Cohen & Co Inc. — Proxy Solicitation & Information Statement 2006

Sep 20, 2006

DFAN14A 1 dfan14a06290002_09202006.htm

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

(Amendment No. )

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[	]	Definitive Proxy Statement
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[	]	Soliciting Material Under Rule 14a-12
SUNSET FINANCIAL RESOURCES, INC.
(Name of Registrant as Specified in Its Charter)

WESTERN INVESTMENT LLC WESTERN INVESTMENT HEDGED PARTNERS LP WESTERN INVESTMENT INSTITUTIONAL PARTNERS LLC WESTERN INVESTMENT ACTIVISM PARTNERS LLC ARTHUR D. LIPSON MATTHEW S. CROUSE JAMES S. SCHALLHEIM D. JAMES DARAS MARSHALL W. COBURN GERALD HELLERMAN
(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)

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Western Investment LLC (“WILLC”), together with the other participants named herein, is filing materials contained in this Schedule 14A with the Securities and Exchange Commission in connection with the solicitation of proxies against the proposed merger involving Sunset Financial Resources, Inc. (the “Company”) and Alesco Financial Trust and related proposals (collectively, the “Merger Proposals”) to be submitted to a vote of the stockholders of the Company at a special meeting of stockholders scheduled to be held on October 6, 2006 (the “Special Meeting”).

Item 1: Presentation by Arthur D. Lipson, the managing member of WILLC, to Institutional Shareholder Services on September 20, 2006:

Western Investment Hedged Partners LP

Solicitation in Opposition to Merger

of

Sunset Financial Resources, Inc.

with

Alesco Financial Trust

Western Investment Group

Owns 9.7% of SFO.

Soliciting GREEN proxies:

AGAINST the Merger.

AGAINST the LTIP.

AGAINST adjournment.

The Alesco Merger – A Bad Deal

Does not maximize value for SFO.

Overvalues Alesco – Undervalues SFO.

Management severance windfalls.

Minimal management share ownership.

Wrong point in business cycle.

Interim management agreement changes fundamental investment strategy without shareholder approval.

The Proposed Merger

1.29 Sunset shares for each Alesco share.

Failure to reduce Peerless loan has cut payouts to SFO holders in the SFO tender offer.

Sunset book value per share $10.42*.

Alesco book value per share $9.40*.

Implied premium, based on book values, is 43%.

What are Sunset holders getting?

Minority ownership: 42% of the resulting entity (and only 34% if the self-tender is fully subscribed).

Reduced book value: $7.77. Paltry $.50 dividend Share buyback at $8.53 – Substantially less than book. Buyback: Only covers 25% of shares. Benefits Alesco holders more than SFO. Substantial merger expenses. New external management with conflicts of interest. Dependence on additional financing for growth. Risky new investment strategy.

SFO’s Stated Investment Strategy

Sunset Financial Resources is a self managed Real Estate Investment Trust (REIT). The company seeks to deliver attractive dividend income and steady growth for its shareholders through the acquisition of high credit quality mortgage assets. Capitalizing on its network of originators and REIT tax structure, Sunset Financial Resources is an efficient provider of specialized mortgage loan products for borrowers with excellent credit.

Business Strategy . . . . Our objective is to generate an income return for our shareholders that compares favorably to other income investment alternatives in terms of both risk and consistency while providing long-term growth potential. Similar to other financial institutions, we generate profits from the interest spread between the interest income earned on the assets in our portfolio and our financing costs. With a focus on adjustable rate assets and the pursuit of a matched funding strategy, we're positioned to effectively manage our portfolio through a variety of interest rate environments and provide our shareholders with sustainable and consistent earnings and dividends over time.

Competitive Strengths . . . . Certain underlying fundamentals are essential to our on-going. Together these elements distinguish us from other long-term holders of adjustable rate assets such as Fannie Mae, Freddie Mac, banks, thrifts, and other mortgage REITs.

High Credit Quality Portfolio. We maintain high asset quality standards to minimize credit and financing risk and to maximize our access to low cost capital. Matched Funding Strategy. Interest rate changes affect our cost of funds as well as mortgage loan prepayment activity. To counter the effect of interest rate changes on our borrowing costs, we closely match the repricing of our borrowings with the repricing of our assets. We also pursue hybrid ARM assets, which have an initial fixed rate period, in order to reduce our exposure to prepayments.

Operating Efficiencies. We outsource our back office functions to high quality, third-party vendors. Another cost advantage is our REIT tax structure. By distributing substantially all of our income in the form of dividends, we are exempt from paying corporate tax.

Western Investment Action : On August 27, 2005, Western Investment LLC (“WILLC”) sent a letter to Sunset expressing its concerns about recent developments with the Company, including the resignation of Ernst & Young LLP as the Company’s independent auditors. WILLC stated its belief that it was in the best interest of Sunset and its stockholders to reconstitute the Sunset Board by electing a majority of new directors. The letter requested that Sunset voluntarily call a special meeting of stockholders.

