Absent an eleventh-hour settlement, Delaware Chancery Court Vice Chancellor Sam Glasscock III will preside over a two-day trial during which direct lender Preston Hollow Capital LLC will try to make its case that Nuveen wrongly sought to choke off its access to financial backing and deals.
Nuveen has defended itself against the accusations arguing its actions — telling banks that they would lose the investment house’s relationship if they did deals with PHC — were fair play in the competitive universe of high-yield municipal deals and didn’t violate any laws.
The non-jury trial is set for Monday and Tuesday. “Parties deliver joint trial exhibits to court July 26, 2019” and the trial will begin at 9:30 a.m. Monday, according to a revised schedule. The court denied Nuveen’s request for a third day and final briefs were filed in recent days.
PHC first cracked the window open on the cutthroat competition in the high-yield municipal market in late February with its accusations. The more recent release of riveting transcripts of tape recorded calls between Nuveen’s head of municipals John Miller and other members of his team and broker-dealer and bank employees further widened the view. More on that below.
The case pits the Dallas-based lender, which describes itself as a well-capitalized, non-bank finance company specializing in high-yield municipal specialty finance with more $1.8 billion in assets and $1.3 billion in equity capital, against an institutional powerhouse. Nuveen has $930 billion of assets under management including $154 billion in municipals and is a top high-yield manager.
The trial — during which depositions from key players on both sides will be made public and municipal market participants will take to the witness stand — will provide a debate on the accusations of strong-arm tactics, broker-dealer complicity and resistance, and the debate over pricing fairness with the reputations of both at stake.
Preston Hollow contends its model offers issuers an affordable and flexible borrowing choice. Nuveen believes it damages the market and overcharges issuers.
The case originally was brought with four causes of unlawful action including Tortious Interference with Contract, Tortious Interference with Prospective Business Relations, violations of the New York Donnelly Antitrust Act, and Defamation.
Glasscock has dismissed the tortious contract claim and the defamation charge.
The complaint asks the court for a preliminary and permanent injunction ordering Nuveen to cease the alleged conduct, to order Nuveen to rectify the harm already caused by withdrawing and disavowing retaliatory threats, and asks that Nuveen be directed to adopt supervisory procedures to ensure ban future misconduct that is alleged.
“In the absence of such relief, Preston Hollow will suffer incalculable and irreparable harm,” the lawsuit reads.
A source following the case said the supervisory condition is crucial since it could be hard to prove alleged future interference if Nuveen were to go “underground,” meaning the alleged pressure is exerted during a dinner meeting and not on a tape-recorded conversation during business hours as required by regulatory guidelines. Regulatory intervention would also be considered a victory.
THE CASE SO FAR
The suit filed in late February on behalf of PHC by its lead attorneys at Morris, Nichols, Arsht & Tunnel LLP names Nuveen LLC, Nuveen Investments Inc., Nuveen Securities LLC, and Nuveen Asset Management LLC as defendants and names John Miller as the central Nuveen figure who orchestrated the boycott. Nuveen’s lead attorneys are Potter Anderson & Corroon LLP.
Several counts survived Nuveen’s motion to dismiss. As the case proceeded, PHC collected subpoenaed information from banks and broker-dealers and more recently, depositions.
Depositions, which all are labeled confidential and under seal, recently submitted to the court by PHC come from Ramiro Albarran, Paul Brennan, Matthew Challis, David Chang, Bernard Costello, Peter Czajkowski, Karen Davern, Curtis Erickson, Andrew M. Harris, Patrick Haskell, Steven Hlavin, William Huffman, Karl Hummel, Michael Jentis, Rodney Krause, John Leahy, Matthew Levin, Darlene Louk, Corey Maple, Sally Markewicz, Thomas Metzold, John Miller, Selina Moriarty, Stephen O’Loughlin, Stephen Peters, Joseph Rosenblum, Jeffrey M. Scruggs, Frank Sorenson, Edward Snyder, Jim Thompson, Philip Traven, Ron Van Den Handel, Charles Visconsi, Clifford Weiner.
While many documents and filing are sealed under a confidentiality order, PHC successfully argued for the public release of transcripts of recordings between Nuveen and broker-dealer employees.
The transcripts of calls that included Deutsche Bank which is PHC’s primary lender and Goldman Sachs and Morgan Stanley revealed Nuveen’s warning: drop any direct placement dealings with its rival or lose Nuveen’s tender-option bond and primary and secondary market trading business.
“You have to choose who you want to do business with. Because I don’t want to do business with those firms that do business with Preston Hollow,” Nuveen’s Miller reportedly says on a tape recorded conversation during which he accuses PHC of predatory lending practices.
Nuveen has responded in its defense that there’s nothing illegal about the tactics it is accused of using and that banks were offered a choice as Nuveen had made the business decision to no longer work with counterparties that did business with PHC.
The latest transcript of audio recordings to be released are between Nuveen’s Karen Davern and an unnamed RBC employee. In the first conversation, the RBC employee refers to an unnamed firm that is clearly PHC as “bad guys.”
RBC released this statement: “We are not a party to this dispute and continue to do business with both Preston Hollow and Nuveen. We stand by the work we do for our issuer clients, leveraging the expertise and broad capabilities of the whole of our Capital Markets division, to help them find the right solutions for their offerings and to help them meet their financial objectives. To that end we believe there is a place for both private placements and public offerings in the municipal bond market.”
In the transcripts, Davern tells the RBC employee that such a position would provide an “in” with Miller. “He has been looking for someone as a partner on this and he has been going around the streets since before Christmas talking to all of the majors about how they have to stop doing this business and how bad it is for — for our business going forward, for munis going forward,” Davern reportedly said.
Davern suggests bankers are easy targets for fee and commission money through a private placement after a tough year volume-wise. In a later call, the RBC employee reports how he or she halted a deal that PHC had brought to one of the firm’s bankers and RBC ended up taking the deal as a private placement directly and through in its own marketing priced the deal at a lower yield for the issuer.
The employee appears uncomfortable with Davern and Miller using the information for public purposes, so Miller jumps on the call and the three have a conversation about their distaste for the PHC model. “Stuff like this, besides it just being bad business. I mean, it’s just a bad business practice,” the employee said, also telling Nuveen that bankers are supposed to inform him or her of all pending deals. A future conversation is about Miller’s appearance at RBC’s planned January Chicago conference focusing on the 2019 mayoral race.
Court documents recently disclosed the involvement of a “governmental entity” that wants to review the original audio recordings from Deutsche Bank. During a recent court discussion over what form of approval might be needed, Preston Hollow attorneys told Glasscock that it was their own co-counsel that contacted the governmental entity.
The governmental entity has not been disclosed. While the Securities and Exchange Commission regulates banks, it’s the Federal Trade Commission working in tandem with the U.S. Justice Department that enforces federal antitrust rules.
The Delaware Court of Chancery, established in 1792, is a non-jury trial court that serves as Delaware’s court of original and exclusive equity jurisdiction, and adjudicates cases involving trusts, real property, guardianships, civil rights and commercial litigation, companies incorporated in Delaware as well as LLCs, and other business entities with the presiding chancellor or vice chancellor deciding cases.
The timing of a decision is unclear as the court could seek post-trial briefs that may then also be argued, according to court staff. Parties can appeal decisions directly to the Delaware Supreme Court.