Ep 29 - Two Seas Capital founder Sina Toussi on his unique event-driven strategy

Hello and welcome to alternative fund insight, taking you behind the trading screens and inside the alpha machines of the global hedge fund industry. I'm Will Wainwright and I'm delighted to introduce today's guest, Cine2C, founder and CIO at 2C's capital. We'll be discussing the growth of his firm, how his legal background informed its event-driven strategy, focused on legal and regulatory catalysts, and some of the trades and court cases that have defined his investing journey. I also wanted to give you a quick heads up about AFI's new hedge fund allocator power ranking, released this week. The power 25 provides analysis and key stats to help your business development, which new foundation will be the biggest new source of hedge fund capital in the years ahead, which multi-PM platform is allocating more to hedge funds than any other single investor this year. Which U.S. pensions are the most innovative and active in hedge, find out more at alternativefundinsight.com and sign up to membership to fully benefit. Before we begin, a heads up about AFI's partners at the independent research forum, which connects hedge funds with high quality research providers, head to independentresearchforum.com for more information. But now, sit back for today's fascinating industry interview. Cine, thank you for joining me on the AFI podcast today. Great to have you on. Can we start with a brief introduction to your background and how you came to start 2C's? Sure, sure. Thank you for having me, Will. Yes, I'm Cine 2C. I'm the chief investment officer and founder of 2C's capital. We're an event-driven fund, but our focus is on legal and regulatory catalysts. It's a strategy that I've been doing for almost 20 years. And unlike litigation financing, we focus on public equity, stocks, bonds, and bank debt. How did it start? Well, I started out as an attorney after Cornell and Columbia Law. I went to scad and arps. I worked there for almost eight years in various departments, M&A, and bankruptcy. I joined my first hedge fund, one East in 2006. I started out as the general counsel, but very quickly, the firm found that I had a great interest and skill set in analyzing public securities that had these sort of legal catalysts. And the one that started out first was a huge dispute between Qualcomm and Nokia over 2G and 3G technology. And I had a pretty good insight into that, to the science, and then into the patent dispute that was at hand. Even though I did not have a patent background, this is really a matter of calling balls and strikes and how a judge would see this or a jury. And that was something that I did feel I had a good insight into. Of course, I brought in experts from the legal side to help me in that analysis, but it was at the end of the day, my analysis, and we did really well. Fast forward two years then into the financial crisis. And now, even more plainly, my legal background became critical to understanding some of the largest bankruptcies at the time. I think of Washington Mutual, Norteil, CIT. By bringing my legal background into the investment process, we had a huge upper hand. This was not happening at other hedge funds. They did not have internal legal analysis. And we were one of the first funds to do that. And succeeded brilliantly. We led the Washington Mutual Bankruptcy, Norteil, CIT. I had become a partner in head of the stress research at my first fund. And then from there, I realized that this strategy can be really fundamental and uncorrelated as well as very unique. And I had the opportunity to leave at that point. I decided to switch to a firm called VR Global. Most people haven't heard of VR, but it's one of the most successful emerging market funds out there. And I joined to incorporate legal strategy into emerging markets. Until then, I demonstrated it worked in commercial disputes like between Qualcomm and Nokia. It worked in restructurings. And now it's going to see if it also works in emerging markets. And in fact, we had great success working with the team at VR in Argentina, Ukraine, Greece, all really great outcomes by incorporating and utilizing legal strategies. Now, of course, Elliott and Eurelius had been doing this as well, but we had incorporated into a lot of other emerging market strategies besides Argentina. And then in 2019, I, recognizing that this strategy works and me having an entrepreneurial bent, I said, you know, I wanted to start this on my own and create a whole fund of a team and systems and power investments that I can make in specific legal systems to help me analyze this strategy and to realize the full potential. And so I left on great terms with VR and we launched and that was the genesis of 2C's capital in March of 2021. Really interesting background scene and great to hear how you got to this point. So where is 2C's at the moment in terms of, you know, where you're located, your AUM strategy, that kind of thing. We launched with about 100 million of AUM. We had a very, we had an anchor deal with a firm called Borealis, but also VR and other VR investors helped form the first day one capital. We launched with roughly five investment professionals, five investment professionals, seven people total. Today we have counting