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For MoneyGram International Inc., the ailing money-transfer company that has lost about $1.6 billion on investments tied to mortgages, the trouble may be just beginning.
The St. Louis-Park based company disclosed that it now is the target of an investigation into its financial statements and other disclosures by the Securities and Exchange Commission (SEC), the nation's chief market watchdog.
While the federal agency hasn't determined if any laws were broken, the cost to defend the SEC inquiry "could be substantial," according to a 10-K form the company filed Tuesday.
The disclosure came on the same day that MoneyGram, the nation's second-largest money-transfer firm, said it completed a transaction that would hand over a majority stake in the company to new investors.
MoneyGram said affiliates of Thomas H. Lee Partners and Goldman Sachs Group bought $760 million in preferred shares that can convert into 79 percent of MoneyGram's common shares at $2.50 a share, the company said in a statement.
MoneyGram shares Tuesday rose 55 cents, or 31 percent, to $2.33. The stock has declined 92 percent in the past year, erasing more than $2.2 billion in shareholder value.
MoneyGram had planned to exchange just 63 percent of its stock to its new investors at $5 a share.
But it had to sweeten the offer after failing to meet some of the terms of the original deal.
"With the completion of this important transaction, MoneyGram now has the financial resources to support our customers and their growth plans," Philip Milne, president and CEO, said in the statement.
But the SEC investigation appears broad, and likely will revolve around whether the company has been candid with investors about its financial losses, analysts said. Some analysts and large shareholders are unsure how the company's investment-related losses grew from $230 million in the third quarter ended Sept. 30 to a $1.6 billion loss just six months later.
MoneyGram said in a regulatory filing Tuesday that the SEC has opened an inquiry into "financial statements, reporting and disclosures related to our investment portfolio and offers and negotiations to sell the company or our assets."
The investigation could lead to the ouster of Milne and other senior management, said Robert Dodd, an equity analyst with Morgan Keegan & Co. "The SEC might be more willing to let the investigation drop if one or more of their top executives goes," Dodd said.
The SEC likely will take MoneyGram's recent ownership change into consideration as it pursues the investigation, said James Cox, a professor of securities law at Duke University. If violations are found, the agency might see little sense in punishing MoneyGram's new owners after they orchestrated a bailout of the company, Cox said.
"Corporations don't act. Officers act," said Cox. "The SEC is more inclined to go after the people at fault and less likely to go after the company if it has a new owner."
MoneyGram's top five executives earlier stood to receive $37 million if they were terminated as a result of the Thomas H. Lee transaction. However, the board of directors determined that the executives no longer are eligible for those severance payments, according to the 10-K.
Executives already received a big payday earlier this month, when MoneyGram announced that it would reward its top four executives a total of $1.26 million for their "extraordinary effort" in negotiating a deal with Thomas H. Lee. Milne was awarded a $600,000 bonus.
MoneyGram on Tuesday reported a fourth-quarter loss of $1.17 billion, or $14.18 a share, largely because of bad investments. A year earlier, the company posted a fourth-quarter profit of $26.4 million, or 31 cents a share.
Chris Serres • 612-673-4308
Figures in millions except for earnings per share.
* Revenue in the fourth quarter of 2007 includes net securities losses of $1.2 billion, which relate to other-than-temporary impairments in the company's investment portfolio.