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The Dealmakers

Bass Family Still Fiddling With Fieldstone

By Terrence O'Hara
Monday, September 27, 2004; Page F01

Fieldstone Mortgage has in recent years become one of the largest independent mortgage lenders in the country. But even though it is based in Columbia, you've probably never heard of it unless you're a customer.

That's in part because until November, it was owned by the hyper-secretive, hyper-wealthy Bass family of Fort Worth.

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Now, however, Fieldstone is stepping into the light. It has been seeking registration of its stock with the Securities and Exchange Commission since April and hopes to list its shares on Nasdaq by year-end. When it does, it will become one of the largest publicly traded financial-services companies in the region.

But Fieldstone is not entirely free of the Bass family yet. Fieldstone and a Bass family partnership are locked in a testy court fight over the price for which Bass sold Fieldstone.

Fieldstone executives, including founder Michael J. Sonnenfeld, declined to comment on the stock registration or the recent history of the company, citing SEC quiet-period rules. Lee M. Bass, who with his brother Sid and various family-related trusts once controlled Fieldstone, also declined (through his secretary) to comment, citing his long-standing policy of never speaking to the press. In fact, no one involved in the deal agreed to talk on the record, though a few individuals with knowledge of Fieldstone and its history agreed to confirm a few facts, but only on the condition of anonymity for fear of angering the Bass brothers. This column relies mostly on Fieldstone's SEC filings and court documents in Tarrant County, Tex., and U.S. District Court in Baltimore.

Fieldstone was founded in 1995 by Sonnenfeld, a career mortgage banker who in the late 1980s helped establish the old Ryland Homes-sponsored mortgage real estate investment trust Resource Mortgage Capital Inc., which through several permutations became today's Dynex Capital Inc., a big Richmond mortgage investment company. Sonnenfeld left Resource in 1994 and for less than two years ran Nomura Securities' business buying and pooling mortgages for sale to investors in the form of mortgage-backed securities.

When Sonnenfeld founded Fieldstone, he did so with Bass money, according to several sources. One source said Sonnenfeld needed a money partner, and at the time the Basses were interested in increasing their investments in the mortgage banking and savings-and-loan markets.

Fieldstone is a fully integrated mortgage bank. It originates loans, services them once they are made, sells some loans and holds onto a large portfolio of others. It funds its business through borrowing and loan sales. While it makes standard "conforming" mortgage loans, most of its business is in "non-conforming" loans: loans to borrowers who wouldn't qualify for a standard mortgage loan that is sold to one of the big government-chartered enterprises such as Fannie Mae or Freddie Mac. Last year, it funded $5.15 billion of non-conforming loans, and $2.2 billion of conforming loans. Mortgage Banking magazine ranked Fieldstone the 49th most-active mortgage lender in the country in the first quarter.

By the middle of last year, according to court papers, the Basses had decided to sell their interest in Fieldstone and hired Friedman, Billings, Ramsey Group Inc., the Arlington investment bank, to recapitalize the company and find new investors to buy out the Basses. And that's where things get interesting.

FBR's real estate investment banking shop structured the deal this way: Create a new company, Fieldstone Investment Corp., that would raise $658.1 million in a "144a" offering, a kind of stock offering, usually for large deals that require more than 100 investors, that is limited to sophisticated and institutional investors. In a 144a, a company files only limited paperwork with the SEC.

In the process, Fieldstone would be converted into a real estate investment trust, a form of corporation that isn't taxed as long as it passes on 90 percent of its operating profits to shareholders in the form of dividends.

The deal went forward, and Fieldstone Investment redeemed the Bass entities' 95 percent stake in the company for more than $186 million. The rest of the 144a money was used to pay down debt and provide funds to expand Fieldstone's investment portfolio of mortgages.

Sonnenfeld wound up with a 2 percent stake in Fieldstone Investment, the largest management shareholder. But FBR, as it has in several of its big 144a deals, also took a big chunk, buying just under 10 percent, making it the biggest shareholder. The rest of the shares in the 144a offering were sold to more than 150 investors, made up mostly of the mid-size foundations, mutual funds, endowments and investment managers that are the core of FBR's institutional client base.

The deal closed Nov. 13 but then, according to SEC filings and dueling lawsuits filed by the Basses and Fieldstone this summer, the Bass interests wanted to make sure the valuation of Fieldstone was proper -- in other words, that they weren't missing something in the deal. The issue was that Fieldstone Investment, when it converted to a REIT, would benefit from taxes paid previously by Fieldstone Mortgage. Just how much was murky. According to court documents, the Basses insisted on hiring their longtime accounting firm, KPMG LLP, to render its judgment on how much this deferred tax asset was worth, based on projections of the balance sheet on the day the deal closed. KPMG did so, and KPMG's assessment was the final word on what the Bass family would get paid.

Not exactly the final word, it turns out.

KPMG prepared the "closing balance sheet" to determine the final price, and the Bass interest were paid an additional $1.8 million. The first hint of a problem came in March, when KPMG's accountants told Fieldstone Investment that it would have to restate its 2003 results to reflect a deferred tax asset that would have increased its net worth on Dec. 31. The deferred tax asset was a result of Fieldstone's conversion into a REIT.

That restatement didn't sit well with the Basses.

On April 16, just a week before Fieldstone applied to register its shares with the SEC, Fieldstone got a letter from the Bass interests, arguing that it was due another $15.8 million to $19.8 million because that deferred tax asset should have been reflected on the balance sheet before the deal closed, not after. In essence, the Basses claim that the report by its own auditing firm was wrong. On May 24 they sued Fieldstone for the money. In a subsequent SEC filing, Fieldstone said KPMG had informed it that the deferred tax asset should have been reflected in the purchase price.

A KPMG spokesman declined to comment last week, saying the dispute was "a matter in litigation."

Fieldstone, in its most recent disclosure statement, said it believes it has a meritorious defense -- that the final adjustment was exactly that: a final adjustment, and the Basses can't claim a windfall that only came after they had sold the company.

The legal fight is still in its formative stages -- the two parties have spent much of their lawyering so far fighting over where the case will be heard, in a county courthouse in Texas or a federal one in Baltimore -- but it's bound to be worth watching. It's not often that the Bass brothers, who control one of the biggest fortunes in North America, argue in court that someone may have gotten the better of them in a deal.


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