seven investment professionals and 12 people and one part time person. I'm very excited to announce that we've crossed the 12 on 12 one of this year, the 1 billion mark. So we have 1 billion of AUM across our strategies. The main strategy is the global fund and that constitutes almost 850 million of the billion. And that's our flagship fund that is the co-mingled fund that, as I said, is an event-driven fund in the traditional sense, but in the untraditional sense in what we focus on is in mergers or spin-offs or things that you would see normal event-driven funds do. So we are in the sort of legal and regulatory catalyst, but very excited to cross the 1 billion mark and getting great, great attention and interest from allocators. Yeah, it would be good to hear your trading priorities for the strategy next year and then we'll look at some of the kind of recent cases and outcomes that you've worked on. Sure, sure. Now look, if you had asked me when I launched the fund, where would we look to find a lot of our opportunities? I would have said bankruptcies, restructurings and maybe emerging markets. Having said that, but there hasn't been a lot of restructurings in bankruptcies and there hasn't been a lot of emerging markets dislocations. There's been a few, but none that have had a legal catalyst that we could get involved in. And having said that, there hasn't been a lot of bankruptcies, I can say we were on the ad hoc or steering group of the three of the most successful bankruptcies of the last four years. So we were on the ad hoc equity committee, the Steerco of Hertz bankruptcy. We were on the Steerco of talent energy and we were on the ad hoc equity committee of core scientific three. And then arguably the most successful restructurings, although Hertz has had its problems as of late, but we were out of it well before the nose dive in Hertz. So we have been finding opportunities in restructurings and emerging markets, but the area where we find the most fertile grounds has been in commercial litigations. And especially in the biotech sector, which is probably, you know, hasn't is still, I would say in a bear market, biotech has been in a terrible, terrible state in terms of how equities that performed. So we're starting out at a starting point of really dislocated equities when you introduce a legal problem with an already dislocated security. Well, then that just causes people to just throw it out the baby with the bath water. So we're finding some tremendous gems with great drugs and products, but because of a legal catalyst, no one wants to touch these securities. And so we've had some really great situations that we've been involved in since we've launched and we're continuing to find those in the portfolio. That's one, I think, regardless of whether we go into recession or if there's problems with emerging markets, you know, of course, then those will be, I think, the Halcyon days for two C's. But apps in that we're going to be finding some great things in public securities, especially in biotech. And then another area that I think is very exciting. So as I said, we don't do litigation financing. But litigation financing has been around for now 10 years. And most recently, Harvard endowment has said that they're actually getting out of a lot of their litigation financing. While the returns have not been attractive over time, and the duration risk has been much longer than anyone anticipated. And so we think, and we've already started putting these trades on secondary trades in litigation financing. I know there's a lot of funds that do that with hedge funds and with private equity funds. But we want to do and have been doing secondary trades in litigation financing funds that have been around for 7-10 years. And they have LPs that want out. But we have strong relationships with these litigation financing firms. And where we have the capability for a portion of our portfolio to do these types of trades. And we think that'll be a very interesting opportunity because the fatigue is duration. And duration has been one of the reasons why I've never really wanted to focus on that in two Cs. I want to be in public securities where we can buy the stock on the eve of trial or a month before trial. Or if the trial is going badly, we get out. Or if the trial is going well, I can add. You can't do that with litigation financing. So our duration risk has never been long. But now that we're seeing fatigue and issues with some litigation financing firms, we think that we would welcome some of that into the portfolio litigation that's been going on for five or seven years to step in on day year eight. And then hopefully reduce that duration risk. And then but get to pick the cases we like. So we're not even buying a whole portfolio of this litigation funds. So we're able to pick and choose what we like and don't like within that portfolio. That's what's really exciting and an area that we're exploring and think will be very exciting for 2025. Yeah, that sounds like an interesting kind of evolution, a different area of opportunity. I just wanted to quickly ask you, you know, when it comes to these legal and regulatory catalysts, just to put it in kind of layman's terms, you know, you have your legal background and years of experience. You've got colleagues on