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IN TUE UNITED STATES DISTRICT COURT FOR TEE DISTRICT 0F DELÀAWARE lu re Oakwood Homes Corporation, et ai., Debtors. Case No. 02-13396 (PJW) Chapter i1i
jJointly Administered
OHC Liquidation Trust, Plaintiff,
v.i
Credit Suisse (t/k/a. Credit Suisse First Boston, a Swiss banking corporation), Credit Suisse Securities (USA), LLC (t/k/a Credit Suisse First Boston LLC), Credit Suisse Holdings (USA), nc. Credit Suisse First Boston, Inc.), and Credit Suisse (USA), Ine. (f/k/a Credit Suisse First Boston (U.S.A.), Inc.), the subsidiaries and affihiates of each, and Does i through 100, Defendants. i Adversary Proceeding Civil Action N.0-9 JF
DECLARATION 0F J. JUSTIN WILLIAMSON IN SUPPORT 0F DEFENDANTS' MEMORANDUM 0F LAW IN OPPOSITION TO PLAINTIFF'S MOTION lIN LIMINE 1, J. Justin Williamson, declare as follows: 1. I arn an attorney associated with the law firm of Linkiaters LLP, counsel to
Defendants in this action. I submit this Declaration in support of Defendants' Opposition to Plaintiff s Motion in Limine. 2. Attached hereto as Exhibit A is a true and correct copy of the Report of Alan C.
Shapiro, Ph.D., served April 30, 2007.
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3.
Attached hereto as Exhibit B is a true and correct copy of selected portions ofthe
Deposition of Alan C. Shapiro, Ph.D., dated September 5, 2007. 4. Attached hereto as Exhibit C is a true and correct copy ofthe Expert Witness
Report of Thomas F. Boland, served February 29, 2008. 5. Attached hereto as Exhibit D is a true and correct copy of selected portions of the
Deposition of Thomas F. Boland, dated March 25, 2008. 6. Attached hereto as Exhibit E is a true and correct copy of selected portions of the
Deposition ofjared Feit, dated June 15 and 16, 2006. I declare under penalty of peijury that the foregoing is true and correct. Dated: May 5, 2008 New York, New York
J.
stin Williamson, Esq.
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EXHIBIT A
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LTNITED STATES BANKRUPTCY COURT DISTRICT 0F DELAWARE In we: OAKWOOD HOMES CORPORATION, etal.,) Debtors.
) ) )
Chapter Il Case No. 02-13396 (PJW) Jointly Administered
OI-C LIQUIDATION TRUST,j Plaintiff,j vs. CREDIT SUISSE FIRST BOSTON, et al,j Defendants.j
)
Adv. Proc. No. 04-57060 (PJW)
REPORT 0F ALAN C. SHAPJRO,.PH.
April 30, 2007
CONFIDENTIAL
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Table of Contents
1. Seope of Engagement.........................................................................i Il. 111. IV.
V.
Credentials...................................................................................i. Basis for Opinions ............................................................................. Summary of Opinions .........................................................................
Assumptions .................................................................................... V.A CSFB Owed Oakwood and lils Creditors a Fiduciary Duty .........................
3 3
4 4
V.B3 VI.
Oakwood Was Insolvent in September 2001..........................................
Manufactured Housing Industry.................................................... Business Overview of Oakçwood ...........................-..
4 4
.... 4
Baekground...................................................................................
VI.A VI.B VI.C VI.D VI.E
-.............. ....... 5 ...
Financial Performance of the Industry Prior 10 1999 ................................. Industry Downtumn Beginning in 1999..-.............................................. Oakwood's Downturn and Bankruptcy ................................................ VIT. 1 Oakwood's Financial Condition Was Deteriorating in 1999 and 2000 VL.E.2 Oalcwood Continued 10 Report Significant Losses in 2001......9
....
5
6 7 7
VI.E.3 Oakwood Discontinued lis Loan Assumption Program and Reported -10 Losses in 2002 ............................................................... VLE.4 Oakwood Fied for Bankruptcy in November 2002 ....................... Vil. CSFB Did Not Behave In a Prudent Manner.............................................. VIIA CSFB Had Access to Public and Private Information Concerning Oakwood's Financial Condition....................................................... VII.A. I Invesiment Banks Have Unique Access
10
Il 12 12
Information ............. 12 14 22 24 24
VII.A.2 Relationshîp between Oakwood and CSFB.............................. VII.A.3 CSFB Obtained Bot Public and Inside Information about Oakwood's Financial Condition . .......................................... VII.B In Evaluating lis Own Exposure, CSFB Considered Oakwood a Bankrupîcy Risk .................................................................................... VII.B. Credit Memoranda Suggest Recognition of Oakwood's Financial Condition ...........-...........................................................
I
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VlLB.2 Throughout Its Relationship with Oakwood, CSFB Continued to Monitor and Insulate Itself from the Bankruptcy Risks Surrounding Oakwood ...................-........-.......................................
26 27
VII.C CSFB's Own Guidelines Require a Higli Standard of Care to its Clients ........ VII.D CSFB's Advice to Oakwood Was Inconsistent wîth Oaicwood's Situation, the Information It Had, Its Own Concerns, and the Duties It Owed Oakwood and its Creditors.......................................................... VII.D. i CSFB Presentations bo Oakwood Prior bo August 2002 Made No Mention of the Fact that Oakwood Should Have Considered
Bankrnptcy..................................................................... VII.D.2 CSFB's Presentation to Oakwood on August 19, 2002, Marked the
-28
29
First Time CSFB Discussed and Presented Potential Restructu.ring
Alternatives .................................................................... 34 VIIE The Advice CSFB Provided to Oakwood was Inappropriate...................... 35 VII.F The Actions CSFB Engaged in with Oakwood Destroyed Value and Exacerbated the Company's Insolvent Financial Condition....................... 36 37
VII.G CSFB Should Have Advised Oakwood to Cuitai! Operations and Should Not Have Enabled it to Continue to Destroy Value.......................................
VIII. CSFB Had a Financial Inventive Wo Keep Oakwood Operating.......................
39
39 40 40 41 41 42 42
VI I.A CSFB Stood to Continue Earning Fees for the Services It Provided to
Oakwood .............................................................................. VIlL.A. i Fees Earned by CSFB for Underwriting Oakwood Securitizations,. VIII.A.2 Fees Earned by CSFB for Providing Loan Purchase Facility to Oakwood....................................................................... VIII.A.3 Fees Earned by CSFB as Oakwood's Restructuring Financial Advisor......................................................................... VIII.A.4 Fees Provided CSFB with a Financial Jnterest in Oakwood Continuing as a Going Concera ... ......................................... VIIJ.B CSF fl's Equity Jnterest provided it with a Financial Interest in Oakwood Continuing Operations.................................................................. VII.B. 1 Agency Conflict between Equity and Debt Holders.....................
