horsehead holdings: guy spier submission to judge sontchi

Guy Spier

1345 Six th Avenue, 2 n d Floor , New York , NY 10105 gspier@aquamar inefund.com

In the U.S. Court of Bankrupctcy of Delaware

Horsehead Holdings

Hearing for an Equity Committee.

In front of Judge Sontchi

May 2n d , 2016

Thank you for holding this hearing.

Judge Sontchi, thank you for agreeing to see us. All of us deeply value the American system of

justice and the opportunity that you have given us to make our voice heard. That is not the case

in many countries around the world, where property rights and the right to due process are

regularly ignored and summarily dismissed.

I am grateful to be able to participate in the world’s leading economy. Where property rights are

respected, and where the extinguishment of property rights is something taken very seriously –

not something to be done light-heartedly, and without careful consideration.

God Bless the United States of America.

By way of introduction.

I am professional investor. and I run a fund of approximately $160 million investing in equities. I

have been doing this for almost 20 years. In comparison to funds like Greywolf and Hotchkis

and Wiley who run of the order of $3-4 billion each, I am miniscule. My annual operating budget

is of the order of $1.5 million a year.

Guy Spier


In 2014, I published a book titled “The Education of a Value Investor”.

As you know, I appear here on account of my personal ownership of Horsehead shares, not the

shares purchased by the fund that I manage. I am here in a pro-se capacity and can only represent

myself.

Also, by way of background, you should know that although I have an MBA and an

Undergraduate degree from Oxford in economics, I did study law for two years and I am familiar

with system of common law. Since the Horsehead bankruptcy filing, I have been racing to learn

as much as time allows about US bankruptcy law. Moreover, I have had some opportunity to

educate myself on the chapter 11 process that we find ourselves in through conversations with

friends and with bankruptcy experts.

Of course, I do not have the enormous legal talent, knowledge and ability that is arrayed against

us. The lawyers representing the objecting parties are being paid, by Horsehead, our corporation,

many hundreds, if not thousands of dollars per hour to oppose us. By contrast, I and my fellow

shareholders appear on account of our own investment in Horsehead, and we appear on our own

dime. We don’t cost the company, this court, or the taxpayer a penny.

Apologies for lack of legal training. I will do the best I can. Even though I am pro-se, I

have a huge responsibility to all the shareholders and I don’t want to mess this up for them.

Please bear with me.

Your Honor, you have to act through law and in accordance with the law. And I am here to

convince you that the just and correct course of action for your court is to appoint an equity

committee. I hope that although I am relatively ignorant of the law, you will listen carefully to

understand my arguments, and that if there is an appropriate legal basis to my submission, that

you will help me, or provide me with the resources to get there.

Guy Spier


We are not a group of embittered shareholders

I want to say up front and emphatically: We are not a group who refuse to acknowledge the harsh

facts of bankruptcy. We understand that some investments, and some companies fail.

I have now read about plenty of bankruptcies: In almost all cases, there was plenty of

forewarning by the company that they were entering the zone of insolvency. Most importantly, in

all of those cases, the company communicated through its filings and news releases explicitly

warning investors that they might have to file.

By contrast, Horsehead’s bankruptcy filing came as a complete surprise to all of Horsehead’s

shareholders.

In a certain way, it is the system that is on trial here.

I and the shareholders, as well as other observers of this process are asking: can investors trust

the markets? Can they invest and trust that the system will protect them? Do the SEC rules of

fair disclosure mean anything? Do the New York Stock Exchange rules mean anything. Do the

Delaware rules of chancery on the means by which someone, or a group of people can take

control of a corporation mean anything?

In short, can the well-heeled, the aggressive, the powerful and the rich take advantage of their

superior knowledge and resources and use the American bankruptcy system to take control of

assets that were in the hands of the less well off, the less powerful, and the less well connected?

And, we ask: Where is the financial system moving? Are we moving towards more democracy -

where more and more people participate in enterprise capitalism? And where the courts and

regulatory bodies protect their right to fairness and full disclosure? Or the opposite.

Your decision in this case will affect our and many observers’ opinion of what the bankruptcy

system is really about.

Guy Spier


Another apology.

As you know, I disagreed with the US Trustee’s response to my petition for an equity committee.

