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Colbeck Capital Aided Ryan Kavanaugh’s ‘Ponzi Scheme,’ Film Lender Claims

UPDATED: The New York investment firm Colbeck Capital aided and abetted Relativity Media’s fraudulent acquisition of a crucial film-release loan — money that was misspent on corporate expenses and to support the high-flying lifestyle of Relativity founder Ryan Kavanaugh and his cronies — a lender charged in a legal filing in New York.

The amended complaint by RKA Film Financing amplifies charges the lender first made in a lawsuit last July, but adds a number of defendants, notably Relativity executives and Colbeck, the New York investment firm founded by two of Kavanaugh’s friends, Jason Colodne and Jason Beckman.

RKA’s amended complaint asks for $110 million in damages, reiterating its claim that Kavanaugh is a “con man” and adding that a money-chase by his Beverly Hills-based entertainment company amounted to “a classic Ponzi scheme” — in which new rounds of investors are brought in to repay the last round, with no substantial financial structure to the underlying company.

A representative for Colbeck and its partners declined to comment. Relativity issued a statement through a spokesperson calling the RKA litigation “nothing more than a shakedown,” adding “RKA is knowingly perpetrating malicious prosecution and misusing the press and the law to extract money.” The statement also said Kavanaugh had never met or spoke with RKA’s principals prior to their investment and that the lender understood the nature of its investment in Relativity.

The company’s spokesperson also said that “Ryan Kavanaugh personally invested $10 million of his own money below the RKA investment.” And, later  Thursday, the company claimed it would counter-sue RKA and its representatives. “We are taking legal action against RKA, its principals and their attorneys, Latham & Watkins,” said the Relativity statement, adding that the proposed litigation would be for “misuse of the legal system, abuse of process, and interference in contractual relations; all in an attempt to extract money not owed to them.”

Relativity has been struggling to emerge from the Chapter 11 bankruptcy it entered last July. Most recently, it has been trying, without apparent success, to close a new equity financing deal and to complete a deal to hire Kevin Spacey and his producing partner, Dana Brunetti, to run Relativity Studios. The company cannot leave bankruptcy until it completes the financial and executive deals, as directed by U.S. Bankruptcy Judge Michael Wiles.

RKA’s filing late Wednesday amounts to a scathing indictment of Kavanaugh, his Relativity leadership team, the company’s board and Colbeck, which the legal filing says either made or arranged $550 million in loans to Relativity over the last several years.

“This case is about a con man — Ryan Kavanaugh — who through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds,” the legal filing says. “Time and again, Kavanaugh induced his victims to invest hundreds of millions of dollars to prop up his failing entertainment company, Relativity Media, LLC, in what amounted to a classic Ponzi scheme.”

It adds of Colbeck: “Two principals of Colbeck — Jason Colodne and Jason Beckman — sat on Relativity’s Board of Directors and operated hand in hand with both Relativity and Kavanaugh to raise additional capital for Relativity through lies and deliberate misinformation in a desperate — and ultimately public and unsuccessful — attempt to salvage their own investments in Relativity.”

The new filing in New York Supreme Court says it was Colbeck that took the lead in getting RKA to lend Relativity a total of $81 million, money that the financier says was supposed to be spent only for the release and promotion of specific films. Instead, the P&A (print and advertising) funds were misdirected into Relativity’s operating accounts and, the filing suggests, to the lavish lifestyle of Kavanaugh and his company cronies.

The misbegotten funds helped pay some of at least $20 million in compensation to Kavanaugh, four of his executives and Colbeck’s two founders, the complaint contends. The money went to “personal indulgences, such as the five personal helicopters purchased by Kavanaugh for his daily commute to work and his multimillion-dollar Malibu mansion,” it alleges.

RKA, via its attorneys at Latham & Watkins, suggested that Relativity and its leaders larded the loan money onto the company’s sinking balance sheet “to create the appearance of financial stability and liquidity for their otherwise cash-strapped entertainment company. In so doing, they hid the breadth and depth of their fraud from their current and future investors and used the P&A Funds as their own personal piggy bank.”

The RKA litigation depicts the Colbeck founders as two close Kavanaugh associates (who even signed his Jewish wedding contract) who took an interest in keeping Relativity afloat after their own substantial investments in the company. “

“Colbeck knew that an imminent collapse of Relativity all but ensured that monies lent under the [P&A] facility would be vaporized — yet they failed to disclose those material facts to RKA,” the lender alleged. “Simply put, Colbeck knew it was holding onto a time bomb with a short fuse.”

RKA said it only learned last April that almost none of the money it loaned to release films was going to that purpose. Of the $73.6 million drawn from the P&A facility, only about $1.7 million had gone to promote movies, it alleged. In one example, it said only $1.3 million of the $25.7 drawn to promote the Kristen Wiig comedy “Masterminds” actually went to back the film. The film remains unreleased.

As Relativity’s “house of cards” began to collapse, Kavanaugh and his executives repeatedly assured the lender that the company had a healthy cash flow, the suit charges. Kavanaugh assured RKA in April 2015 that he was in the “final stretch of closing” a $550 million refinancing of Relativity that had to be the focus of his attention, rather than RKA’s concerns. The lender alleges that the claim was just one of many lies.

RKA’s attorneys said it was only on July 15 of last year, after months of trying to work out a settlement and helping Relativity remain afloat, that it filed its lawsuit accusing the entertainment company founder of fraud.

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