Waterton Spurred Loan-Linked Gryphon Bankruptcy, Suit ClaimsBy and
Investor claims officers let private-equity firm take control
Borrowing came at interest rates as high as 1,057 percent
A shareholder of Gryphon Gold Corp. sued some of its former officers and directors alleging that they drove the company into bankruptcy through a series of illegal high-interest loans from Waterton Global Resource Management Inc.
The suit, filed by G.R. Dawson Holdings Ltd. on March 3 in a Nevada state court, claims the directors and officers allowed Waterton to take control of Gryphon’s primary asset, a gold mine in Hawthorne, Nevada. It alleges that the people agreed to loans at usurious rates of as much as 1,057 percent, in breach of the Canadian criminal code, according to the filing.
The complaint alleges that Waterton, a Toronto-based private equity firm, while not named as a defendant in the suit, uses a business model that places “friendlies” on company boards and management that encourages using it as the only source of capital. It alleges that former Gryphon Chief Executive Officer James O’Neil came from a company that was heavily indebted to Waterton, Jipangu International Inc., and returned to that company after “the course of the debtor’s destruction was fully set in place.”
“There is no evidence that the Gryphon board did anything except intentionally allow Waterton to create agreements that Gryphon had no chance of performing and would inevitably lead to Gryphon’s loss of all value,” the complaint says. Gryphon Gold filed for Chapter 11 bankruptcy in July 2013 in Reno, Nevada.
Waterton officials, including Isser Elishis, managing partner and chief investment officer, couldn’t be reached for comment. A request for comment submitted to Jipangu Inc. for the company and O’Neil received a reply that Jipangu International was no longer its subsidiary and that the company has “no information or comments" on the suit.
Prospecting and small-cap mining companies have turned to private equity and hedge funds in recent years for financing as their industry has faced headwinds from lower prices. Waterton, an active player in private equity and mining, has two funds that raised more than $1.7 billion in 2014 and 2016 for investments, according to its website.
Private-equity firms often acts a “lender of last resort” in distressed financial situations by providing loans that banks would be unwilling or unable to make.
The suit alleges that during the bankruptcy proceeding, Waterton caused the mine to underperform in order to inhibit Gryphon from having a “successful reorganization.” Before resigning, the directors and officers failed to protect the interests of Gryphon shareholders, according to court filings.
Disputes about company valuations frequently arise in bankruptcy proceedings, Robin Schwill, a partner in Davies Ward Phillips & Vineberg LLP’s restructuring practice, who has worked on mining cases, but isn’t involved in the suit. Disagreements about whether a rate of interest is criminally high are common because there is no straightforward way of calculating it to include fees, timelines and other factors, he said.
“That will always give rise to potential arguments,” he said.
The suit alleges that as of October 2015 Waterton has caused $450 million of losses to shareholders of mining companies since it began providing debt financing in Canada in 2009. Gryphon Gold has been damaged by the loss of its entire interest in the Nevada mine, damage worth at least $50 million dollars and “perhaps hundreds of million of dollars,” according to court papers.
The plaintiff is seeking a judgement for breach of fiduciary duty with damages proven in excess of $10,000, and for punitive damages, according to the filing.
The case is G.R. Dawson Holdings Ltd. v. James O’Neil, CV17-00461, Second Judicial District Court for the State of Nevada, Washoe County.