Vffl.B.2 CSFB Had a Conflict of Interest wîth Oakwood's Debt Holders....45 VIII.C Even Though CSFB was a Lender, Its Interests Differed from Those of Other Debt Holders ..................................................................... VIII.D Conclusion Regardîng CSFB's Incentives .......................................... 45 47
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List of Tables
Table 7. 1: CSFB's Roles and Fees Earned .............................................................. Table 7.2: Surnary of Strategie Options Provided by CSFB ....................................... Table 8. 1: Illustration of Payoffs and Probabilities of Projects ...................................... 21 32 44
List of Figures
Figure 7. 1: Oakwood's Securitization Process......................................................-.17
iii
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1.
Scope of Engagement
I have been retained by Stutman, Treister & (ilatt, P.C., counsel for Plaintiff Oakwood Homes Corporation Liquidation Trust ("Oakwood Liquidation Trust"), to provide an expert opinion on whether Credit Suisse First Boston ("CSFB") perforrned its responsibilities in its capacity as underwriter, lender, and financial advisor to Oaicwood Homes Corporation ("Oakwood") in a reasonable or reasonably prudent mariner. This report contains my opinions on this matter, as well as the analysis and methodologies I have employed in forming my opinions. As part of my analysis, I have reviewed various materials froin public sources, as well as those provided to me by counsel for Oakwood Liquidation Trust from the discovery in the litigation. The opinions ami conclusions contained herein represent rny current opinions and conclusions in this inatter. I reserve the right to supplement or amend my opinions and conclusions in light of any new information that becomes available through discovery or other means. A list of documents on which I relied in writing this report is included in Appendix B.
Il.
Credientials
I amn the Ivadelle and Theodore Johnson Professor offlanking and Finance, and past chairman of the Departinent of Finance and Business Econornics, Marshall School of Business, University of Southern California. Treceived a B.A. in Mathematics from Rice University (1967) and a Ph.D. in Economics from Carnegie Mellon University (1971). Prior to joining fiSC in 1978, I was an Assistant Professor at the Wharton School of the University of Pennsylvania (1971
-1978).
I have
also been a Visiting Professor at Yale University, UCLA, the U.S. Naval Academy, the Stockholm School of Economics, and the University of British Columbia. My teaching experience at these universities includes courses in corporate finance, international finance, international econornics, corporate financial. strategy, international
banking, macroeconornics, and microeconomics, for which I have won several teaching awards. Additionally, I have taught in numerous executive education programs, including programs sponsored by Yale University, the Wharton School, University of Southemn California, UCLA, UC Berkeley, Columbia University, University of Hawaii, University of Washington, University of Melbourne, Stockholm School of Economnics, and the Arnerican Management Association.
1
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I have conducted numerous in-house training and executive programs for banks, corporations, government agencies, consulting firms, and Iaw firrns in the areas of corporate finance and international finance and economies. In October 1993, I was recognized by Business Week as one of the ten most in-demand business sehool professors in the U.S. for in-house corporate executive education programs. My publication credits include over 50 articles in sucli leading academie and professional journals as the Journal of Finance, Harvard Business Review, Golumbia Journal of World Business, Journal of Financialand Quantitative Analysis, Review of FinancialStudies, Journal of Business, Journal of InternationalMoney and Finance, FinancialManagement, Management Science, and JournalofApplied CorporateFinance. In 1988 I was cited as one of the "100 Most Proli tic Authors in Finance." I was also cited in 2005 in the Journalof Finance Lîterature as one of the rnost frequent contributors to the academic finance literature over the past 50 years. Another study published in 1991 ranked me as one of the most prolific contributors to international business literature. My article "Corporate Stakeholders and Corporate Finance," for which my co-author Brad Corneil and I received the 1987 Distinguished Applîed Researcli Award from the Financial Management Association, is the most frequently cited article published in Financial
Management since 1985. 1 amn a member of the American Finance Association, the American Economic Association, and the Financial Management Association. I have published several books. These books include my textbook, Multinational Financial Management (John Wiley, Sth ed., 2006), which is in use in most of the leading MBA programns around the world; Modemn Corporate Finance (Macmillan, 1990), cited by the Journal of Finance as potentially the "standard reference volume in corporate finance;" Foundations of Multinational Financial Management (John Wiley, Sth ed., 2005); International Corporate Finance (Ballinger, 1989); Capital Budgeting and Investment Analysis, (Prentice-Hali, 2005);and Modemn Corporate Finance: A n JnterdisciplinaryApproach to Value Creation (PrenticeHall, 2000), coauthored with Sheldon Baîbirer. In addition, I have published two monographs, International Corporate Finance: Survey Management. I have served as a director of the American Finance Association, the Academy of International Business, and the Western Finance Association. and Synthesis and Foreign Exchange Risk
2
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Among the varlous goveruiment agencies and departments for whomn I have consulted are the FBI, Internai Revenue Service, Federal Home Loan Bank System, Resolution Trust Coq,., Department of Justice, Securities and Exchange Commission ("SEC"), Department of Energy, California Franchise Tax Board, New York State Department of Taxation and Finance, Massachusetts Department of Revenue, Alabama Department of Revenue, and Federal Deposit Insurance Corporation. I have also consulted with numerous firms and banks, involving analyzing various aspects of financial. markets, financial institutions, and securities, including such matters as pricing stocks and bonds, corporate valuation, mergers and acquisitions, value-based management, and derivatives. I also frequently serve as an expert witness in cases involving valuation of businesses and debt and equity securities, economic damages, economic substance, international finance, takeovers, financial analysis and accounting, and transfer pricing. My curriculum vita is included in this report as Appendix A.
111.
Basis for Opinions
is report and
My opinions are based on my professional knowledge and experience, as well as on a review of documents and information relevant to «is mal-ter and analyses described in
assumptions I have been asked by counsel to make. Documents and other materials that I have relied on as a basis for my opinions are cited in this report; ail documents and materials are of the type typically relied on by experts or Ernancial economists in their research. Assumptions and analyses that form the bases for rny opinions are described in this report. The opinions offered in this report are subject to refinement or revision based on new or additional information that may be provided to or obtained by me in the course of this matter.
IV. Summary of Opinions
My opinions in this matter are as follow:
CSJYB did noz behave in a reasonable or reasonably prudent manner with respect to the services it provided to Oakwood. CSFB's various relationships with Oakwood afforded it
access to information, both public and inside, about Oakwood's financial condition. (liven Oakwood's financial. condition and in line with its fiduciary responsibility to Oakwood and its creditors and its own guidelines and principles of conduct, CSFB should have advised Oakwood to reduce its operations or file for bankruptcy prior to its engagement as a financial. advisor for restructuring purposes in Augusi 2002. 3
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*CSFB had financial incentives to keep Oakwood operating and to delay recommending tisai Oakwood file for bankruptcy. These incentives came in two forms: 1) CSFB continued to earn fees for the underwriting, lending, and advising services il provîded as long as Oakwood continued as a going concern; and 2) due to its equity interest in Oakwood ibrougli warrants issued as a resait of its participation in the boan purchase facility, CSFB stood to benefit if Oakwood did recover from its dire financial position. At the samne time, even though CSFB was a lender to Oakwood, its interests differed from those of other Oakwood debt holders because its exposare to Oakwood was protected fromn the threat of bankruptcy. Thus, as a bankruptcy-insulated lender with an equity interest in the borrower, CSFB was exposed to the apside of an Oakwood recovery, no matter how remote the possibility, while insulated from the costs of a futile turnaround attempi. And, due to the potential of continaed secaritizations and other fees, CSFB stood to profit [rom the turnaround autempt even if it was not saccessful.
