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Freeport-McMoRan Settlement Leaves Credit Suisse in Cross Hairs -- Update

01/15/2015 | 05:28pm US/Eastern
By Liz Hoffman 

Freeport-McMoRan Inc.'s settlement of a shareholder lawsuit over certain acquisitions leaves Credit Suisse Group AG, its counselor on the deals, in the cross hairs of investors and underscores the growing scrutiny Wall Street banks face over their boardroom advice.

Freeport confirmed in a court filing Thursday that it would pay $137.5 million to resolve allegations that conflicts of interest marred its 2013 acquisitions of McMoRan Exploration Co. and Plains Exploration & Production Co. for a combined $9 billion. The settlement, one of the largest ever in such a case, explicitly allows shareholders to pursue claims against Credit Suisse, which the plaintiffs say made a mathematical error that inflated the value of McMoRan.

A Credit Suisse spokesman said the allegations "misinterpret basic principles of buy-side valuation," adding that the Swiss bank "rejects any suggestion that we acted improperly over the course of this engagement." Freeport denies the allegations in the case and settled it only "to avoid the substantial expense and distraction of continued litigation," a spokesman said.

Credit Suisse now faces the possibility that it will be forced to defend itself against the shareholders, who said, in the Delaware Court of Chancery filing, they want to bring a case against the bank. Such a lawsuit would make Credit Suisse the latest merger adviser targeted by corporate shareholders. While deal-related lawsuits against companies are commonplace, in a handful of recent cases shareholders have gone after the banks that have advised them, often alleging conflicts or errors.

In October, a Delaware judge ordered RBC Capital Markets LLC to pay $76 million for its role in a 2011 buyout. RBC has defended its advice and said it plans to appeal. Goldman Sachs Group Inc. is a defendant in a lawsuit brought by Tibco Software Inc. shareholders, who allege the bank failed to spot an error in the company's share count that resulted in its private-equity buyer paying $100 million less than agreed. Goldman is fighting the allegations in court.

In a sign of its unease over the possibility it will be targeted next, Credit Suisse in recent weeks sought to join the settlement talks after earlier declining offers to do so, people familiar with the matter said. Credit Suisse, which advised Freeport's independent directors and wasn't a defendant in the lawsuit, privately argued that Freeport couldn't settle the case without a guarantee the plaintiffs wouldn't later target the bank, some of the people said. Thursday's settlement includes no such promises.

The unusual behind-the-scenes tussle played out amid sharp declines in oil prices, which has cast a further shadow over Freeport's purchases of McMoRan--for which it paid a 74% premium--and Plains. Freeport's shares are down about 50% since July, trading at a multiyear low Thursday, and the company has been selling assets to pay down debt.

Freeport paid $2.1 billion for McMoRan, an oil-and-gas company it had separated from in the 1990s, and $6.9 billion for Plains, a Houston-based rival. For Freeport, the moves were a big bet on energy that created a global producer of commodities including copper, gold, oil and gas.

But ties between the three companies raised red flags for some investors. At the time the deals were struck, Freeport owned a roughly 16% stake in McMoRan. Freeport insiders, several of whom also held leadership positions at McMoRan, collectively owned millions of dollars of McMoRan stock, according to public filings. In the run-up to the deal, McMoRan shares had tumbled amid delays at an offshore well.

Freeport shareholders sued, claiming the company had overpaid to bail out McMoRan, and that to seal the deal also agreed to acquire Plains, whose 30% stake in McMoRan could have been a roadblock.

Thursday's settlement, details of which were reported on by The Wall Street Journal in November, resolves those allegations. Freeport will pay $22.5 million of its own money and contribute another $115 million from a special type of corporate insurance policy. Most of the funds are earmarked for a special dividend for Freeport shareholders that, after attorney fees and other costs, is likely to amount to more than $100 million--a rare payout for investors in such a case.

The natural-resources company also agreed to governance changes, including establishing a lead independent-director position. Investors had alleged that James "Jim Bob" Moffett, Freeport's co-founder and chairman, wields undue influence over the board. Mr. Moffett wasn't immediately available for comment on the investors' allegations.

Write to Liz Hoffman at liz.hoffman@wsj.com

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