Oct 27, 2023 - Economy

Fraud allegations could roil private equity's typical defenses

Illustration of a hundred-dollar bill being shattered by a gavel.

Illustration: Brendan Lynch/Axios

H.I.G. Capital this week sued fellow private equity firm Audax Group, accusing it of perpetrating a "brazen, massive, systemic fraud." Audax says it plans to countersue.

Why it matters: Both firms appear to be asking a court to pierce the so-called "corporate veil," behind which private equity often hides when accused of wrongdoing. If successful, it could set new precedent.

Backstory: The dispute stems from H.I.G.'s 2022 purchase of a majority stake in telecom software company Mobileum from Audax for $915 million.

  • Each firm has decades of history, billions of dollars in assets under management, and founder ties to consultancy Bain & Company.

The complaint: H.I.G. basically argues that it was presented with artificially inflated financials, including via the creation of a quasi-shell "customer" of Mobileum. As such, it believes it overpaid by around $250 million.

  • But rather than suing company management, board, sell-side banks, or auditors, it's suing Audax.
  • H.I.G. argues that Audax helped install certain company management, and thus those executives were doing Audax's bidding. Moreover, it claims that Audax was aware of the alleged financial impropriety and helped direct it. Thus, Audax is the defendant.
  • Audax, meanwhile, disputes the allegations and says it plans to countersue. We're still awaiting that document, but it may argue (at least in part) that H.I.G.'s has mismanaged Mobileum and, thus, destroyed value.

Intrigue: As part of the transaction, Audax rolled over around $100 million of equity for a 23.5% remaining ownership stake. Mobileum management and directors rolled over another $41 million for an additional 9.6% position.

  • H.I.G. says Audax effectively had no choice but to retain minority ownership, alleging that another unnamed buyer insisted on the same condition.
  • Audax, via a spokesperson, disputes that claim — saying there was another suitor that didn't require an rollover, with a bid that would have "offered higher cash proceeds in the immediate term."

The bottom line: Delaware courts typically allow the corporate veil to be pierced in cases of fraud, so long as the "corporation" was formed for the sake of establishing or furthering said fraud. In this case, Mobileum was created to sell software to telecom companies.

  • But H.I.G. is nonetheless going directly after Audax. And Audax is expected to go directly after H.I.G. Other private equity firms, and their lawyers, should pay close attention.

Read the complaint:

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