your team who have the legal experience and will, you know, really get to understand the circumstances pertinent to each case inside out. Is it a case then that, you know, you might have a biotech firm, there is a trial that it faces and that's part of the reason that it is undervalued by the stock market and you think it has a much better chance of actually winning that case. And therefore you will get in in advance of that case of that trial starting. I think there's a perfect example. A company called Isspirion is a company that had, they had a drug, it's called nexoset and nexotol, the agent is mempedoic acid, it reduces cholesterol and it had very favorable studies published in the New England Journal of Medicine, in JAMA, in March of '23, and they have a partner called daichi, a big Japanese firm that has all the marketing rights for this drug in Europe and outside of the US. And upon the results that were published, they were entitled to a $300 million milestone payment from daichi. Isspirion was at the time a $400, $500 million stock but, you know, this $300 million was critical to the company's success and daichi said, no, we're not paying. And the stock taint, it went from $7 to, at one point, under a dollar. We were approached by a biotech, I'm very respected biotech fund that, I'd say probably one of the best, that said, see now, look, we think this drug is very good. We don't understand the legal catalyst like whether they have a strong case against daichi, but we're, we want to see if you can help us. We'll share our work on the drug if you can help us on the legal outcome. And we partnered with them, and we found the alloyer, a law firm, and this is where our advantage comes in. So we're such a big user of legal talent, and I know all the major funds, we went, we found a law firm that had litigated against daichi on almost identical terms, basically a dispute over a milestone payment. And that law firm came back and said, this is an airtight case. I wish I had this case in which I won against daichi, and they've been against daichi twice, and said, this is, this is like almost too hard to believe how simple this case is. And with that, we went to the company and said, look, and I had become a 5% shareholder of the company stock. And I said, look, we are willing to offer you also some litigation financing. Maybe you'd need it, maybe you don't, but I know you think you have an airtight case, but no one else believes that in daichi thinks they have a strong case. What if we offered you $50 million us in this very respected hedge fund, biotech fund, expressing their vote of confidence in you and your case, and in your company by owning stock, and then offering you $50 million of financing, which I'm only asking for a 1x return, which isn't in terms of legal finance and litigation financing usually get a 3x return. But we only asked for a 1x return, 1 because we thought the case was strong, but B, I had much more invested in the stock of the company that I wanted both to work. So making $50 million in what we thought was a 1-year time frame because the judge had already expedited this trial. And the company agreed and thought this was a great idea. We never fulfilled or at least did the financing because they ended up, I think they armed with our financing, they went to daichi and said, look, we've got a fund that's willing to offer $50 million. And if that happens, there's no settlement. And so daichi settled within a month of us making our sending our term sheet to the company. The stock went from $0.80 to over $3. We also owned about 20 million of its debt that we bought at $0.50 that went to effectively par. So we made money on the debt of the company, on the equity of the company. We never got to do the litigation financing, which is fine, but we did incredibly well on the stock and the bonds of the company that we were able to take advantage of because of our knowledge and expertise on the litigation that the company was affecting. So you have that understanding and you're actually able to apply that from a few different angles actually when it comes to how you trade these situations. That's really interesting. I actually pitched this to the creditors coalition, a very wide audience last year, while it was October of '23, when the stock was at $0.80 and the bonds were at $0.45. A huge audience. I think a lot of my hedge fund friends participated in that. I know they did, but so we were very public and open with this strategy back in October of '23 and it worked out beautifully. How do you handle the uncertainty? Because obviously with these cases, they could go either way. You know, our knowledge goes knowledge and research goes into it. You never quite know, do you? So how do you cope with that psychologically in the uncertainty? Well, I'll ask you, over the past year, we've now seen whether it's Nvidia, Meta, Google, Amazon. There's a 10% implied move in the options, either positive or negative. So how do those people deal with the uncertainty of Google and Meta and like, well, how do we deal with it? We have a different uncertainty. It's the decision of a judge or jury. But we do have enormous amount of research that goes into precedent does matter. While politics get involved in some Supreme Court decisions, commercial disputes