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] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
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Dismal Long-Term Performance: Since Mr. Falcone took control
of HC2 six years ago, there has been a steady erosion of stockholder value. Our view is that HC2 has delivered exceptionally poor total stockholder returns (“TSR”) over one-year (-33.43%), three-year (-65.56%), five-year (-71.97%) and
six-year (-35.14%) horizons.2 We find that the picture only gets bleaker when evaluating performance on a relative basis:
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1-year TSR: -33.43% vs. S&P 500 return of 29.68%, Russell
300 return of 28.72%, and 2019 proxy peer group3 average return of 12.57%.
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3-year TSR: -65.56% vs. S&P 500 return of 53.16%, Russell
3000 return of 50.34%, and 2019 proxy peer group average return of 13.77% .
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5-year TSR: -71.97% vs. S&P 500 return of 80.79%, Russell
3000 return of 77.09%, and 2019 proxy peer group average return of 31.29%.
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6-year TSR: -35.14% vs. S&P 500 return of 101.82%,
Russell 3000 return of 95.92%, and 2019 proxy peer group average return of 32.51%.
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A Haphazard Corporate Strategy: Despite marketing itself as
a diversified holding company that invests strategically and opportunistically across industries, we feel that HC2 and Mr. Falcone have consistently failed to demonstrate to stockholders that they possess the abilities, competence, and
expertise to acquire and manage controlling stakes in companies operating across seven distinct sectors. Perhaps this explains why Mr. Falcone recently defended HC2’s insurance holdings and questioned MG Capital’s scrutiny of the business
in an email to us—only to turn around days later and disclose the intended sale of Continental Insurance.4 It is also noteworthy that although HC2 has invested a significant amount of capital in the insurance space, Mr. Falcone
is actually banned from the sector in several states, including New York.5
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An Ineffective, Unqualified Board: A review of HC2’s 2019
Proxy Statement and other publicly-available information reveals that the incumbent directors are either closely connected to Mr. Falcone, underqualified, or in possession of a track record that includes legal and regulatory issues. We
believe the problems in the boardroom obviously begin—but do not end—with Mr. Falcone, who has been able to reap outsized compensation and push through concerning related party transactions while holding the Chairman role.6
Lead Independent Director Wayne Barr, Jr. has not only failed to check Mr. Falcone’s actions, but he lost the support of Glass Lewis & Co in 2019 and lacks any stated expertise in construction, insurance, energy, marine services, and
other business segments of relevance to HC2. It is also notable that Board member Lee S. Hillman was Chairman and Chief Executive Officer at Bally Total Fitness prior to its bankruptcy and during the period in which the Securities and
Exchange Commission (“SEC”) ultimately focused on during its investigation of the entity’s accounting practices.7 Although we intend to share additional analyses related to the Board, our hope is that stockholders begin to
recognize that HC2’s Board needs a top-to-bottom overhaul.
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Excessive Debt: Under the watch of Mr. Falcone and the
incumbent Board, we feel HC2 has taken on excessive levels of debt at the holding company level. It currently has approximately $470 million of senior, secured notes outstanding with an interest rate of 11.5%.8 A significant
debt load and high double-digit interest rate is inappropriate given HC2’s already large holding company expense structure and the illiquid nature of many of its holdings. Even if the Company was somehow able to reduce HC2’s debt to more
reasonable levels in the near-term, we believe the Board has already shown itself to be lacking when it comes to balance sheet management and financial judgement.
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Unjustifiably High Corporate Expenses: HC2’s “Non-Operating
Corporate” segment lost $25.9 million in “Adjusted EBITDA” in 2018.9 In addition, management was paid more than $4 million in equity compensation that year.10 That brings total corporate expenses over the full-year
period to more than $30 million. Given that HC2 had a market capitalization of approximately $100 million at the end of 2018, we find this level of spending to be damning evidence of excessive waste and validation of our view that Mr.
Falcone and the Board are not prioritizing independent stockholders’ interests. It is also worth highlighting that expenses continued to spiral out of control in 2019, with “Adjusted EBITDA” of negative $15.2 million through the end of
September 2019.11
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Numerous Related Party Transactions: We have discovered a
string of disturbing related party transactions that appear to have benefited Mr. Falcone at the expense of stockholders. HC2’s most recent 10-Q
discloses that in January 2015, the Company entered into a "Services Agreement" with Harbinger Capital Partners (Mr. Falcone’s investment management firm).12 The firm is currently extracting approximately $4 million per year
through this opaque "Services Agreement." We were also shocked to learn that in 2018, HC2 entered into a costly 75-month lease for office space previously occupied by Harbinger Capital Partners. Is it appropriate for a small public
company to have a lavish office on Park Avenue intended for a once large hedge fund?
