MoneyGram International Inc. agreed to replace three board members and pay $80 million to resolve claims that it defrauded investors by allegedly concealing its exposure to the subprime mortgage crisis until hundreds of millions of dollars in shareholder wealth was wiped out.
The settlement covers just a fraction of the losses incurred by an estimated 2,000 investors, including individuals, institutions and at least one teachers' pension fund.
Analysts said the removal of three board members is unusual, and could indicate that another large payout -- to federal regulators -- could be around the corner for the St. Louis Park-based company. The U.S. Securities and Exchange Commission is conducting an inquiry into MoneyGram's investments.
"The fact that there was a settlement does imply the SEC will do something," said Robert Dodd, an analyst at Morgan Keegan & Co. "Just what, and how much it will cost, remains to be seen."
A spokeswoman at MoneyGram said the SEC inquiry is "another matter," and the settlement does not affect the outcome of that inquiry. In a written statement, MoneyGram CEO Pamela Patsley said her goal is to refocus the company on its money-transfer business, and that the settlement "will put these claims behind us and move MoneyGram another step forward."
According to securities filings, the SEC is looking at MoneyGram's investment portfolio, whose losses nearly destroyed the company in early 2008. The company invested heavily in mortgage-backed securities that lost much of their value and became difficult to sell after the housing market began its sharp decline in late 2007. The company ultimately lost more than $1.6 billion on the securities.
The losses forced the company to sell a majority stake to an investment group led by private equity giant Thomas H. Lee Partners. The leveraged buyout left the company heavily in debt. Nearly all of the company's profits flow directly to its new owners as interest payments and preferred-share dividends. Common shares that traded as high as $30.11 in mid-2007 closed Thursday at $2.77 a share.
Dodd estimated that the $80 million payout represents just 3.5 percent of the total losses by MoneyGram shareholders, though he said that's in line with settlements in other class-action securities cases. "I think the embarrassment here isn't the settlement, it's watching this stock go from $30 to $3," he said.