V.
V.A
Assumptions
CSFB Owed Oakwood and its Creditors a Ficluciary Duty
I have been asked by coansel to assume that CSFB owed Oakwood and its creditors a fiduciary responsibility. V.B3 Oakwood Was Insolvent in September 2001
I have also been asked by counsel to assume that Oakwood was insolvent in September 2001. This assumrption is based on the expert report of Dr. Michael Tennenbaam.
VI.
Background
VI.A Manufactured Housing Industry The manafactured housing industry consisis of companies that design and manafacture prefabricated and modalar single- and multi-family homes. Manafactured homes are constructed in a controlled factory environment and include varyîng types that are designed for long-term residential use. Units are transported to a site and installed subsequent to being built in a factory. Top indastry coînpetitors inclade Clayton Homes, Champion Enterprises, Fleetwood Enterprises, and Oakwood Homes (which has subsequently been acquired by Clayton Homes). In addition bo providing manafacturing and retailing services, some of these companies also assist homebuyers with financing needs. A number of companies, including Oakwood, have vertically integrated their manufacturing, retailing, and financing services.
4
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VI.B Business Overview of Oakwoodi
Oakwood was founded in North Carolina in 1946. The Company went public in 1971 and experienced consistent growth throughout the i1970s and 1980s. Oakwood designed, manufactured, and marketed manufactured and modular homes and financed the majority of its sales. In 2000, the Company operated 32 manufacturing plants in 12 states and sold ils homes ilirougli 371 company-owned-and-operated sales centers and 575 independent retailers. The Company also sold insurance to its customers and assumed the related underwriting risk through ils captive reinsurance business.1 In 1999, Oakwood was the largest U. S. retailer of manufactured homes and the third-largest manufacturer. Oakwood's financial services unit, Oakwood Acceptance Corporation ("OAC") securitized its boans and generated revenue through servîcing fees as well as interest spreadsi Thas, Oakwood operated under a fully vertically integrated business strategy that offered ils customers one-stop shopping by providing manufacturing, retailing, and fmnancing services.
VI.C
Financial Performance of the Industry Prior to 1999
The manufactured housing industry lias experienced a cyclical pattern of growth and decline over the past several decades. In the 1970s and early i1980s, steady growth occurred throughout the industry. llowever, in the mid i1980s, manufactured home companies began experiencing steep declines in their earnings as the resuit of changing economic and financial. conditions: "Beginning in 1984, manufactured housing shipments posted eîght years of consecutive declines, falling over 40% 10 a 1991 trougli of 170,713 units. The significant downturn was due to a severe recession in the oul paîcli economy and a lack of available financing due crisis. During this period, the nuruber ofmanufacturers declined
10 10
the savings and boan
85 ftom 170Q."3
The manufactured housing market experienced a resurgence in the i1990s, due in part to the rising cost of conventional homes, the general economie recovery from the 1991 recession, and favorable financing termis, In the early I1990s, manufactured housing shipmenîs grew ai a fiveyear compound annual rate of 16.3 percent. In addition, increased competition among financing companies resulted in manufactured housing boans with down payments of 5 percent and longer maturities of 20 years to 25 years. As well, lenders effectively bowered credit standards by reducing
2CSFB,
Mergent FIS. IIistory & Debt. "Oakwood Homes Corporation." December 5, 2000. Equity Rescarch. "Manufacturcd Housing Industry." January 13, 1998. p. 16. Ibid., p. 2.
5
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the minimum acceptable level ofecredit worthinessi"Thus, the resurgence stemmed largely from a strong overall economy and greater availabîlity of financing, as welI as [rom improved product offerings by industry manufacturers. Ail of the major competitors enjoyed high returus on invested capital and extremely attractive valuations. Throughout the I1990s, shares of manufactured housing companies outperformed thec Standard & Poor's ("S&P") 500 Index; in particular, an index of manufactured housing companies experienced annual growth rates in stock prices of 40 percent, 26 percent, and 29 percent over three-, five-, and ten-year periods, respectively.5 Also, the favorable effects ofeconomies ofscale resulted in consolidation within the industry. In 1996, the Iargest four companies, Champion, Fleetwood, Oakwood, and Clayton, accounted for almost haîf of ail industry shipmentsr The year 1998 was a particularly auspiclous year for the îndustry. Shipments ofmanufactured bouses had increased by 5.5 percent over 1997, and the pace of the increase was accelerating (December 1998 shipments were 10.9 percent higher than in December 1997). Strong job growth, low interest rates, and the continuing desire for home ownership supported continued growth.? The significant upturn in the overali industry throughout the i1990s led manufactured housing companies to drastically expand the number of manufacturing production sites and retail outiet stores. However, as discussed below, as conditions changed near the end of the decade, overcapacity began to, plague the industry. VI.D Industry Downturn Beginning in 1999
Afier a dramatic increase in manufactured housing demand throughout the i1990s, sales began to decline by 1999, due largely to tightening lending standards. 8 Aggressive lending practices that emerged in the i1990s began to catch up with the industry. Delinquency and repossess ion rates rose dramatically, forcing lenders to tighten their lending criteria by increasing both credit standards and mortgage interest rates. Tighter standards led to Iower demand. The industry's poor performance also stemmed from problems ini the securitization market. Lenders were engaging in aggressive underwriting and accounting practices, which translated into paying more to have their boans securitized.9
4"Ibid. 'Ibid., p. 7. 6 Ibid., p. 3.ý 7Arnold and Bleîchroeder, mec. Manufactured Ilousing Research, "A Strong Close for a Good Year: Shipment Rise for Seventh Consecutive Mont." Fcbruary 4, 1999. p. 1. ' Amnilda Dymi. National Mortgage News. "Recovcry When for Manufactured 1-ousing?' November 13, 2000. Vol. 25, Issue 9. 9 Arnold and Bleichroder, Ine. Manufactured Housing Research. "A Strong Close for a Good Year: Shipmcnt Rise for Seventh Consecutive Mont." February 4, 1999. p. 2.
6
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The recluction lu demand led to an industry-wide excess-inventory problem. Manufactarers had expanded too quickly to support this adjustment lu demand, leading to overcapacity of manafactared housing plants. Likewise, retailers had purchased too mach inventory. By November 1999, manufactured hoasing shipments had dropped 14.7 percent compared to the previous 10 November, and analysts projected a 7.5 percent decline for the 1999 calendar year. The pace of the decline iu shipments accelerated in the following monîhs. In March 2000, for example, shipments of manufactared homes had decreased by 23 percent from Mardi 1999 as manufacturers continued to cut back production iu response to deteriorating demand."l Several companies began closing retail outiets because they could not secure inventory financing as a resait of many consumers failing to qaalify for boans. "While [industry] stocks
...
