A Delaware judge’s ruling last week found disturbing levels of double-dealing by the sponsors of a special-purpose acquisition company deal that bloomed, then wilted in last year’s SPAC mania.
Chancery court Judge J. Travis Laster ruled that the sponsor of the SPAC called
26 Capital Acquisition Corp.
(ticker: ADER) clinched its selection by a Philippines casino company through a hidden deal with the firm hired by the casino to find a SPAC partner. The judge declined 26 Capital’s request to force the casino to go through with the merger.
The SPAC sponsor Jason Ader is a gaming industry analyst and activist investor. The advisor hired by the casino is a Manhattan hedge fund manager, Alex Eiseman. In his Thursday opinion, Judge Laster said that Ader secretly sold most of his SPAC shares to Eiseman, who then conspired to push his casino client into a deal favoring the SPAC. The judge likened Eiseman to famous double-agents like Robert Hansen, Aldrich Ames, and Kim Philby.
During their court testimony, both Ader and Eiseman denied that they had behaved improperly.
The hidden conflicts ascribed by the judge underscore why the Securities and Exchange Commission proposed rules last year that would require SPAC sponsors to disclose conflicting interests behind a deal. The SEC is expected to vote on adopting a final rule soon.
Ader’s SPAC filed the Delaware lawsuit this year to force the merger deal on the casino—a lavish destination called the Okada Manila, that is itself the most valuable asset of the Japanese producer of pachinko pinball machines,
Universal Entertainment Corp.
(6425. Japan).
Universal hired Eiseman to find a SPAC acquirer for its Manila casino in 2021. Instead of seeking the best deal for Universal, he leveraged his position of trust to find a SPAC whose sponsor would sell him half its stake in the SPAC, wrote judge Laster.
Ader sold him 60% of his stake in 26 Capital. They hid that arrangement from Eiseman’s client Universal and from the SPAC’s public shareholders, said the judge. Universal didn’t learn that Eiseman had been on the other side of the table, the judge found, until it was revealed in the Delaware case’s pretrial discovery.
Speaking to Barron’s after this article first appeared, Ader said he had Eiseman’s assurance that the adviser had permission to invest in the SPAC. “We relied on what Alex disclosed to us,” said Ader. “We never intended to mislead anyone.”
Critics of SPAC deals have argued that SPAC sponsors are tempted toward questionable dealings because they can launch a SPAC for just a few thousand dollars—yet realize hundreds of millions on their sponsors stock if a deal comes through.
Ader didn’t even wait for the 26 Capital deal to close, before cashing out of the SPAC, noted the judge. After selling the majority of his sponsor’s stake to Eiseman, Ader sold another chunk to a billionaire’s family office for $25 million—which Ader and his mother pocketed, the judge said. In a separate suit by the family office, Ader said the payout was proper.
Universal formally canceled the SPAC deal in June 2023. Judge Laster wrote last week that he was denying the SPAC’s request to order Universal to complete the merger because he couldn’t compel the Philippines casino and because Ader and Eiseman had conspired to mislead the casino’s owner.
The judge will still allow the SPAC to pursue monetary damages if it can prove a breach of contract.
Shares of the 26 Capital SPAC are down 4% since Thursday’s ruling, to $11.07.
“Had this deal gotten done as contemplated, our stock would be higher and Universal’s stock would be higher,” Ader told Barron’s. Since the end of the Covid pandemic, he said, travel to Asian casinos like the Okada Manila has revived.
“We are disappointed by the Court’s ruling as the proposed merger benefits all parties,” said Ader in his company’s announcement, “But we remain committed to enhancing shareholder value and will continue to explore all available strategic options.”
Testifying in the Delaware case, Eiseman pointed to a 2021 email in which he told his client Universal that it needn’t pay him for his SPAC search because he “might want to participate in the SPAC deal.” Judge Laster found, however, that Eiseman and Ader actively concealed the adviser’s interest in the SPAC.
Eiseman declined to comment on the Delaware court case, where he wasn’t a party. He and his firm Zama Capital are being sued for fraud by the casino owner, in Manhattan’s federal district court. In an email, Eiseman said: “I’m disappointed because I think this was a good deal for Universal. I wasn’t a party to the case in Delaware. I’ve been sued by Universal in New York and will tell my side of the story there.”
A lawyer for Universal—Grant Mainland, of Milbank—said the Japanese company was ready to defend itself, if the SPAC pursues monetary damages.
“Our clients feel vindicated by the court’s ruling that 26 Capital is not entitled to an equitable award of specific performance compelling the closing of the merger,” said Mainland.
Corrections & amplifications: Judge Laster’s opinion compared the behavior of Alex Eiseman to historic double agents like Kim Philby. An earlier version of this story incorrectly said the judge included Jason Ader in that comparison.
Write to Bill Alpert at [email protected]
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