Sunset Response : After discussions with Art Lipson, WILLC’s managing member, the Sunset Board did not call a special meeting. Instead, on August 31, 2005, the Sunset Board amended Sunset’s bylaws, making it harder for stockholders to call a special meeting by increasing the percentage of the outstanding shares required to call a special meeting from 25% to 50%.

Western Investment Action : On September 22, 2005, WILLC sent a letter to the members of the Sunset Board requesting that the Sunset Board consult with Sunset’s principal stockholders with respect to one remaining vacancy on the Sunset Board and that the Sunset Board appoint a stockholder representative to fill the vacancy.

Sunset Response : The Sunset Board did not respond to WILLC’s request and, effective September 26, 2005, appointed Charles W. Wolcott to fill the vacancy.

Western Investment Action : On October 3, 2005, WILLC filed a preliminary consent solicitation statement with the Securities and Exchange Commission in connection with the solicitation of written consents to call a special meeting of Sunset’s stockholders. The contemplated purpose for the special meeting to be called included the removal of the existing Sunset Board and election of WILLC’s nominees.

Sunset Response : On and effective October 5, 2005, the Sunset Board adopted further amendments to the Sunset bylaws, implementing complex procedures governing stockholder-requested special meetings and advance notice of stockholder nominees for directors. Also on October 5, 2005, the Sunset Board appointed Charles D. Van Sickle to fill a vacancy on the board created by the resignation of Sunset’s former Chief Executive Officer. Mr. Van Sickle, a supposedly “independent” director who serves on the audit and nominating and corporate governance committees and is chairman of the compensation committee, served with George Deehan, who had been appointed Sunset’s Chief Executive Officer two days earlier, on the board of directors of Paragon Financial Corporation, including during Mr. Deehan’s tenure as chief executive officer of that company.

There is an Alternative

2006 Annual Meeting is long overdue.

Current Board has failed to respond to stockholder concerns.

Western intends to propose a slate of director nominees.

Possible change in portfolio management.

Preliminary discussions with Mike Tokarz.

Chairman and Portfolio Manager of MVC Capital.

Chairman of Tokarz Group.

Former General Partner of KKR.

Merrill Lynch High Yield B Index, Yield Spread vs. 10-year Treasuries

Merrill Lynch High Yield CCC Index, Yield Spread vs. 10-year Treasuries

Selected REITs - Price to Book| | | CMO | IMH | RWT | TMA | Average | | --- | --- | --- | --- | --- | --- | --- | | 10K | BV11.85 | 14.04 | 20.97 | 14.32 | | | | Bloomberg | Price38.32 | 18.08 | 46.75 | 21.5 | | | | | P/B3.23 | 1.29 | 2.23 | 1.50 | 2.06 | |

		CMO	IMH	RWT	TMA
10K	BV7.88	9.02	20.27	11.45
Bloomberg	Price6.40	4.56	14.00	7.63
	P/B0.81	0.51	0.69	0.67	0.67

		CMO	IMH	RWT	TMA
10K	BV6.47	9.76	20.88	11.40
Bloomberg	Price6.50	4.13	12.50	8.25
	P/B1.00	0.42	0.60	0.72	0.69

CERTAIN INFORMATION CONCERNING PARTICIPANTS

WILLC, together with the other Participants (as defined below) named herein (collectively, the “Western Group”), has made a definitive filing with the Securities and Exchange Commission of a proxy statement and accompanying proxy card to be used to solicit votes against the Merger Proposals at the Special Meeting.

THE WESTERN GROUP STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS RELATING TO THE SPECIAL MEETING BECAUSE THEY CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS ARE AVAILABLE AT NO CHARGE ON THE SECURITIES AND EXCHANGE COMMISSION’S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THE SOLICITATION WILL PROVIDE COPIES OF THE DEFINITIVE PROXY MATERIALS, WITHOUT CHARGE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY SOLICITOR, INNISFREE M&A INCORPORATED, AT ITS TOLL-FREE NUMBER: (888) 750-5834.

The participants in the solicitation are Western Investment LLC, Western Investment Hedged Partners LP, Western Investment Institutional Partners LLC, Western Investment Activism Partners LLC, Arthur D. Lipson, Matthew S. Crouse, James S. Schallheim, D. James Daras, Marshall W. Coburn and Gerald Hellerman (collectively, the “Participants”). Information regarding the Participants and their direct or indirect interests is available in their Schedule 13D initially filed with the Securities and Exchange Commission on March 17, 2005, as subsequently amended on March 29, 2005, May 6, 2005, August 29, 2005, September 23, 2005, October 4, 2005, November 1, 2005, December 5, 2005, December 13, 2005, May 3, 2006, June 20, 2006 and July 7, 2006.