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Apollo draws fury from small-time investors who lost everything

Bloomberg logoBloomberg 4/18/2019 Sabrina Willmer

The opportunity was tantalizing: invest alongside the mighty Apollo Global Management LLC.

But what looked like a sure thing turned out to be a big loser -- and accusations are flying.

The dust-up involves CEVA Logistics AG, a Swiss company that Apollo acquired more than a decade ago.

Former executives today say Apollo double-crossed them. In a $34 million class-action lawsuit against Apollo and CEVA, they say the buyout firm looked out for its own interest and used a deft stroke of financial engineering that ended up wiping out their equity. Apollo denies wrongdoing.

“We believe the claims against Apollo have no merit, and we intend to continue to defend the case vigorously,” an Apollo spokesman said in a emailed statement.

Lost Savings

The company’s stock-buying plan ended up hurting employees like Madelein Smit, who was a vice president of global finance and accounting at CEVA in the Netherlands.

Smit says she was required to buy into the stock plan when she took the job in 2011. Eighteen months later, she lost her investment of 52,500 euros (about $68,000) -- money she’d been saving for a down payment on a house.

Interviews with 35 current and former CEVA managers, as well as presentations made to prospective executives, reveal how Apollo and CEVA persuaded, pressured or required managers to put their money in. Over the years, Apollo and CEVA told executives they could make as much as 15 times their investment when Apollo eventually took CEVA public.

“It didn’t even enter my mind that I could lose this money,’’ said Smit, who signed a document promising she wouldn’t sue over the investment. “It feels like they robbed hundreds of people by legal means.’’

Fiduciary Duty

Apollo started buying CEVA debt at a discount in 2007, according to the lawsuit and an Apollo document. That made it possible for Apollo and other big creditors in 2013 to swap debt for equity in a new company that would own CEVA. The lawsuit says the move erased the shareholders’ stake and let Apollo maintain control with minority ownership of a going concern with less debt.

CEVA didn’t go public until 2018, long after the value of executives’ shares fell to zero.

In response to the lawsuit, Apollo and CEVA said they had no fiduciary duty to CEVA executives, and that even if they did, it wasn’t breached. Apollo said it lost its equity stake, too, and that a recapitalization was needed because CEVA was close to defaulting on some interest payments. CEVA declined to comment.

‘The Toughest’

Apollo, founded almost 30 years ago by Leon Black, Josh Harris and Marc Rowan, may have angered small-time investors, who said they raided their retirement funds or mortgaged their homes to raise the money to buy shares. But its aggressive approach to protecting its investments has won the approval of its limited partners, which include pension funds and insurance companies.

Those partners were so willing to put their money behind Apollo that two years ago they poured $24.7 billion into the largest private-equity fund ever.

“In a business where people are tough negotiators, they have a reputation for being the toughest,’’ said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.

The CEVA share plan first appeared in 2006 when Apollo made the participation of top CEVA managers a condition of its acquisition, according to the lawsuit. Apollo bought CEVA that November for about $1.9 billion.

Shortly after the CEVA purchase, Apollo acquired another logistics company, EGL Inc., for $2.1 billion, doubling the debt on the books of the merged company.

Apollo says that in 2006 and 2007 managers were given the opportunity to invest since it would give them “skin in the game.”

By 2007, CEVA’s bonds had started tumbling and Apollo began buying. From 2007 to 2011, Apollo purchased CEVA bonds for an average price of 50 cents on the dollar, according to an Apollo document.

Mandatory Purchases

Meanwhile, equity purchases were made mandatory for newly hired senior CEVA executives, former employees said. Plan documents said that the managers risked losing their entire investments, but conversations with Apollo executives and CEVA officials focused on the upside, said some former executives.

“I accepted it because I wanted the job,’’ said Dominik Tichelkamp, former chief operating officer of CEVA’s ocean-freight business based in Switzerland, who signed a waiver saying he wouldn’t sue over his stock purchase.

Companies use long-term incentive plans to retain talent and ensure everyone is pushing in the same direction, said Bonnie Schindler, a consultant at Compensation Advisory Partners. But having employees put capital upfront “would be really unusual,’’ she said.

Heavy Debt

CEVA was losing money in part because of the heavy debt it carried. To cut how much it owed and help prepare for what it called “capital markets opportunities,” Apollo exchanged $1.1 billion of notes for preferred B shares in 2012, according to a company document. The firm filed for an initial public offering, but earnings tanked and eventually the IPO was pulled.

Mike McEvoy, a former CEVA director of operations in Jacksonville, Florida, said he was unaware of any problems when he was celebrated at a companywide event for 37 years of service in 2012. Soon after, McEvoy said that he and more than 1,000 other workers were fired. When McEvoy tried to get his stock investment back, he said he got little to no response.

“Never did Apollo say anything about the stock being in jeopardy,” said McEvoy, who’s now lead plaintiff in the class-action suit.

In 2013, when Apollo’s debt-for-equity swap rendered CEVA executives’ shares worthless, current and former managers say they were shocked.

“I would’ve never thought a PE firm of that size would do what they did,’’ said Sven Kirkerup, a former regional CEVA chief financial officer who’s not part of the lawsuit. “We aren’t talking about a niche PE firm in some overseas tax shelter.’’

CEVA rolled out a new share plan in 2013 that offered managers the possibility of recouping losses -- if they gave up the right to sue. Former managers, such as McEvoy, didn’t see a cent.

CEVA went public in May 2018. In November, Apollo sold its remaining stake. Taking into account management and transaction fees, the buyout firm made a profit on the deal.


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