Having spent $100,000 of my own money for the submission to the US Trustee, I was informed

by my attorney at the time – Ancela Nastasi that the cost of filing this motion would be

$250,000. Simply money that I did not have to spend. But when I decided to do it Pro-Se, I knew

it had to be genuine, so I made sure that I owned shares of the company personally and set about

writing the motion on my own. In that submission, I did not realize that you should be addressed

as Judge, not Justice. I hope that you will accept my apology for that. I now know to address you

as Judge Sontchi.

I also need to apologize to you for another reason. Because I know that our presence here makes

your life far more difficult. I understand which way the wind is blowing. I and all the other

equity holders understand the rules of priority, and that in order to receive a meaningful

distribution all the other claimants against the company need to be made whole.

Even though I am simply requesting an equity committee I can understand that the most straight-

forward thing for this court to do would be to approve a course of action that leaves the

shareholders with nothing.

My intent is not to make your life difficult for the sake of it and is not my intent to waste your

court’s time. I understand that this is one of many cases on your docket, and that you have

enormous amounts of work to get through. And it is certainly not my intent to seek to gain a

distribution where we do not deserve any.

But I want to remember here that while there is much in our liberal democracies that is highly

efficient, justice, by its nature is not efficient and not meant to be efficient. If we were willing, as

a society to endure a lot more injustice, we could model ourselves on a country like Russia where

Guy Spier


courts often approve asset grabs. Here we don’t do that. That takes time, and causes headaches.

But for a very good cause. For fairness and for justice. And that is why we are here.

Let me start with the objections to our motion to form an equity committee.

Let me first dismiss a couple of objections with are so risible that I thought twice about

addressing them in this statement.

The first is that we can represent ourselves. Your Honor, not one of us is a significant owner. We

are geographically dispersed. Very few of us manage money professionally and none of us can

afford the sort of high powered attorneys, like those from Kirkland and Ellis or Akin Gump that

our very well-funded opponents have.

The second is the idea that the KPMG report is hearsay – which is also risible. It was prepared

for Aquamarine Capital management through its then lawyers, Nastasi partners and sits on the

docket as part of this case.

Let us go to the substantive objections as I understand them.

I can summarize them as follows.

1. The KPMG Report is based on old data

2. The KPMG report is flawed.

3. Book value is not a guide to valuation.

4. That the market valuation of the securities proves their point.

Let me deal with these.

1. The KPMG report based on old data

The reason why the KPMG report is based on old data is that they are the only reliable data we

have. At the time of our motion, the company had filed its third quarter 10q with the SEC. Over

Guy Spier


and above that, they made some declarations in their first day filings that showed enormous book

value as well as more than $80 million or more of ebitda two years out.

But your Honor, the debtor, through its control of the corporation and the secured creditors,

through their extraordinary influence over this process are seeking to squash down the value of

the corporation.

They can control the flow of information. For example, it was only a few days ago that they filed

the exhibits to their proposed plan of reorganization – in which they have a liquidation analysis

and a valuation analysis.

We have not had time to examine these, or to be able to properly challenge their assumptions.

Indeed, the debtors themselves don’t want to hold themselves to their assumptions or to their

conclusions – because these filings with the court are riddled with hedging statements that say

that they are making estimates that they cannot be held to, and where they say that they reserve

the right to change their estimates and their assumptions, and that the figures presented can be

subject to change.

We are being asked to prove the valuation of Horsehead, when the company has not even filed

its audited year end 10K - a statement that all public investors are used to seeing, and count on

with accounting oversight and with the legal responsibility that comes with filing a 10K.

In this regard, I ask you to also note the various statements in their joinders where the other

shareholders called up the company to find out what was going on, and they were told by Ali

Alavi, their director of investor relations that they should rely on the public filings of the

company. Except that the company is not making that information available.

So on the one hand, the company is telling its shareholders to rely in its statements and public

filings, and on the other hand it is not providing the information we need. And when it does

Guy Spier


provide information to this court, their statements are surrounded by hedging language that these

are estimates, and should not be relied on, and do not have the blessing of their auditor, or the

scrutiny that comes with a filing from the SEC.

It does not appear right to me that the court should require us to prove valuation when we do not

have access to reliable data, and moreover, the company itself is not willing to certify the little

data that it is providing. That’s just not fair. You are sending us into a punching match with a

Mohammed Ali with one hand tied behind our backs.

But there is also the broader point: If you deny an equity committee, you will be giving a

blessing to the debtors and the creditors actions. Effectively, you will be saying that it is all right

for a company to declare bankruptcy, to shut down substantive communication with the

shareholders, and then to rely on its own, unaudited, and heavily hedged reports to justify a low

valuation that deprives the shareholders of their ownership interest in the company.

