UPDATED: A New York finance company that supports film promotion has sued Relativity Media CEO Ryan Kavanaugh and accused him of being a “con man… who through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds.”
Nine days after RKA Film Financing filed another action trying to recover $7.5 million from Kavanaugh, the lender’s second lawsuit goes much further, alleging that the entertainment impresario induced victims “to invest hundreds of millions of dollars to prop up a failing entertainment company.”
The $90 million action, filed in Supreme Court for the state of New York early Friday afternoon, comes as disgruntled investors have been circling Relativity, multiple film releases have been delayed, and the company has been struggling to pay its bills, as the danger of bankruptcy looms.
Relativity responded with a statement calling the RKA allegations “patently false” and saying the investment company was “engaged in an underhanded scheme to extract money from Kavanaugh, the company and its lenders, all of whom have refused to submit to RKA’s outrageous demands.” The company said it had responded with a lawsuit of its own, asking for $200 million and a judge’s ruling that all the P&A funds had been used properly by Relativity.
The new lawsuit by RKA claims that its investors had loaned about $75 million to Relativity on the condition that the money be used exclusively for print and advertising expenses on specific films. But Kavanaugh, despite promising to use the money only for such film promotion, never intended to do so, the lawsuit alleges.
Instead, Kavanaugh and Relativity used the millions of dollars “for salaries, bonuses, the fulfillment of Relativity contract debts and other general corporate expenses, including the funding of Relativity’s sports agency and television studio,” the litigation charges. The monies were allegedly listed on Relativity’s balance sheet to give “the appearance of financial stability for their otherwise cash-strapped entertainment company.”
Kavanaugh and his company’s actions “hid the breadth and depth of their fraud from their current and future investors,” RKA alleges, “and used the P&A funds as their own personal piggy bank.”
The litigation by RKA depicts an increasingly tense relationship with Kavanaugh, roughly a year after the firm was formed and began loaning millions for film promotion. Concerned about how the funds were being spent, RKA in April tried to verify how various Relativity subsidiaries — each linked to a specific film — were spending the P&A funds.
But, according to the lawsuit, “Kavanaugh and his team suspiciously resisted this effort.” RKA representatives told the company that they suspected fraud. But Kavanaugh and his associates denied any wrongdoing and insisted their enterprise was in healthy financial condition, the lawsuit says.
When RKA demanded to see the Relativity books, the company responded “that they were unable to provide the backup for their assertions (supposedly) because Relativity’s staff was focused on an imminent fundraising deal,” the lawsuit contends. The real reason for not opening the books was “to prevent RKA from uncovering Relativity’s imminent insolvency,” according to the suit.
When financial information finally was turned over, it misrepresented the health of Kavanaugh’s operations and did not account for the P&A funds, RKA claims. The finance firm said that only through continued inquiry did it discover “that Kavanaugh’s house of cards was on the verge of collapse.” At this point, the suit claims, Kavanaugh and his compatriots “finally admitted their fraudulent scheme” — that the money had been diverted to other uses.
RKA’s lawsuit, which compares Relativity to a “Potemkin village,” said that once the misspending was exposed, “Kavanaugh begged RKA to give him one last shot to make good on his promises.” The finance firm said in the litigation that it hoped for an amicable solution and to keep Relativity out of bankruptcy, in order to improve its chances of being repaid.
It entered into a June agreement with Relativity — holding back on its fraud claims — in hopes that Kavanaugh would find a solution. The lawsuit claims that it went ahead with its initial lawsuit on July 16 only when Kavanaugh made it clear that he would not make good on his promises. “After being rebuffed and fed self-serving lies, RKA is left with no other choice” but to sue to make itself whole, the suit contends.
The lawsuit accuses Kavanaugh and unnamed John Does of fraud, conspiracy to commit fraud, negligent misrepresentations, conversion of funds and breach of covenants of good faith and fair dealing. It asks for $90 million in damages.
Asked for comment, lawyers at Latham & Watkins who represent RKA said only, “The complaint speaks for itself.”