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Revlon Settles With SEC Over 2009 Stock Swap

NEW YORK ( TheStreet) -- Revlon (REV - Get Report) on Thursday settled Securities and Exchange Commission charges of misleading investors, for $850,000, without admitting or denying guilt.

The SEC alleged that the cosmetics giant mislead its public investors in a 2009 shareholder swap with majority owner MacAndrews & Forbes.

According to the SEC, Revlon violated securities laws by misleading investors on the value of their holdings in stock exchange to give give shareholders preferred stock for their common stock holdings. The regulator said Revlon intentionally sought to withhold an independent third party opinion that stated the exchange undervalued the company's shares.

"By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors," Antonia Chion, Associate Director in the SEC's Division of Enforcement, said in a statement.

The shareholder exchange centered on a large debt Revlon owed to its majority owner, Ronald Perelman-run MacAndrews & Forbes, and a proposal to extinguish some of those loans through a tender offer for the company's outstanding common stock.

In April 2009, Revlon owed $107 million on a term loan to MacAndrews & Forbes that was set to expire in August. Given Revlon's financial constraints at the time, the company was at risk of failing to repay its debt, which could have triggered a set of other defaults.

To alleviate Revlon's liquidity crunch, MacAndrews & Forbes proposed a mandatory offer to swap the company's existing common stock on a one-for-one basis for new preferred stock that would pay a quarterly dividend, in a move to take the company private. As part of the deal, MacAndrews & Forbes would eliminate most of Revlon's loan balance.

To evaluate the merger proposal, Revlon's independent board members formed a special committee to weigh the financial merits of the exchange. However, after a third party financial advisor deemed the exchange unfair to common shareholders, Revlon sought to suppress those findings in public filings, according to the SEC.

When the third party analysis showed the exchange undervalued Revlon shares, the company tabled MacAndrews' mandatory exchange and instead proceeded with a relatively similar voluntary exchange for public shareholders. Some Revlon shareholders, such as a trustee for the company's 401k plan, however, would be prohibited from participating in a voluntary exchange if a third party deemed it inadequate.

Revlon, as a result, was accused by the SEC of "ring fencing" the findings of the third party review by essentially brokering communications with the 401k plan that would allow it to suppress the opinion of inadequacy to all other public shareholders.

In public filings, Revlon "materially misled minority shareholders" when disclosing investors could voluntarily tender their shares, according to the SEC.

"In fact, all minority shareholders - as well as its Independent Board members - were unaware that Revlon's 401(k) members would not be able to tender their shares if an adviser found that the consideration offered for their shares was inadequate," the SEC complaint states.

"Moreover, Revlon's non-401(k) minority shareholders were not on equal footing with Revlon's 401(k) members because Revlon's 401(k) members received protection as a result of the adviser's finding that 401(k) members were not provided adequate consideration."

On October 8, 2009, Revlon shareholders tendered 9.3 million shares of Revlon Class A common stock, or approximately 46% of the company's shares not owned by MacAndrews & Forbes.

In June 2012, Revlon settled a shareholder lawsuit surrounding the exchange with Fidelity Management for $19.9 million and recorded a $6.7 million charge to its earnings.

Since the shareholder exchange offer, Revlon shares have gone up roughly fourfold. Year-to-date Revlon shares have gained over 40% to $20.43. In Thursday trading, Revlon shares gained over 2.5%.

-- Written by Antoine Gara in New York

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