It cannot be right that you can bless a situation where the fox is watching the hens.

2. The KPMG report is flawed.

First of all, let me state simply: KPMG report is not flawed. KPMG is a big four account and has

a reputation to protect. The validity of the report is patently obvious to anyone who reads it. Can

one disagree with the assumptions? Of course. But the KPMG report takes great pains to show

that their assumptions are reasonable and that they are based on independent and reputable third

parties.

Now of course the debtor and the secured creditors want to take the most conservative possible

assumptions, and of course they want to disagree with the KPMG report. But it is not flawed. It

is a perfectly valid valuation report – one that any one of the debtor and or the creditor would

have attested to and supported were they interested in showing a richer valuation.

Guy Spier


In regard to assumptions, I would like to go into one misconception of the US Trustee – who in

their objection to our motion state that the KPMG report does not reflect current conditions. The

US Trustee contends that the ebitda multiples are too rich. That betrays a fundamental

misunderstanding of valuation in cyclical industries. For it is well known and well understood

amongst investment analysts that cyclical industries show their highest ebitda multiples at

cyclical lows, and their lowest ebitda multiples at cyclical highs. This may be counter-intuitive,

but it makes sense. Because markets and rational actors are forward looking. To value a business,

analysts look to normalize the cyclical nature of the business under examination in order to think

through where the company stands mid-cycle. Not at the peak, and not at the trough. The debtor

and the secured creditors seem to have convinced the US trustee and others that at a cyclical low,

multiples have to be low as well, when it is the exact opposite.

Your Honor, the KPMG report represents is a perfectly valid valuation of Horsehead. One that

any purchaser would use in deciding how much to pay for the business.

3. Book value not a guide to valuation.

Let me also state. This court cannot ignore the whole world of accounting and Generally

Accepted Accounting Principles. If book value is not a guide to valuation, then what is it? I

would like to remind the court of Benjamin Graham, the author of the Intelligent Investor. He

built a very successful investment career and mentored Warren Buffett based on the simple idea

of valuing companies based on book value which is widely recognized as a guide to business

value.

So if book value does not represent a first approximation of the value of the company, then what

is it? Just an irrelevant number? And what does it mean when a company takes a write-down on

its assets? Or when a company writes up its assets, or re-values its assets on the balance sheet?

In the world outside of the bankruptcy courts, book value is most certainly a guide. A first

approximation of the value of the business. I believe that your court understands book value and

Guy Spier


the economic importance of these numbers. Bankruptcy court cannot be a place where these

numbers are just ignored. It seems, your Honor, that this is the claim that the objectors are

making.

And here is the most important point that is ignored by the objectors. If the Mooresboro plant

was so impaired: if business was so bad, why did they not take a write down? In this case, the

relevant accounting standard is SFAS 144. This is a widely available accounting standard. One

that I assume the court is aware of.

Here is the relevant quote:

Under SFAS 144, “impairment is the condition that exists when the carrying amount of a

long-lived asset (asset group) exceeds its fair value. An impairment loss shall be

recognized only if the carrying amount of a long-lived asset (asset group) is not

recoverable and exceeds its fair value.”

SFAS 144 then goes on to determine how that is calculated and when it is applied.

As I said in my motion, the company did not recognize a write down of their assets. I just want to

repeat that to you: All the way up to the bankruptcy filing, the company did not recognize a

write-down in the carrying value of Mooresboro.

Any disinterested observer cannot rule out the possibility, or should I say the probability that the

debtor did not write down the value of Mooresboro because they did not believe that it had been

impaired.

In other words, the debtor’s own actions prior to bankruptcy are utterly inconsistent with what

they are now claiming in bankruptcy.

Guy Spier


If the debtor wants to claim, as they do that more than $400 million of value was inexplicably

wiped out since the their last audited 10q, and since their bankruptcy filing, then at least this

court should make them go to their auditors to do an official write down of their assets. I wuold

expect that the auditors will refuse write down the assets because they did not meet the

accounting test. A write down of the only assets happens when there has been an “other than

temporary” impairment of the value of the asset. And it is clear that teething problems in getting

a plant up and running, as well as a temporary decline in the price of zinc (which has already

reversed itself) is very much temporary.

Bottom line is that I don’t think that the accountants would agree to write it down.

