Bond Litigation Documents

Tribal Council Recaps Bond Litigation Settlement

March 2017


Dear Tribal Members,

The Tribal Council together with the Boards of Directors of the Lake of the Torches Economic Development Corporation (EDC) and Federal Development Corporation (FDC) offer this recap of the settlement, which ends our long-standing bond litigation.

For those Members unable to attend the March 4 Membership Meeting, we are hopeful this gives you a sense of what was discussed to keep you informed. Additional background on the litigation can be found below.  Please contact President Joseph Wildcat, Sr., or Secretary Jamie Allen with questions.

Litigation Ends: The Hard Road to Settlement

The case stemmed from a $50 million bond issuance by the EDC in 2008, which was guaranteed by the Tribe. Litigation started in 2009. For years, litigation in several courts focused on the sovereign immunity of the EDC and Tribe (Tribal Parties) and related jurisdictional issues. Ultimately, it was determined that the Tribal Parties had waived their immunity and the litigation proceeded in the Waukesha County Circuit Court, a Wisconsin state court.

Initially, the bondholders’ focus of the litigation in Waukesha Circuit Court was on the Tribal Parties, but after exchanging documents and taking depositions in discovery, it became clear that other parties shared responsibility with the Tribal Parties.

In 2015, the bondholders, Saybrook (including several Saybrook-related entities and trustee Wells Fargo Bank NA) in addition to their claims against the Tribal Parties, brought new claims against the underwriter and initial purchaser of the bonds, Stifel Nicolaus & Company, Inc. and Stifel Financial Corporation (Stifel), and two law firms, Godfrey & Khan, S.C. (Godfrey), counsel to the Tribal Parties and bond counsel, and Dentons U.S. LLP (Dentons), Saybrook’s counsel. Tribal Parties brought cross-claims against Stifel and Godfrey. Stifel, Godfrey, and Dentons also asserted cross-claims against the Tribal Parties, and each other. In total, there were 56 different claims back-and-forth among the parties to the lawsuit.

Following an October 2016 bench trial on certain legal issues, the Court made some rulings in favor of Tribal Parties and Saybrook in December 2016 which changed the dynamic of the litigation. However, the Court also ruled the bonds were valid and enforceable and set a jury trial to decide all other issues in the case shortly thereafter.

The jury trial for this case, scheduled for seven weeks, started Monday, January 30, 2017. Jury trials, by their nature, are extremely costly and risky. Trial outcomes and the reactions of the jury and the judge are unpredictable. All would be influenced by highly complex and contentious issues as well as conflicting witness testimony about what took place.

Settlement negotiations proved challenging. Without at least two of the other parties agreeing to settlement terms, it was impossible for Tribal Parties to settle the case. Tribal Councils—both current and previous—suggested settlement negotiations on a number of occasions over the years, but were rejected by the other parties. Only a few days prior to the trial start date of January 30, 2017, did two of the parties (Stifel and Saybrook) start to talk. Tribal Parties then joined the settlement negotiations shortly afterward.

Tribal Council immediately turned to its financial advisors and legal teams. They evaluated the financial and legal implications of the various settlement terms being proposed. Tribal Council worked to ensure any settlement would not put the Tribe back in the same position as when the bonds were issued in 2008.

Tribal Council made it clear that a settlement would only be acceptable if it protected Tribal governmental operations. A significant payment by the Tribal Parties would be required to reach a settlement. This payment, however, would require cash from the Tribe. Despite the settlement negotiations, the case appeared headed to a trial because the Tribe did not have enough cash available to meet the required payment amount.

On the eve of trial, Stifel indicated it would consider a loan to cover part of the Tribal Parties’ settlement with Saybrook. With funding from Stifel, settlement was now possible. The Tribal Council and the Tribe’s advisors were mindful of the history with Stifel. Only after communicating directly with Stifel’s CEO, who committed to reasonable loan terms, did the Tribe and its advisors agree to consider accepting a loan from Stifel.

