Case 0:09-cv-03664-JMR-FLN Document 42

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UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Akanthos Capital Management, LLC; Aria Opportunity Fund Ltd.; AQR Absolute Return Master Account, L.P.; CC Arbitrage, Ltd; CNH CA Master Account, L.P.; Galileo Partners Fund I, L.P.; GLG Investments plc: sub-fund GLG Global Convertible UCITS Fund; GLG Investments IV plc: sub-fund GLG Global Convertible UCITS (Distributing) Fund; GLG Global Convertible Fund plc; GLG Market Neutral Fund; Highbridge International LLC; Kamunting Street Master Fund, Ltd.; KBC Financial Products (Cayman Islands) Ltd.; Kingstown Partners, L.P.; Pandora Select Advisors, LLC; Parsoon Opportunity Fund Ltd.; Tenor Opportunity Master Fund, Ltd.; Whitebox Advisors, LLC; Whitebox Combined Advisors, LLC; Whitebox Convertible Arbitrage Advisors, LLC; and Whitebox Hedged High Yield Advisors, LLC; Plaintiffs, vs. CompuCredit Holdings Corporation, Defendant.

Civil No. 0:09-cv-03664

PLAINTIFFS’MEMORANDUM IN SUPPORT OF MOTION TO PROCEED WITH LIMITED DISCOVERY

Plaintiffs seek leave to serve narrowly tailored document requests in advance of the Rule 26(f) conference and to schedule reasonable depositions shortly after the documents have been produced within the time allowed by the Federal Rules of Civil Procedure. Plaintiffs’request is reasonable under the circumstances, is supported by

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good cause, and will not create any undue burden on Defendant CompuCredit Holdings Corporation (“ CompuCredit” ). BACKGROUND The facts in this case have been presented more fully in the briefing on Plaintiffs’ Motion for Preliminary Injunction, on Defendants’Motion to Transfer Venue, and as summarized below,1 recent developments highlight the need for this case to move forward expeditiously to prevent serious harm to the Noteholders. CompuCredit provides various credit and financial services to the sub-prime consumer credit market. It has posted losses for six straight quarters that total $595 million and its earnings have dropped by $10 per share. CompuCredit faces a severe liquidity crisis. Its reported equity has fallen to barely $254 million, and on a pro forma basis, the company is already insolvent. CompuCredit must also make a $231 million payment to a group of noteholders in 2012. Despite these financial straits and its upcoming obligations, CompuCredit announced on December 3, 2009 that it would pay a $25 million dividend to shareholders— something it had never done and that went against its stated policy— the majority of which would be paid to two corporate insiders who control the Company.

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Judge Rosenbaum’ ruling on Plaintiffs’recent Motion for Preliminary Injunction and s Expedited Discovery only addressed the preliminary injunction request. (Tr. at 58-66.) Stating that the motion was before the court on “ application for temporary restraining an order and preliminary injunction,” Judge Rosenbaum concluded that “ was an this application insufficient to support a preliminary injunction.” (Tr. at 58.) The Court’ s ruling was silent on the issue of expedited discovery. In any event, the present motion simply seeks leave under Rule 26(d)(1) of the Federal Rules of Civil Procedure to
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CompuCredit has been unabashed about the strategy behind its actions: by stripping assets out of the company now, it plans to force the bondholders to redeem their debt at fire sale prices. Plaintiffs (the “ Noteholders” collectively own the majority of ) two groups of notes— the 3.625% convertible senior notes and 5.875% convertible senior notes— at issue. Plaintiffs brought this action for preliminary and permanent injunctive relief under the Uniform Fraudulent Transfer Act and Georgia Corporate Code to prevent CompuCredit from defrauding them. In the short interim since Judge Rosenbaum denied Plaintiffs’motion for a preliminary injunction on December 29, 2009, CompuCredit has taken additional steps in its asset-stripping strategy that require prompt development of the merits of this case. Immediately after the Court’ denial of Plaintiffs’request to stop CompuCredit’ $25 s s million distribution to its stockholders, it announced that it would spin off its only profitable subsidiary, Purpose Financial Holdings, Inc. (“ PFH” (Ex. 1.)2 PFH ). accounted for $114.68 million of CompuCredit’ $254.14 million in equity— s approximately 45%— as of September 30, 2009. (Exs. 2-3.) During the most recent nine-month reporting period, PFH contributed 79% of CompuCredit’ total revenues, or s $98 million of the Company’ $124 million in total revenues. (Exs. 2-3.) s As with the $25 million dividend, PFH will effectively be given to shareholders, the majority of whom are insiders, but this proposed divestment will be more than four