And if the debtor managed to convince the auditors to do a $400 million write-down, then I

would want to read in the footnotes why this happened. What if the auditors write in their

footnotes that the decline in the value of the business had little to do with their temporary

problems before bankruptcy and a lot to do with the actions that the management took after

bankruptcy?

Your Honor, if the company had made statements prior to bankruptcy that their plant was

impaired, if the company had taken a write-down, then their claims that the business is worth so

little would be believable.

But they were saying the opposite before bankruptcy. So are you now willing to accept their

claim that the business is worth so little without challenge? If this was a valuation fight between

two equal parties – with equal resources where they are allocating the pieces of the pie, then

perhaps.

But as it is, they are seeking to use your court to extinguish our state-law property rights. As

such, I submit that you ought to move very slowly and carefully to make sure that our property

rights are not being unfairly taken away from us.

Guy Spier


For this reason, it would be just and fair to level the playing filed by granting us an equity

committee.

4. The trading valuation of the debtor’s securities proves the objecting parties point.

The debtor has charts in their submission showing that the market was already marking down the

value of the company’s securities prior to bankruptcy thus indicating insolvency. Your honor,

they are wrong. They seem to be implying that the market is efficient – that it accurately reflects

all available information. But that is a theory that has been thoroughly debunked many times.

Security prices move for all sorts of reasons. They move because of liquidity reasons and also

because of cycles of fear and greed not to mention market sentiment. It regularly occurs that an

irrational seller is selling an illiquid asset and that its price goes down while he is selling only for

it to go back up once he stops. The idea that the market prices of the securities is a guide to value

at all times is risible and naïve.

But in this regard, what is certainly not naïve is that the precipitous drop in the market price of

the debtor’s shares around the bankruptcy was the result of the realization within the equity

markets that the ad-hoc group had gotten a hold of Horsehead, and that their intent was to grab as

much value as they possibly could. And while this explanation of that precipitous drop may well

be true, that does not make it fair or right, or the correct outcome in this case.

As I stated in the motion, the court should guard against circular reasoning. The court cannot

deny our motion and allow the creditors to continue in their current course of action simply

because they have been very successful to date.

In other words, just because the wolf has half-swallowed the rabbit does not mean that this court

should give it the right to eat the rabbit. In this analogy, the rabbit is Horsehead and the ad-hoc

creditors are the wolf.

Guy Spier


My point to you is that we are being asked to prove that the rabbit is alive when the wolf has half

swallowed it. Well, if you allow the wolf to swallow it, of course it will die. But if you allow us

to pry open the wolfs jaws and stop it from swallowing the rabbit, then you will see that the

rabbit is very much alive.

A word on Spansion.

The objecting parties have cited the Spansion case a number of times in their objections. Before I

go into Spansion, you should know that I am at a substantial disadvantage to the other parties.

Not least because I have a day job which does not involve fighting Kirkland and Ellis on a daily

basis and I have been doing this work in my spare time. But also because I don’t have access to

Lexis Nexis and the body of case law upon which your court bases its judgements. And so when

the objectors cite Spansion, or Exide, it has been hard for me to get a complete statement of the

facts of the case and the judgements rendered in order to fully understand the precedent and to

argue it.

But based of the fragments of the case that are available on the internet I would like to point out

the following distinction in the Spansion case: In Spansion, we are talking about the valuation of

a participant in the semiconductor industry. It is a fast moving industry, in the midst of rapid

technological change where prices drop every year and technologies that are in demand today

can easily be obsolete tomorrow. It is an area where patents and intellectual property are subject

to disruption and where projections are certainly difficult and uncertain.

In the case of Horsehead, we are not talking about an industry with rapid technological change –

where a company’s whole product line can be obsolete within a matter of years. We are talking

about zinc metal. Where there are tried and tested processes that have been around for decades

and whose economics are well understood. With Horsehead we are talking about industry and

plant economics that are not subject to rapid, dynamic change.

The court needs to make this important and relevant distinction.

Guy Spier


I can accept that the judge in Spansion was right to deny an equity committee based on an overly

optimistic forward looking valuation that made all sorts of uncertain assumptions – because of

the extreme uncertainties in the semiconductor industry.

But that is emphatically not the case here.

Let me repeat. Spansion does not apply because the fact of the case are not analogous. In this

case, predictions about the future can and do apply – because the industry economics are simple

and unchanging. For this reason, Spansion is not a precedent for the case that we have before us

today.

