Creditrust sues insurer Enhance, seeks $520 million

Malicious statements on Internet alleged

Financial services

April 06, 2000|By Shannon D. Murray | Shannon D. Murray,SUN STAFF

Troubled Creditrust Corp. said yesterday that it filed an 18-count lawsuit seeking $130 million in compensatory damages and $390 million in punitive damages from its insurer, New York-based Enhance Financial Services Group Inc.

The suit also names an Enhance subsidiary, Asset Guaranty Insurance Co., which insures three of Creditrust's four asset-backed bonds, and Charles Henneman, a former Enhance senior vice president, as defendants.

In its suit, Creditrust, a Baltimore-based company that buys and manages delinquent credit-card accounts, alleges that Enhance, through Henneman, posted "maliciously false and disparaging statements" about the company on a Yahoo! message board on the Internet.

The suit alleges libel and violations of state and federal securities laws in nearly two dozen messages placed on the Internet to "undermine investor confidence in Creditrust and to interfere with Creditrust's efforts to raise capital."

"The Internet, unfortunately, has become a vehicle for people to say slanderous and untruthful things about a company for their gain, whatever that may be," Thomas Henning, Creditrust's general counsel, said yesterday. "We have been advised of our rights and we are pursuing this matter."

The suit was filed Tuesday in the U.S. District Court in Baltimore.

Enhance officials released a written statement yesterday saying that the company is "confident that the companies will prevail in the litigation based on strong defenses to the claims."

Bernard Kilkelly, an Enhance spokesman, said that the company is still insuring Creditrust's bonds and that Henneman was fired last week. He declined to say if Henneman's firing was related to the lawsuit.

Creditrust said the false statements were posted to coincide with a February 1999 registration by the company of a 3 million-share secondary stock offering.

The suit alleges that the Internet postings under the screen name "mcnooder" resulted in a number of ill effects for Creditrust, including undermining the investing public's confidence in the company, and enhancing the position of another company partially owned by Enhance that competes directly with Creditrust.

The Internet postings criticized Creditrust's accounting practices, financial status and management based on insider knowledge, the suit says.

Analyst Derek S. Derman, who follows Creditrust for Wedbush Morgan Securities in Los Angeles, said the suit could be important for Creditrust.

"The company has had a lot of misfortune lately," he said. "If they win this case, it would be big for them."

Last week, Creditrust said it had ended negotiations with an unidentified potential lender after the two sides couldn't agree on the terms of a badly needed $55 million loan.

In March, it was revealed that the company was under review by the Federal Trade Commission and several states to determine whether it violated consumer laws.

Before then, Creditrust hired Goldman, Sachs & Co. in December to advise it on finding a partner to buy a portion of the company.

The move came after Standard & Poor's withdrew Creditrust's "above average" ranking as a credit-card servicer, after disclosure that an employee of the company misdirected $500,000. The money was eventually recovered at no loss to Creditrust.

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