Swiss Firm Sues Castle Harlan In U.S. Over Quick Flip

  • Alleges firm acted as “straw purchaser”
  • Perhaps quickest flip ever
  • Goldman Sachs allegedly played role

The lawsuit follows an earlier suit filed in Australian federal court against Bradken Ltd, the company that bought Norcast from Castle Harlan.

A quick refresher on this deal: On July 6, 2011, Castle Harlan bought Norcast, a Toronto-based supplier of mill liners and other products to the mining industry, from Pala Investments for $190 million. Within seven hours—perhaps the quickest “quick flip” in private equity history—Castle Harlan had sold the company to Bradken Ltd, an Australian competitor of Norcast’s that has a long history with Castle Harlan, for $215 million, according to the lawsuit.

Adding to the context is the decade-long relationship between Castle Harlan and Bradken. CHAMP Private Equity, Castle Harlan’s Australian affiliate, bought Bradken in 2001 took it public in 2004, as Buyouts previously reported. In 2006, Castle Harlan bought AmeriCast Technologies, a designer and manufacturer of steel castings, for $110 million, with Bradken taking a 19 percent minority stake. Less than two years later, Bradken bought the company for $288 million.

The lawsuit claims that Castle Harlan and Bradken entered into an agreement under which Castle Harlan would buy Norcast, immediately resell it to Bradken and keep Bradken’s role secret. Bradken’s motivation stemmed from its belief that as a strategic buyer it would likely have to pay a higher price than a financial sponsor like Castle Harlan, the lawsuit says.

Though the lawsuit doesn’t mention any documentation revealing an agreement between Castle Harlan and Bradken, Scott Balber, an attorney with Chadbourne & Park LLP representing Pala Investments, told Buyouts, “Based upon the timing of the purchase from us by Castle Harlan and the sale to Bradken, there can be no other explanation than there was an agreement to do the deal. It’s not possible for sophisticated purchasers like Bradken to enter into and close a transaction of this size in seven hours without having some due diligence in advance and conversations in advance.”

The lawsuit claims Castle Harlan earned a $25 million fee (the difference between the sale price to Castle Harlan and the subsequent sale to Bradken) from Bradken by acting as such a “straw purchaser” of the company, and that it defrauded Norcast by failing to disclose these material facts. The suit also claims Castle Harlan misrepresented facts by denying that there were any external sources of financing for the transaction.

“The actions of Castle Harlan amount to a scheme to defraud Norcast,” the lawsuit states.

The lawsuit discloses some other interesting aspects of the deal, including the role of Goldman Sachs and the question of whether or not Bradken was privy to the initial sale process, run by UBS Securities Canada Inc.

The lawsuit claims that UBS did not distribute sales information to Bradken and other strategic competitors because Norcast didn’t want to reveal confidential information about its business, but was nonetheless open to receiving bids from competitors. To that end, the lawsuit states that an investment adviser to Norcast met on Feb. 24, 2011 with Goldman Sachs, an adviser to Bradken, to relay to Bradken information about the sale process being run by UBS, the lawsuit states. Goldman Sachs has since confirmed in writing that it did notify Bradken about the sale process, the lawsuit states.

“Approximately one week after Bradken had been informed of the NWS sale process, Castle Harlan … made a completely unsolicited approach to the New York office of UBS, expressing interest in participating,” the lawsuit states.

Executives at Castle Harlan declined to comment.