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Concerns Over Mr. Falcone’s Regulatory Issues: We are
concerned about the appropriateness and legitimacy of the services that HC2 may be receiving from Mr. Falcone and his affiliates, especially given past infractions. Mr. Falcone entered into a settlement agreement with the SEC in 2013
after admitting wrongdoing and agreeing to a ban from the investment advisor industry, including a prohibition on adding new clients. Yet he and Harbinger Capital Partners still established a "Services Agreement" in 2015 with HC2, which
controls more than $4 billion of securities via its insurance subsidiary.13 In addition, numerous public reports have noted that Mr. Falcone was previously fined $18 million by the SEC and was thereafter required to pay more
than $30 million to New York State to settle a tax evasion case.
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George R. Brokaw, 52, has served as a private investor
through several private and public investment vehicles. Previously, Mr. Brokaw served as Managing Director of the Highbridge Growth Equity Fund at Highbridge Principal Strategies, LLC (“Highbridge”). Prior to joining Highbridge, Mr.
Brokaw was a Managing Director and Head of Private Equity at Perry Capital, LLC (“Perry”). Prior to joining Perry, Mr. Brokaw was Managing Director (Mergers & Acquisitions) of Lazard Frères & Co. LLC (“Lazard”). Mr. Brokaw
currently serves on the board of directors of DISH Network Corporation (NASDAQ: DISH), Alico, Inc. and Consolidated Tomoka Inc. Mr. Brokaw previously served on several public company boards of directors including Modern Media Acquisition
Corp, North American Energy Partners, Inc. and Terrapin 3 Acquisition Corporation. Mr. Brokaw received a BA from Yale University and a JD and MBA from the University of Virginia, and is a member of the New York Bar.
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Kenneth S. Courtis, 64, is a financial executive with over 30
years of investment banking and board experience. Since January 2009, Mr. Courtis has served as the Chairman of Starfort Investment Holdings. Previously, he served as Vice Chairman and Managing Director of Goldman Sachs, and Chief
Economist and Investment Strategist of Deutsche Bank Asia. He received an undergraduate degree from Glendon College in Toronto and an MA in international relations from Sussex University in the United Kingdom. He earned an MBA at the
European Institute of Business Administration and received a Doctorate with honors and high distinction from l’Institut d’etudes politiques, Paris.
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Michael Gorzynski, 41, is the Managing Member of MG Capital
Management, Ltd., an investment firm focused on complex value-oriented investments. From 2006-2011, he invested in special situations globally at Third Point, LLC, a large asset management firm, where he focused on macro, event-driven,
distressed, and private investments across the capital structure (equity, hybrids, bonds, & loans). He is an expert in restructurings and in the insurance and banking industries, having participated in dozens of large-scale bank and
insurance company restructurings. He earned a BA from the University of California, Berkeley, and received an MBA from Harvard Business School.
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Robin Greenwood, 43, has been the George Gund Professor of
Finance and Banking at Harvard Business School since 2013 and began serving as Head of the Finance Unit in 2018. At HBS he is the Faculty Director of the Behavioral Finance and Financial Stability project and cochairs the Business
Economics PhD program. Mr. Greenwood also currently serves as a member of the Financial Advisory Roundtable of the Federal Reserve Bank of New York and a Research Associate at the National Bureau of Economics Research, which he joined in
2017. Mr. Greenwood received a PhD from Harvard in Economics, and BS degrees in Economics and Mathematics at MIT.
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Liesl Hickey, 46, is a veteran political strategist who has
worked at the highest levels of politics and issue advocacy. Since 2016, Ms. Hickey has served as a senior advisor at each of Guide Post Strategies, Blitz Canvassing and Pathway Partners, and as a partner at Ascent Media. In addition,
since 2015, she has provided political consulting services through RAE LLC. Prior to that, from 2015 to 2016, she served as an executive director of Right to Rise and a partner at Patchwork Productions. From 2013 to 2014, Ms. Hickey was
the Executive Director of the National Republican Congressional Committee (NRCC). She was a fellow at the University of Chicago’s Institute of Politics and a contributor to the Wall Street Journal’s former “Think Tank.” Ms. Hickey is a
graduate of Southern Methodist University.
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Jay Newman, 68, is currently serving as the Managing Member
of Ginzan Management Ltd., a family office he founded in 2016. He has over 40 years of experience working in the finance industry as a lawyer, investment banker and principal investor. Immediately prior to establishing Ginzan, Mr. Newman
was a Senior Portfolio Manager and Member of the Management Committee at Elliott Management Corporation where he worked for over 20 years. He is a graduate of Yale College, Columbia Law School and completed an LLM in Tax at NYU.
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