SecProbe.io

CORRESP
1
filename1.htm

SEC Letter

 LOCKE LIDDELL & SAPP LLP

ATTORNEYS & COUNSELORS

 2200 ROSS AVENUE

Phone: (214) 740-8000

 SUITE 2200

Fax: (214) 740-8800

 DALLAS, TX 75201-6776

AUSTIN • DALLAS • HOUSTON • NEW ORLEANS • WASHINGTON, D.C

www.lockeliddell.com

Direct-Number: (214) 740-8743

Direct-Fax: (214) 756-8743

E-mail: kbetts@lockeliddell.com

 September 29, 2006

 Securities and Exchange Commission

 Division of Corporation Finance

 100 F Street, N.E.

 Washington, D.C. 20549-0405

 Attention: Karen J. Garnett

Re:
    Sunset Financial Resources, Inc.

    Registration Statement on Form S-3

    Filed September 8, 2006

    Registration No. 333-137219

 Dear Ms. Garnett:

 On behalf of Sunset Financial Resources, Inc., we are furnishing Sunset’s
responses to the comments of the Staff received in your letter dated September 28, 2006, to Stacy M. Riffe, Sunset’s Chief Executive Officer.

 As we discussed, Sunset intends to file a pre-effective amendment to the Registration Statement next week to reflect the changes discussed in this letter and to request that it be declared effective by Thursday,
October 5, 2006.

 Sunset announced today that Alesco has agreed to forego the increase in the exchange ratio in the merger to 1.29.
The exchange ratio has returned to 1.26, which is the exchange ratio set forth in the proxy statement.

 For convenience of reference, each
Staff comment contained in the comment letter is reprinted below in italics, numbered to correspond with the paragraph numbers assigned in the comment letter, and is followed by the corresponding response of Sunset.

 General

1.
We note that the shares being registered for resale have not yet been issued because the merger has not been consummated. Please tell us why it is appropriate to register the
shares for resale at this time. General Instruction I.B.3 to Form S-3 permits the registration of outstanding securities for resale. Please tell us why you believe the shares to be issued in the merger should be viewed as
“outstanding” on the date that you filed the Form S-3.

 In the March 1999 Supplement to the Telephone
Interpretation Manual, the Division of Corporation Finance listed criteria for registering the resale of securities prior to issuance. Sunset’s Registration Statement is being filed in accordance with those criteria. Below is a list of

the requirements from the March 1999 Supplement and an explanation of why the Registration Statement complies with those requirements:

 a) The company has completed a Section 4(2)-exempt sale of the securities to the investor, and the investor is at market risk at the time of filing
of the resale registration statement.

 Sunset has completed, within the meaning of this interpretation, a 4(2)-exempt sale to Alesco
shareholders. As of the filing of the Registration Statement, the Alesco shareholders were subject to market risk.

 b) The investor must be
irrevocably bound to purchase a set number of securities for a set purchase price that is not based on market price or a fluctuating ratio, either at the time of effectiveness of the resale registration statement or at any subsequent date. There can
be no conditions to closing that are within an investor’s control or that an investor can cause not to be satisfied. For example, closing conditions in capital formation transactions relating to the market price of the company’s securities
or the investor’s satisfactory completion of its due diligence on the company are unacceptable conditions.

 Alesco shareholders are to
receive a fixed ratio of Sunset shares for each Alesco share in the merger. The exchange ratio will not change at the effectiveness of the resale registration statement or at any subsequent date.

 There are no conditions to closing that are within the Alesco shareholders’ control or that the Alesco shareholders can cause not to be satisfied.
The shares are to be issued pursuant to a binding merger agreement signed by the parties and approved by the Alesco shareholders.

 The major
remaining conditions to closing are a vote of the Sunset shareholders and the effectiveness of the Registration Statement. The other conditions to Alesco’s obligations are all traditional closing conditions in M&A transactions, such as the
absence of an injunction, the receipt of legal opinions, Sunset’s compliance with the merger agreement and the absence of a Sunset material adverse change.

 c) The closing of the private placements of the unissued securities must occur within a short time after the effectiveness of the resale registration statement.

 The closing of the merger is scheduled to occur on Friday, October 6, 2006, subject to the Sunset stockholders’ approval of the merger, the
effectiveness of the Registration Statement and the satisfaction of the other conditions to the merger.

 Risk Factors,
page 5

2.
A number of the risk factors included in the prospectus appear to be related to the merger between Alesco and Sunset. Please tell us why you believe these risk factors are
relevant to investors in the resale transaction or remove these risk factors from the Form S-3.

