Woodbridge Bankruptcy: “Plan to Fail or Fail to Plan”
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The Chapter 11 bankruptcy filing of the Woodbridge Group of Companies and dozens of its subsidiaries (Woodbridge) astounded its investors and the real estate investment community. When the truth emerged, thousands of investors, primarily senior citizens in California and Florida, turned out to be victims of a Ponzi scheme.
No firm expects to be bankrupt nor an investor relations (IR) professional wishes to deal with the chaos amid bankruptcy. Yet, the unexpected comes unexpectedly, so “plan to fail or fail to plan” is all up to us.
Background
According to court documents, high-end real estate developer Robert Shapiro founded Woodbridge in 2012. Through about 236 Woodbridge entities he “raised over one billion dollars from approximately 10,000 investors—as either Noteholders or Unitholders—and used approximately $368 million of new investor funds to pay existing investors—a typical characteristic of Ponzi schemes.”
On Dec 4, 2017, Woodbridge filed for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware. Rick Archer of Law360.com, a LexisNexis company providing computer-aided research on legal, business and risk management, reported on Jun 5, 2018 that Woodbridge sought reorganization “with about $1.2 billion in liabilities but only about $12 million in available cash” following an SEC’s investigation into the company during the past year.
A closer look
According to court documents, Shapiro deceived investors by telling them that “their money would be used to make high-interest loans to unrelated, third-party borrowers,” which were actually disguised affiliates of Woodbridge. Investors received notes issued by Woodbridge that were not lawfully backed for recovery as Shapiro had claimed. Shapiro also used investors’ money “to pay approximately $64.5 million in commissions to sales agents who sold these fraudulent ‘investments’ and … to pay at least $21.2 million for Shapiro’s personal benefit.”
The SEC subpoenaed on Woodbridge on Aug 16 and 17, 2017, then sought relief when Woodbridge failed to respond by the August 31, 2017 court ordered-deadline. The SEC was investigating whether Woodbridge was “operating a fraud on its investors” in relation to over $1 billion of investor funds raised by selling unregistered securities from 2012 through 2017.
Dawn McCarty of Bloomberg Business, one of the world’s leading financial news sources, noted in her article on December 4, 2017 that in a company statement, Woodbridge said Shapiro resigned on Nov 30, 2017 but would continue to serve as a consultant with the pay of $175,000 per month.
Additionally, court documents alleged that Shapiro “hired outside managers” to take on Woodbridge’s operations under his control “on or about December 1, 2017,” including commencing the bankruptcy filing.
On Dec 4, 2017, Woodbridge filed for Chapter 11 seeking restructuring of $750 million in debts. On December 20, 2017, the SEC sued Woodbridge for its fraud related to Ponzi schemes.
A number of articles published by Law360.com and The Wall Street Journal pointed to several court lawsuits filed against Woodbridge by creditors, noteholders and unitholders who objected to Woodbridge’s bankruptcy claims and its proposed liquidation plan.
Court documents indicated that on Jan 23, 2018, Woodbridge reached a settlement with the SEC, creditors, noteholders and unitholders in forming a new board of management that has “no ties whatsoever to Shapiro.” The new board includes the SEC’s designee Michael Goldberg, who was “unanimously selected to be the Liquidation Trustee by the Unsecured Creditors’ Committee, the Noteholder Committee, and the Unitholder Committee.” On Feb 6, 2018, Woodbridge announced the settlement in a company press release without admitting its wrongdoing.
Jeff Montgomery of Law360.com reported on Aug 8, 2018 that U.S. Bankruptcy Court Judge Kevin J. Carey approved a $215 million loan facility “to aid noteholders – some of whom invested their life savings – while waiting for payments from bankruptcy.” Judge Carey remarked that it was unprecedented when a bankruptcy filing entity offered such loan facility to its investors.
On Oct 26, 2018, Judge Carey approved Woodbridge’s Chapter 11, saying Woodbridge’s plan and its incorporated settlements “are the best way to untangle the company’s complex affairs and insure the maximum recovery for thousands of investors,” according to Archer on Oct 29, 2018.