do turn on precedent on a judge's prior decisions on the facts. These all go into it, but even with that, there's uncertainty. So how do we deal with that? It's sizing. So if I didn't have this law firm giving me with almost medical certainty that we should win this litigation, this wouldn't have been more than a two or three percent position. But with that armed with that knowledge and the fact that the stock was already trading at liquidation value, we were willing to make this a five percent position. That's generally as big as this position will come into the fun because of that uncertainty. It was about more of a four percent position. We try to have a diversified portfolio of about 30 names, each of them size between one and five percent based on the probability of winning the litigation, the upside and downside if you win. Another thing, it's a little bit more amorphous, but it's also how many eyes are in it. So we don't, for example, JetBlue and Spirit had a big litigation over the merger. There was also the Capri and tapestry, huge merger of the handbag companies. When you go to those hearings, you will see other hedge funds there and that's why we don't play in those situations. There's too many eyes on those litigations. There's too many people analyzing that. And the big funds like a pent water and sculptor and Citadel, they know the right lawyers to go to. They know these situations. And so we tend to avoid those situations. because of the crowdedness, but in this espionne trial, more often than not, we're the only ones on the hearings listening to the judge. When you go to courtrooms, we're the only ones in the courtroom, alongside the lawyers, not even journalists. And so that gives us a lot more confidence that if we're right, that you'll see in a strong appreciation, if we're wrong, it may not even go down much because no one is valuing the litigation. So those are the, and liquidity, those are the four factors, probability of winning, upside, downside, eyeballs on the name, and liquidity going to how we size positions anywhere from one to four or five percent. And so that's how we address that uncertainty. That exists in all investing, but in our, that's how we address it in our. It would be good to hear how we use FRIs as we call them in this country, freedom of information requests. I believe you call them foyers. I believe in the US, to help inform your legal strategy. Yeah, no, that is critical. And I think that comes up often when people sometimes profess or funds profess to do it, but they actually don't. And you know that because when you make a foyer request on a company, there's a log of who does it. And you'll see for some of our big litigations against Indivior, for example, that's a company that we have a very large investment, or we're involved in the litigations against Moderna and Pfizer, you'll only see two Cs as listed on the logs. And there's actually an article that came out like, why is this fun? Two Cs doing foyer requests on Moderna and Pfizer and Indivior. And it is critical. And I mentioned Indivior is a great example of a company that had a trial, a big criminal case against it. But we did foyer requests against the CDC and the FDA related Indivior. And we found internal emails that were very revealing about how, so here was a company in which the Virginia Department of Justice was going after criminally. And we had internal emails from the FDA and the CDC saying, this is this is very unusual because this company's claims to saving lives is actually true that their change in format from a pill version of to film, like those films that you put on your mouth are actually preventing childhood adolescent overdoses. And this was all proven and true back as early as 2015. And so we got the insight that there's basically a dispute within the government as to why they're going after this company that is making opioid treatment drugs that is saving America from its opioid addiction from fentanyl and heroin and oxy that they're being in some ways wrongly attacked. And we were correct, whereas the company was trading at liquidation value at a fraction. Not just below cash level, but they were trading at a 300 million market cap with a billion dollars of cash, no debt, and one of the fastest growing drugs for opioid treatment. And when the settlement was announced based on our participation, the stock tripled. And this was based on our FOIA request, seeing how other parts of the government, and I'm sure they put pressure on this prosecutor to say, don't bankrupt this company, stock is now multiples of where it was when we first got involved. And so that is where the Freedom of Information Act requests informed our understanding of how this litigation was going on. And to this day, we're the only ones who have made that Freedom of Information Act request for individual. And I know a lot of your cases of interests of U.S. trials and legal situations, but you've also looked at a few in Europe as well. Maybe you could give us some insights into your activity in the UK and Europe. Sure, sure. No, of course. Now, I want to be clear, we only do U.S. and UK. That is one of the things that we limit ourselves. It's hard enough to do the U.S. and UK, but when you go beyond that to emerging market, or even German Frankfurt courts