 Sunset confirms that it
will remove all merger-related risk factors that are not relevant to investors in the resale transaction. Exhibit A includes changes to the risk factors in response to the Staff’s comment. These changes will be made in a pre-effective amendment
to the Registration Statement.

 Selling Stockholders, page 45

3.
Please confirm that you will include the names and other information required by Item 507 of Regulation S-K for each selling security holder prior to the effective date of
the registration statement, or explain to us your basis for omitting such information. We may have further comment on this disclosure after you include it in the prospectus.

 Sunset confirms that it will file a pre-effective amendment to the Registration Statement listing the information set forth in Item 507 of Regulation
S-K for each selling stockholder. Attached as Exhibit B is a draft of the selling stockholder information, which includes the required information with respect to selling stockholders holding all of the shares to be offered pursuant to the
Registration Statement. Sunset is still in the process of verifying this information and may make changes to the draft.

 Exhibits

 Exhibit 5.1 - Legal Opinion

4.
Please file a revised opinion that more accurately describes the registration statement. The references to “proxy/statement prospectus” and the “issuance by the
Company of its shares of common stock” in the first paragraph of the current opinion do not appear to be appropriate.

 Sunset confirms that it will include a revised legal opinion in a pre-effective amendment to the Registration Statement. A draft of the revised legal opinion is attached as Exhibit C.

5.
We note the assumption in the fourth paragraph that “the appropriate certificates representing shares of Common Stock will be executed and delivered upon issuance and sale
of any such shares, and will comply with all applicable requirements of Maryland law.” This paragraph inappropriately assumes facts which are fundamental to the legal opinion. In addition, it is not appropriate for counsel to assume legal
matters, such as compliance with Maryland law. Please file a revised opinion that omits the assumptions contained in this paragraph.

 The legal opinion has been revised in response to the Staff’s comment.

 Exhibit 8.1 - REIT Opinion

6.
Please file a revised opinion that references the registration statement on Form S-3 rather than the merger and the registration statement on Form S-4. The REIT opinion should be
prepared in connection with this registration statement, so that investors in the resale transactions may clearly rely on the opinion.

 Sunset confirms that it will include a revised REIT opinion in a pre-effective amendment to the Registration Statement. A draft of the revised REIT opinion is attached as Exhibit D.

7.
Refer to the assumptions in the fifth paragraph of the opinion. Please provide a revised opinion clarifying that counsel has assumed the accuracy of factual representations in
the Officers’ Certificates.

 The REIT opinion has been revised in response to the Staff’s comment.

8.
Please tell us why counsel is providing the REIT opinion only through the taxable year ended December 31, 2005 rather than 2006.

 The REIT opinion has been revised in response to the Staff’s comment to include the taxable year
ended December 31, 2006.

 * * * *

 Sunset has scheduled a meeting of its shareholders for 9:00 am on Friday, October, 6, 2006 to vote on the proposed merger with Alesco. Sunset hopes to close the merger on the same day shortly after the completion of the meeting.
Accordingly, Sunset hopes to have the Registration Statement declared effective no later than Thursday, October 5, 2006, as it is a condition to the merger between Sunset and Alesco that the Registration Statement shall have become effective.
Your assistance in helping Sunset meet its schedule would be greatly appreciated.

 If you have any questions or comments regarding the
foregoing, or have additional questions or comments, please contact me at (214) 740-8743.

 Very truly yours,

 /s/ Kenneth L. Betts

 Kenneth L. Betts

cc:
Amanda McManus

Kristina Beshears

Daniel Gordon

Stacy M. Riffe

John J. Longino

Richard D. Pritz

Kathleen L. Werner

Bryan L. Goolsby

 EXHIBIT A

 REVISED RISK FACTORS MARKED TO SHOW CHANGES

 FROM THE S-3 FILED SEPTEMBER 8, 2006

 RISK FACTORS

 In addition to the other information included in this prospectus or incorporated into this prospectus, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Statements” beginning on page
         of this prospectus, you should carefully consider the following risks before making an investment decision regarding the Sunset shares.