[had] been
inexpensive for some time, LArnold & Bleichroeder] believed the bad news had not yet stopped,",1 2 recommendîng against purchasing stocks in the manafactured housing îndustry. By the end of 2000, companies began responding
10
the sluggish demand by closing plants
or exiting the industry altogether. By November 2000, manafactarers had closed aI least 50 plants and capacity had declined by 15 percent since the beginning of the year.13 Nearly 800 retailers had exited the industry, with another 1,000 expected to follo.' rebound by 2002. VI.E VI.E.1 Oakwood's Downturn and Bankruptcy Oakwood's Financial Condition Was Deteriorating in 1999 and 2000
4
Aithough many hoped
the indastry would reach tie bottom of ils downtur n late 2000, the industry had stili failed to
Lîke otier companies lu the manufactured ioasing industry, Oakwood enjoyed tremendous, growth lu the 1990s. While il experienced greater growth than many of ils competitors daring that time, Oakwood's financial condition and operations also suffered more than most during the indastry downturn.
Arnold and Bleichroeder, mne. Global Viewpoint. Manufactured llousing: Nuvemnber. "Novemnber Shipmcnt Feul Nearly 15% - Bad News Continues." Januaxy 13, 2000. '1Arnold and Bleichroder, Ime. Global Viewpoint. Manufaetured Housing: Mardi. "Shipmnents Dropped 23% Thîs Month." April 28, 2000. p. 1. 2 1 libid. 13 Amilda Dymi. National Morigage News. "Reeovery When for Manufaetured Housing?" November 13, 2000 Vol. 25, Issue 9. IbJ/,
10
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By June 1999, Oakwood's retail sales had dropped 16 percent on a per-home basis while total dollar sales dropped 10 percent, on a year-over-year basis. The Company's inventory had increased more than any of ils competitors. With higher inventory per dealer and lower sales per 5 outlet, Oakwood's inventory days outstanding increased by 57 percent year-over-year.'1 The Company's earnings and valuation declined dramnaîically. In the second quarter of 1999, Oakwood took a $45 million earnings charge because of higher-than-expected defaults and refinancings on ils mortgage boans. With a market value of $600 million, the Company's share price dropped 52 percent over a 12-month period to about $12 per share. lie credit-rating agencies also reacted 10 Oakwood's precarious financial condition;, Moody's downgraded the
6 junior tranches of some of the company's asseî-backed securîties ratings.'1
These trends continued in the following quarters. In September 1999, Oakwood's inventory per outiet was up 13 percent year-over-year. The increase was attributed bo lower-than-expected sales. The Company responded by closing three plants and lowering manufacîuring rates. In addition, Oakwood significantly discounted prices and mortgage rates in hope of reducing ils
inventory. 1
In January 2000, Oakwood's $300 million in long-termn debt lraded for around 50 cents on the dollar, causing some analysts to believe that "Oakwood's foundation had sunk deeper into the distressed pil and that there was not much 10 buttress il." 18 With its financial condition spiraling downward, the Company struggled to maintain ils operations. Oakwood was in a liquidity crisis, and it îried to stay above water until overail industry conditions could rebound. However, in November 2000, an article in the Winston-Salem Journal reported that "if there is a light ai the end ofîthe tunnel, Oakwood Homes Corporation does not expect bo see il for a while." In particular, Oakwood losI $82.9 million in the fourth quarter of 2000 rom its excessive retail outlets and higli inventory levels. This was the fifth consecutive quarter in which Oakwood lost money. During calendar year 2000, Oakwood's stock price feli 86 percent. In fiscal year ("FY") 2000, Oakwood reported a net loss of $121 million, compared bo a net loss of
$3 1.3 million in 1999. On Novemnber 28, 2000, Oakwood's stock price closed at 56 cents per
share on the New York Stock Exchange, raising the possibility that it would be de-listed.' 9
Equity Research. "Second Quarter 1999: Retail lnventory Update." September 9, 1999. Kite. Asset Sales Report. "Oakwood: Earnings halved, ABS roots intact." June 28, 1999, Vol. 13. Issue 26. 17 CSFB. Equity Rcsearcb. "Second Quarter 1999: Retail Inventory Updatc." Scptcrnber 9, 1999. 18Rick Appin. High Yield Report. "Bonds Sînk to Dis.ressed Area," January 24, 2000. Vol. 11, Issue 4. 1Adrian Zawada. Winsîon-Salem Journal. "Set for a Long 1Ilaul; Oakwood Homes' Lusses Grow; Outlook of Manufactured-Housing Industry 5h11l Uncertain as Tougher Lending Standards Cut Demand," November 29, 2000.
'CSFB. 6Shane
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Oakwood's outlook became more precarious given that no industry upturn was expected in the near future. Robert Curran, a financial analyst ai Merrili Lynch Global Securities, stated that "the manufactured housing industry would continue
10
suffer int spring 2001, if flot longer.",20
Mr. Curran reasoned that higher lending standards and inlerest rates were reslricting demand for an already-overbuilt market. In addition, boan foreclosures and repossessions were diminishing demand for new homes.?' These predictions turned out to be correct as Oakwood continued to suffer losses throughout 2001.ý VI.E.2 Oakwood Continued to Report Signiticant Losses in 2001 In the first quarter of 2001, Oakwood reported losses of 91 cents per share. Duane Daggert, Oakwood's President and Chief Executive Officer ai the lime, stated that "we expect the current difficult market conditions bo continue, possibly int next year."2 Wilh littie hope of a recovery .40 any lime soon, Oakwood shares were trading at approximately $1. per share in late January 200 1. The second quarter of 2001 affirmed Mr. Daggert's expeclalions. Oakwood losI $28 million, more than double ils $12 million loss during the samne period the year before. Given that Oakwood financed most of ils home sales, the Company was widely exposed to buyers who were unable to continue 1o make mortgage payments» By the fourth quarter of 2001, Oakwood lost $49.5 million, or $5.24 a share. In ail, the Company losI $176 million, or $18.68 per share, in fiscal year 2001. Not only was this loss greater than ils previous fiscal year loss, it was also the third sîraighî fiscal year for which Oakwood reported a loss.24
20)[bd
21 ibid.
2Amy Joyner. Greensboro News & Record. 'Oakwood Homes Loses $43 Million The Manufactured Housîng Company Says That Sales are Improving Slightly." January 27, 200 1. 23 Associated Press Newswires. "Oakwood Homes Struggles to Pull Out of Slmp." May 10, 2001. 21 Brian Louis. Wînston-Salemn Journal. "Oakwood Culs Losses in Quarter; Fiscal Year is Worse than 2000; Wocs are Industrywîde." November 21, 200 1.