Valuation and substantial likelihood of recovery to the equity

Your Honor, I understand full well that in circumstances where the equity is out of the money,

then awarding an equity committee would be an unjustifiable gift. And I understand that this is,

at its heart, the point that the objectors to the motion are making. Their claim is that there is no

value to the equity, and allowing an equity committee would unjustifiably burden the estate. And

that, to the extent that we were to exercise nuisance value, that would enable us to extract

something out of this situation that would not be ours to claim given the rule of priority that

exists in bankruptcy.

But given the proper resources: The ability to challenge their assumptions. To gain information

from officers of the company. To force them to be honest and reveal all the facts. To have the

resources to be present in a persistent way in this bankruptcy case, then we will be able to

demonstrate substantial recovery to the equity.

But let me state emphatically. If my prior arguments on valuation have not convinced you, then

we are unlikely to be able to demonstrate substantial recovery to the equity if you do not allow us

the resources we need to demonstrate it.

Guy Spier


You should know that I learned from an informal conversation with counsel for the UCC that

one option would be for you to dismiss our motion without prejudice. In other words, that you

might decide to base your decision on this motion on the narrow confines of the Spansion, and

Exide, and deny this motion without prejudice, meaning that we could theoretically come back at

a later date and make our case.

But you should know, and I want to state this with emphasis, that this is not an option for us. We

face enormous obstacles of organization, of resources, and of information. This is the end of the

road for us. Telling us that we can come back and mount a valuation fight while denying us the

resources to do so is no different to denying us an equity committee.

In saying this, I am fully cognizant that granting an equity committee would introduce an

inefficiency into this process, and that it would burden the estate. Of course it would, but as we

know, that is the nature of justice and due process.

Even if you decide, like the US Trustee that we have not (yet) met the burden of showing a

substantial likelihood of a recovery to the equity, you have to accept, at minimum, that we have

done a great job with the information and resources that we have at our disposal. And you have

to allow for the possibility, and I would argue that it is a high probability that, given a level

playing field, we would be able to demonstrate that value.

And given the stark contrast between the debtor’s actions and behavior pre and post-bankruptcy.

The optimism with which they talked about the business pre-bankruptcy and the sudden shut

down in communication and the pessimism of their submissions and statement subsequently, is it

so wrong that we burden the estate with an equity committee that can properly represent our

interests, which can carefully examine the debtor’s statements, their data and their witnesses?

Even if the probably that we win a valuation fight were, in your judgement, less than 100%

would it not be just to allow us a fair chance?

Guy Spier


I am only asking the court to give us the opportunity to prove that.

In considering this, I would like you to take into account some incontrovertible facts that I do not

think are subject to dispute by any party to this case.

1. At no time prior to the bankruptcy did the debtor make any statements that pointed to the

impairment of their business or of Mooresboro. Instead they repeatedly pointed to

difficult trading conditions, but frequently reassured us that they had sufficient liquidity

to get through 2016.

2. At no point prior to bankruptcy were they required by their auditors to take an asset write

down.

3. When the company entered technical default on their Macquarie line, they stated that they

would make the required payment by the end of the month.

4. On the first day filings, the creditors revealed that while they were unwilling to work with

the company to cure a discrepancy in the value of their collateral, they were, however,

willing allow a primed $90 million DIP Loan while at the same time not allowing the

equity a chance to fund the company through a rights issue, or similar. Thus the same

secured lender that did not consider a rights issue to bring in new equity capital allowed

itself to be primed via a $90 million DIP.

Forgive me for repeating myself. But I want to make this point again:

5. At no point did they come to the equity owners and announce the need for more capital.

At no point did they announce a rights issue, or make any statement of the need for cash.

And in their plan of reorganization, they shut out the equity, and reserve for themselves

only the right to invest in the business.

Guy Spier


Does this seem to you like the actions of someone who is hopelessly insolvent? Or does this

seem like something else? Because to more than 1,000 shareholders and many other observers, it

seems like something else.

And I submit to you that even if you have one iota of a doubt as to the objecting parties claims

regarding no recovery to the equity, I think that the right thing for the court to do is to find in

favor of our motion. Not to do so would be to be acting in far to cavalier and a precipitous

manner with regard to depriving us of our state law property rights.

I would also like to note; your Honor is that we are not asking you to deprive the creditors of

their right to 100% recovery. We believe that if you allow an equity committee, we will be able

to bring about a course of action for the debtor that will result in 100% recovery for them and

enable us to remain as owners of the business.

