Gawker released over 950 pages of documents relating to Bain Capital and Mitt Romney's investments, mostly for the years 2008-2010. While I haven't gone through even a fraction of them yet, one entity leaped out at me -- Brookside Capital Partners
August 24, 2012

Gawker released over 950 pages of documents relating to Bain Capital and Mitt Romney's investments, mostly for the years 2008-2010. While I haven't gone through even a fraction of them yet, one entity leaped out at me -- Brookside Capital Partners Fund.

Mitt Romney's Relationship to Brookside Capital Partners Fund, LP (BCPF)

We've heard a lot about Bain Capital and Sankaty Investors, but not too much about BCPF. However, it was listed as an asset on Romney's 2006 disclosures filed while governor of Massachusetts with ownership set at 3 percent.

BCPF goes back much farther than 2006, however. In 1997 and 1998, when Romney was still an active partner in Bain Capital, the structure of Brookside and related entities looked like this, according to the first SEC filing I could find for it:

Brookside Capital Investors, L.P., a Delaware limited partnership ("Brookside Investors"), is the sole general partner of the Brookside Fund. Brookside Capital Investors, Inc., a Delaware corporation ("Brookside Inc."), is the sole general partner of Brookside Investors. The executive officers of Brookside Inc. are set forth on Schedule A hereto. Mr. W. Mitt Romney is the sole shareholder, sole director, President and Chief Executive Officer of Brookside Inc. and thus is the controlling person of Brookside Inc.

To translate that labyrinth a bit, Mitt Romney was the sole shareholder of an entity that was the sole general partner of the investment partnership, BCPF. As general partner, Romney could expect the following:

Pursuant to the terms of a partnership agreement, Brookside Investors as general partner of the Brookside Fund receives a percentage of profits generated by the Brookside Fund. Brookside Inc., as general partner of Brookside Investors, receives a percentage of profits from Brookside Investors. Mr. W. Mitt Romney receives a percentage of profits from Brookside Investors.

This was the structure of Brookside in 1998, at a time where CCA Realty Investors found itself in need of a restructuring.

CCA Realty Investors, CCA, and the Private Prison Industry

Originally, Corrections Corporation of America (CCA) was two separate, publicly traded entities. There was the prison management side of the business (CCA), and the real estate piece (CCA Realty Investors). Both were publicly traded but after a period of fairly steady growth, trouble was brewing. has a good recap of the history (PDF):

CCA sought a way to extract even more investment capital from the stock market to pay for its ambitious expansion plans. The solution it hit on was the real estate investment trust. REITs are publicly-traded entities that own and manage real estate but do not pay corporate income taxes. However, these tax avoidance entities must distribute 95 percent of their operating income as dividends to shareholders. These characteristics are intended to boost the price of REIT shares and thereby help raise even more capital.

In July 1997, CCA Prison Realty Trust, a REIT registered in Maryland, made an initial public offering of 21.3 million shares, priced at $21, raising more than $400 million. Most of the proceeds of the offering were used to purchase nine facilities from CCA, which leased them back and continued operating them under government contracts. This process improved the look of CCA’s finances but amounted to the kind of off-balance-sheet transactions that would later become notorious in connection with the fall of Enron. Back in 1998 an investment banker told the financial magazine Investment Dealers’ Digest that REITs such as Prison Realty were “an off-balance-sheet financing vehicle if you want to pursue more acquisitions.” The fact that Prison Realty owned only properties connected to CCA made it a captive REIT.

The use of off-balance-sheet financing was also at the center of numerous deals in which construction of CCA’s prisons was financed through the issuance of tax-exempt lease-revenue bonds (or certificates of participation). These financing vehicles involve the creation of a non-profit entity that issues the bonds and acts as the titular owner of the facility. The bonds are backed by lease payments made by the correctional agency, which also pays CCA an operating fee. More than a dozen CCA facilities were built using this arrangement, which amounts to a form of taxpayer-subsidized low-cost financing for what is essentially a private facility. This financing is only one of the ways in which CCA (and other private prison operators) have received state and local economic development subsidies. It has also received tax abatements (in Youngstown, Ohio, for example), infrastructure assistance and other incentives.

[Side note: This is a perfect example of "You didn't build that."]

Brookside Capital Partners Fund, LP and CCA Realty Investors

On August 26, 1998, BCPF acquired 5.21 percent of CCA Realty Investors, or 1,125,000 shares in anticipation of a reverse merger with CCA and a one-for-one stock exchange of Realty shares for CCA shares. Presumably the investment was made as part of the restructuring, but also in anticipation of big profits to come, since business was going fairly well for the private prison industry at the time.

