Wednesday, September 9, 2020

No. 390: Philip Falcone and a Series of Amazing Developments

In No. 389 (August 26, 2020), I wrote about the termination of Philip A. Falcone, who had been chairman, president, and chief executive officer of HC2 Holdings, Inc. (NYSE:HCHC) from 2014 to 2020. I said my interest in Falcone arose from his involvement with a block of long-term care (LTC) insurance policies originally issued by Kanawha Insurance Company. I also said that, because Falcone was no longer connected with that block, I did not plan to write further about him. However, shortly after No. 389 was posted, I learned of a series of amazing developments that prompted me to prepare this further update.

James Corcoran
James P. Corcoran served as Superintendent of Insurance in what was then New York State's Department of Insurance from March 9, 1983 to January 26, 1990. I have known Corcoran since that time, although not well, and have always considered him above reproach.

Falcone hired Corcoran in 2015 to serve as executive chairman of Continental Insurance Group Limited (CIGL) to provide state insurance regulators, who were concerned about Falcone's admission of wrongdoing in a 2013 settlement with the Securities and Exchange Commission, with assurance that Falcone and HC2 would have no involvement in the day-to-day operations of any insurance companies HC2 might own or acquire. On April 2, 2020, HC2 terminated Corcoran without cause.

CIGL's Complaint
On May 22, 2020, CIGL and two affiliates, one of which is Continental General Insurance Company (CGIC), filed a lawsuit against Corcoran in a Texas state court. Here is the first paragraph in the "Nature of the Action" section of the complaint:
Continental brings this action against its former Executive Chairman, James P. Corcoran, for breaches of his fiduciary and contractual duties arising out of a secretive scheme to wrest control over Continental from its current sole shareholder, HC2 Holdings Inc. ("HC2"), through a campaign of subterfuge and lies. Mr. Corcoran, a longtime insurance executive, was hired by HC2 in 2015 to run its newly acquired Continental family of insurance companies. By 2019, however, Mr. Corcoran had abandoned his allegiances to both HC2 and the Continental companies he had been hired to lead and instead embarked on a campaign to line his own pockets at their expense.
The complaint includes four counts: breach of duty of loyalty, breach of fiduciary duty, breach of contract seeking damages, and breach of contract seeking injunctive relief. The full complaint is in the complimentary package offered at the end of this post. (See CIGL v. Corcoran, 395th Judicial District, Williamson County, Texas, Cause No. 20-0754-C395.)

Corcoran's Answer
On June 22, Corcoran filed an answer to the CIGL complaint. Here is part of the first paragraph in "The Facts" section of the answer (the full answer is in the complimentary package offered at the end of this post):
This lawsuit is nothing more than an ill-advised, transparent strike suit by Plaintiffs in an effort to diffuse the fact that they unlawfully terminated a whistleblower for reporting improper conduct. Corcoran was hired by CIGL in 2015 for the express purpose of providing assurance to insurance regulators that CIGL's parent company, HC2 Holdings, and its chairman, Phil Falcone, would have no involvement in the day-to-day operations of any of the insurance companies HC2 was looking to acquire... [O]ne of Corcoran's primary roles ... was to ensure that CGIC did not run afoul of any regulatory requirements by permitting Falcone improperly to become involved with and influence CGIC's operations, which conduct would subject CGIC to significant penalties, including the revocation of its certificate of authority to operate. But when Corcoran on multiple occasions raised legitimate concerns with Falcone and HC2's general counsel ... regarding Falcone's attempts to improperly influence CGIC and its officers, which concerns Falcone ignored and instead continued his improper influence, Corcoran was compelled to report such conduct to CGIC's regulator, the Texas Department of Insurance. And when Corcoran reported these facts to HC2's board of directors ... [they] forced CIGL to terminate Corcoran in retaliation. In their blatantly disingenuous effort to recharacterize their retaliatory discharge as somehow a justified business decision, Plaintiffs literally make up facts about an alleged "shadow" scheme in order to defame Corcoran and justify his termination, notwithstanding the fact that their falsehoods have gotten the better of them, since their current claims contradict CIGL's prior admission that its termination of Corcoran was "without cause."
Corcoran's Motion to Compel Arbitration
As mentioned earlier, HC2 terminated Corcoran on April 2, 2020. However, his employment agreement provides that disputes
shall be resolved exclusively and finally by arbitration in New York County, New York, in accordance with the Employment Arbitration Rules and Mediation Procedure of the American Arbitration Association.
On July 6, Corcoran filed in the Texas state court a motion to compel arbitration and for a stay of discovery and further proceedings. The briefing on the motion to compel has not yet been completed.

Corcoran's Whistleblower Complaint
The Sarbanes-Oxley Act of 2002 (SOX), which was enacted in the wake of accounting scandals such as those at Enron and WorldCom, provides for the filing of whistleblower complaints with the U.S. Department of Labor. On August 27, Corcoran filed such a complaint against HC2. Here is the first paragraph of the complaint (the full complaint is in the complimentary package offered at the end of this post):
As counsel of record, we submit this SOX whistleblower complaint on behalf of James Corcoran, who was terminated after complaining to senior management and ultimately the board of directors about material misstatements made by a publicly traded company which failed to correct those statements but instead fired him, as explained below.
CGIC's Statutory Financial Statements
During the preparation of this post, I reviewed the three most recent statutory financial statements that CGIC submitted to state insurance regulators: (1) the annual statement for the year ended December 31, 2019, and dated February 28, 2020; (2) the quarterly statement for the quarter ended March 31, 2020, and dated May 15, 2020; and (3) the quarterly statement for the quarter ended June 30, 2020, and dated August 14, 2020.

The first statement above showed Corcoran as one of the directors, but did not otherwise mention him. However, in the "Notes to Financial Statements," on page 19.18, under "Note 22 - Events Subsequent," the following statement appears:
On January 2, 2020, the Company received notification from the Texas Department of Insurance that a limited scope exam would be conducted as of December 19, 2019. The scope of the examination would focus on company operations including but not limited to corporate governance, related party activities, affiliated agreements and investment activities. The Company has complied with all request [sic] at this time.
The second and third financial statements above make no reference to Corcoran. Also, they do not appear to contain anything relevant to the subject matter of this post.

MG Capital's Report on HC2
MG Capital (MGC) describes itself as "a privately-held investment firm based in New York City that focuses on investing in complex, event-driven opportunities." MGC is a major shareholder in HC2. On April 13, 2020, MGC issued a 97-page, single-spaced report entitled "Time for a Better Board and Vision." The report is harshly critical of the HC2 board, including Falcone, and offers a replacement slate of directors. The MGC report may be found here.

General Observations
I think the CIGL Texas state court lawsuit against Corcoran is outrageous. At this time, however, I have no further comments because there are several related and important matters that are currently pending. Among them are the motion to compel arbitration, the SOX whistleblower complaint, and the ongoing investigation by the Texas Department of Insurance. I plan to follow and report on future developments.

Available Material
I am offering a complimentary 80-page package consisting of the CIGL complaint against Corcoran (25 pages), Corcoran's answer to the complaint including exhibits (49 pages), and Corcoran's SOX whistleblower complaint (6 pages). Email and ask for the September 2020 package about Falcone.