How a 'hotshot whiz-kid' ensnared a Sask. company in a $97.5M deal riddled with red flags
CBC News investigates the American businessman behind the failed purchase of a Canadian company
Input Capital, a publicly traded company based in Regina, says it is investigating after its $97.5-million proposed sale to smooth-talking American businessman Eric Blue collapsed two months ago.
On Aug. 12, 2020, Input, a company that lends money to farmers in exchange for some of their future canola crop, announced that Bridgeway National Corp. was making a cash purchase of all Input shares.
The deal with Bridgeway, a Washington, D.C.-based firm owned by Blue, fell apart on Oct. 29 without much explanation.
A CBC News investigation reveals there were plenty of warning signs that experts say should have caught Input's attention.
They certainly caught the attention of Julian Klymochko, a Calgary-based merger and acquisitions specialist and CEO of Accelerate Financial Technologies, who offered a blunt assessment on Twitter the day after the deal was announced:
"More red flags than a bullfighting convention."
If you engage in merger arbitrage, listen to me when I tell you to stay away from this Input Capital <a href="https://twitter.com/search?q=%24INP.to&src=ctag&ref_src=twsrc%5Etfw">$INP.to</a> / Bridgeway National deal <br><br>More red flags than a bullfighting convention 🔴<a href="https://t.co/JdbLcAm25G">https://t.co/JdbLcAm25G</a>—@JulianKlymochko
Documents readily accessible online reveal Blue is embroiled in multimillion-dollar disputes stemming from failed deals involving companies from Massachusetts to Wisconsin to Louisiana. He's tangled in disputes involving entities as diverse as the Joy detergent brand and the Tom and Gayle Benson Foundation, run by the family that owns the NFL's New Orleans Saints and the NBA's Pelicans.
In court, plaintiffs have alleged Blue made fraudulent commitments and supported them with forged documents.
Court documents also show Blue is facing bankruptcy, with 25 creditors — including individuals, corporations, banks and the U.S. Internal Revenue Service — looking to collect millions.
Who is Eric Blue?
Clarence Roby Jr, a New Orleans-based lawyer, said Blue's deal with Input was backed by a phoney financial commitment letter.
He said he knows this because Blue used the identity of Roby's client, New Orleans-based investment adviser Octave Francis III, without his knowledge or consent, to persuade Input.
Roby said Blue, who represents himself as a lawyer and an investment specialist, comes off as "some hotshot whiz-kid, young investor type" who is "crafty enough to talk his way into a lot of prominent places," just like the Leonardo DiCaprio character in the movie Catch Me if You Can.
"For whatever reason, Mr. Blue probably felt he could use Mr. Francis's good name and reputation for whatever his fraudulent, corrupt schemes may have been," said Roby.
In mid-November, the day after CBC News first reached out to Input CEO Doug Emsley for an interview about the collapsed deal, the company's legal counsel and corporate secretary, Patricia Warsaba, contacted Francis looking for information and assistance.
Francis forwarded her email to Roby. According to Roby, Warsaba wrote: "Input and its shareholders have suffered damages as a result of the various breaches by Bridgeway."
For example, the agreement said if the deal wasn't consummated, Bridgeway would owe Input a $3-million termination fee. In an email to CBC News, Warsaba clarified that at no point did Input pay any money to Bridgeway.
Roby told Warsaba his client had nothing to do with Bridgeway or Eric Blue and that he had reported the whole thing to the FBI. Warsaba told Roby she was investigating the matter and asked him to forward all his correspondence with the FBI.
Roby said he felt it was a bit late for Input to be conducting due diligence.
"That horse is out the barn and up the road," Roby said. "Had they done their job, they probably could have saved themselves the embarrassment, at the very least, of engaging this clown."
In a briefing on the deal prepared for shareholders, Input describes in some detail the due diligence it undertook, including reviewing the fairness of the proposed offer, the regulatory environment and the background of Blue and his firm.