Analysis
In their book titled Public Relations Practices: Managerial Case Studies and Problems (Eighth Edition), Center et al. (2014) asserted that while investors are usually ones of the most impacted when a reputable company takes bankruptcy to avoid its legitimate debts and obligations, investors are usually “the last consideration in the distribution of assets of the bankrupt entity.” For this reason, it appears to be unfair for investors.
Dealing with bankruptcy is a part of public relations function, specifically investor relations or financial relations. The accepted definition of public relations (PR) is a strategic management function that effectively uses two-way communication to build mutually beneficial relationships between a firm and its stakeholders. In their book, Center et al. advised that when bankruptcy occurs, an IR professional is required to be an “interpreter and mediator between the prime audiences.”
Questions arise: Is this practice strategic public relations? Would stakeholders and the SEC agree on the firm's bankruptcy filing? It depends on whether it is true reorganization. As Center et al. pointed out, it depends on how the reputable company takes “advantage of the shelter of Chapter 11 to reorganize.”
Center et al. highlight great truth number 4 of PR in their book, “Planning and preparation are invaluable. When disaster strikes, it’s too late to prepare a crisis plan or build a legacy of trust.” To help IR professionals to effectively navigate their firms before an imminent bankruptcy filing, below are useful steps incorporated from Molly Venturini’s presentation on Bankruptcy: Communicating for Future Success dated Oct 5, 2013 and suggestions from Ulmer et al. (2015) in their book titled Effective Crisis Communication: Moving From Crisis to Opportunity:
Phase 1: Pre-bankruptcy
Research on the financial situation of the company
Analyze how seriously the losses will impact the operational business in the long run
Prepare a strategic communications plan for bankruptcy (part of a crisis management plan)
Build strong, positive relationships with all stakeholders
Prepare primary and secondary messages, and latent communication channels (website, statements, news releases and so forth)
Form a communication team that includes cross-functional representatives of the management, finance, legal, human resource, sales and marketing, purchasing, IT, and PR/corporate communication, to name a few
Designate spokespersons team
Rehearse/Train/Practice
Evaluate
Phase 2: Bankruptcy
Determine primary and secondary stakeholders (including the media)
Activate the communications plan
Send out tailored messages to stakeholders through their preferred communication channels (hotline, email, phone calls, meetings…)
Contact those who are affected
Stay visible and approachable
Be open and candid
Provide what information is available, accept uncertainty and inform stakeholders what steps to find out the information and timeline.
Frequently update stakeholders
Avoid communications mistakes: “no comment” or stonewalling
Phase 3: Post-bankruptcy
Move beyond bankruptcy to reorganize
Evaluate
Grow and renew
Under Shapiro’s control, Woodbridge appeared to be deceitful from the onset of its business. As the SEC’s subpoenas stated, “Each time a property is purchased by Woodbridge to add to its inventory, Woodbridge forms a different LLC, purportedly to segregate liability.” The real estate developer clearly prioritized its profit over investors’ interests. Furthermore, by deceiving investors who are senior citizens, it was ruthlessly unethical of the firm to have ripped off the investors’ life savings.
Dimond Kaphan & Rothstein law firm noted in its blog in December 2017 that the real estate holding firm failed to pay monthly dividends to its investors after filing for bankruptcy, claiming “rising legal and compliance costs.” Whereas, Shapiro’s lavish lifestyle was described as he “lived in luxury homes, drove a Porsche and charged $1 million in expenses to Woodbridge Group of Cos.,” according to Peg Brickely of The Wall Street Journal on April 23, 2018.
It’s impossible to determine whether Woodbridge’s bankruptcy filing was for restructuring or simply an avoidance of its obligations and legitimate liabilities as a part of Shapiro’s plans.
Questions for discussion:
I’m wondering where Woodbridge’s IR team was. Do you think whether there is an existing IR team at Woodbridge or should the firm have had an IR team to build and maintain relationships with thousands of investors?
It’s critical for IR professionals to adhere to the code of ethics for mutually beneficial relationships between Woodbridge and its investors. Why did nobody say anything whatsoever to Shapiro and all the misconduct during those five years (2012 - 2017)?
Do you agree or disagree with the judge’s approval for Woodbridge’s Chapter 11? Please explain why or why not.
Any helpful input should be added to this case study?
I welcome and appreciate constructive comments from all of you.