Macquarie found to commit fraud in misrepresenting traffic forecasts

Link to article here.

Of course, Toll Road News defends toll shysters, Macquarie, but common sense would side with the Judge on this one. It’s FRAUD! Just because wrongdoing has become commonplace doesn’t make it any less FRAUDULENT!

Bankruptcy reorganization for American Roads not as harmonious as seems
July 26, 2013
By Peter Samuel
Toll Road News

2013-07-26: American Roads LLC operator of the Detroit Windsor Tunnel and owner of four toll
bridges in Alabama will be owned by a major creditor Syncora Guarantee Inc if the 'prepackaged agreement' between its current owner Alinda Capital Partners and creditors is accepted by the US Bankruptcy Court. Syncora was one of nine other creditors that filed in favor of the American Roads reorganization plan in US Bankruptcy Court this week. The plan pays off eight of the creditors. And the transfer of ownership to Syncora satisfies Syncora's claims it says in the filings.

Sounds all very harmonious!

Except behind the look of a happily agreed joint filing under Chapter 11 is a fierce legal war that Syncora has been waging against Alinda and Macquarie in the New York state courts. American Roads was originally a creation of Macquarie in October 2006 - the financing which loaded it up with the debt now of $830m it is unable to service.

It was almost immediately spun off to Alinda by Macquarie.

In the little publicized litigation in the State Supreme Court of New York Syncora alleges that the financing and spinoff by Macquarie involved fraud and misrepresentation, in particular that Macquarie had a secret and improper relationship with Australian traffic and revenue forecaster Maunsell Australia Pty Ltd (since absorbed into Aecom) to produce unrealistically high traffic and revenue forecasts.

"Success fees"
Syncora was solicited for insurance for complex borrowing involving interest rate swaps, the insurance being used to get 'Aaa' ratings for $500m of backloaded bonds. Syncora agreed in December 2006 to provide the financing insurance, it claims, on the basis of fraudulent misrepresentations of the objectivity of Maunsell's traffic and revenue forecasts. 

The case is summarized by State Supreme Court judge Melvin Schweitzer in a 29-page judgment filed July 1. It says that an undisclosed scheme of "success fees" from Macquarie to Maunsell incentivized it to boost up traffic forecasts.

Judge Schweitzer's rendering of the allegation: "These under-the-table success fees amounted to additional millions of dollars per transaction, and were paid in connection with the American Roads transaction as well as many others. None of this was disclosed to Syncora which was instead led to believe that Maunsell was an objective adviser on whom it could, and did, rely.


The undisclosed under-the-table payments involved "conflicts of interest tainting Maunsell's work," Syncora claimed.

Syncora alleged that Maunsell's forecasts were "specifically engineered to ensure that the Macquarie Group could justify the overpriced bids it placed in acquiring infrastructure assets such as American Roads."

Macquarie responded that the Maunsell forecasts were presented as projections only and that they specifically warned of circumstances in which actuality would be below projection. It was well established in the courts that "speculation and expressions of hope for the future do not constitute actionable representations of fact."

The judge ruled in the case on a motion by Macquarie to dismiss it that Syncora had sufficiently strong arguments and evidence to go to trial. He ruled that Maunsell's erroneous forecasts weren't the heart of the case. That lay in the concealment of compensation arrangements with Maunsell, its conflict of interest and potential bias.

Schweitzer continued: "Syncora argues, and the court agrees, that the undisclosed conflict of interest under which Maunsell operated, in addition to secret success fees that Maunsell was paid... do amount to a material misrepresentation or omission of fact."

"Plainly actionable as fraud" - Judge
This, the judge said, was "plainly actionable as fraud."

Judge Schweitzer says in his ruling that Macquarie is accused by Syncora of "promoting inflated projections that Maunsell had prepared on promise of undisclosed success fees (so) Macquarie could quickly acquire asets around which to build an entire business model that generated a cascade of fees so long as they could keep the assets afloat through the issuance of debt."

Schweizter: "It is the court's opinion that Syncora alleged more than sufficient facts from which to infer that Macquarie acted with knowing fraudulent intent."

Syncora alleged that Macquarie wanted the assets bought at inflated prices so it could move them between funds and earn fees for the various funds on each transfer.
Macquarie argued in rebuttal that Syncora was a sophisticated investor and that it was capable of critically reviewing the Maunsell projections which had described the assumptions and methodology used. 

On the "under-the-table" fees paid to Maunsell, Macquarie acknowledged they that they paid "success fees" to the traffic and revenue forecaster. But they said Syncora never asked about Maunsell's compensation arrangements, so Macquarie could not be accused of any misrepresentation on this score.

Again Judge Schweitzer ruled against Macquarie saying that status and incentives of consultants is customarily covered by the bond prospectus or bond agreement and that Macquarie had a duty to disclose its payment method to Maunsell, and Maunsell's incentives to help close a deal. 

On every point the Judge ruled for Syncora saying it has the basis for a claim of fraud and compensation for damages against Macquarie. 

No comment
We can't get anyone in the case to address the relevance of this to the emergence of the prepackaged deal in Chapter 11 bankruptcy. But the deal looks mightily like a settlement of the NY Supreme Court litigation reached from Syncora's strong bargaining situation after Schweitzer's strong ruling in its favor earlier in the month.

Since Alinda has ceded control of American Roads to Syncora the State Supreme Court case now seems, as the lawyers say, "moot."

COMMENT: We find the notion that Macquarie deliberately and systematically overpriced its bids for greater fees earnings implausible. To the contrary the group as a whole has suffered large losses, and damage to its reputation, from bids that have proven to be over high. Potential losses on the Indiana Toll Road and Dulles Greenway for example would seem to vastly exceed any inflated fees income. But unfortunately for Macquarie its partner in the American Roads financing Syncora came to believe it had been 'had' by Macquarie and seems to be succeeding in persuading the courts of that. It clearly should have disclosed its "success fee" payments to the forecaster. Secrecy of this kind usually proves unwise - editor.

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