Dan Meyers lost a very large fortune watching First Marblehead Corp., the Boston student loan company he runs, plunge in value over the past five years. His problems just got even more expensive.
A Suffolk Superior Court judge has ruled that Meyers, who cofounded First Marblehead 21 years ago, reneged on two personal deals to borrow money so he could buy more stock and maintain his ownership stake in the fast-growing business during the 1990s.
Judge Christine Roach found Meyers acted in bad faith and would have to pay that tab - about $45 million, including interest - to an investor who bankrolled the stock transactions years ago.
Buried in the ruling is a simple lesson. It pays to settle disputes while everyone can profit. The future may not be so generous.
The Meyers award will probably be the largest to come out of any Massachusetts court since 2010. It would be the biggest in recent memory requiring a person, rather than a company or organization, to pay.
All of Dan Meyers’s First Marblehead stock is no longer worth enough to pay the $45 million he owes.
One complication: All the First Marblehead stock Meyers owns is no longer worth nearly enough to pay the judgment. Though his company stock holdings were once valued at more than $400 million, shares and stock options owned by Meyers are currently worth just $9.2 million.
Meyers also plans to appeal the ruling, which Roach issued Feb. 24, after hearing a six-day trial last year. The judge’s decision is “wrong as a matter of law and fact,’’ says Jack Falvy, an attorney for the First Marblehead chief executive.
The case has become part of a remarkable Boston business boom-and-bust story that started with two men and an interesting idea. Meyers and Stephen Anbinder were financial service industry executives who wondered how private student loans could be bundled up and turned into securities, paying interest to investors who would finance them.
That process, already common in the home mortgage industry at the time, could increase access to loans for college students and offer investors attractive yields on their funds. Meyers and Anbinder created First Marblehead in 1991 to pursue that business idea - becoming the middlemen between students and investors - and immediately tapped into a big demand.
As the company grew, its need for money and resources also increased. Les Alexander, owner of the Houston Rockets basketball team, became First Marblehead’s first outside investor, providing more cash. Later, a handful of other investors joined to buy shares of the company, which was still privately held.
Over time, the company would offer new shares for sale to existing investors as a way to raise additional funds. Meyers and Anbinder were given the chance to buy enough shares to maintain their ownership slice of the expanding business pie. The problem: They couldn’t afford it.
The solution turned out to be Robert James, a wealthy former oil executive and investor. James struck separate deals with Meyers and Anbinder that seemed relatively simple. James would put up the money for both men to buy the shares, and they would share in fruits of future appreciation when the stock was sold.
It’s unlikely any of the men anticipated just how valuable that stock would become.
With $635,000 from James, Meyers bought shares in the late 1990s that grew in value to nearly $90 million a few years after First Marblehead went public in 2003.
As First Marblehead’s stock price climbed, James told the two founders he wanted to cash out of their deals. He reached an agreement with Anbinder, but Meyers had no interest in selling. Meyers was the actual owner of the stock and nothing in the contract with James required him to sell.
James sued Meyers in 2006, alleging he had violated the spirit of their agreement. He complained that Meyers wanted to hold onto the stock because those shares were paying cash dividends that he could pocket. His lawyer pointed out that Meyers sold $86 million worth of other First Marblehead shares between 2003 and 2006 - but wouldn’t touch the stock purchased with James’s money.
The dispute finally went to trial five years later, but the value of First Marblehead shares had plunged in the meantime. Problems at the company and the global credit crisis drove the price of First Marblehead shares from a peak of more than $56 to a low of just 60 cents. The stock closed yesterday at $1.28.
Though Meyers never violated the written contracts, the judge ruled that he failed to hold up his end of an “old fashioned, trusting, gentlemen’s agreement,’’ violating the good faith and fair dealing requirements implied in their contract.
“It’s a careful decision that vindicates Bob James’s position and understanding of the agreement,’’ says Joseph Bierwirth, the attorney who represented James.
Meyers and his lawyer insisted the executive stuck by the terms of the deal, and warned the ruling set a dangerous precedent. “It would mean that no one doing business in Massachusetts could rely on the terms of the written contracts they enter into,’’ says Falvy.
Read the volumes of material produced by this case, and you won’t miss another meaning. It always pays to settle when everyone can walk away with money in their pockets.