Preston Hollow v. Nuveen judge signals intent to side with PHC

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The judge overseeing Preston Hollow Capital LLC’s lawsuit accusing Nuveen Investments of trying to choke off its high-yield loan business is close to rendering a decision that likely favors the private lender.

That’s what Delaware Chancery Court Vice Chancellor Sam Glasscock III told lawyers for both firms during a telephonic hearing Friday during which he pressed the two rivals to sit down at the table and mediate a resolution for the litigation that could stave off a formal opinion in the case.

“I am prepared to issue very shortly a decision in the case. I won't be coy with you. It's apparent to me that Nuveen's behavior is very likely to be found tortious,” Glasscock told lawyers for the two firms during a telephonic court hearing Friday. The court provided a transcript of the hearing. “I am going to issue a decision, if I need to. And I'm, as I say, prepared to do it quickly. It won't be very complimentary toward Nuveen's behavior.”

Lawyers for the firms will jointly notify the court by Dec. 24 whether mediation is a possibility. Glasscock told the lawyers to inform him whether they would like to attempt a mediation, they’ve rejected a mediation and would like an opinion or whether more time was needed to discuss the parameters of a mediation.

“Any of those three things will be good information to have,” Glasscock said.

Nuveen could not immediately be reached for comment. PHC declined to comment on the mediation effort saying it first wanted to report back to the court before making a public comment.

Two of four counts remain before the court from the litigation filed by Dallas-based PHC against Chicago-based Nuveen in February. It accuses the investment powerhouse of trying to freeze its access to capital and deals with alleged strong-arm tactics that included threatening to pull business from broker-dealers and banks that worked with PHC.

Glasscock’s revealing comments that he’s likely to conclude Nuveen’s behavior was “tortious” or wrongful offered the first indication of where he is leaning in a long-awaited decision that comes after dozens of documents, affidavits, and testimony from both sides from high-profile municipal market witnesses were submitted to the court.

The court record also included transcripts of calls between Nuveen and broker-dealer officials during which top Nuveen officials, including its head of municipals John Miller, were critical of PHC’s business model and warned firms to choose between the two.

A two-day, non-juried trial was held in July and post-trial arguments held in September.

PHC isn't asking for damages on claims of tortious interference with prospective business relations and violations of the New York Donnelly Antitrust Act. Instead, it asks the court for a preliminary and permanent injunction ordering Nuveen to cease the alleged conduct and to order Nuveen to rectify the harm already caused by withdrawing and disavowing retaliatory threats. It asks that Nuveen be directed to adopt supervisory procedures to ensure it would ban future misconduct that is alleged.

On the issue of a remedy, Glasscock said during the Friday hearing he is struggling because of the difficulty related to enforcement of any order.

“As I think Preston Hollow's counsel warned me at the post-trial argument, the difficulty in this case is the remedy,” Glasscock said. “So that is what I'm still struggling with … I still haven't determined how I put in place a proper remedy in this case that will not lead to unfortunate results and will not lead to court entanglement going forward with the behavior of the defendants.”

While the two sides had previously failed at attempts to settle the litigation, Glasscock is nudging the two to return to the table with the new revelation of his leanings providing a new sense of urgency.

“I really don't feel that this is a case that is best stalled by an imposed exercise of equitable power or lack of exercise of that power in light of what's — what has been proven here,” Glasscock said. “I think it is much more preferable for the parties to work out a way to live together in the market going forward that doesn't involve a court-imposed exercise of equity, which will undoubtedly be a rather blunt instrument, or won't be imposed at all, depending on what I find the equities of the situation are and the limits on equitable relief.”

Lawyers for Nuveen reminded Glasscock of its recent expression of a “willingness to mediate.”

PHC lawyers said on the call their decision on mediation will be partially driven by whether “we can shape the parameters of the mediation such that we would see it as a likely productive exercise.”

Glasscock’s revelations and fresh push for mediation came during a telephonic hearing held to issue a ruling on Nuveen’s recent motion to reopen the trial record and supplement it with information regarding PHC’s recent trades of its Chicago-based Roosevelt University bonds.

Glasscock denied the motion.

“The new evidence involved Preston Hollow's post-trial sale of bonds, specifically the Roosevelt University bonds. That raises the following question: Is the ex post evidence inherent in that bond sale material as to whether Nuveen's prior actions were tortious? I find that they're generally not. To the extent that they are material, they’re not sufficiently so to justify reopening the record,” Glasscock concluded.

Glasscock further noted that if he agreed to reopen the record that would require a fresh round of opinions and rebuttals further delaying an opinion over an issue he believed was not material to the case.

A PHC official said it expected the outcome. “We considered the motion deficient in several respects, which is why we opposed it. The court’s conclusion that Nuveen’s purported ‘new evidence' was too immaterial to justify reopening the trial record is well-founded,” PHC spokesman Greg May said in a statement.

Nuveen had petitioned the judge last month to reopen the trial record citing a published news article looking at the price differential on PHC’s recent sale of a portion of the $200 million Roosevelt issue it directly purchased last year and a fresh affidavit from Nuveen expert witness Edward A. Snyder, a Yale School of Management professor and antitrust expert. The 2018 deal was one of two deals described by Snyder as “central to the litigation.”

Snyder concluded after reviewing the sale price that it provided evidence of his assertions that Roosevelt paid too high an original yield on the deal, allegedly supporting Nuveen’s allegations that PHC engaged in predatory practices, which in turn would undercut the lawsuit’s legal contentions.

Snyder argued the Roosevelt bonds landed 100 basis points over comparable paper and that the recent sale equates to a gain of about 20% in about 14 months since the initial purchase.

The filing argued that the review and pricing is relevant to Preston Hollow’s claims because Preston Hollow asserts that municipal bond issuers benefit from its unique presence in the market and its ability to offer 100% placement of the debt.

In its reply, PHC called the accusations of profiteering on a recent sale inaccurate, misleading and desperate. PHC called the new “evidence” immaterial and asserted that Nuveen fails to meet the legal threshold for reopening the record as the new “evidence” must be so material that it is likely to change the outcome of the case.

PHC is represented by Morris, Nichols, Arsht & Tunnell LLP wrote and Wollmuth Maher & Deutsch LLP.

Nuveen is represented by Potter, Anderson & Corroon LLP and Winston & Strawn LLP.

The case pits the newer and smaller non-bank finance company specializing in high-yield municipal specialty finance against an institutional powerhouse.

Preston Hollow contends its model offers issuers an affordable and flexible borrowing choice. Nuveen says the firm engages in “predatory” lending practices that damage the market with weak covenants and overcharges issuers and contends its actions seeking to protect its access to high-yield deals was legal.

The case originally was brought with four causes of unlawful action including tortious interference with contract and defamation. Glasscock has dismissed the tortious contract claim and the defamation charge. The defamation charge was dismissed because it requires jury consideration and Chancery Court cases are decided by a judge. That charge has been transferred to the Delaware Superior Court but is on hold until the original case is resolved.

When PHC filed the case in late February it cracked the window open on the cutthroat competition in the high-yield municipal market. Its accusations sparked debate on the accusations of whether strong-arm tactics broke the law, broker-dealer complicity and resistance, and what constitutes pricing fairness.

Transcripts of subpoenaed calls between Miller and other Nuveen officials and banks put on display the choice Nuveen offered banks — drop any direct placement dealings with PHC or lose Nuveen’s tender-option bond and primary and secondary market trading business. The calls also lay out Nuveen’s position that it believes PHC engages in “predatory” lending practices.

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