Most private equity groups will at least say they embrace succession. However, when it goes wrong, transitioning gaffes often spiral into a case of he said, she said, or for Lincolnshire Management Inc., a case of he said, they said. Clearly, the passing of the torch isn’t always a frictionless process and it has been known at times to cauterize some fingers in the handoff.
A recent lawsuit filed by former Lincolnshire Management Inc. (LMI) Chairman Steven Kumble against the firm he founded serves as a reminder that succession is tougher than changing the name on the door. In the complaint, dated July 28, 2005, Kumble, along with Lincolnshire veterans Peter Van Raalte and Kenneth Clay, cites a laundry list of accusations against Lincolnshire Management and its current head T.J. Maloney.
The lawsuit primarily revolves around the transition agreement between Maloney and Kumble and its related compensation elements, such as the sale of Kumble’s majority stake in the firm. But as the 60-page complaint fans out, the allegations against Maloney become more contentious and depict a power struggle during Kumble’s last days at the firm. In addition to alleging a breach of contract related to the transition agreement and other covenants, the lawsuit accuses Maloney, through a Lincolnshire spokesman, would not comment on those allegations for this article.
Kumble Beginnings
Kumble helped found Lincolnshire Management in 1986. For him it was a fresh beginning after the tumult and eventual fall of Finley Kumble, the fated law firm he helped to build in the roughly 20 years preceding Lincolnshire’s launch.
In its initial incarnation, Lincolnshire acted as a pledge fund, operating on a deal-by-deal basis. Following some early successes, the firm started raising an institutional investment vehicle, and amassed $120 million for its first fund in 1992. That fund also had its share of triumphs, and when it came time to raise the firm’s second fund, the 1999-vintage, $315 million Fund II, the firm was advertising net returns of 67% through its first 30-plus investments.
Two years after Lincolnshire raised its first fund, T.J. Maloney was brought on board. By 1998, he had already ascended to the role of president and CEO of Lincolnshire, a progression that could be described as meteoric by any estimation. As president, Maloney had garnered operational control of the firm, and that was seen by some as the first stage of Lincolnshire’s succession plan. However, it wasn’t until 2004 that the realignment was completed with the signing of the transition agreement, transferring Kumble’s majority ownership stake in Lincolnshire to Maloney.
While this would appear to be the point where the succession plan got off track, based on the accusations made in the complaint, the transition started veering off course before that. In the lawsuit, the plaintiffs allege that Maloney treated Lincolnshire as “his own personal piggy bank… [converting] millions of dollars from LMI by improperly making payments to shell companies or entities which he controls…”
The complaint cites payments to what is said to be a Maloney-owned shell company [Buyout Associates, LLC], and also details payments to his former law firm, the defunct Maloney Mehlman & Katz LLP [after its operations ceased]. Additionally, the suit says Maloney has improperly charged roughly $10,000 a month to the corporate credit card for the past couple of years and also paid “exorbitant” rates “above the market” for investigations conducted by Sultan & Associates in connection with proposed acquisitions.
The suit depicts Maloney as a combative co-worker who pushed Kumble out the door once he wrested away control of the firm, and the complaint actually states that Maloney has been heard saying he was “kicking Kumble out of Lincolnshire,” and giving Kumble “a real haircut.”
The lawsuit further illustrates a fractious work environment where not-so-subtle hints were regularly dropped. “Maloney consistently rejected deals Kumble submitted,” the lawsuit claims, adding, “On occasion, Maloney rejected such deals literally within minutes of submission.”
There is also the implication in the grievance that the termination of Clay and a “pattern of abuse toward Van Raalte” were related to creating a hostile environment for Kumble. Both Clay and Van Raalte are also seeking monetary claims in the suit.
Lincolnshire Treks On
All the while, the lawsuit and the departures have not prevented Lincolnshire from raising its third fund, a vehicle that was targeted at $400 million, recently closed on $425 million, and is still seeking more, according to one limited partner. While the progression of the firm’s fund size may suggest all is well at Lincolnshire, the revolving door at the firm’s offices could signify otherwise.
In addition to Van Raalte, Clay and Kumble, William Wolffer, Neil Goldman, Drew Shea, Jeffrey Muti, John Camp and Thomas Ley have all beat a path out of the firm in recent years.
One pro formerly on Lincolnshire’s payroll blamed the departures at least partly on Maloney. “Sometimes when you’re put in a position like [Maloney], you start to feel invincible, and that seemed to be true in his case,” he said. It was the ivory tower syndrome: He spent too much time in New York looking out from his 40th floor perch.”
However, with regards to the pending litigation against the firm, the Lincolnshire vet says, “Steve [Kumble] probably thought it would be viewed as a more magnanimous transition, but he and T.J. [Maloney] ultimately became very much at odds… Is it all Steve’s fault? No. But it’s probably not all T.J.’s fault either.”
Meanwhile, the Lincolnshire limited partner, an investor in Funds II and III, dismisses the litigation simply as “ransom.”
“Steve Kumble wasn’t really involved in the business at this point,” he said. “They made him the chairman emeritus, but he thinks of himself as a deal junky…”
There had been no word as of press time as to a legal response from Lincolnshire or Maloney regarding the lawsuit, although another source close to the firm, a party more in tune to the Maloney camp, said that a rebuttal will be forthcoming, and the group could be expected to file a counterclaim later this month.
This source also added that Lincolnshire attempted to settle the dispute amicably without going to court and noted, “There are a lot of false allegations thrown around, and it’s our view that the lawsuit is without merit.”
The message coming from the Lincolnshire loyalists is that Maloney was forced to let Kumble and Van Raalte go when the two began working with Clay on raising a new “competitive” buyout fund (see story, page 5). “They were setting it up right there in the Lincolnshire offices,” the LP said, “using the Lincolnshire email system, with faxes coming in, and everything.”
However, based on the language found in the lawsuit, the transition agreement Kumble signed “does not contain a non-compete provision or any other provision that proscribes Kumble from being involved with another private equity fund…” The only restriction, the grievance detailed, was that Lincolnshire’s third fund has the right of first refusal on all transactions originated by Kumble.
In the meantime, Maloney has made moves to fill in the vacancies on Lincolnshire’s employee roster. At the end of August the firm hired Rabobank International vet Pieter Kodde as a managing director and member of the origination team, and bumped William Hall up to managing director. The firm, in May, hired ex-Pillsbury Winthrop Partner James McLaughlin as managing director, and in March, poached Mellon Ventures hand Ed Moss to serve as a managing director based in Los Angeles. The Lincolnshire limited partner also noted that he was aware of five exits that should be in the offing in the next six months.
Meanwhile, Lincolnshire is ostensibly taking shots from multiple fronts. In a separate lawsuit filed less than two weeks after the Kumble team first filed its grievance, an investor in Lincolnshire, Paul Marcus, alleged that the firm and Mr. Maloney breached an agreement regarding the potential sale of his 10% ownership interest in the firm.
Based on the complaint, the Marcus lawsuit appears to be unrelated.
Holland & Knight are representing the plaintiffs in the Kumble-led lawsuit against Lincolnshire, while Stillman & Friedman LLP are representing Marcus in his complaint. Lincolnshire has hired Kirkland & Ellis LLP as its defense for both suits.
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