 Sunset is changing its strategy and redeploying its assets into a portfolio of assets consistent with Alesco’s investment strategy. Therefore, Sunset already is,
and the merged entity upon consummation of the merger will be, subject to the risks described below with respect to Alesco, unless expressly indicated otherwise with respect to a particular risk factor. In addition, Sunset is also subject to risks
related to the disposition of its existing portfolio of assets. In order to implement its new strategy, Sunset has appointed Cohen Brothers as its interim manager and will assume the management agreement Alesco entered into with Cohen Brothers at
the closing of the merger. Therefore, Sunset is also subject to risks relating to management by Cohen Brothers. Sunset will be subject to these risks both indirectly through Alesco and directly. For a description of the risks that Sunset was subject
to before it began redeploying its assets, please see Sunset’s Annual Report on Form 10-K for the Year Ended December 31, 2005. This document can be obtained as described in “Where You Can Find More Information” beginning on page
[            ] of this prospectus.

 Alesco and Sunset expect to incur
costs and expenses in connection with the merger, which may adversely impact the financial condition of the combined company.

 Alesco and Sunset
are expected to incur one-time, pre-tax costs and expenses of approximately $10 million in connection with the merger. These costs and expenses include change of control, severance, stay bonuses and other benefit payments, insurance costs, fees
relating to the termination of contractual obligations, investment banking expenses, legal and accounting fees, printing expenses and other related charges incurred and expected to be incurred by Alesco and Sunset.

 Following the merger, Sunset will continue to be managed by Cohen Brothers and will continue to be obligated to pay
substantial fees and be subject to potential conflict of interest risks.

 Following the merger, Sunset will assume Alesco’s management
agreement with Cohen Brothers and accordingly Cohen Brothers and its affiliates will earn substantial fees from their relationship with Sunset comparable to the fees currently earned by Cohen Brothers and its affiliates in respect of their
relationship with Alesco. For example, from the commencement of Alesco’s operations in January 2006 through June 30, 2006, Cohen Brothers and its affiliates have earned $664,000 in base management fees, and $195,000 in incentive fees (net
of $374,000 of asset management fee credits) under Cohen Brothers’ management agreement with Alesco, as well as $3.9 million of origination fees, $12.6 million of structuring fees and $6.0 million of placement fees in respect of CDOs and CLOs
in which Alesco has invested. In addition to ongoing management fees and fees arising from Sunset’s investments, Cohen Brothers will also be entitled to a termination fee of three times the sum of the average annual base fee for the past two
12-month periods under the management agreement if the agreement is terminated under specified circumstances. Sunset is presently paying substantial fees to Cohen Brothers under the interim management agreement. Sunset will be subject to potential
conflicts of interest arising out of its relationship with its manager and affiliates, including the following potential conflicts arising from fees payable to Cohen Brothers and its affiliates:

•

Cohen Brothers is controlled by Daniel G. Cohen and certain of Alesco’s other executive officers. As a result, Alesco’s management agreement, which will be assumed by
Sunset in the merger, was negotiated between related parties and its terms, including fees payable, may not be as favorable as if the terms had been negotiated with an unaffiliated third party;

•

the substantial fees to be earned by Cohen Brothers and its affiliates from Sunset’s investments in CDOs and CLOs structured, managed and sold by Cohen Brothers and its
affiliates, whether or not those investments generate attractive returns for Sunset, present potential conflicts for Cohen Brothers in causing Sunset to make investments which may not be fully addressed by policies that require Sunset’s
independent trustees to approve all transactions between Sunset and Cohen Brothers and its affiliates;

•

the incentive fee that will be payable under Sunset’s management agreement with Cohen Brothers may induce the manager to make higher risk investments; and

•

the substantial termination fee that will be payable under Sunset’s management agreement with Cohen Brothers will make termination of the agreement extremely costly and may
deter Sunset from exercising its termination rights.

 Sunset is presently subject to many of these potential conflicts of interest, including
those listed above (other than the third bullet point, as the interim management agreement does not provide for an incentive fee) as a result of the interim management agreement. These risks and other risks arising from Sunset’s relationship
with its manager are explained in detail below under the caption “Risk Factors Relating to Alesco – Risk Relating to Alesco’s Management and its Relationship with its Manager.” The interim management agreement and the management
agreement are described under the captions “The Interim Management Agreement” and “The Alesco Management Agreement.”

 Sunset has suffered losses as a result of the sale of its existing portfolio of mortgage-backed securities.

 As a result of the redeployment of its assets, Sunset has recognized a net loss of $22.2 million from the sale of $809.1 million of its
mortgage-backed securities. Related hedge gains reduced the net loss to $3.2 million. The losses resulted from the sale of these securities at a time when their market value was less than their amortized costs. These losses might not have resulted
if Sunset had retained these assets for a period of time necessary to recover the amortized costs.

 Risk Factors Relating to Alesco

 Risks Related to Al