are no touristly slow. Swiss courts are even slower. There's massive unpredictability to a concurso in Spain or a safeguard proceedings. That's the bankruptcy proceedings in France. I used to do that at my prior fund, but we stay away from those at two Cs. It's just too unpredictable and we don't know the right lawyers in those jurisdictions like we do in the UK and the U.S. And the perfect example of that is the Argentina GDP warrants. They were warrants issued by Argentina in the 2005 and 2010 exchange. There's two tranches. They're very large. They're over 18 billion face value of dollars and euro warrants. We decided to get involved in the euro warrants. When I was at VR, I was part of the team that brought the litigation and filed it in the UK courts. A lot of my competitors decided to bring a parallel sister litigation in the U.S. courts under different provisions. We sued under one provision under actually two provisions, 48 and 49. It's a common indenture between the dollars and the euro. One indenture, just two different tranches of warrants. Fast forward to October of this year, we won at the lower court, the pelvic court, and now the Supreme Court has affirmed the lower court decisions, the UK Supreme Court. So these warrants that I purchased at one euro when I launched the fund are now north of eight euros. The dollar warrants where my competitors have been in were completely thrown out of court by the U.S. court. Primarily because they relied on the wrong provision that they did not rely on the provision we relied on. Now I've subsequently joined my competitors in that lawsuit. I was able to buy those dollar warrants very cheap and now we're going to try to resurrect that lawsuit under the right provision. But that is one example where we had the choice to sue in the U.S. or the UK and we chose the UK because we thought it was more favorable as a jurisdiction for this dispute. And so this is one where knowing your courts and your where just the jurisdiction of differences can make a big difference in the outcome. The facts of both the U.S. and the euros were the same. It was the government's actions in 2012 and 13 with respect to payment of the warrants. So the facts were exactly the same but you had two strikingly different outcomes. Yeah that's really interesting and it's also very pertinent that you would mention Argentina in this case because it's obviously a country where you've had a lot of activity over the years in your trading career. I was going to ask you and this is a bit of a left-field question but you know all eyes at the moment are on the Ave Mille and his agenda. How is that changing things in terms of opportunities and developments in Argentina or is it not really relevant? Well certainly it's relevant. I think you're seeing a resurgence in Argentina and a lot of it can be attributed to Ave Mille. You know I was at first fairly skeptical of what he could do that there was a lot I didn't fully appreciate about the sophistication of his economic theories. I'm not a disciple of the Austrian School of Economics which he follows while I've read Mysees and I read Hayek and Rothbard. I have always approached it with some skepticism but he has and that there was a very interesting three-hour podcast that he had done recently and there was a great translation of it so it just shows you know how technology is evolving and I you know he has a hybrid version of of the Austrian School of Economics I think that was fairly interesting while I'm not still a buyer of that school I think the austerity measures that he's taken was something that was very important for Argentina and I think that's come country that has been plagued with this sort of mismanagement and corruption that he is certainly and this is what you have to give him enormous credit is his steadfast fight against corruption and that is that has been critical and I think that is giving people a lot more confidence that under his leadership you know you could at least get rid of the corruption and that is half the battle whether his economic policies are the right perfect policies certainly his steadfast opposition to corruption has been critical to a lot of and to the success of Argentina and you're seeing it now in the inflation numbers you're seeing it you know we think that the GDP should start rebounding from the austerity will inevitably that whether you're a Keynesian or Austrian if you impose austerity you will have a reduction in GDP and that's happened But hopefully what's coming out on the other side will be a cleaner, less corrupt, more efficient economy, and he deserves a lot of credit for that. On top of that, he's also said, and this is very pertinent to my investment, that he wanted to address some of these legacy liabilities, including the Argentina GDP warrants. And so there's been some, well, I'm not involved in that. There's been a lot of press relief reports that there's been settlement discussions underway. And I think that's a real positive. Our strategy was actually for a long time, long these warrants, and actually short Argentina sovereign. But we had taken a few trips down to Argentina earlier this year, and it was clear that there was a change. So we had actually, as a fund, taken off our short Argentina position, and thank God we did, because