Subprime Billionaire John Paulson: Not a Credible Witness, Court Says

Date: Thursday, June 26, 2008
Author: Peter Lattman, WSJ.com

If we were playing a word-association game and you said “John Paulson,” we’d say “rich.” Paulson, after all, is the hedge-fund honcho who reaped $3 billion–$3 billion!–shorting the mortgage market.

But rich wasn’t among the adjectives recently used by a Canadian judge used to describe the New York hedge-fund manager’s 2006 testimony in a Calgary courtroom. Instead, she used these choice words: “unpersuasive,” “self-serving,” “unbelievable.” In sum, she said, “Mr. Paulson was not a credible witness.”

Before Paulson was a Wall Street Journal pinup idol, he was just another hedge-fund manager trying to eke out a living. His strategy: event arbitrage, or betting on such corporate events as mergers, restructuring and spinoffs. In 2005, he saw an opportunity to profit when French oil giant Total bid for Deer Creek Energy.

Total bid $31 a share, or $270 million, for Deer Creek, an oil-sands play based in Calgary and backed by Connecticut private-equity firm Lime Rock Partners (which, as an aside, made a bundle on the deal). Paulson refused to tender his stake, arguing that fair value for the company was as high as $190 a share. He sued in Canada to prove that point, exercising his so-called dissenter’s rights to seek a higher price from a court.

On June 13, the Honourable Madam Justice B.E.C. Romaine of the Court of Queen’s Bench of Alberta (that building to the left) ruled that Total paid fair value for Deer Creek, quashing Paulson’s claim. The 130-page opinion, issued more than a year-and-a-half after the trial, contains insights into corporate governance and valuation methodologies. But for our money, the most interesting section is the judge’s description of Paulson’s testimony on pages 47-50.

Paulson testified that he hadn’t heard of Deer Creek until he read the Aug. 2 news release about Total’s acquisition. That day and the following one, Paulson says, he snapped up one million shares after a 15 to 30 minute meeting and a review of a one-page analysis. The decision to purchase was based on rapidly rising oil prices and considerable M&A activity in the oil and gas sector, he said. Later, Paulson reviewed a bullish presentation from the Canadian Association of Petroleum Products that convinced him Deer Creek’s value was as much as $190 a share. In the next two months he acquired 16% of the company for about $250 million, at an average cost of $30.33 a share.

Justice Romaine didn’t buy Paulson’s testimony, calling him a “not credible” witness and implying that he was essentially trying to greenmail the company. His valuation methodology was “unpersuasive in someone of his credentials and level of financial sophistication.” His selective judgment of risk in an oil-sands company was “self-serving.” And as a minority shareholder, Paulson’s “limited and skewed interpretation” of Total’s intention to buy the whole company was “self-serving and patently erroneous.”

A spokesman for Paulson declined to comment.