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VI.E.3 Oakwood Discontinued Its boan Assumption Program and Reported Lasses in 2002 In the firsi quarter of 2002, Oakwood reported a loss of $1.05 per share compared with a loss of $5.36 per share the previous year. Delinquencies on Oakwood-originated contracts rose Io 6.7 percent compared with 5.8 percent a year before. Likewise, repossessions rose 25 percent from the prior year? 5 By this time, Oakwood's stock was trading at less than a third of ils book 2 value and CSFB research analysts belîeved the carrent valuation reflected a more dismal outlookY In the second quarter of 2002, Oakwood reported operating losses amounîing bo $6.25 per share. While wholesale sales increased somewhat, retail sales declined 20 percent, resulting in a 7 percent overaîl decline in total sales. Provisions for credit losses also increased to $25 million compared with $2.3 million the year before, $20.4 million of which was associated with its Loan Assumption Programi ("LAP"). The Company's earnings before income and taxes (EBIT) margin declined to -18.7 percent versus -8.9 percent from 2001. Oakwood also experienced a loss of $2.2 million associated with a $156 million securitization.2 By May 2002, CSFB research analysts noted "the uncertainty in the indusîry with respect to how long it drags along the botton before realizing any meaningful rebound." 2 8 Oakwood's financial condition still suffered from increases in ils delinquency and repossession rates. With respect to the Company's balance sheet, Oakwood had about $41 million in short-terni debt outsîanding, $25.9 million in cash, and $322.9 million in long-terni debt. Oakwood also recorded pre-tax charges of $1.2 million relating bo the impairment of the value of certain retained interests in boan securitizations. The Company took a similar charge of $0.4 million in the second quarter of 2001.9 In July 2002, Oakwood terminated its LAP afler significantly increasing its use in 2001 and early 2002. The Company used thie LAP mainly
10
avoid the high costs associaîed with
repossession, încluding refurbishment costs, relocation costs, and cosîs associated wiîh forced eviction. Under the LAP, Oakwood would arrange for new mortgagees to assume mortgages that were in defanît instead of repossessing the home. Oakwood would offer a borrower in default an opportunity to assign ils mortgage to another borrower with a credit profile similar to the current
21
CSFB. Equity Researcli. "OH: FYI Q02 EPS Loss of $1.05 Versus a Loss of $5.36 A Ycar Ago." January 25, Jbid.
CSIFB Equity Research. "OH4: FY2QO2 Operating Loss of $6.25." May 1, 2002. p.l1.
2002.
26
21 2X1
Ibid.
29
Ibid., p. 2.
10
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borrower. The delinquent boan would remain classified as sucli until a qualified borrower was found, and would then become re-aged. The payments during the delinquent months would be advanced by the servicer and the new mortgagee would then be required to pay ail of ihe back paymenîs from the original borrower, thus reimbursing the servicer. For the nine-month period ending the second quarter of 2002, the mostly cash LAP expense had grown bo $51 million. Oakwood could flot a[Fford this cash cosi and thus ierminaied ihe LAP. In so doing, it passed mucli of the expected future losses to, the bondholders. With the discontinuation of the LAP, ail new problem boans were classified as repossessions. In the ihird quarter of 2002, Oakwood's retail sales continued to drop, Oakwood reported an operating boss of $1.29 per share compared with a loss of $6.92 the year before. Two nonrecurring expenses iotaling $100.8 million were recorded, $86.5 million of which consisîed or charges related to the curtailment of Oakwood's LAP. Thus, Oakwood reported an earnings loss of $12.61 per share. Future credit bosses were also expected from Oakwood's plan to, seil off inventory through lower-margin wholesabe channels rather than through retail channelS. 3 By September 2002, Oakwood shares had lost approximately 99 percent of their value over the course of a three-year period.3 On October 25, 2002, CSFB dropped its coverage of Oakwood 32 due to its lack of iquidity and smalb market capiîalization. VI.E.4 Oakwood FiIed for Bankruptcy in November 2002 On November 15, 2002, Oakwood filed for Chapter il bankruptcy. At this time, Oakwood had structural problems wiîh ils boan portfolio and was oui of cash; Oakwood's board of directors 3 and senior management made the decision to file for bankruptcy. Beiween 1999 and 2002, many factors caused both Oakwood and the industry bo suifer a major financial downturn, including overcapacity, excessive number of retaibers, increasing number of repossessions and lenders exiting the îndustry. During bis testimony, Douglas Muir, Oakwood's Chief Financial Officer, stated several reasons for the decline in Oakwood's performance thai led 10 its Chapter lb fibing. Firsi, he bebieves there was "a deep and susîained downîurn" in the indusiry, during which shipments from manufacturers to retaibers decbined by 60 percent from their peak in 1998. This decline was causing benders to exit the business. He
30
31
CSFB. Equity Research. "OH: Fiscal 3Q02 Operating Loss of $ 1.29 Per Share." August 8, 2002, Monte Burke. Forbcs. "Trailer King." Septemnber 30, 2002. Vol. 170, Issue 6. 12 CSFB. Equity Research. "Oakwood Homes Corporation: Dropping Coverage." October 25, 2002.
" Deposîtion of Myles Standisb, Oakwood Homes C'orporation/OHC Liquidation v. Credît Suisse Fîrsi Boston, Septembr 2l, 2006, p. 9.
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believes the downturn could stili be occurring. Second, Mr. Muir believes Oakwood bult too many sales centers and factories and expanded at a rate that it could flot manage. Third, lie cited insufficiently stringent underwriting standards .3 4 Finally, there was an economic recession during this period. Mr. Muir gave an example of North Carolina textile workers Iosing 30,000 jobs over a two- to three-year timeframe. Because a large number of those workers lived in mobile homes, a large number of boans defaulted.3
VII.
CSFB Did Not Behave In a Prudent Manner
In this section I demonstrate that CSIZB did not behave in a prudent mariner in its dealings with Oakwood given its fiduciary responsibilities. I first establish that CSFB was, as a resuit of its multiple relationships with Oakwood, in a unique position to know Oakwood's true financial condition (as noted previously, I have been asked to, assume that Oakwood was insolvent in the fali of 2001). J then show that CSFB's actions witli respect to its own risk exposure to, Oakwood suggest cognizance of Oakwood's bankruptcy risk. Finally, I demonstrate that CSFB's advice and conduct with respect to Oakwood was inappropriate given the Conipany's financial condition and violated its fiduciary duty to Oakwood and its creditors as well as its own guidelines. VII.A CSFB Haci Access to Public and Private Information Concerning Oakwood's Financial Condition Among its robes, CSFB acted as Oakwood's lender, tinancial advisor, and underwriter. As such, CSFB had access to, information about the Company's tre financial condition. In this section I discuss the access to information that investment bankers enjoy, review the investment banking activities and other functions performed by CSFB for Oakwood, and demonstrate that CSFB had access to bot public and inside information concerning Oakwood's financial situation and outbook. VII.A.1 lnvestment Banks Have Unique Access to Information
An investment bank is a financial intermediary that performs funictions for the issuer of securities including underwriting and advising. By providing these services, investment banks necessarily have access to information about the financial conditions of their clients.
3Deposition of Douglas Muir, Oakwood Homes CorporationlOHC Liquidation v. Credit Suisse First Boston, September 26, 2006, p. 59.
