According the suit, Hurley told Milstein he would look for another investor. Milstein reversed course yet again, the lawsuit claims, viewing Hurley’s efforts “as a challenge to his authority.”
At about that time, certain changes to the way FN structured transactions made it far more complex for the young firm to complete deals. In 2008, Milstein required FN to reclassify all its investments in RIA firms as debt, not equity, according to the complaint. The key motivation appears to be an effort to satisfy regulatory capital requirements, though that is not clearly spelled out. The document maintains that the net result of this change was to dramatically reduce the number of firms FN could invest in from 18,000 to 4,000.
While FN and much of the asset-light, RIA industry recovered relatively quickly from the financial crisis, many banks did not. The lawsuit maintains EB experienced serious difficulties due to bad investments in mortgage-backed securities and other underperforming investments.
Cited in the complaints are a 2009 story from Crain’s New York Business entitled, “Meet New York’s Wobbliest Bank,” about EB and another 2010 Crain's story claiming EB had yet to repay its TARP loan. Hurley’s lawyers maintain such negative publicity may well have scared RIA firms from doing deals with FN.
To deal with EB’s purported financial woes, Milstein diverted Hurley and other FN personnel to projects that would strengthen EB’s balance sheet. From EB’s viewpoint, this may have made sense. In the late 1980s, Hurley took a leave from Goldman Sachs’s financial institutions group to work at Resolution Trust Co. created to address the S&L crisis of that era. Utilizing Hurley's experience in the distressed lending world may have helped EB but it also could well have slowed FN’s growth.
Restructuring of EB’s position in FN continued. With Dodd-Frank’s increased tier 1 capital requirements looming, the lawsuit says Milstein instructed Hurley to find a minority investor for FN so EB could deconsolidate its balance sheet and generate capital by reducing its stake in FN below 50 percent. Virgo Investments, a private equity firm, bought the stake at what the lawsuit contends were “absurdly favorable” terms requiring them to receive 200 percent of its capital investment before any other distributions to EB. The investment also valued FN at $160 million, or 40 times cash flow.
Between 2011 and 2015, an “uneasy détente” existed between EB and FN. In December 2015, Hurley first became able to exercise his forced sale right. Convinced he had EB’s support, he began to solicit other bidders.
“Unbeknownst to Hurley, the prospect of his exit from FN triggered a multiyear scorched-earth campaign by defendants to sabotage the sale process and wrest control of FN at a price far below its fair market value,” the complaint states. “Insidiously, defendants also sought to erode the industry-leading reputation and relationships Hurley had cultivated, thereby preventing Hurley from competing with FN after his exit. As communicated by their longtime associate, David Seldin, during August 2017, Milstein and Friedberg wanted to ensure that Hurley “w[ould] never be able to raise capital again.”
Eventually, EB and Hurley would go to arbitration, after which awarded Hurley over $1 million in reimbursed attorneys’ fees.
The lawsuit then charges that Hurley’s “exercise of his Forced Sale Right should have triggered a process by which the parties selected a third-party investment banker to solicit potential bids in an orderly, value-maximizing fashion. Instead, it triggered a flurry of attempts by EB and Milstein to produce either a failed sales process or a very low price for FN.”