A federal judge has ruled that Bob Sillerman was probably dishonest with his failed bid to take SFX private in early 2015, ruling that the offer was likely a disingenuous attempt to pump up the share price and distract from the company’s poor financial performance.
In a 24-page ruling, Judge Colleen McMahon denied a motion by Sillerman to dismiss a lawsuit from investors who lost $18 million buying SFX stock. In her ruling, McMahon said there was evidence that individuals within SFX participated in the scheme.
“Plaintiff has pleaded facts sufficient to show that Sillerman and (company directors) may have been culpably involved in the Company’s misconduct,” McMahon wrote (read it here), paving the way for a lawsuit against SFX to move forward.
The lawsuit is being brought by investors with the Guevoura Fund and mirrors a class action suit in New York by several institutional investors including Edward Gutman, who purchased 42,000 SFX shares between May 27 and Aug. 17 at an average price of $3.56 per share. The stock is now trading for about .02$ per share. Both suits allege that Sillerman committed securities fraud during several failed buyout offers. In February 2015, Sillerman made an offer to buy out the outstanding common stock shares of SFX for $4.75 per share and signed a revised merger agreement a few months later to buy up the shares for $5.25 a share. Plaintiffs argued that these actions were designed to hide the company’s poor financial performance. McMahon seemed to agree, ruling that a case against Sillerman and the Board of Directors could proceed.
“These actions signaled to the market that Sillerman saw significant value in SFX. And because Sillerman was known as a savvy business mogul within the entertainment industry, his faith in the Company was interpreted as evidence that SFX was in fact valuable, even if that value was not yet reflected in the Company’s financial reports,” McMahon wrote.
In her ruling, McMahon said the buyout offer was likely made to distract attention from the company’s poor quarterly financial reports, which showed that SFX was bleeding money and attendance at its events dropping. She also criticized analysts watching the company, saying they “spent much of 2015 ignoring all indications that the Company was in a poor financial state” and ignored key developments like a decision by Moody’s to downgrade SFX’s credit rating, a development that “under normal circumstances would be a significant red flag for investors.”
McMahon also said there were plenty of reasons to not believe Sillerman was serious about the go-private offers.
“Most tellingly,” she wrote, “Sillerman twice declined to consummate the transaction at the expiration of a Go-Shop period, despite indications that there were no other interested buyers and the Company was his, if he wanted it,” she wrote. “These allegations, viewed collectively, are enough to suggest that Silerman did not intend to purchase the Company, despite signaling to the market that he would do so.”
Sillerman was the Company’s largest shareholder, McMahon explained, “and he served to gain personally from his plan to distract the market from the Company’s poor financial performance. Moreover, he had a strong motive to keep the Company afloat, since he allegedly had personally guaranteed a loan facility available to the Company before making the initial offer. Furthermore, over the course of 2015, entities he owned or controlled grew increasingly intertwined with SFX. As a result, after using these entities to help the Company refinance and renegotiating its debt, Sillerman had a strong incentive to continue indicating to the public – as he did that he was going to consummate the transaction.”
When the privatization bids fell apart, “Director Defendants repeatedly extended the Go-Shop period, falsely indicated that other parties were interested in purchasing the Company and included terms highly favorable to Sillerman,” and ruled there was sufficient evidence to move forward with the case.
“Finally, plaintiff has pleaded facts sufficient to show that Sillerman and the Director Defendants may have been culpably involved in the Company’s misconduct,” McMahon wrote. “For instance, whether or not the Director Defendants themselves made statements falsely alleging that the Special Committee (and thus the Director Defendants) received indications of interest from third- parties – and thus whether they are liable for their falsity as a ‘maker of the statement.’ Plaintiffs have alleged facts suggesting that they were involved in the decision to issue them.”