12
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The role of the investment bank begins with pre-underwriting counseling to the issuer and continues aller the distribution of securities in the form of advie
37 than does the issuer.
The advising functionha
value bo the issuer because investment banks have better information about the capital market
Before an investment banc can commence with issuing securities, it must first conduct a due-diligence investigation of the issuing firmn it represents. Ris investigation begins with inquiries into the issuer's business and operations consisting of an investigation into the issuer's
8 industry and discussions with the issuer's management?3 Ris study entails gathering and assessing
ail essential and relevant information that could have a bearing on the valuation of the securities the investment bank is seeking to place. Such information would include a review of the company's basic business strategy and competitive advantages, as well as evidence of the company's success in pursuing its business strategy. During its discussions with management, the investmnent bank is provided with information management believes should appear in the registration statement.3 9 The investigation is designed to give the investmnent banker a reasonable basis to believe that the key representations made to investors are true, accurate, and complete, so that investors can make informed decisions aller understanding the risks and returns of the securities hhey are purchasing. ht is also designed to enable the investment batik to assess whether management is capable of achieving its prospective goals. The underwriher's duty is to independently verify the information that the issue? s management provides to
i.(
As underwriter, the investment bank is also responsible for examining the issuer's current financial health and future financial prospects. Toward this end, the investment bank must review the issuer's financial statements, whîch in hum requires scrutinizing the independent auditor's report and letters to management ho detennine whether ail potential problem areas were uncovered during the audit. In addition, it should examine general financial issues of the issuer, including profits and revenue, budget concerns, and the internai, audit controls the issuer has in place; this review provides the investmenh bank with an in-depth understanding of the issuer's overali financial condition. 4
"Invesimnent Bank," Investopedia website, littp ://www.investopedîa.com/termns/i/investrnentbanik.asp, accessed April 2007. 37' David P. Baron, "A Model of the Demnand for hIvestment Banking Advising and Distribution Scr-vices for New Issues," Journal of Finance, Vol. 37, No. 4, Septemnber 1982, p. 1. Je FindLaw, "Underwriter Due Diligence in Sucurîties Offerings," FindLaw websîte, http://library.findlaw.cor/1I999/May/27/1 26952,html, acccssed April 2007, ý9Ibid. 40 Ibid.
36
4' Ibid
13
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To thoroughly assess a company's financial. condition, investment banks rely on both publicly available information and inside information supplied by the client. Investment banks also interact with other financial intermediaries to obtain ail publicly available information. These institutions include credit-rating agencies, lawyers, accountants, other investment batiks, and market analysts. In addition to providing underwriting services, investment banks provide advice and assist corporate clients with mergers and acquisitions, reorganizations, and strategic matters suci as leveraged buyouts and joint ventures. Other activities involve structuring and implementing transactions as a way to manage the variety of risks a client is exposed to. These transactions include structured or project finance through the use of derivatives and otT-balance-sheet transactions. In addition, investment bankers aid their clients in obtaining funding on more desirable terms, thereby providing liquidity and investment opportunities, as well as facilitating rîsk dispersion. As discussed below, the funictions CSFB1 performed for Oakwood went beyond those associated with underwriting securitizations; CSFB also served an advisory role. VII.A.2 Relationship between Oakwood and CSFB
CSFB served as Oakwood's investment banker and thus enjoyed the type of access to information described previously. In faci, the services provided by CSFB to Oakwood consisted of assisting the Company in raising funds through the capital markets by underwriting securities, acting as a tender for Oakwood's loan purchase facility, and serving as Oakwood's tinancial advisor. VII.A.2.a Role as Lead Securities Underwriter
CSFB began to serve as Oakwood's securities under-writer in 1994. Over the next eight years, CSFB wrote more than $7.5 billion in Oakwood securities over approximately 25 securitizations 4 AS Oakwood's Iead securities underwriter, CSFI3's rotes were * Advising and assisting Oakwood's management and directors in setting the ternis of the securities sales; " Conducting reasonable due diligence into the accuracy of the written representations of the prospectuses; " Testing the financial information contained in the prospectuses; and " Facilitating the sale of the securities.
42
Oakwood Homes Corporation/OHC Liquidation v. Credit Suisse FirstBoston, Objections and Countcrclaims.
Novemnber 13, 2004.
14
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Fiachra O'Driscoll, a Managing Director of CSFB's Asset Finance Group, stated that CSFB's role as Oakwood's Iead securities underwriter entailed the structural and financial engineering of Oakwood's securitizationst In particular, the structural and financial engineer's role was to [D]o the analysis of the boans themselves, the characteristics of the boans, the performance of the boans, to do the analysis of the securities bo put together scenarios for those securities that are commonly referred to in the industry as what's known as computational materiait4 In the course of a mortgage securitization, CSFB would then approach the rating agencies and explain the nature of the transaction bo be conducîed. CSFB would "prepare the raîing agencies for the rating process and Lwould] prepare materials which included circulars, red herring, sales points and sales materials for purely internai consumption"
45
The information that
CSFB supplied to the rating agencies entailed a summary form of information on the boan pool itself, which included, among other things, the principal balances and weighted average coupon rates on the boans, as weIl as the boan-to-value ratio on average for ail of the boans. In addition, CSFB supplied information on the performance of Oakwood's past securitizations wiîh a summary of prepayment, delinquency, and loss performances, as well as changes in the coupon rate and in the characteristics of the boan pools in question. 46 Finally, on compleîing analysis of the boan portfolios and working closely with the credit rating agencies, Mr. O'Driscoll explained that the robe of the asset securitization team was to [Ejnsure that the transaction was put together in a timely fashion, 10 make sure that the questions of the sales force were answered, to make sure that investors questions were answered, to make sure that the legal structure of the mortgage securitization itself worked as it probabby - or properly should do, and to make sure that the transaction got cbosed, processed, and that it was deait with in the after market in a
4 timely fashiont
4Deposition oîfEachra O'Driscoll, Oakwood Homes C'oeporation/OHC Liquidation v. Credii Suisse FirsiBoston, June 29, 2006, Vol. 1. p. 13. 'Ibid., p. 16. 45 bid., p. 17. 4 Ibid., p. 21.ý 'Ibid., p. 18.
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In 2001 and 2002, CSFB sold and underwrote approximately $850 million in real estate montgage invesiment conduit ("REMIC") certificates. The securitization process was an integral part of Oakwood's business miodel. In addition to selling the manufactured homes bo a customer, as discussed, Oakwood also typically provided the customer with financing for the home. To provide the liquidity it needed to offer the mortgage loans, Oakwood would bundie these boans and securitize them. Typically, Oakwood would accumulate between $150 million and $200 million worth of mortgages before engaging in the securitization process and selling REMIC certificates to the public. REMICs are mortgage-backed securities ("MBSs"), a class or asset-backed securities ("ABSs"), that are pass-through securities in which mortgages are pooled, securities are issued, and investors receive a pro rata share of principal and interest payments paid by the homeowners. In particular, investors in the Oakwood-issued REMICs were receîving their share of the principal and înterest payments paid by the homeowners who purchased and financed their homes through Oakwood. Therefore, the riskiness of these securities was directly related to the credit-worthiness of these homeowners. The ability to finance the sales of its manufactured homes was critical to Oakwood's integration strategy, as it generated the liquidity necessary to continue financing the homes it was selling and enabled Oakwood to maintain its competitive position. 48 As discussed, CSFB was responsible for underwriting these REM ICs. As part of this process, Oakwood provided CSFB with inside information, including the historical loss experience of the securitized pool of assets, the repossession and foreclosure rates, and the credit quality of each home buyer. CSFB used this information bo prepare the prospectus for an impending securitization. CSFB also provided the credit-rating agencies with enough information bo obtain bond ratings for each class of the issued securities.