commence discovery now, but gives CompuCredit the full time allowed for responses under the Rules. 2 “ __” refers herein to the Exhibits to the Declaration of Jeff Ross, filed with Ex. Plaintiffs’Opposition To Defendant’ Motion to Transfer Venue. s
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times greater. If both transactions are completed, over 53% of CompuCredit’ value will s have been transferred to the shareholders. By transferring more than half the value of the Company to shareholders and spinning off the only profitable entity, insider shareholders have all but ensured that the Company will be unable to meet its obligations to Plaintiffs. CompuCredit’ purpose in using its divestiture strategy to force the bondholders to s redeem their debt at a deep discount has been blatant. Indeed, the Company coupled its divestment announcement with calls to institutional bondholders to buy back their bonds at current fire sale prices. (Ross Decl. ¶ 2.)3 CompuCredit is essentially predicting that it will be defunct before 2012 when holders of the 3.625% bonds are entitled to redeem their notes and is using that to leverage a repurchase of their notes now for pennies on the dollar. Because CompuCredit is moving rapidly down a road that Plaintiffs contend is illegal and will lead to irreparable harm, the Noteholders respectfully seek leave to serve discovery in advance of the Rule 26(f) conference, which will be limited to financial data, business plans, and depositions of relevant officers and directors who can speak to CompuCredit’ solvency and business plans. Such discovery is necessary in light of s CompuCredit’ actions and will allow Plaintiffs to expeditiously develop the record as to s whether the pending spin off and $25 million dividend are fraudulent transfers.

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“ Ross Decl. ___”refers herein to the Declaration of Jeff Ross, filed together with Plaintiffs’ Opposition To Defendant’ Motion to Transfer Venue. s
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ARGUMENT The Federal Rules of Civil Procedure authorize the Court to allow discovery in advance of the Rule 26(f) discovery conference. See Fed. R. Civ. P. 26(d)(1). The Court is “ to use and control pretrial procedure in furtherance of the orderly administration free of justice.” Cook v. Kartridg Pak Co., 840 F.2d 602, 604 (8th Cir. 1988). The decision to relax strict application of the discovery rules is within the Court’ broad discretion to s alter the timing, sequence, and volume of discovery. See Cook, 840 F.2d at 604 (“ A district court is afforded wide discretion in its handling of discovery matters....” Courts ). generally relax strict application of the discovery rules when the moving party shows “ good cause.” Semitool, Inc. v. Tokyo Electron Am., 208 F.R.D. 273, 276 (N.D. Cal. 2002). Good cause”is present where the need for discovery “ consideration of the in administration of justice, outweighs the prejudice to the responding party.” Semitool, 208 F.R.D. at 276 (finding good cause to expedite discovery from defendant where requested information was relevant to dispute, requests were narrowly tailored, defendant would not be prejudiced by responding to limited requests, and plaintiff sought information during pre-litigation discussion). Here, Plaintiffs have good cause to serve discovery now. CompuCredit is aggressively pursuing its asset-stripping scheme. Until now, its pattern of behavior and clear intent has been to transfer assets to corporate insiders, in full disregard of its current financial distress and its future obligations. CompuCredit is already insolvent on a proforma basis, which reflects the company’ true financial condition. Yet not only has s CompuCredit paid a $25 million dividend to transfer assets, it has also announced a tax5

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free spin-off of PFH, its only profitable subsidy, effectively crippling its future finances and ensuring that it will not be able to meet its obligation to Plaintiffs. CompuCredit’ haste demands that the record in this case be promptly developed s so that all parties can reach a timely and fair resolution of this dispute relative to CompuCredit’ announced actions. Limited discovery is urgently needed to gather s information about CompuCredit’ business plans, projections, valuations assumptions, s and operating results for the fourth quarter of 2009, as well as the proposed terms and conditions of the imminent PFH spin-off. Such discovery is crucial to investigating CompuCredit’ solvency and financial condition. It will also shed light on the impact of s CompuCredit’ actions on Plaintiffs. This discovery will allow Plaintiffs to determine s the validity of their contention that the $25 million dividend and pending spin-off are fraudulent transfers, and will aid the Court and parties in moving this action forward as efficiently as possible. There is virtually no case to be made that CompuCredit will be prejudiced by Plaintiffs’limited discovery. Plaintiffs’request is narrowly tailored to specific information and limited depositions, which will be targeted at individuals who can speak to CompuCredit’ financial condition. Undoubtedly, the material is relevant to the s claims. Indeed, the scope of Plaintiffs’requested discovery goes to the very heart of this action: the fraudulent transfer claims cannot be evaluated without information about CompuCredit’ solvency and financial condition. Most importantly, Defendant will have s the full time (30 days) allowed under the Federal Rules of Civil Procedure to produce responsive documents. Fed. R. Civ. P. 34(b)(2)(A). Accordingly, the information sought
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would need to be produced in the normal course of discovery, and CompuCredit cannot complain about any hardship from being served with discovery now when its actions make such recourse necessary. As Plaintiffs have shown good cause for expedited discovery, this motion should be granted.

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CONCLUSION Because Plaintiffs’request is reasonable under the circumstances, is supported by good cause, and will not create any undue burden on Defendant, the Court should grant the motion.

Dated: January 22, 2010

ROSS & ORENSTEIN LLC By: s/ Bernard E. Nodzon

Jeff Ross (#0144782) 100 South Fifth Street, Suite 1200 Minneapolis, MN 55402 Telephone: (612) 436-9801 Facsimile: (612) 436-9819 FAEGRE & BENSON LLP James L. Volling (#113128) Michael F. Cockson (#294329) Bernard E. Nodzon (#032422X) 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Telephone: (612) 766-7000 Facsimile: (612) 436-1600 ATTORNEYS FOR PLAINTIFFS
FB.US.4779247.03

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