By Julie Reynolds
It’s become clear in recent months that Alden Global Capital — an ambulance-chaser of a hedge fund whose self-proclaimed mission is to “invest in distress” — profits from human misery through two kinds of investments: buying up legitimate but struggling companies and investing in firms mired in accusations of fraud, corruption and environmental violations.
In the first case, Alden buys up companies that are struggling to survive, but instead of rebuilding them, it strips these firms of all assets and resources while extracting maximum profits for Alden’s secretive circle of investors.
Then there’s the second category of Alden’s preferred investments: buying into ethically sketchy companies dogged by claims of illegal pollution, corruption or fraud. Alden has invested in an extraordinary number of such companies around the world, as we’ve reported.
Alden’s $83 million investment in the Mexican housing firm Homex — accused last year by the U.S. Securities and Exchange Commission of committing the biggest fraud in Mexican history — is a classic example of the New York hedge fund’s long-running practice of investing in ethically challenged businesses that destroy lives.
Homex’s rise and fall was the subject of a recent — and scathing — Los Angeles Times exposé titled “The Wall Street-backed developer that reaped billions, went bankrupt and left slums across Mexico.”
Besides defrauding investors by allegedly cooking the company’s books to the tune of $3.3 billion, Homex’s developments “were riddled with infrastructure and construction defects, and residents abandoned them by the thousands, helping trigger the collapse of the housing industry,” the LA Times reported.
“Today, with its broken-down, blighted and half-finished developments littering cities across Mexico, Homex is one of the country’s most despised companies.”
When Homex collapsed, a New York bank moved in to foreclose on those homes not already abandoned.
As the scandal unfolded, scant mention was made of Alden’s role in picking up the pieces of the disgraced development firm, whose practices left thousands of working-class Mexicans homeless and destitute.
A group of Homex shareholders recently filed a class-action lawsuit in a Southern California federal court, accusing the company’s top executives of engaging “in a multi-billion dollar fraud to create and sustain the illusion that Homex had built and sold tens of thousands of homes annually that, in fact, it had neither built nor sold.”
Like the SEC’s complaint, the suit alleges that Homex had falsely overstated its revenue by $3.3 billion U.S. (Alden was not named as a defendant in the suit).
The SEC began investigating Homex in 2012 and according to its claim, the company “systematically and fraudulently reported revenue from the sale of tens of thousands of homes annually that it had neither built nor sold. Homex personnel perpetrated this fraud by manually entering false information into its internal accounting and financial systems.”
To be clear, most of these practices took place before Alden got involved. But not all — the SEC complained that Homex continued to misreport its finances in 2015 and beyond, after Alden was key among the group of investors who bailed out and took charge of the bankrupt firm.
And as the Southern California lawsuit alleges, Homex executives even continued to use falsely reported data in the firm’s bankruptcy restructuring. According to the suit, “this (false) model played a central role in the company’s business plan for post-bankruptcy operations.”
According to a Mexican government document detailing Homex’s restructuring, Alden in 2015 invested what today would be valued at $83 million in U.S. currency.
The document lists a number of Alden’s funds as Homex investors: “Alden Global Capital LLC, in its capacity as investment manager of Alden Global Adfero Bpi Fund Ltd, Alden Global Opportunities Master Fund, LP, Dungan Partners, LP Turnpike Limited, and Wilshire Institutional Master Fund II SPC-Wilshire Alden Global Event Driven Opportunities Segregated Portfolio.”
Perplexingly, Alden and the seven other top investors who bailed out the firm did not demand the resignations of its top executives — the very men accused of cooking the company’s books. This stunned Mexico’s financial press, which reported that smaller shareholders were furious that the team accused of causing Homex’s downfall was still in place.
Last week, shareholder plaintiffs notified the federal court in Southern California that serving their lawsuit’s defendants in Mexico will likely take up to six months under Hague Convention rules for suing people in foreign countries.
What’s not clear is when or if Alden has sold or otherwise pulled out of its stake in Homex, since the investment was never reported in the first place by the privately held hedge fund.
Alden’s SEC filing last week of its investments in publicly traded companies lists only three firms, all of them in financial straits: the Fred’s Pharmacy chain, General Electric and ParkerVision, a tech firm with “negative earnings.”
All of these investments are part of Alden’s pattern of profiting from struggling companies, beleaguered industries and even the currencies of deeply indebted countries.
A $38 million buying spree on the heels of layoffs
As to that first category of Alden’s investments — honest companies struggling to survive — those include the scores of local newspapers that are part of the Digital First Media chain. Just this month, Alden/DFM bought yet another bankrupt newspaper, snagging the winning bid of $12 million for the Boston Herald.
The purchase — whose terms include eliminating at least 65 Herald staff positions — followed an aggressive round of buyouts and layoffs across the DFM chain that caught editors by surprise after a profitable year of meeting financial goals.
The timing has made some wonder if the layoffs were part of a plan to raise the $12 million Alden needed to buy the Herald without dipping into its own investors’ pockets.
Apparently feeling flush with cash even as the layoffs continue, Alden on Feb. 16 put in a $26.2 million bid to buy Aerogroup, the bankrupt manufacturer of Aerosoles shoes. Final approval of the sale by a federal judge has been postponed, awaiting review by creditors who complained that Alden’s purchase agreement and other documents were not released until “shortly before the hearing, and only hours after the auction,” according to Law360.
EXTRA: A Homex-Alden timeline
In 2002, Chicago real estate investor and former newspaper mogul Sam Zell invested in Homex, an obscure Mexican construction company that also built prisons. Homex grew exponentially, expanding worldwide, and its valuation grew from $100 million to $3 billion.
In 2008, Zell sold his shares, though he would later extend a line of credit after Homex’s restructuring.
By 2013, the company was struggling and raised 4 billion pesos by “selling two of its prisons to a consortium part-owned by Carlos Slim, a telecoms magnate.” (source: The Economist)
In 2014, the company declared bankruptcy. Bank of New York Mellon, representing creditors, foreclosed on thousands of homeowners.
In April 2015, Alden became a lead investor in Homex’s “distress,” with a stake in Mexican UDIs (a special investment currency used in that country) valued today at around $83.6 million, according to Mexican government documents.
By October of that year, the bankruptcy restructuring was finalized, with Alden as one of the top investors.
By November 2015, Homex was re-admitted to the Mexican Stock Exchange, even before the new investors completed their promised influx of capital. Mexico’s financial press and smaller creditors were dismayed that the investors, who included Alden, kept Homex’s executive team in place.
Also in 2015, housing whistleblower Humbertus Perez successfully stalled foreclosures at a Homex development. Then, in November, he was arrested on what observers across the region decried as trumped-up charges (burglary and brandishing a firearm). “A representative of the U.N. High Commissioner for Human Rights visited Perez last year, expressing concern that Perez was being persecuted for his defense of human rights,” the Los Angeles Times recently reported.
In 2016, the SEC accused Homex of committing the largest fraud in Mexican history. Allegations include reporting nonexistent sales of 100,000 homes.
In its 2017 lawsuit, the SEC says Homex continued to file false data reports to the U.S. in the years since Alden took on its lead investor role.