary to their fiduciary duties to the fund, breaching the Australian Corporations Act and company law in New York, Delaware and the Cayman Islands.
Babcock & Brown collapsed in March 2009.
DIF III filed the writ on November 13, just a week before hitting the six-year statute of limitations on taking action against the Coinmach deal, which was completed on November 20, 2007.
Defendants have not had a chance to respond to the allegations because they are yet to be served with the writ. DIF III has a year to do so.