Class action filed in SFX share buy back debacle

October 2015

Live events sector



A US law firm has filed a class action lawsuit against EDM promoter SFX on behalf of anyone who bought shares in the company between the 25th February and 17th August of this year. Abbey Spanier LLP, which specialises in class actions, alleges that SFX and its CEO Robert Sillerman made “materially false and misleading statements” in the first half of this year in relation to the latter’s much publicised plan to buy-back all the shares he doesn’t currently control in the business, taking the EDM powerhouse back into private ownership.
Sillerman floated SFX in 2013 at a price of $13 per share, and indeed his buy-back plan, initially at $4.75 per share, was not well received by investors. A committee of independent directors at SFX approved the proposal after Sillerman improved his offer to $5.25 per share (which was then well above the share price of $3.13). However the SFX share price subsequently dropped, at one point hitting a low of just $1.94 cents: last month Sillerman admitted that he couldn’t raise enough finance to go through with the proposed deal and also had to make a public apology after SFX subsidiary Beatport announced a royalty freeze whilst Sillerman’s buy back went through – effectively depriving artiste and labels of much needed income that they were owed. SFX also cancelled the One Tribe festival which was due to take place near LA on 25th and 26th September. This was as a result of poor ticket sales. Matters had been confused earlier in June when, despite having announced the share buy back, SFX has sold stock to Wolverine Flagship Fund Trading Limited and Virtual Point Holdings LLC in an unexplained cash deal worth $10 million.
At the time of Sillerman’s admission he could not then finance a buy back, it was announced that the special committee of independent directors, previously set up to consider the firm’s founder’s proposals, would start exploring other options for the future of the company. That includes the possibility selling some or all of the firm’s assets to another party, or, indeed, an alternative buy back plan from Sillerman.
Abbey Spanier allege that Sillerman has breached rules under America’s Exchange Act in his dealings earlier this year. The legal firm claimed on Friday: “Sillerman repeatedly affirmed his commitment to acquire SFX. However, [he] knew or recklessly disregarded and failed to disclose that he did not have any financing in place at the time he made his proposal, and knew or recklessly disregarded that he could not obtain the financing to consummate the transaction”.
And “Given the company’s growing debt and decreasing margins it was not feasible that Sillerman was ever going to buy the company and, with the aid of the other defendants, Sillerman initiated and maintained a sham process designed to lure third party offers, in an attempt to shed his failing investment before the truth about the deterioration of the company could no longer be concealed”.
And “The effect of the false and misleading statements by defendants during the class period was to fraudulently inflate and maintain the market price of SFX shares at levels that would not otherwise have prevailed based on the true financial performance and future prospects of the company”.
Edward S. Gutman, the lead plaintiff, purchased 42,000 SFX shares between May 27th and August 17th at an average price of $3.56 per share. SFX shares closed at $1.33 on August 17th and stood at $0.45 on September 14.
Sillerman, as well as board members D. Geoffrey Armstrong, John Meyer and John Miller, are also named as defendants in the complaint.
In early August SFX reported a 48% rise in second quarter revenue to $121 million, driven by ticket sales at live events such as Life In Color Austin, Kingsland Amsterdam, Rock In Rio Vegas, Electric Zoo Tokyo, Tomorrowland Brazil and Mysteryland USA. Other sales, which including digital music streaming and marketing partnerships with brands like Budweiser and T-Mobile, came in at $14.4 million. However, SFX reported an operating loss of $27.8 million during the second quarter and an overall net loss of $48 million.
Abbey Spanier have also said that SFX’s full-year guidance given in March — revenue over $500 million and $60 million of earnings before interest, taxes, depreciation and amortization — was false and misleading and the company knew or disregarded that SFX’s debt was increasing, cash was running low and ability to borrow money was limited.
ratings agencies Moodys and Standard & Poor  both recently downgraded the music firm’s corporate credit rating. The company had said that it is having to dip into its cash reserves to a greater extent than planned, mainly because it was having to make more upfront payments in relation to its current programme of festivals.
In early August a separate lawsuit was brought against Sillerman and the SFX’s Chairman of Strategy & development, Sheldon Finkel,  by three men who claim to be co-founders of the company, This claim was allowed to move forward after a judge in California refused Sillerman’s request for a summary judgement in his favour. Paolo Moreno, Lawrence Vavra and Gabriel Moreno claim that Sillerman approached them in early 2012 to discuss his plans for a dance music-focussed company and used the three men’s expertise to identify and purchase seven of the firm’s early acquisitions but that they were defrauded out of shares which would now be worth $100 million (although potentially substantially less at the time of writing this piece).
Los Angeles-based law firm Glancy Prongay & Murray LLP has said that it is investigating SFX Entertainment on behalf of investors after allegations of fraud.

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