Derivatives settlement with bank nets MIND $18.5 million

Yokneam-based MIND CTI will be getting $18.5 million in a settlement with a bank over auction rate securities (ARSs) that the bank sold the company.

The bank in question is reportedly Credit Suisse, on the grounds that all the other Israeli companies that fell on their ARSs bought them from the Swiss bank, which has been reaching settlements with them.

MIND will be distributing a $15 million dividend following the settlement.

The agreement provides for MIND, a small company that makes billing and customer-care software, to receive the settlement proceeds this calendar quarter. The company had previously written off NIS 20.2 million in connection with the bonds.

Its dividend, which amounts to 80 cents a share, represents a dividend return of 81% for stockholders who held onto MIND shares until the close of trade Wednesday, when the share price stood at $1.01 representing a market cap of $19.4 million.

The relevant date has not yet been set for purposes of the dividend distribution, and the distribution requires court approval. As of the end of the second quarter, the company had $11.8 million in cash on hand.

The settlement with the bank comes against the backdrop of MIND's investment of 62% of its funds, $20.3 million, in auction rate securities with a 2046 redemption date.

After the world credit crunch began in July of last year, many investors lost confidence in market credit instruments, resulting in a collapse in their price. The ARS is a bond issued for 10 to 40 years with a rate that is adjusted weekly, biweekly, monthly or every five weeks.

Like many companies, MIND invested in the ARS in light of its relative liquidity, but unlike most buyers of this type of bond, MIND pointed an accusing finger at the investment bank which sold MIND the bonds and sued the bank.

MIND claimed the bank made the investment without its knowledge and contrary to the company's explicit instructions that the funds be invested in highly safe and liquid bonds.

MIND said the bank acknowledged it did not follow instructions, and unlike other Israeli companies, MIND invested greater sums relative to the amount of cash in the company. This made it difficult for the company to operate in the prevailing financial climate and resulted in a decline in company revenue. MIND was also unable to make purchases as most of its funds were not liquid.

Several days ago a class action suit was brought against MIND in the United States, contending the company hadn't disclosed it invested in ARSs and that company procedure regarding management and monitoring was faulty. The suit also said the company's lack of liquidity made financing of the company's operations and purchases difficult.

Many other Israeli companies invested in ARSs, and most got their money back. Among those that got a complete refund were Teva Pharmaceutical Industries, Nova Measuring Instruments, Visonic and IncrediMail.

Most of the Israeli companies made their investments in ARSs following a visit by two brokers from Credit Suisse. The brokers visited Israel at the end of 2006 and convinced a lot of companies to invest in Credit Suisse ARSs.

At the time, the bonds were considered safe because they were highly rated, and some were based on university student loans or municipal bonds. Gradually, however, the brokers transferred the companies' money from relatively safe investments to more adventuresome ones backed by mortgages and then allegedly didn't inform the companies. In some instances, the brokers allegedly lied about the investments. The two are now accused of a billion dollars in fraud.

Israeli companies took two different paths in dealing with the huge losses that the ARS investments caused. Some chose to sue Credit Suisse, while others preferred to wait - with the understanding that the matter involved a systemic failure that couldn't be reasonably dealt with only locally.

Most of the companies received compensation in 2008 when U.S. regulatory authorities began to act aggressively against the banks to make arrangements to free up funds for small businesses - companies investing up to $10 million in these securities. Because MIND had invested more than that, it was not included in the earlier settlement and its case was just settled now.