That would happen through selling Zochem and Inmetco, and then doing a rights issue, along

with a potential swap of the unsecured debt for equity.

Some glaring inconsistencies in the debtor’s actions when it relates to valuation.

Your Honor, I want to reiterate a few of the inconsistences of the debtor’s actions, which to my

mind are extraordinarily revealing.

Announcements prior to bankruptcy

Note that when the company went into technical default on the Macquarie loan in January of this

year, they did not make an announcement to the market that the company was in danger of

insolvency. Nor did they solicit the shareholders for more money. They did not announce to the

shareholders or to the market that unless they came up with more money, they might have to file

for bankruptcy. Instead, they told the market that they were within the grace period and that they

would make the required payment of $1.8 million by the end of the month.

Guy Spier


Rights Issue

If the debtor is claiming that the value is so low, and that there is hardly recovery for the

debtholders, why would they not allow the equity to participate. You would think that they

would welcome our willingness to put fresh money into this. Instead, they shut us out and put

together a plan that only allows accredited investors to participate.

Are these the actions of a corporation that really thinks its value is so low. If they truly disagree

with us, they should allow us to put our money where our mouth is. Allow us to participate.

Allow us to come up with fresh capital.

Appearance of the members of the Ad Hoc Group on the shareholder list.

At the time of and up to the bankruptcy filing, various members of the ad-hoc group owned

shares. Does this strike you as the actions of someone who does not believe in the value of the

business? Moreover, one member of the ad-hoc group owned a dominant position at all levels of

the capital structure.

And if the value of the business is so low, why would they have put an additional $90 million

into it? Why not solicit the shareholders to put money in? You don’t put $90 million into a

business you believe has failed..

DIP Facility

Now consider the way that the company sought to remedy the situation. Rather than seek money

from the equity holders. Rather than make an announcement to the market that they were in dire

need. they filed for bankruptcy with a proposed $90 million DIP facility.

Sale of Zochem and Inmetco

Why has the debtor not vigorously marketed Inmetco and Zochem for sale so that they can use

the proceeds to pay down debt. Why would the debtor not share information about the health of

Guy Spier


Zochem and Inmetco and advertise it widely? Instead, it seems to me that they are keeping

enormous amounts of information to themselves.

I am aware of at least one buyer that would be very interested in Zochem. Why not sell it to pay

down debt at par?

To me and to many observers, the pattern of facts is extraordinarily consistent an attempt to gain

control of valuable assets through the backdoor of the bankruptcy court. By contrast, an equity

committee would provide us with the ability justly restructure the company’s obligations in the

manner actually intended by the by the bankruptcy code.

Other bases of action for you to enter an order for an equity committee.

In urging you to take this action, our opponents will plead with you that while all of the above is

surely heartbreaking, the law is the law and that your only course of action is to take a narrow

view of Spansion and of the existing case law and that, therefore, no matter how much sympathy

you find with our motion, you have to find against an equity committee.

As I have mentioned above

1. I submit that we meet the valuation criteria established in Spansion.

But if the court finds that we do not meet the Spansion criteria, I submit to you that

2. Spansion does not apply in this case.

But I would also like to plead with you that, separate to valuation, as a court of equity, you have

are other grounds to grant us an equity committee.

Guy Spier


Your court cannot be used to side-step SEC rules of fair disclosure.

I hope that it has become clear to you from the facts already presented that there is an

extraordinarily high likelihood that prior to bankruptcy, the company violated SEC rules of fair

disclosure. The company clearly did not communicate numerous and important material facts to

the market.

Several class action suits in this regard have already been announced, and it is only a matter of

time before a complaint is filed – in a Delaware court.

Given the very strong prima facie evidence for these violations, it should be clear to this court

that the debtor’s bankruptcy filing is an extraordinarily fortunate way for them to whitewash this

behavior and to leave any claims that are proven against the estate, while the debtor goes on,

with your blessing, unburdened by their past misdeeds.

This is a form of fraudulent conveyance. Pile on in your violations of all sorts of rules prior to an

intended bankruptcy filing in the knowledge that you will be made clean by the bankruptcy

court.

The facts clearly point to this, and I am pointing this out to the court

Your Honor, I submit that the US Bankruptcy court cannot be a venue where debtors’ pre

bankruptcy violations of law are whitewashed. Not only is it unfair and unjust. It thwarts the

extraordinary work done by the SEC, and by those people who legislated the SEC protections for

public investors. Allowing the debtor to whitewash their actions in this case would only

encourage others to do the same thing. It would be a bad decision and it would encourage bad

behavior.