By December 31, 1998, BCPF owned 7.13 percent of CCA Realty Investors, or 1,565,800 shares.

The stock was de-listed on January 8, 1999 after closing at $22.31 per share, which translates to just under $35 million value held in BCPF.

Unfortunately, the SEC system does not require reports when securities are sold, but we do know from BCPF's Statement of Holdings on June 30, 1999 that they no longer held shares of CCA Realty Investors or any successors, which means it's reasonable to conclude that sometime in the first half of 1999 Brookside sold those shares.

Here's what we do know, however. In April and May, 1999 the stock price was on the rise, peaking on May 10th at $73.79 per share. (See historical prices here) On May 17th and 18th, over 3.6 million shares were traded, far heavier volume than on any day preceding. If Brookside's shares were sold during this period, Mitt Romney stood to make profit of anywhere from $51.48 per share on the high side to $22.30 per share on the low side, when compared to the value of the CCA REIT on the day it was de-listed.

That's a lot of money no matter whether the high or the low. 1,565,000 shares sold at the lower price would still mean post-merger profit of $35 million dollars, or 100 percent profit. At the higher price, it would have been more like $80 million.

And this matters, why?

CCA's reverse merger was not a smashing success. In fact, there was a class action lawsuit brought and ultimately settled. Here's what happened, from the report cited above:

Nine months after CCA Prison Realty Trust was formed, it and CCA announced a plan under which the REIT would acquire the management company (CCA). Operating as a subsidiary of the REIT, CCA would be controlled by insiders and freed from the direct pressure of showing quarterly earnings growth, while CCA Prison Realty Trust would enjoy REIT tax benefits as the owner of the entire CCA portfolio of prisons. Many CCA stockholders were less enthusiastic about the deal, arguing that the amount they were going to be paid for their shares was below the recent market price. Several major pension funds, including the California Public Employees Retirement System and the New York State Common Retirement Fund, came out against the deal. In the end, however, the merger was approved, and the surviving public company took the name of Prison Realty Corporation (later changed to Prison Realty Trust Inc.).

Faced with slumping occupancy rates in its facilities, Prison Realty Trust had to take on more debt to survive. In May 1999, it landed a $1 billion credit agreement (secured by the Trust’s real property) from a syndicate of lenders led by Lehman Brothers. In the same period, it was hit with several shareholder class-action lawsuits charging that the REIT was paying an artificially high management fee to its operating subsidiary CCA. The increase in the number of REIT shares generated by the merger increased the amount that had to be paid out in dividends.

All of this raised doubts about the wisdom of the restructuring, given that an arrangement that was supposed to free up capital had generated a financial squeeze instead. Securities analyst James Macdonald of First Analysis Corporation concluded in November 1999 that “the financial structure is unsustainably flawed. Ultimately, it needs to be demolished.” Even more serious was the fact that in Prison Realty’s 10-K filing for 1999, the company’s auditor, Arthur Andersen LLP, warned that the company’s financial difficulties “raise substantial doubt about [its] ability to continue as a going concern.” Andersen noted that the same concern had been raised by the auditors for CCA, which was privately held at the time.

The timing is particular fortuitous for Mitt Romney's entity, however. Here are the plaintiffs in the class action lawsuit:

Prison Realty Trust, Inc., which was formed in a merger between Corrections Corporation of America and Prison Realty, revealed on May 14, 1999, that it would be retroactively increasing the amount of fees it paid to CCA, which is owned by, among others, certain officers of CCA, by approximately $80 million to manage certain real estate for Prison Realty. It is charged that Prison Realty Trust knew of these additional fees and failed to disclose them at the time of the merger. If you (1) purchased CCA common stock during the period October 16, 1998 or converted your shares of CCA into Prison Realty Trust in the January 1, 1999 merger or (2) purchased Prison Realty Trust common stock in the market from January 4, 1999 through May 14, 1999 you may be included in the action.

Romney bought shares in September, 1998 and sold them sometime in the first two quarters of 1999. Depending on when they were sold (and especially if they were sold before May 14th), there's a serious question about whether he had inside information and acted on it to the detriment of other investors, like the California and New York Public Employees' Retirement Systems, for example.

Ultimately, the lawsuit was settled for $120 million, but as you can see from the numbers, Romney could have made off with $80 million in profit, leaving the plaintiffs to quibble over $120 million, less lawyers' fees.

What we do know is that Romney invested in private prisons. We can also surmise that he profited from them, at states' expense.

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