Suit Hints at Rydex Price Tag
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Wednesday, August 08, 2007

Suit Hints at Rydex Price Tag

How much is Security Benefit Life paying for Rydex? Barring regulatory requirements, the value of a deal is typically a closely guarded secret by all involved. In the case of Rydex's sale, though, a lawsuit is bringing more details of the June 28 sale to light -- court records show that Security Benefit is spending as much as $775 million to buy Rydex (the sale is expected to close this fall). The suit also gives a glimpse into the firm's strategy to retain its senior staff through the sales process.

Prior to the June sale, published reports suggested that E-Trade had bid as much as $1 billion for Rydex, suggesting that the Viragh family did not take the highest monetary bid on the table.

The can be found in a lawsuit filed last week by Phil Fragasso, a senior vice president and chief marketing officer for Rockville, Maryland-based Rydex [download original and amended complaint PDFs]. Fragasso is claiming in the suit that Rydex CEO Carl Verboncouer made verbal promises that Rydex "would do the right thing" and give Fragasso accelerated phantom share grants if he signed a "more restrictive non-compete agreement." Fragasso also claims that some of the Rydex units he was promised had not been delivered by a June, when he claims they were due.

A spokesperson for Rydex said the firm could not comment on pending litigation. Wayne Dennison, Fragasso's counsel at Brown Rudnick Berlack Israels, is on vacation and could not be reached for comment.

According to Fragasso's complaint, Rydex provided special Executive Participation Units similar to phantom shares to roughly 25 of its senior executives as part of its Value Participation Plan. As part of the plan, the managers agreed to a non-compete agreement. Fragasso also claims in the complaint that he was given additional units in recognition for his serving as one of seven members of Rydex' Executive Office.

Fragasso, who earlier in his career was a senior marketer at Liberty Funds (now part of Bank of America's Columbia Funds), joined Rydex in July of 2004.

An initial version of the complaint filed on August 1, said that "Security Benefit agreed to purchase Rydex for approximately $775 million" and that "$110 million is allocated by Rydex for payments to its senior executives." The initial complaint also claims that Fragasso's units were worth approximately $1.3 million because of the sale. Those references to the value of the sale were dropped in an amended filing with the court filed on August 3.

However, other sources who claim to be familiar with the terms of the sale have told The MFWire that the sales price came to between $770 million and $800 million. One of those sources also says that 26 Rydex executives, including CEO Verboncouer, will receive grants under the incentive plan ranging from $1.35 million for 10 of the executives to $25 million for Verboncouer himself.

The Viragh family, whose trust inherited the company when founder Skip Viragh died, is also providing a gift to employees who remain with the firm through the sales process, according to a source at the company. Those gifts are based on the employee's pay and length of service and average about $40,000 per person, according to the source.

Not all of the proceeds of the sale will go to the Viraghs. Goldman Sachs, the trust's bankers on the sale, will collect a fee of roughly seven percent of the sale price. That amount is in line with typical investment banking fees.

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