Case 0:09-cv-03664-JMR-FLN Document 42 Filed 01/22/10 Page 1 of 8

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; ) Civil No. 0:09-cv-03664
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 ) PLAINTIFFS’MEMORANDUM IN
Master Fund, Ltd.; KBC Financial ) SUPPORT OF MOTION TO
Products (Cayman Islands) Ltd.; ) PROCEED WITH LIMITED
Kingstown Partners, L.P.; Pandora Select ) DISCOVERY
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. )

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.

1
Judge Rosenbaum’s ruling on Plaintiffs’recent Motion for Preliminary Injunction and
Expedited Discovery only addressed the preliminary injunction request. (Tr. at 58-66.)
Stating that the motion was before the court on “an application for temporary restraining
order and preliminary injunction,” Judge Rosenbaum concluded that “this was an
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’s denial of Plaintiffs’request to stop CompuCredit’s $25

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’s $254.14 million in equity—

approximately 45%— as of September 30, 2009. (Exs. 2-3.) During the most recent

nine-month reporting period, PFH contributed 79% of CompuCredit’s total revenues, or

$98 million of the Company’s $124 million in total revenues. (Exs. 2-3.)

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
“Ex. __” refers herein to the Exhibits to the Declaration of Jeff Ross, filed with
Plaintiffs’Opposition To Defendant’s Motion to Transfer Venue.

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times greater. If both transactions are completed, over 53% of CompuCredit’s value will

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’s purpose in using its divestiture strategy to force the bondholders to

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’s solvency and business plans. Such discovery is necessary in light of

CompuCredit’s actions and will allow Plaintiffs to expeditiously develop the record as to

whether the pending spin off and $25 million dividend are fraudulent transfers.

3
“Ross Decl. ___”refers herein to the Declaration of Jeff Ross, filed together with Plaintiffs’
Opposition To Defendant’s Motion to Transfer Venue.

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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 “free to use and control pretrial procedure in furtherance of the orderly administration

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’s broad discretion to

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 “in consideration of the

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 pro-

forma basis, which reflects the company’s true financial condition. Yet not only has

CompuCredit paid a $25 million dividend to transfer assets, it has also announced a tax-

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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’s haste demands that the record in this case be promptly developed

so that all parties can reach a timely and fair resolution of this dispute relative to

CompuCredit’s announced actions. Limited discovery is urgently needed to gather

information about CompuCredit’s business plans, projections, valuations assumptions,

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’s solvency and financial condition. It will also shed light on the impact of

CompuCredit’s actions on Plaintiffs. This discovery will allow Plaintiffs to determine

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’s financial condition. Undoubtedly, the material is relevant to the

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’s solvency and financial condition. Most importantly, Defendant will have

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