(Updates with Gorman lawyer comment in seventh paragraph.)
May 30 (Bloomberg) -- John Gorman IV, a Texas junk-bond salesman, lost a bid to regain control of the brokerage he co- founded from executives who claim he wasted the firm’s money on escorts and private jets.
Gorman violated an agreement by installing a slate of directors on the board of the parent company of Austin-based Tejas Securities Group Inc. and improperly removing an existing board member, Delaware Chancery Court Judge John Noble ruled yesterday.
The seven-member board now has only four validly elected directors, including Gorman, Noble said. The judge also found Gorman acted in accordance with the voting-rights agreement by ousting another director and naming an ally to the board.
The decision means the question of who controls Tejas, a distressed-debt broker with about $20 million a year in revenue, remains unanswered until directors are properly elected to fill three vacant board seats. The company has had about 50 employees in Austin and New York.
“We’re open for business today with no change,” Robert Halder, Tejas’s research director and a former company director, said in a phone interview. Gorman didn’t immediately return calls today for comment on the ruling.
The board is now deadlocked, with Gary Salamone, Tejas’s chief executive officer, and Mike Dura, whom Gorman tried to remove, on one side, and Gorman and ally T.J. Ford, a retired professional basketball player, on the other. Ford played in the National Basketball Association for the Milwaukee Bucks, Toronto Raptors, Indiana Pacers and the San Antonio Spurs over an eight- year career.
“At most the decision is a draw, but it’s favorable to Gorman,” Michael Rennock, one of the bond salesman’s lawyers, said in an interview today. “Gorman has many more options available to him in the future than the defendants.”
Gorman is controlling shareholder of Westech Capital Corp., the holding company for Tejas, owning more than 2.4 million shares, or 59 percent of the common stock, along with about 51 percent of the preferred shares, according to court filings.
Noble was asked to interpret a voting agreement created as part of an $8.5 million recapitalization the brokerage undertook in 2011. Halder and other investors say Gorman’s trading losses and extravagant spending forced the firm to recapitalize.
Halder and other Westech investors argued in court that they had the power under the agreement to nominate a majority of directors. Gorman said that as majority shareholder he should control the board.
The control fight escalated after Gorman resigned from the board last year and began pushing to replace directors with board members loyal to him, Westech’s current managers said in a court filing. Gorman later rejoined the board after buying the interests of a Westech investor.
When Gorman called for a meeting of a new board at Tejas’s Austin office in August, Halder and the other current directors locked him out of the building, Gorman said in a filing.
A review found Gorman misused company funds, Halder and the current directors alleged in court. Cash was spent, “at least in part, on escort services,” they said in a filing, adding that Gorman chartered private jets “without any business purpose.”
Gorman denied wasteful-spending allegations in a January phone interview, saying he’d invested $15 million in the company and never took a salary or a dividend. He said he’s donated millions of dollars to private schools and charity wine auctions and helped the city of Austin expand its hiking and biking trail.
In a press release last year, he said the company’s board was paying “unauthorized bonuses” and “excessive attorneys’ fees.”
Gorman, who said he helped found Tejas in 1994, said current directors are misreading the voting-rights agreement signed as part of the capital infusion. It gives him power to elect a majority of directors because of his status as controlling shareholder, he said. At the company’s annual meeting in September, his director slate won a shareholder vote.
In his 47-page ruling, Noble found Gorman’s push to have Ford named to the board didn’t violate the agreement and the broker properly removed Halder from the board under the pact. Halder said in today’s interview that he no longer serves as a Westech director.
Still, Gorman’s attempt to have his full director slate installed ran afoul of the voting agreement, Noble ruled. Directors proposed by Tejas’s current management also violated the agreement’s terms, he said.
The evidence in the case “does not demonstrate that the directors on either slate were designated in accordance” with the agreement, the judge wrote.
The case is In Re Westech Capital Corp., CA No. 8845, Delaware Chancery Court (Dover).