Overseas Shipholding to Sue Former Legal Counsel Over Tax Snafu

Overseas Shipholding Group plans to sue its former legal team for bad advice that forced the company to restate more than decade's worth of financial results.

The company, one of the world's largest publicly traded shippers, said it will pursue professional liability claims against its "former external counsel" in connection with advice its outside lawyers gave the company regarding its international tax liabilities.

A person familiar with the situation said Wednesday the suit would not target Overseas Shipholding's onetime auditor, Ernst & Young LLP, or its current accounting firm, PricewaterhouseCoopers LLP. Lawyers from the law firm Proskauer Rose LLP were Overseas Shipholding's legal advisers at the time its tax issues were discovered.

News of the pending lawsuit surfaced in a filing Tuesday in U.S. Bankruptcy Court in Wilmington, Del., where Overseas Shipholding Group is operating under Chapter 11 protection. Bankruptcy followed revelations in October 2012 that the company's financial reports from 2009 through the present were not trustworthy.

An internal investigation later found that the company's tax issues date back to 2000. In August, the shipper said it may owe $460 million or more to the Internal Revenue Service.

Overseas Shipholding is seeking bankruptcy court approval to hire Texas-based law firm, Mullin Hoard & Brown, which specializes in professional negligence and malpractice litigation, to pursue the litigation.

A spokeswoman for Proskauer, a New York law firm with more than 600 lawyers that is perhaps best known for representing pro sports leagues like the National Basketball Association and the National Hockey League, didn't' respond to requests for comment. John Ray, Overseas Shipholding's restructuring chief, didn't return calls seeking comment. Lawyers for Overseas Shipholding and its creditors didn't respond to requests for comment.

Since filing for bankruptcy last fall, Overseas Shipholding Group has been reticent about the nature of the tax foul- up. However, investors have spelled out the issue in detail in a class-action lawsuit filed last year, after the initial announcement of the pending restatement sent share prices reeling.

According to its complaint, Overseas Shipholding Group triggered U.S. tax liabilities by pledging its international shipping unit subsidiaries to secure or guarantee loans to the parent company. The IRS considers the loan guarantee from foreign subsidiaries the equivalent of a dividend to the U.S. parent, thus, taxable, according to the amended complaint.

Overseas Shipholding's Chapter 11 bankruptcy shields the company from the action. Last month a federal judge threw out securities law violations against the company's former leaders--ex-Chief Executive Morten Arntzen and Myles R. Itkin, the chief financial officer who was pushed out in April. However claims against the shipper's auditors, accountants and underwriters including Ernst & Young, PricewaterhouseCoopers, and affiliates of Citigroup Inc. ( C ), and Goldman Sachs Group Inc. ( GS ) remain pending.

Overseas Shipholding, which operates more than 90 oil tankers, has directed its restructuring efforts toward reworking the terms of, or in some cases rejecting outright, its money-losing charters.

The company has also had a number of management changes in recent months. It replaced Mr. Arntzen, its former chief executive, with Capt. E. Johnston. Overseas Shipholding's chief financial officer also left the company.

Crude-oil shippers like Overseas Shipholding have been buffeted in recent years by slowing demand for oil combined with a glut of tanker capacity, resulting in a sharp fall in charter rates for international crude and product vessels.

Overseas Shipholding this week posted a $55.3 million net loss for its quarter ended June 30. Notwithstanding the red ink, the company recently forecast positive cash flow for the next five years and a fleet of 40 vessels by 2018. That outlook was enough for Overseas Shipholding to buy more time from lenders who'd been upset over the pace of the restructuring.

Overseas Shipholding was formed in 1969 by the merger of the vessel holdings of five private companies. The company's was founded by Raphael Recanti, an Israeli-American banker and shipping mogul. In 1970, the company launched its initial public offering, becoming the only publicly traded pure-ocean shipping company in the United States. The company's stock was trading at $1.98 a share Wednesday afternoon.
Source: Dow Jones