In an email to CBC News, Warsaba also pointed out the deal was brought to Input by Bridgeway's high-profile New York-based law firm, so "there was no reason whatsoever to question the veracity or authenticity of these commitments."
When asked about Roby's criticism, Warsaba replied: "Mr. Roby's comments are unprofessional, unwarranted and baseless and certainly made without any knowledge of the facts.
"He is definitely not an expert."
Blue has not responded to multiple emails and text messages from CBC News.
Blue offers to buy Input Capital
On Aug. 12, Input was trading on the TSX Venture Exchange for 86 cents a share. That day, Input announced Bridgeway was offering to buy the company for $97.5 million, or $1.75 a share, which Input's news release described as a "103% premium" to the closing price.
According to Input's shareholder briefing, CEO Doug Emsley stood to make $20 million on the deal, while CFO Brad Farquhar would have made almost $6 million, based on the number of shares they held at the time.
The document said the deal was "not subject to any financing condition, which provides additional certainty to Input shareholders that the arrangement will be completed."
By the end of September, Input's shareholders had voted almost unanimously in favour of the proposed agreement and the Saskatchewan Court of Queen's Bench had approved it.
Some investors bought in, driving Input's share price close to the $1.75 Bridgeway was offering.
"Not a single director or officer or employee of Input sold a single share as a result of the Bridgeway process or benefited in any manner whatsoever," Warsaba said in an email to CBC News. "Input at all times acted appropriately in all of its efforts to have the Bridgeway transaction close."
Bridgeway's stock rose as well, from $0.03 a share to as high as $0.18.
Bridgeway is now back down to $0.02. Input's stock is currently valued at $0.88.
Julian Klymochko, the Calgary-based CEO of Accelerate Financial Technologies who tweeted about red flags back on Aug. 13, said he has analyzed thousands of proposed deals over the past decade and has rarely put out such a warning.
"I think it's fair to say that within five minutes, I knew the whole thing was a sham," he said.
One of the first things that jumped out to him was that Bridgeway was "worth less than the average house."
"The market capitalization of Bridgeway National stock is about $225,000 currently," he said. "How would they scrounge up the cash to do a $100-million deal?"
He said that valuation alone should have alarmed the members of Input's board.
What the market tells you, he said, is that Bridgeway doesn't have credibility.
"So the believability of the proposed agreement was pretty much nil, in my opinion."
According to Bridgeway's 2019 annual report, it had no income in either 2018 or 2019 and had an accumulated deficit of almost $7 million.
"The company currently cannot predict when the company will become revenue producing," the report says.
103% premium on share price a red flag
It also surprised Klymochko that Bridgeway offered more than double what Input's shares were worth on the market at the time.
He said it's common in takeovers of this sort for the acquiring company to offer a premium of 25 to 30 per cent more than the current value of the stock.
However, a 100 per cent premium would only be offered for a company that is "something special," he said. In his view, Input didn't qualify given "the business had not been tremendously successful."
He also said Bridgeway's corporate history was a red flag. It was incorporated in 2012 and had changed names and industries several times, from a marketing company to a software firm to a private investor to a holding company "primarily in the business of industrial organic chemicals," according to documents filed with the U.S. Securities and Exchange Commission.
"What that constant changing of the name and the business of the company is indicative of, you know, is something that's struggling," Klymochko said.
Finally, he said, the source of financing for the deal wasn't made clear in Input or Bridgeway's public statements.
Input's shareholder briefing said Bridgeway would pay using equity from Bridgeway's "former parent company (a U.S. based family office)." The entity was not named.
Input said the rest of the deal would be debt financed by "a U.S.-based non-bank lender that the management team at Bridgeway has worked with in the past." That lender was not named either.
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When asked about this, Warsaba said the information wasn't disclosed because it was confidential.
Klymochko said Bridgeway's financial position is shaky, so "if they're going to do a $100-million deal, you figure investors deserve to know where the money's coming from."