The possibility of a loan to cover the Tribe’s contribution toward a settlement allowed discussions to continue among the parties. Many challenges beyond compensation remained, however. Numerous complex claims, counterclaims and legal releases needed to be resolved before reaching a settlement. Saybrook, Stifel and Tribal Parties negotiated virtually around the clock for weeks to reach a mutually acceptable settlement. Several times negotiations stopped before the settlement was finally reported to the Court on Friday, February 10, 2017.

Three of the five parties were in agreement. Only the two law firm defendants had yet to settle. Three days later on Monday, February 13, 2017, Saybrook, Stifel, and the law firms agreed to settle their claims with each other and reported their settlement to the Court. The bond litigation concluded with all parties agreeing to settle without ability to appeal. As a result, the litigation ends.

Risk Eliminated: The Tribal Parties’ Settlement

As we previously shared with Members, actions against Tribal Parties included claims to repay all $50 million for bonds issued in 2008. Repayment terms also included a 12% interest rate annually. The total amount claimed against Tribal Parties in the lawsuit exceeded $92 million.

If Tribal Parties did not win at trial, the litigation likely would have led to a large judgment. That judgment would have been followed by collection efforts. Those efforts could have drastically interfered with casino and tribal governmental operations—and would almost certainly have been the subject of continued litigation.

On the other hand, if Tribal Parties did win at trial, the opposing parties were certain to appeal. This would mean millions in continuing legal costs and continued risk of a large judgment payable by Tribal Parties. Tribal Council and the Tribe’s advisors carefully considered these and other risks associated with a potential adverse judgment while negotiating.

Tribal Council continuously rejected unreasonable settlement positions taken by the opposing parties. The Tribe’s financial advisors determined an amount the Tribe could reasonably afford to pay in a settlement. All settlement scenarios were evaluated against the priority of protecting governmental programs and operations.

Tribal Council ultimately agreed to pay $27 million to settle the bond litigation. The Tribe paid $4 million in cash. The remaining payment of $23 million has been made with a loan financed through a Stifel bank subsidiary. The bank subsidiary had no connection to Stifel investment bankers who underwrote the bonds.

Most importantly, without a loan from Stifel, bond litigation would have continued. It was certain no other lender would have taken the risk to loan the Tribe the amount of money needed to settle while in litigation (or after a judgment was entered against the Tribe). This would mean the Tribe could not afford to settle, leading to more litigation, more legal cost and ongoing uncertainty.

Even when the Tribe's litigation-related expenses over the past eight years are considered, the settlement cost the Tribe $12 million less than it would have cost the Tribe to pay off the original bond deal according to its terms (approximately $75 million to pay off the bond obligations v. approximately $63 million to pay the litigation costs, the settlement loan and previous payments made on the bond). Moreover, if the Tribal Parties had lost at trial and the Court entered judgment for the entire amount claimed by Saybrook, the amount owed by the Tribal Parties would have vastly exceeded their ability to pay, making financing virtually impossible, risking loss of control over the casino, and jeopardizing the Tribal government. The Council was unwilling to take these risks and determined settlement was a better option than proceeding with the trial.

Tribal Council and the Tribe’s advisors negotiated loan terms so the Tribe can refinance the loan with no prepayment penalty. As the Tribe makes loan payments, the likelihood increases that other lenders will be willing to refinance the Stifel loan at a lower rate than the agreed upon 7%. The loan from Stifel was crucial to achieving a settlement. That settlement creates a manageable outcome for the Tribe.

Please remember, until all sides agreed to settle, many perceived the Tribal Parties were entirely at fault. Only after settlement—when the opposing parties agreed to fund $48.5 million of the settlement—did it become clear to those not involved in the case that there was shared responsibility in this matter. This includes potential future lenders.

