A Texas-Size Feud for Sam Wyly

A lawsuit filed by the manager and co-chairman of one of his new hedge-fund ventures accuses the billionaire of business extortion

It was launched only last November, but already Dallas-based billionaire Sam Wyly's fledgling corporate-governance hedge fund is embroiled in litigation that could lead to its breakup. BusinessWeek Online has learned that in April, co-chairman of the fund and former Carl Icahn protege Russell D. Glass filed a lawsuit against the Wyly-controlled investment firm that had financially backed the entity, Ranger Partners.

In the civil complaint, filed in Delaware Chancery Court, Glass accuses Wyly's Ranger Entrepreneurs, L.P., of, among other things, breach of fiduciary duties, breach of contract, and "business extortion." Glass claims in the suit that Wyly and his entities attempted to get the financial upper hand over Glass in the joint venture the parties had formed to create Ranger Partners and other funds. The suit seeks, among other things, at least $200 million in damages and court enforcement of the original joint venture agreement.

PROXIES AND PAYOUTS.

  Glass could not be immediately reached for comment. One of his attorneys, Joel Friedlander, declined comment. K. Scott Canon, president of Wyly's Ranger Capital Group, a limited partner of Ranger Partners, says: "In our opinion, the lawsuit he [Glass] has initiated does not have merit and is a clear detriment to investors." Wyly was not available for comment.

Wyly, 68, amassed a fortune over the past 40 years with deft business dealings in everything from oil and gas to restaurants to retail. His biggest payday came in March, 2000, when he simultaneously sold his two software companies -- Sterling Software and Sterling Commerce -- for $4 billion apiece to SBC Communications and Computer Associates, respectively. Wyly was thrust into national spotlight after he led two high-profile proxy battles with Computer Associates in 2001 and 2002. The battle ended last July, when the software giant agreed to pay him $10 million to drop the fight and, among other things, not mount another proxy contest for five years.

Since then, Wyly has quietly been trying to help launch a family of four hedge funds, including Ranger Partners and an arbitrage fund launched May 1.

Wyly certainly knows a thing or two about the hedge-fund business. In 1990, he co-founded Maverick Capital. With about $8 billion in assets under management, Maverick is now the third-largest, and one of the most successful, hedge funds, according to Institutional Investor. For years, Maverick has been run by former Tiger Management money manager Lee Ainslee and Wyly's son, Evan. In 2001, Wyly gave up his ownership stake in Maverick, which has no ownership stake or management role in the Ranger funds.

"SUBSTANTIVE CHANGES."

  Glass, however, contends that Wyly lured him away from his post as president and chief investment officer of Icahn Associates in early 2002 to help start Ranger Partners and other funds. The enticement, he alleges in his lawsuit, included a $10 million investment by Wyly's Ranger Entrepreneurs on Glass' behalf, plus another $3 million investment for Glass in a separate Wyly-controlled investment vehicle.

According to Glass' suit, the deal quickly began unraveling. In mid-2002, he alleges, after he had developed the corporate-governance fund, one of Wyly's representatives "threatened to divert the index-fund opportunity" to a separate Wyly investment entity. In addition, that representative, who isn't identified in the suit, threatened to renege on Wyly's promise to pay Glass for getting Icahn Associates on board unless Glass agreed to "substantive changes" in the original agreement that were "highly advantageous" to Wyly and his associates.

Having resigned his position at Icahn Associates and "desperate to keep [the fund] afloat," Glass contends that he "reluctantly" gave in to Wyly's demands, which cost him, among other things, the $4 million he was to have gotten if he had resigned under certain conditions under the original terms of agreement." In another claim, Glass alleges that in the second half of 2002, he developed an arbitrage fund for the joint venture. But in the winter of 2002/03, Wyly's representatives demanded that Glass hire Wyly's marketing firm, Ranger Capital Markets, in perpetuity to market the fund to investors, Glass claims in the suit. Glass says he was given two hours to agree to the demand and, when he didn't, Wyly yanked the arbitrage fund from the joint venture and pursued it independently in another of his investment vehicles.

CONFLICTING ACCOUNTS.

  Further, Glass alleges that, at a meeting on Mar. 7, 2003, Wyly threatened to file a lawsuit accusing Glass of fraud, and also to send fund investors a letter expressing that he was "not comfortable continuing" his associations with Glass.

Glass contends Wyly told him all that could be avoided if Glass further altered terms of the agreement that were favorable to Wyly. Then, in late March, Glass says Wyly's entities proposed a further restructuring of the joint-venture agreement that would have allowed Glass to avoid litigation.

The complaint describes the threatened lawsuit and a draft letter to investors as "a crude form of business extortion to attempt to exact for themselves more favorable terms than are available" under the joint-venture agreement.

Ranger Capital's Canon denies Glass' allegations. He says Wyly and his entities are still in settlement talks with Glass "trying to take steps to allow investors to get their capital back or stay in the fund," if Glass should continue managing it. Ranger Partners has about $180 million under management, says Canon.

Canon claims that Glass is the one who "misrepresented" himself to Wyly, other limited partners, and to investors. Glass "represented himself to be an active value investor," but most of Ranger Partners' investments were "passive," contends Canon. And, Ranger Partners' largest position, Canon says, was in HealthSouth Corp. bonds.

TALE OF THE TAPE.

  HealthSouth and its former CEO Richard Scrushy are facing civil charges by the Securities and Exchange Commission, which alleges that the chain of rehabilitation, diagnostic-imaging, and outpatient-surgery centers inflated reported earnings by some $1.4 billion since 1999. Criminal charges have also been brought against several former HealthSouth executives for alleged accounting fraud.

"In our opinion, skilled research should have been able to detect" problems at HealthSouth, says Canon. Canon also alleges that "in the greatest personal violation of our trust, [Glass] secretly taped phone calls with Sam [Wyly], Carl Icahn, and possibly others." He adds: "Take all this, and in our opinion this creates a breach of fiduciary duties [on Glass' part]."

Canon says Ranger Partners is "at a complete standstill" until the lawsuit is settled, either in or out of court. He says Glass is still with Ranger Partners "but he's not managing any funds." Given how nasty this fight has turned, it might be a while before Glass gets that chance again.

By Stephanie Anderson Forest in Dallas

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