Your Honor, please also note that in this matter, we do not have recourse in another venue

because it would be too late to obtain any real redress.

Guy Spier


Your Honor, if we have not convinced you on valuation, it seems to me that this is a very solid

basis for action on your part. And if I had the time and the access to the case law, I would like to

believe that I would have found precedents that would give you a solid and legal basis for

allowing an equity committee.

Your court cannot be used to sidestep the Court of Chancery.

Your honor, in parallel reasoning to the above, I submit that the creditors have unjustifiably and

precipitously taken control of the debtor, but without having to go through an annual meeting,

without having make the customary filings and get the requisite permissions. It is clear to me,

and I submit to you that they are using the guise of Bankruptcy to sidestep all of the protections

put into place regarding corporate control. The shareholders had a right to know that there was a

new master in the house, and that the new master was seeking to gain control of their

corporation. That is the reason why investors have to file 13d and 13g filings. That is the reason

why when you seek to acquire 100% of the shares of a corporation, there are announcements that

have to be made, and permissions that have to be granted.

None of these happened in this case. If you allow a course of action that extinguishes the equity

in Horsehead, you will have granted the debtor and the secured creditors a de facto pass on all

these rules.

The Bankruptcy Court is there to help insolvent companies to reorganize or to liquidate under its

protection. It is not there to rubber stamp a change in corporate control.

I would like to draw to your attention to the fact that, in spite of stating that we are willing to

provide more financing, and that the company can raise cash by selling Inmetco and Zochem, we

have been shut out. Does that look to you more like an insolvency, or does it look like an attempt

to subvert and sidestep investor protections regarding corporate control?

Guy Spier


Your Honor I submit that if you find that you cannot grant our motion on any of the basis

mentioned above, this also provides a very solid basis upon which you would grant us an equity

committee.

US Bankruptcy Court does not operate in a vacuum

Your Honor if you allow the bankruptcy proceedings to continue on their current course the

basic result is that you will be giving your court’s blessing to all those activist investors who

seem to want to use bankruptcy as a way to sidestep the investor protections that have been built

up for the public markets.

The message you would be sending to rich and powerful activist funds everywhere is that if you

can’t get what you want because of the protections provided in the public markets, find an

excuse, or orchestrate a reason why a company should file for bankruptcy, and then all your

wishes will be granted.

Such a decision would set a chill on the appetite of individual investors to take risks and to fund

growing businesses. It would raise the cost of capital in the United States and make its capital

markets less efficient. It would make the United States a less attractive place to do business.

And it would be rewarding what is at best, mercenary behavior and at worst, perhaps unethical,

or illegal behavior.

Discovery and a high standard to be placed on the debtor and the secured creditors

Your Honor, I hope that I have at least presented you with at least a reasonable suspicion that

this is not just an ordinary bankruptcy proceeding. And that we are not just a group of embittered

shareholders, who refuse to accept that the company we invested in has no value. That it has now

filed for bankruptcy and its equity is worthless.

Guy Spier


I hope that I have raised some very real questions in your mind as to the behavior of the debtor,

and of the secured creditors. Behavior which, if you do not grant our motion, would ultimately

be whitewashed.

There are numerous other questions that we have as shareholders which I believe we have the

right to get to the bottom of.

For example, when did the debtor became aware that shareholders had also become creditors and

were exerting a dominant influence on the company? Why was this not a material fact to

communicate to the market?

When did the company begin discussions with Kirkland and Ellis and with Lazard. The

announcement that they had been hired came less than a few short days before the bankruptcy

filing. Why did that announcement come so late?

Because I do not believe that those elaborate filings were prepared in such a short time. I believe

that we have the right to know.

My point to you is this. If the debtor and the secured creditors want to make the claim to you that

normal shareholder protections were not violated, I think that the shareholder have the right to

find out, through discovery, if that, indeed, was the case. They should bring the evidence that

they are not misusing the US bankruptcy court. Anything else would allow a de-facto subversion

of the SEC protections for public investors.

An equity committee would allow that process of discovery to occur.

Again, I believe that extinguishing the state law rights of the equity holders is not something that

your court should take lightly. And given the pattern of facts that I have pointed out, I think that

the court should be extraordinarily careful in case a big injustice occurs.

Guy Spier


Granting an equity committee would allow us to properly investigate and understand if the

debtor and the secured creditors were fully within their rights, and fully complied with the law,

or, as we believe they were not.