VII.A.2.b Role as Provider of boan Purchase Facility
In February 2001, CSFB becamne a secured lender to Oakwood via the $200 million "Warehouse
Facility." Prior to February 2001, Enterprise Funding Corporation, a Bank of America affiliate, acted as lender to Oakwood by purchasing these notes from the Warehouse Trust. In February, Bank of America decided not to renew the Warehouse Facility, and CSFB assumed the role as lender to Oakwood by purchasing the notes fromn the Warehouse Trust. The Warehouse Trust was vital to providing liquidity for Oakwood's securitization business.
48
Foothili Interoffice
Memlorandumn. Credit modification request between Oakwood and Foothili. November 26,
2002. p. F-658& 16
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This Warehouse Facility was another integral part of Oakwood's business because il provided the temporary liquidity Oakwood needed to securitize the boans. In essence, the Warehouse Facility was lilce a revolving uine of credit. As the lender to Oakwood, CSFB purchased shortterm notes from Oakwoocl. Oakwood used the funds it received from selling these notes to CSFB to originate the boans to its customers. As discussed, after accumulating a pool of mortgages valued between $150 million and $200 million, Oakwood proceeded with its securitization process, with CSFB as its underwriter. Upon receiving the funds from the securitization, Oakwood would pay off the outstanding notes purchased by CSFB. Figure 7.1 illustrates this process. Because the Warehouse Facility provided the temporary liquidity Oakwood needed to originate the boans to its customers, if CSFB did not take over the robe as lender, its securitization business would have immediately colbapsed.
Figure 7.1: Oakwood's Securitization Process 6. Pay off notes using funds fromn securitization
2MkRol VII.A as Fnancal Aviso cn
Acorint
yes Standish Oawo'
he
xctieOfcr
ro osgigte iaca
ofOakwood's Boa. ofDretos, stated
"s>DepsiionofMyls tanîs, Ok-oodHes C'iatorprto/H iudto
. rdtSis is otn
Septembe 13 200,up. 21, Mortga17
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1lknow that there was a point in lime when the board approved a specific contractual
arrangement with CSFB, but that was fairly late in the game and I have the sense that CSFB was providing advice both bo the audit committee and the board prior to that. The audit committee looked Io CSFB for some advice relating Io the model that 50 [Oakwood was] using to evaluate the repossessions and the securitizations. Jared FeI, Director of CSFB's Restructuring Group, confirmed that CSFB acted as advisor
10
Oakwood prior bo formally being engaged in that role, testifring that "prior to being engaged
[as a formai, financial advisorj, [CSFB] was working to provide ideas and to provide [Oakwood] with [CSFB's] besi advice."51 During ils relationship with Oakwood, CSFB provided financial advice and presented Oakwood wiîh certain business strategies to help the Company overcome ils precarious financial position. CSFB assisted and advised Oakwood on a number of financial and business-related issues aside from ils roles as an underwriter of securitizations and secured lender. Prior bo CSFB's formai engagement as Oakwood's financial advisor, Douglass Muir noted that [t]here were a number of occasions when people from CSFB outside the invesîment banking side, for example, perhaps fromn the investmnent banking side or the financial. advisory side came and talked to us about ideas. These were not engagements where there was an engagement letter and they were getting a fée. [CSFB would] just come down and say hey, we've been thinking about you. I-ere's an idea. Why don'î you consider this. 52 Mr. Muir aiso testified that Oakwood regularly soiicited feedback from CSFB with respect to any significant action taken by the Company: It was not unusual and, in fact, it was practice for me anytime [Oakwoodj made any substantive business decision that miglit have a material impact or even a less than material but significant impact on anything having to do with boan originations, the ABS program, loan servicing, il was my practice always to inform CSFB of what we were doing and why we were doing il and solicit feedback. So to the extent that's 53 weighing in, yeah, [CSFB] sure did. [CSFB was] asked 10 weigh in.
18
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Furtherniore, CSFB advised Oakwood on issues relating to the Comnpany's credit standards. In an attempt to reduce its defaulis rate and improve the coliateral of Oakwood's subordinated notes, CSFB consuited Oakwood regularly with respect to ways in which the Company could tigliten its lending standards. As Mr. Muir stated: So in the event that someone was thinking about making a decision that affected which customers got approved and which didn't or the termns under which boans were originated in ternis of down payment, interest rate, credit score, real property versus personal property, (Oakwoodj would oflen consuit with CSFB on that to get their 5 view on how that would affect the market's perception of the collateraiY Aside froni attempting to help Oakwood reduce its levels of defaults and repossessions in the Company's securitization portfolios, CSFB assisted the Company in other general business issues sucli as the condition of Oakwood's balance sheet. Jared Feit stated that CSFB was "initially trying to solicit [Oakwood's] business and in the process of doing that, trying to help them understand creative ways to address their balance sheet issues that we saw." 55 Furthermore, Mr. Feit stated that CSFB was "trying to provide [Oakwoodj with good ideas primarily and aiso
6 hoping to gain their trust so that they would work with us as opposed to someone else."51 In
response to being asked how CSFB 's advisory role changed subsequent to its formai engagement, Feit testified that "then of course [CSFB] shifted from an idea generation mode to more of an active role in trying to help [Oakwoodj address their needs." CSFB provided financial advice and assistance to Oakwood both before and afier it was engaged as a financial advisor. Aithougli CSFB did not begin eamning fees specific to its role as a financial. advisor until afier its formai. engagement with Oakwood, the Company stili reiied on CSFB's representations and assistance prior to that time as financial advice. In describîng the long-standing relationship between Oakwood and CSFB, Mr, Standish asserted that "certainiy there was a lot of trust, a lot of loyalty between the two entities. "'e In liglit of CSFB's advice and assistance prior to and subsequent to its formai engagement with Oakwood as a financial advisor, the parties created an extra-contractuai financial advisory relationship.
Ibid,, p. 45. " Deposition of Jared Feit, Oakwood Homes Corporation/OHCLiquidation v. Credit Suisse FirsiBoston, June 15,
54
2006, p.64. 56
17
Ibid., p. 86. Ibid., P. 89.
" Deposition of Myles Standish, Oakwood Homes CorporationQI-k Liquidation v. C'rediî Suisse First Boston,
September 21, 2006. Vol. 1, p. 47.
