Spencer Capital of Rye sued over $4.4M in stock offering fees

A Bermuda insurance company is questioning the meaning of profit, as portrayed in a stock offering by a Rye-based holding company.

Cavello Bay Reinsurance Ltd. sued Spencer Capital Ltd. and Kenneth Shubin Stein, its founder and CEO, claiming they violated securities laws by misrepresenting $4.4 million in performance fees.

The fee was supposed to be based on growth in profits from Spencer Capital's operations, Cavello claims in the Dec. 6 lawsuit filed in federal court in White Plains. Instead, it was based on the increase in the book value from selling new shares, using funds that were meant for company operations.

Stein and Spencer Management, the complaint states, received at least $4.4 million "for doing absolutely nothing."

Spencer Capital and Stein did not respond to a voicemail message or to an email sent through the company's website asking for their side of the story.

Cavello is a subsidiary of Enstar Group Ltd., a publicly traded, global insurance company with $15.1 billion in assets, based in Bermuda.

Spencer Capital is a private holding company based in Rye that owns insurance assets such as Southwest Dealer Services, Spencer Re and USA Risk.

Stein, the founder and chairman, holds degrees in medicine and public health and certifications in public health and financial analysis. He has taught advanced investment research at Columbia University Business School.

In 2015, Spencer Capital was trying to raise $75 million by offering shares in its holding company. The stock offering, according to the lawsuit, was supposed to be used for general corporate operations and to fund the purchase of another company.

Cavello claims that a presentation sent to Enstar and personally pitched by Stein said Spencer Management would be paid $1 million a year plus an incentive fee of "25 percent of profits above an 8 percent growth in book value per share," to manage Spencer Capital's portfolio.

In common business parlance and in the insurance industry, the complaint states, profit means financial gain due to operational activities or investments. It does not include an increase in a company's value due to capital raised by selling shares.

Cavello, Enstar's subsidiary, paid $5 million for 250,000 shares in March 2015. The stock offering raised $60 million.

Eight months later, Cavello claims, it discovered that the stock offering presentation was incomplete. Spencer Capital's deal with Spencer Management called for performance fees, not an incentive fee, and the calculation was based on appreciation in net book value, not profits.

Even though Spencer Capital's 2015 investment income was negative, the complaint states, Spencer Management was paid at least $4.4 million in performance fees.

Cavello claims that the performance fees diverted funds that were needed for ordinary business operations.

For 18 months, according to the complaint, Cavello and other shareholders tried and failed to negotiate a settlement. Last year, Cavello formally requested that Spencer Capital rescind the transaction and pay back the investment.

The lawsuit, Cavello states, "is an action seeking to remedy the fraud" perpetrated by Stein and Spencer Capital.

Cavello is represented by Michael H. Barr and Anthony B. Ullman of Dentons US LLP, Manhattan.