Opposing Parties’ Responsibility

The settlements paid Saybrook $75.5 million. Stifel and the law firms paid $48.5 million. The Tribe contributed $27 million to the settlement. The amount paid by Stifel and the law firms accounted for nearly two-thirds of the total settlement. The amount paid by the Tribe will be instrumental in efforts to restore the Tribal Parties’ reputation in the financial community.

In the end, all parties to the litigation contributed financially to reach an agreed upon settlement. Tribal Council instructed its advisors to ensure opposing parties paid their fair share of the settlement. With the settlement terms, the Tribe’s reputation, as it pertains to the bond litigation, begins to be restored. The fact that opposing parties were willing to settle for these terms indicates all parties to this litigation shared responsibility for what took place in 2008. This will be important to the Tribe restoring working relationships with financial institutions and other critical organizations.

Manageable Outcome: A Difficult Decision, But Clear Road Ahead

Tribal Council was very concerned with the financial commitment necessary to settle this matter. They met many times with the Tribe’s advisors to evaluate alternatives. In the end, Tribal Council weighed the certain benefit of ending litigation by paying $27 million against the potential cost of losing at trial for two to three times that amount.

Even factoring in litigation cost and payments made to date by the Tribe, the settlement amount represents the lowest-cost option for the Tribe.

The Tribal Council considered how best to protect casino and Tribal government operations. If the Tribe won at trial, it was almost certain opposing parties would appeal. And future trials also were possible. The litigation—and the lingering cloud hanging over the Tribe—would continue and cost millions more in litigation and advisory-related fees.

Tribal Council also considered the risks of losing at trial. After the Court determined that the bonds were valid and enforceable, the only remaining defense to the bond debt was based on allegations that Stifel, along with Godfrey, were responsible for leading Tribal Parties into a bond deal that Tribal Parties did not understand and could not afford. The case hinged on convincing the jury that Stifel and Godfrey should repay bond funds the EDC promised to repay.

The opposing parties planned to present the following case: the Tribal Parties borrowed the money, they received it and spent it, so they should pay it back. Their experts were going to testify that the Tribal Parties could have afforded to repay the bond debt, but just decided not to pay it—hiding behind legal technicalities while using the casino and hotel cash for Tribal programs and per cap distributions to members.

The Tribe’s trial team was prepared to address this mischaracterization, but feared it would be an uphill battle based on a number of factors. Focus group research indicated that many potential jurors believed that if you borrowed money and spent it, you should pay it back. More specifically, potential jurors indicated—even with inappropriate conduct by opposing parties—the pre-existing debt should be paid back by the Tribe. In addition to jury risks, many serious challenges for the Tribal Parties existed with this case. These included conflicting versions of events offered by witnesses about the history of the transaction, as well as inconsistencies in documents that called into question the Tribal Parties’ theory of the case.

Tribal Council felt strongly that the Tribal Parties had been poorly represented in the original bond transaction. Proving this at trial, however, and convincing the jury to shift the burden of the bond debt to other parties was far from certain. Understanding these uncertainties and the catastrophic impact of a potentially large judgment against the Tribal Parties, Tribal Council and the Tribe’s advisors worked toward reaching a reasonable settlement and a manageable outcome for the Tribe.

Settlements are compromises—and this settlement is no exception. No one is “happy” about the Tribe’s $27 million share of the settlement. When weighed against the risks, however, Tribal Council chose the settlement option versus continuing litigation. The settlement also proved that other parties had responsibility in causing financial hardship upon the Tribe.

The Tribe is now free to rebuild trust with Members and reestablish trust with the financial markets. Tribal Council has consistently worked to ensure Members and operations are protected. Going forward, our focus centers on maintaining daily operations and overall health of our Membership.

Tribal Council appreciates the input and support of Members during this challenging time, and we encourage our Members to ask questions. This is an extremely complex matter with many twists and turns over many years.

Please contact President Joseph Wildcat, Sr., or Secretary Jamie Allen with questions. Additional background on the litigation can be found below.

Thank you for your time and consideration.

Relevant Documents:

        

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