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VII.A.2.d
Role as Financli Advisor for Restructuring Purposes
As discussed, on August 19, 2002, CSFB became Oakwood's exclusive restructuring and financial advisor pursuant bo the Financial Advisory Agreement (the "Agreement") between Oakwood and CSFB. 59 Upon being asked as bo why Oakwood decided
10
retain CSFB as its financial advisor
for restructuring purposes, Mr. Muir responded dm1t "LCSFBj had a very, very long history with the company going back 10 1994 ...We liked them. We trusted them."6 0 According to the Agreement, Oalcwood retained CSFB as its exclusive financial advisor by fultilling te following services: " Assisting Oakwood in its evaluation of certain strategic alternatives and possible means of execution; " Assisting int preparing materials describing Oakwood's operations, its historical financial resuits, and future prospects to be provided 10 qualified acquirers; " Identifying and contacting potential acquirers of Oakwood; " If requested, rendering an opinion as bo the fairness from a financial perspective of a proposed sale transaction;, " Advising Oakwood with respect to the terms and timing of any restructuring transaction; " Assisting Oakwood in the preparation of documents that relate o bte termns of a resîructuring transaction; and " Assisting Oakwood in soliciîing tenders and consents in connection with any restructuring transaction. The Agreement between Oakwood and CSFB also stated that Oakwood was bo use its best efforts to secure a court order approving the retention of CSFB as ils exclusive financial advisor in the event of an order for relief concerning a case by or against the Company pursuant bo Tille 1l, In addition, the Agreement stated that CSFB had te right but flot the obligation bo act as dealer manager with respect bo any restructuring transaction, and CSFI3 had the right but not tite obligation to act as exclusive placement agent for Oakwood in connection with any sale of ils securities6
54 6<)
Financial advîsory services agrecement bctween Oakwood Homes Corporation, Oakwood Acceptance Corporation,
Oakwood Mobile Homes, lue., HBOS Manufacturing, LP. And Credit Suisse First Boston, August 19, 2002.
Deposition of Douglas Muir, Oakwood Homes Corporation/OHC Liquidaztion v- Credit Suisse FirsiBoston, Scptember 26, 2006. Vol. 1,p. 143. 6< Financial advisory services, agreement between Oakwood Homes Corporation, Oakwood Acceptance Corporation, Oakwood Mobile Homes, mec., UIBOS Manufacturing, LP. And Credit Suisse First Boston, August 19, 2002. 20
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According to Mr. Standish, CSFB's prîmary role as Oakwood's restructuring financial advisor was 10 prepare the Company for a banlcruptcy Miing, Toward that end, he believed CSFB was to do everything possible to avoid a free- [ail bankruptcy and to make the bankruptcy as close to a prepackaged bankruptcy as possible. H-owever, Mr. Standish also stated that CSFB believed its role included providing alternative courses of action, sucli as a sale of the Company, but that he personally saw CSFB's role as preparîng for the bankruptcy filingY Mr. Muir believed CSFB's rote as restructuring financial advisor was to be an effective advisor to Oakwood and 10 get the Company through bankruptcy successfully with minimal damage to the business. Oakwood needed to have debtor-in-possession financing arranged and a warehouse financing facility. 6 Table 7.1 provides a brief summary of the rotes perfonned by CSFB and the Cees earned for Uts services to Oakwood (I discuss, the fees received by CSFB in more detail in Section VIII).
Table 7.1: CSFB's Rotes and Fees Earned
Role Lead Securities Underwriter
Description Lead securities underwriter for about 25 securitizations; under-writing totaling more than $7.5 billion in Oakwood securities Over-secured tender 10 Oakwood's $200 million Loan Purchase Warehouse Facilîty in February 2001 _________________________ Provide ideas and advice to Oakwood regarding its overaîl financial and liquidîty condition Assist Oakwood in evaluating strategic alternatives, employing restructuring options, contacting potential acquirers of the firm, and preparing Oakwood for bankruptcy
Fees Earned At leasi $30 million
Secured Lender
*
*
Warrants of 19.9% of Oakwood's Common Stock Upfront Cee of $2.5 million Program Fee of $15 million
Financial Advisor
No direct fees earned; Role used to pitch business as a way to earn underwriîing and lending fees $1.8 million
Financial Acivisor for Restructuring Purposes
of Myles Standîsh, Oakwood Homes Corporation/OHfC Liquidation v. Credit Suisse Firçt Boston, September 21, 2006, p, 163. 63 Deposîtion of Douglas Muir, Oakwood Homes Corporation'OHC Liquidation v. Credit Suisse First Boston, September 26, 2006, p. 152.
6Deposition
21
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This section and section VIILA. i demonstrate that investment banks are in a unique position to access information concemning the Financial conditions of their clients and that CSFB's professional responsibilities with respect to Oakwood went beyond its role of underwriter. In light of the numerous roles CSFB served for Oakwood, CSFB had access to both public and private infornation about the Company's financial condition. In the following section J show that CSFB did in faci obtain public and inside information about Oakwood's financial condition and outlook. VII.A.3 CSFB Obtained Both Public and Inside Information about Oakwood's Financial Condition
Given its roles as underwriter, lender, and financial advisor, CSFB obtained both public and private information from Oakwood, credit-rating agencies, and other market analysts. Oakwood provided CSFB personnel with substantial amounts of confidential information, including the historical loss experience of the securitized pool of assets, repossession and foreclosure rates, and the credit quality of each home buyer. This information was relevant to an assessrnent of whether the manufactured housing industry in general was experiencing a significant downturn, and whether Oakwood in particular was suffering from an insolvent financial position from which it would not likely recover. As early as June 1999, Moody's and S&P rated Oakwood's unsecured senior notes as Baa3 and BBB-, respectively
-
the lowest investment-grade ratings. Any downgrade would result in a
junk bond status. Both Moody's and S&P placed the Company on a negative credit watch given that Oakwood's third-quarter resuits were anticipated to be as much as 50 percent lower than expectations. M By November 1999, Moody's and S&P had downgraded Oakwood's ratings on its corporate credit and long-termi senior debt securities to below investment grade with a negative outlooki'5 in late 2000, the credit-rating agencies continued to downgrade Oakwood's credit rating. In lowering the credit rating of the Company's senior notes from BB- to CCC, S&P viewed Oakwood as having the highest-risk junk bond rating possible before entering default status. S&P maintained a negative outlook on Oakwood based on its belief that the Company's "curTent operating loss position will continue well into [2001], due to lower volumes at manufacturing, continued pricing pressures at retail, and higher costs within its captive finance
64
CSFB New Customer Credit Review dated July 16, 1999. Document # CSFB-00250093. 6Email fromn David Caspar to Douglass Muir dated November 2, 1999. Document # CSFB-00175025.
22
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6 unit."- 6 By June 2001, Fiachra O'Driscoll noted that Oakwood "was rated Baa3/BBB- two years
ago and is now Caal/CCC." 67 In closely monitoring the actions taken by the credit-rating agencies, CSFB knew Oakwood had fallen below investment-grade status in 1999 and continued to be downgraded through 2002 to a level jusi above default j unk bond status. T
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