Given all the red flags, Klymochko said he still doesn't understand why Input would announce such a deal.
"Because, in my opinion, it had low-to-no probability of actually being consummated."
Klymochko said the reputational cost is significant.
"There's not much worse than a deal that falls apart to dilute investor confidence," he said.
Klymochko isn't alone in his critique. CBC News provided documentation related to the proposed transaction to Camden Hutchison, a professor at the University of British Columbia's Peter A. Allard School of Law.
Hutchison is an expert in corporate transactions and governance who previously practised at Kirkland & Ellis LLP, a high-profile firm in the U.S. specializing in mergers and acquisitions.
He said if he had been asked to conduct the due diligence on this deal back when he was a corporate associate, he would have sounded the alarm.
"I would come back with like a million questions for the partner," he said. "'Whoa, whoa, whoa, whoa, whoa, whoa. This is a red flag, that's a red flag.'"
He independently raised many of the same concerns highlighted by Klymochko.
"You don't need to be a super sophisticated sleuth to see the issues here," Hutchison said.
A trail of broken promises
A Google search of Eric Blue's name reveals another series of companies, transactions and court actions that raise questions about his business practices.
One of those deals involves Arthur Maxwell, who owns Boston-based Portfolio Secure Lone LLC. He told CBC News he was introduced to Blue back in early 2019 through a mutual acquaintance.
According to Maxwell, Blue said he had a series of transactions on the go and asked Maxwell for $2 million US in short-term financing to make the deals work. Maxwell said Blue promised generous compensation in return.
Maxwell did some due diligence and found problems — unpaid bills and trouble with the IRS — linked to someone named Eric Blue, but Blue had an explanation for everything.
Maxwell said Blue told him some of the problems were old news and had been resolved, and others actually concerned a different Eric Blue.
"He claimed that his father, who was of the same name, was the individual who had the challenges and it was not him," Maxwell said in an interview with CBC News.
Maxwell said at the time, the red flags seemed relatively small when compared with the massive deals that were pending. So his company loaned Blue the $2 million.
Initially, everything seemed fine. According to Maxwell, Blue said he was going to use the money to close a series of transactions, including the purchase of the Joy Detergent Company, a subsidiary of Procter & Gamble. Bridgeway's SEC filings indicate the company signed an agreement to purchase the brand for $30 million in May 2019. Blue officially took over running the brand in September 2019.
Maxwell said he spoke with the new Joy management team Blue had hired and was impressed. He said he helped Blue on an almost daily basis, offering advice based on his experience in manufacturing.
A couple of repayment deadlines came and went, but Maxwell wasn't worried because Blue assured him the money was on its way.
Eventually, a hard deadline loomed. Maxwell was insistent that he had to be paid out by July 1, 2019, as he needed the money for another deal.
July 1 arrived. The money didn't.
Then Blue disappeared, Maxwell said.
"He completely disconnected. He stopped picking up his phone. I used other people's phones to call him. He would hear my voice and hang up on me," said Maxwell. "It was like he never knew me and he never met me."
Maxwell said Blue was tough to track down, but he eventually did with the help of a lawyer and a private investigator. Maxwell filed legal action, attempting to force Blue into bankruptcy.
Those involuntary bankruptcy proceedings, which list 25 different creditors, are working their way through the U.S. Bankruptcy Court in Texas.
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Maxwell also filed a lawsuit against Blue alleging he obtained the loan fraudulently and "misappropriated the loan proceeds for his personal use."
"Blue has not provided any explanation of where the money has gone and has blatantly ignored PSL's attempts to be repaid," says a court filing obtained by CBC News.
Blue didn't respond to the lawsuit, and in June 2020, the U.S. Bankruptcy Court in Texas awarded Maxwell a default judgment worth about $6 million US.
When CBC News told Maxwell about Input Capital's failed deal, he expressed surprise the company would have done a deal with Blue, given that all of the documentation about his case and others is readily available online.