The Beauty of the Common Law

Your honor, I do not have access to the law, or knowledge of the law to be able to give you the

proper alternative legal basis for the granting of an equity committee if we do not succeed

through valuation, but I strongly believe that the basis for affirmative action on our motion exists

within the common law.

As a student, I spent two years studying law at Oxford. It was British Law. Even though the

United States left the commonwealth, and the Napoleonic Code is also part of North America’s

legal tradition, the United States and the United Kingdom both share in a common law system

which is considered by many to be one of the crowning achievements of Western Civilization.

The Common Law provides an extraordinary balance between precision and justice. Precision is

key, because in order to engage in productive economic activity, people need to know what the

law is. But at the same time, the law needs to be fair – not just treating like cases the same, but

also allowing for justice in specific circumstances.

I hardly need to take your time regarding matters of jurisprudence. But here is the salient point:

If I , or a legal expert working for me would have had the time and the resources to study the

case law (Lexis Nexis is very restrictive on providing access, and I have a fund to run), I am

quite certain that we would have been able to find you the legal precedents for you to enter an

order to provide an equity committee.

Summary

Your Honor, this bankruptcy has lead into some valuable discussions with various experts in

bankruptcy including Diane Dick who is a professor of law at Seattle University. My discussions

Guy Spier


with her have only reinforced the legal and moral validity of our quest for an equity committee in

this case to achieve adequate representation.

Simply put, without an official committee to advocate on our behalf, this case has the potential to

violate all of the fundamental principles that supposedly govern both the financial markets and

the bankruptcy system.

In saying this, I have learned of what some used to call the “goldfish bowl quality” of

bankruptcy. I.e. the capacity of the bankruptcy process to put the debtor’s operations under an

unfair and glaring light.

Also, bankruptcy requires much more disclosure, including opportunities to examine debtor’s

officers, than is generally required in non-bankruptcy financial reorganization. This is because,

as we all know, only in bankruptcy can state law rights be legally compromised, through the

automatic stay and cram down.

For these reasons, I have learned that the drafters of the Bankruptcy Code expressed repeated

concern for the vulnerable position of a debtor’s public equity investors.

1. For instance, the legislative history reveals that Congress believed it was “essential for

the public to have legislative assurance that their interests will be protected,”1 and that “such

assurance should not be left to a plan negotiated by a debtor in distress and senior or institutional

creditors who will have their own best interest to look after.”2

2. Recognizing the unique collective action obstacles faced by shareholders, the drafters

hoped that the appointment of an official equity committee in appropriate cases would counteract

the tendency for debtors to appease creditors at the ultimate expense of shareholders. These

1 S. REP. NO. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5796. 2 Id.

Guy Spier


protections were viewed as especially necessary during bankruptcy, as reorganization

proceedings are “literally the last clear chance to conserve for [shareholders] values that

corporate financial distress or insolvency have placed in jeopardy.”3

3. The drafters ultimately adopted the discretionary standard for the appointment of official

equity committees in recognition of the fact that many companies in bankruptcy are hopelessly

insolvent, and that an equity committee would, in those circumstances, simply impose additional,

unnecessary costs.

4. But in cases such as Horsehead Holdings, where the most recent disclosures suggest

considerable equity value and the debtor has not disclosed enough to suggest a major departure

from those figures, it seems clear that the drafters would have wanted the court to err on the side

of appointing an official equity committee.

5. Otherwise, Your Honor, the court would basically be saying that—notwithstanding the

debtor’s own first day filings that claim nearly half a billion dollars of equity—the company’s

shareholders must overcome a truly impossible hurdle in order to obtain an official committee:

a. they must put forth a successful valuation trial and

b. they must do this without the benefit of professional advisors who are being paid by the

estate, and with only a few days to even simply digest the debtor’s plan-related disclosures.

In reading the legislative history of the Bankruptcy Code, this cannot be what the drafters

intended. Nor does this seem to be at all fair or equitable.

3 S. REP. NO. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5790.

Guy Spier


Conclusion

Your Honor, I urge you to consider this case from the public investor’s perspective. Please do

not allow bankruptcy to overturn the investment-backed expectations of the company’s public

equity investors, who—on the basis of the company’s own public disclosures—are entitled to a

seat at the negotiation table and require an official committee for adequate representation.

Respectfully submitted,

Guy Spier

horsehead holdings: guy spier submission to judge sontchi

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