the bonds have ripped since basically February when we, well, they've started improving as early as January, but we learned our lesson and covered our shorts by February. Yeah, really interesting to get you a take on that. Of course, in this country, he's seen as a Thatcherite. Of course, yeah, and every kind of global macro hedge fund or any investor with a kind of international perspective wants to talk about Argentina at the moment. Couple of final questions, you know, moving on to a different political situation. We've just had the election in the US. Will Trump 2.0 have any impacts on your strategy? I think that there's already been some impact, you know, as I said, we have a lot of biotech and some of the people he's put forward as involved in health care hasn't been favorable for health care and biotech companies. And so that's led to a little bit of a depression in the prices in November and December. This is seen whether those people will actually carry out some of their policies, including, you know, Kennedy and others. So it's already so depressed, I don't know how much worse it can get, but that is one thing we're looking at. They have a very positive attitude towards crypto and one of the things we have, I'm not a believer in crypto and I've never invested in crypto, but we are invested in a company called Core Scientific. It was one of those bankruptcy names I mentioned earlier that's been a great success for us. We are of course scientific is a Bitcoin miner that is transforming itself into an AI data center company. So they're effectively not all of their data centers that are now housing ASIC Bitcoin mining computers, they're being replaced by Nvidia Blackwell GPUs. And so we buy into that transformation. But while that transformation is happening, they are producing Bitcoin. And so positives for Bitcoin are very positive for our investment in Core Scientific. So that is a positive for us. Outside of that, you know, again, we're not involved in situations outside without a legal or regulatory catalyst. So we should be unaffected by his tariff policies or any other policies that he wants to impose. We're not invested in any Chinese companies because while we may look at something in Germany or a concourse on Spain, although probably not, there's zero chance we'll touch anything in China or even Hong Kong or the like. So we try to avoid any of that. So we are not involved in any China companies at all. So I think the good thing about our strategy is we're not dependent on interest rates or what Powell is going to do or inflation. We had one of our best years in 2022 when interest rates were going up. So we should be neutral to that and able to take advantage of any dislocations that he does create, which I think he will. Yeah, sure. There will be a lot of dislocations one way or another. Final question. Do you have any tips on you know, building a firm and any advice for young people who are making their way in the industry? Sure, although I don't invite competition and I'm glad so far there isn't anyone doing what I'm doing. But I think to not to be, look, it's a cliche, but I think whether it's in legal investing or just general investing, I think having almost like a journalist mindset and interest. Because a Google search will get you things that you never would have imagined and we have. I think being interested in one of the things that I've, I wasn't a patent lawyer, but I was interested in understanding patent law. We're involved in a company called Roy Man that's doing what there in a Pfizer and BioNTech for the COVID vaccine. I wasn't a chemistry major, but I dug really deep into the science behind lipid nanoparticles which is the foundation delivery mechanism for the COVID vaccine. So having a general curiosity digging into the science or the math or into an investment I think is critical. Having a journalist mentality to, you know, visiting places and going to local communities to learn more about maybe something going on. We were involved in a nuclear power company and dealing with Amazon and we did a search of property records around that site to learn more about, you know, Amazon's plans for that facility and they were buying up everything around it and that so gave us a lot of confidence that Amazon was there to stay even though there's some legal issues related to its transaction. So that's sort of curiosity and willingness to learn outside of your comfort zone or your expertise, having a journalistic kind of appending hearings might seem very tried or why would you do that, but there is a benefit to going to hearings and watching a judge and watching his body language and, you know, seeing how people in the courtroom behave. I think there is an advantage to being there in person and I think those are all great things that I've learned at VR and elsewhere that I've incorporated into two C's. Yeah, turning up is important, something that AI can't be used for you. Simple, but yeah, I just want to close by saying thank you for joining me on AFI. Thank you. Thank you. Well, it's been fun. Thank you to Cena for future AFI updates subscribe to the newsletter at alternativefundinsight.com. Make sure you sign up for future podcasts with your chosen provider and leave a rating and review. See you next time. Bye. (upbeat music)