"Why would anybody deal with somebody who has a history at this point now?" Maxwell said. "This isn't sheer speculation. This is a documented history that this guy, if given the opportunity, is going to screw whoever he's going to do business with."
Joy turns to sorrow
Despite the dispute with Maxwell, Blue's acquisition of the Joy brand from Procter & Gamble continued to move forward.
In early September 2019, Blue's new company, Prestige Value Brands, which had acquired Joy, set up an office in Cincinnati, Ohio, staffed with people who had previously worked with the brand when it was part of Procter & Gamble.
Michael Whelan, a finance executive based in Cincinnati, was intrigued by the opportunity and impressed with the team that had been assembled, so he applied to be the chief financial officer.
Whelan said Blue, whom he had never met before, proved to be "a very impressive guy."
"I left the interviews exhausted from trying to keep up with him and his thought patterns and the way he did things and thought through things," said Whelan.
Blue offered Whelan the job. He accepted and resigned from a previous long-term position.
In late September, just two weeks into his new role, Whelan received a nasty surprise.
"We got a call from the bank that was financing the deal and [it] said that we were in default of our loan and that the bank was taking over operations of the business and that we were to cease and desist doing anything until they came and spoke to us," Whelan said.
That was on a Friday. On Monday, the bankers showed up and took over.
"I have not seen [Blue] since the day the bankers called us and said we were in default," said Whelan.
In its annual report, Bridgeway notes that "as of Oct. 1, 2019, the transaction agreement [to acquire the Joy brand] was terminated between the parties. The terms of the termination are undergoing further negotiations."
The company that provided the financing to Blue for the deal, Piney Lake Opportunities, is listed as a creditor in Blue's bankruptcy proceedings.
Blue tries to buy another company
Maxwell said Blue also claimed he was using his money to broker another deal, this one with JHT Holdings, a transportation services company based in Wisconsin.
In May 2018, Blue offered to purchase the company for $200 million US.
According to a lawsuit filed by JHT, the company wanted Blue to commit to a $10-million termination fee in the event the transaction fell through.
Blue provided JHT with a letter purportedly from the Sydney and Walda Besthoff Foundation, a New Orleans-based trust corporation, guaranteeing the fee and committing to backing the $200-million JHT purchase. That letter was purportedly signed by Octave Francis III.
Blue also provided JHT with what appeared to be audited financial statements for the Besthoff Foundation showing the organization had $3.8 billion in unrestricted net assets, the lawsuit says.
Based on this information and the commitment letter, JHT entered into the agreement, which was to be sealed on Jan. 18, 2019, when Blue was to provide a $2-million deposit, according to JHT's lawsuit against Blue.
Blue did, in fact, provide that $2-million cheque to JHT on Jan. 18. However, one week later, JHT learned it had bounced.
Blue told the company he was unable to pay the deposit, the lawsuit says. Then the whole deal started to unravel.
Allegations of forged documents, identity theft
According to the lawsuit, the company discovered the Besthoff financial statements "were entirely fraudulent."
JHT alleged Blue had simply taken the financial records from another organization, the Kresge Foundation, and attributed them to the Besthoff Foundation.
On Feb. 11, 2019, JHT sent an email to Blue and Octave Francis III to inquire about the documents.
According to the lawsuit, Francis asked to be removed from the email chain.
"I am 100% unaware of, and not familiar with any pending deal(s) or discussions with any parties referred to herein," he wrote. "I, nor any member of my team… have any affiliation with the Sydney & Walda Besthoff Foundation … at this time or at any time in the past."
Up until that point, JHT had only communicated with who they thought was Francis through an email address connected to Blue's company. JHT officials say they have also spoken on the phone with someone claiming to be Francis.
Through his lawyer, Clarence Roby Jr., Francis told CBC he has never worked with Eric Blue or any company associated with him.
In an interview, Roby said that in 2016, Blue and Francis both served in roles representing the Sewage and Water Board of New Orleans. Blue was briefly a board member while Francis serves the organization as a financial adviser. The two men are also pictured together at a 2016 meeting of the New Orleans Regional Black Chamber of Commerce, of which Francis was the chair.
