Gary Chodes, founder of Oasis Financial, is suing D.E. Shaw, a $50 billion hedge fund, claiming that it sold Oasis in a hurry for less than what it was worth.
In 2007 the hedge fund used D.E. Shaw Composite Side Pocket to purchase a majority stake in Oasis. It then sold the company to private equity Parthenon in 2016. Side pocket funds are used by hedge funds to make investment that are outside their strategy and these investments usually have a longer timeline. These funds are not meant to be long-lasting products and often close once an investment is completed.
Chodes claims that equity holders in the side pocket fund improperly received payouts from the deal and he got nothing, even though he still had a chunk of equity and an Oasis board seat. The lawsuit was filed in February 2018, and currently, a trial date is set for November 18. The lawsuit states that D.E. Shaw's Side Pocket investors received $7.2 million for its equity stake in Oasis, while Chodes, who still held equity, despite being relieved of his CEO position in 2013, did not.
The side pocket funds like Two Sigma, Tiger Global, Coatue, and Point72 have built out venture capital-like arms to evaluate investments outside the public sphere. The lawsuit is an example of the difficulties in evaluating private companies. While valuations for unicorns like WeWork are now under scrutiny, private companies at all sizes can be tough to peg.
A growing number of asset managers, from Fidelity to D.E. Shaw look for higher returns they have gotten into the business of making private investments in less traditional manners. Oasis is a key player in the litigation finance industry, an area that alternative asset managers like hedge funds have turned to for returns. The asset managers will lends money to people looking to sue corporations or other individuals, and receives a portion of whatever settlement is won.
Oasis had reportedly underwritten more than 100,000 lawsuits as of 2016, and lawsuits funded by third parties are expected to grow by 20 to 30 percent annually the next few years, according to Vannin Capital. The lawsuit claims that prior to the sale to Parthenon, Raymond James bankers hired by D.E. Shaw pegged Oasis' valuation at more than $140 million — roughly double what it ended up selling for. Sources familiar with the deal also said that Chicago-based private equity company GTCR made a preliminary bid for Oasis that was between $105 million to $125 million.
"Notwithstanding having market information and professional analyses available to them showing even better economic times in 2017 (which they considered for the good of their own companies but not for Oasis), the defendants pushed for the immediate sale of the Oasis Companies to Parthenon for an undervalued price and ignored obvious alternative options," the lawsuit reads. The lawsuit claims that the D.E. Shaw Side Pocket owning the majority stake had become a "zombie fund" that held onto its assets longer than it had wanted, and that the hedge fund wanted to be done with the side project.
Sources close to the defendants said the allegation that equity holders were treated differently will be challenged during the litigation and that Chodes lost his board seat when he was removed as the CEO of Oasis in 2013.