Quadpay founders sue Merrill Lynch over Zip stock sale

Bank of America, owner of Merrill Lynch, declined to comment. Mr. Lindenberg, Mr. Ezra or Zip Co also declined to comment.

Brad Lindenberg and Adam Ezra are unhappy with the advice given to their associated companies by Merrill Lynch.

The transactions in question relate to 12.8 million shares of Zip Co, not subject to escrow restrictions, issued to Bleeker Nominees and AJE as part of the $400 million acquisition. The shares could be sold as early as September 1 after the deal closes.

Relatives of Mr. Lindenberg and Mr. Ezra are listed as shareholders of Bleeker Nominees and AJE, but the couple served as agents in connection with the share sales.

Mr. Lindenberg owned an additional 1.8 million shares in his own name, while Mr. Ezra owned 1.625 million shares that were not subject to escrow restrictions.

Shares not subject to sale restrictions represented 30% of the total Zip shares issued to Bleeker, AJE, Mr. Lindenberg and Mr. Ezra.

After offering their services, Merrill Lynch was hired to sell the shares “as soon as possible and at the best price,” the plaintiffs allege in court documents.

The advice was to do a block trade at or after market close on September 1, as it was the “only way to sell a lot of shares of the size without driving the price down and affecting the price of sale,” documents filed by plaintiffs allege.

A block trade is basically an arranged bilateral sale of shares, as opposed to a market sale in which the securities are offered on the open market during trading hours.

The block trade was to proceed with an agreed fee of 0.5%, in addition to a 20% fee above an “agreed floor price”.

But a surprise statement from Nasdaq-listed PayPal on the evening of Aug. 31 that it would launch a competing buy now, pay later bid shook the industry.

Shares of Zip Co closed down 13% on the day at $7.99, but traded at $8.80. This prompted Merrill Lynch chief executive Mark Warburton to recommend waiting until “markets stabilize”.

That evening, Mr. Lindenberg emailed Mr. Warburton asking if they could sell shares on the market or “whether everything should go through a block”, to which Mr. Warburton confirmed the next morning that it was “good”.

“Mr. Lindenberg and Mr. Ezra raised concerns about the bulk trade notice and the failure to sell the plaintiffs’ shares before the share price fell on September 1, 2020,” claim the plaintiff’s lawyers in the file.

The following day, September 2, Merrill Lynch sold 4 million shares each in the market on behalf of Bleeker and AJE at a price of $7, earning $27.8 million for Bleeker and $28.3 million for AJE.

The next day, September 3, Bleeker and AJE dumped Merrill Lynch and hired Shaw and Partners, and on September 4, Shaw’s brokers sold 1.25 million shares for each side at $6.70 for additional gain. $8.37 million each.

Between October 2020 and February 2021, Bleeker and AJE sold an additional 1 million shares of Zip through Shaw and Partners at prices between $7.32 and $11.76, for a combined total of $9 million.

A total of 11.6 million shares of Zip were sold for proceeds of $82.7 million. Zip stocks have since corrected sharply. On Monday, Zip shares changed hands at $3.30.

Bleeker and AJE allege that a block trade at the close of trading on September 1 would have resulted in a lower price than what would have been obtained if the shares had been sold in the market throughout the session.

“The evil was that the Zip Sell Shares would not be sold at the best possible price and as quickly as possible in accordance with the instructions,” attorneys for Bleeker and AJE allege.

This resulted in them “receiving less consideration for the sale of these shares than they would have received if [Merrill Lynch] exercised reasonable skill, care and diligence”.

They claim that Merrill Lynch was in conflict because it also acted for Zip as a corporate adviser and would have earned higher fees for doing a bulk transaction, compared to market sales.

But lawyers for the broker have denied the allegations, saying it’s unclear whether the fees for a block trade would have exceeded market sales commissions, and that the pair was aware of its role in advising Zip. on the transaction and financing of the associated convertible notes. .

The case is listed for trial on May 20.

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