Roby said "don't read too much into that photo," and insisted Francis has no relationship with Blue. He says his client is a victim.
"It's akin to having someone try to steal your identity," Roby said. "But, in this particular situation, this is his professional reputation."
Roby said he has reported the matter to the FBI and believes the agency is investigating.
CBC News asked the Besthoff Foundation about Eric Blue and his business dealings. Someone at the office said, "No comment," and hung up the phone.
According to JHT's lawsuit, "the Besthoff Foundation denied any knowledge of or association with Francis, the foundation commitment letter, the foundation guarantee or the transactions contemplated by the merger agreement."
It is possible Blue may have become familiar with Sydney Besthoff in 2016-2017 when Blue was on the board of the New Orleans Museum of Art. Besthoff is a well-known patron of the arts and is a vice-president with the museum.
In August 2019, JHT won a default judgment against Blue for $11 million. It is one of the many creditors lined up in Blue's bankruptcy proceedings.
Information turned over to FBI, lawyer says
The whole matter came to a head again for Francis on Nov. 17, 2020, when a lawyer for Input Capital, Patricia Warsaba, sent him a letter asking for information and attempting to collect the $3-million termination fee Blue had agreed to.
Roby provided CBC News with part of his email exchange with Warsaba. He did not provide the original email she sent to his client in which she included a series of confidential documents.
"I have turned the information over to the FBI and I would not want to do anything that could interfere with their ongoing investigation," he said.
He did quote from portions of the documents, providing enough details that CBC News was able to confirm the authenticity of the information.
According to Roby, Warsaba said she had a letter written on what appeared to be letterhead belonging to a company owned by Francis in which he purportedly claimed to represent the Tom and Gayle Benson Foundation.
Until Tom Benson's death in 2018, he and his wife Gayle were the billionaire owners of the NFL's New Orleans Saints and the NBA's New Orleans Pelicans. Gayle is now the principal owner.
Roby said Warsaba's letter claimed that his client, Francis, had guaranteed the funding for the deal through the foundation and that Blue had said throughout the negotiations that Francis was part of Bridgeway's investment committee.
In an email Roby provided to CBC News, he told Warsaba: "My client has no affiliation, association or business interest with Mr. Eric Blue or any agent of Mr. Blue. He has also not been authorized to act as a financial advisor for the Tom and Gayle Benson Foundation."
"Mr. Blue appears to have created a fraudulent scheme, misrepresenting an investment relationship with Mr. Francis," he wrote.
Roby said apart from his client's flat denial, there are telltale signs the document is not authentic.
In his email to Warsaba, he noted that Input's letter to his client was addressed to a company Francis used to own but had since shut down.
"Mr. Francis has not been at the listed address for more than a year," he wrote, pointing out that Francis had since been employed at a different firm.
CBC News reached out to the Benson Foundation for comment. In an email, the organization said, "We have never heard of nor have we had any dealings with the persons you mention in this email — Eric Blue nor Octave Francis III."
CBC News asked Warsaba about Roby's account of the events.
"We are concerned as to how you now have highly confidential, highly sensitive information relating to Octave Francis and the Tom and Gayle Benson Foundation, the disclosure of which is damaging," she said.
'How are you making money out of this thing?'
Given how crucial this letter Input received appears to be to the entire deal, it is curious that Input didn't conduct more due diligence, Roby said.
"I mean, really? Explain that to me," he said. "What kind of due diligence might they have done?"
Warsaba told CBC News that Input was introduced to Bridgeway through a reputable investment bank, and the financing commitments were delivered from a major New York-based law firm.
Roby said his client is frustrated and feels helpless about the way his name is being misused.
He also said he's baffled by what's motivating Blue to keep engaging in a series of failed deals.
"I'm just trying to figure out what's the hook," said Roby. "How are you making money out of this thing?"