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FILED: NEW YORK COUNTY CLERK 03/09/2016 09:23 PM

NYSCEF DOC. NO. 19

INDEX NO. 652592/2015 RECEIVED NYSCEF: 03/09/2016

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

RKA Film Financing, LLC,

 

Plaintiff,

- against -

Ryan Kavanaugh, Colbeck Capital Management, LLC, Colbeck Capital, LLC, Colbeck Partners IV, Jason Colodne, Jason Beckman, David Aho, Ramon Wilson, Andrew Matthews, Greg Shamo, Tucker Tooley, Steven Mnuchin, and John Does 1-

6,

 

Defendants.

AMENDED COMPLAINT

Index No. 652592/2015

Plaintiff RKA Film Financing, LLC (together with its lender-investors, “RKA”),

by and through its attorneys, Latham & Watkins LLP, for its complaint against Defendant Ryan

Kavanaugh (“Kavanaugh”), Defendants Colbeck Capital Management, LLC, Colbeck Capital,

LLC, and Colbeck Partners IV (collectively, “Colbeck”), Defendant Jason Colodne (“Colodne”),

Defendant Jason Beckman (“Beckman”), Defendant David Aho (“Aho”), Defendant Ramon

Wilson (“Wilson”), Defendant Tucker Tooley (“Tooley”), Defendant Greg Shamo (“Shamo”),

Defendant Andrew Matthews (“Matthews”), Defendant Steven Mnuchin (“Mnuchin”), and John

Does 1-6 (collectively, with each of the other Defendants, the “Defendants”), hereby alleges the

following:

NATURE OF THE ACTION

  • 1. 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. Time and again, Kavanaugh induced his victims to invest hundreds of millions of

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dollars to prop up his failing entertainment company, Relativity Media, LLC (“Relativity”), in

what amounted to a classic Ponzi scheme.

  • 2. Colbeck, a financial advisory firm, was integral to Kavanaugh’s scheme.

Specifically, Colbeck and its principals leveraged Colbeck’s role as (i) an equity investor in

Relativity, (ii) a lender to Relativity, and (iii) an agent and advisor to Relativity to aid and abet

Kavanaugh’s recruitment and deception of investors (like RKA) to keep the Ponzi scheme afloat.

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.

  • 3. One of the victims of this Ponzi scheme was RKA, a financing company.

Kavanaugh, Relativity, and Colbeck and its principals each courted RKA to invest about $81

million on the express condition that RKA’s funds would be used solely for print and advertising

(“P&A”) expenses relating to certain Hollywood films (the “P&A Funds”). These films were

financed, produced, and marketed by special purpose entities set up and controlled by Relativity

(the “Film SPEs”). RKA made its investment after extensive due diligence and based on specific

and repeated assurances from, among others, Kavanaugh, Matthews (Relativity’s CFO), and

Colbeck and its principals that Relativity and the Film SPEs would only use the P&A Funds for

P&A expenses incurred by the Film SPEs.

  • 4. Unbeknownst to RKA, however, Kavanaugh, Colbeck, and its principals

never intended—as they now admit—that Relativity would use the P&A Funds as

promised. Instead, from the outset of their scheme, Kavanaugh, along with a complicit and

negligent Board of Directors and set of senior officers, repeatedly represented to RKA that its

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P&A Funds would be used solely for P&A expenses of certain films—knowing full well that

said funds were to be used as a working capital facility for Relativity, and failed to disclose the

same to RKA. In turn, the Defendants converted and misappropriated the P&A Funds, using

them for myriad personal emoluments, salaries, bonuses, the fulfillment of Relativity contract

debts, and other general corporate expenses. To further their scheme, Kavanaugh and Colbeck

caused RKA’s P&A Funds to be listed on Relativity’s 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.

  • 5. In April 2015, RKA sensed for the first time that the litany of promises

and representations made by Kavanaugh and his compatriots had been hollow. So, RKA

attempted to verify exactly how the Film SPEs had spent their recently drawn-upon P&A Funds.

Suspiciously, Kavanaugh and his team resisted this effort. Given Kavanaugh’s uncooperative

posture, RKA confronted Kavanaugh, Matthews, and Wilson (Relativity’s Executive VP of

Business Development) about the suspected fraud. Each vehemently denied any malfeasance

and, instead, doubled down by assuring RKA (yet again) that Relativity was in healthy financial

condition and that RKA’s P&A Funds had only been spent on P&A. When RKA asked to

inspect Relativity’s books and records to verify these claims, Kavanaugh and his cohorts

repeatedly pivoted and stated that they were unable to provide the backup for their assertions,

(supposedly) because Relativity’s staff was focused on an “imminent fundraising deal.” In

actuality, Kavanaugh and his team refused RKA’s demands for basic information in order to

prevent RKA from uncovering their unravelling Ponzi scheme, the breadth of their

misrepresentations, and Relativity’s imminent insolvency.

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6.

When Kavanaugh, Matthews, and Wilson finally provided RKA with

Relativity’s alleged balance sheets and financial statements, they materially misreported the

financial health of Kavanaugh’s companies and failed to account for the whereabouts of RKA’s

$73.6 million in drawn-upon P&A Funds. Only after continued diligence and inquiry, and in

spite of roadblocks erected by Kavanaugh and the other Defendants to conceal their fraud, did

RKA discover that Kavanaugh’s house of cards was on the verge of collapse.

  • 7. In desperate conversations with RKA, between about April and June 2015,

Kavanaugh and certain officers and directors of Relativity, including Matthews, finally admitted

their fraudulent scheme to RKA. Specifically, they divulged that they had (i) converted the P&A

Funds and spent them contrary to the verbal and written representations made to RKA prior to its

investment and (ii) used the P&A Funds as a general line of credit to fund their Potemkin

Village: Relativity. With their scheme revealed, Kavanaugh begged RKA to give him one last

shot to make good on his promises. Dubious of Kavanaugh’s veracity—yet hoping in good faith

that Kavanaugh could fix the damage he had done—RKA endeavored to find an amicable

resolution and give Relativity the opportunity to find alternative funding to keep itself

afloat. Ultimately, on June 5, 2015, RKA agreed to refrain temporarily from asserting fraud and

other legal claims by striking a good faith deal with both Kavanaugh and Relativity.

  • 8. Again, Kavanaugh and his syndicate of fraudsters did not live up to their

word, failing to deliver on their June 5, 2015 promises. Yet, RKA showed further restraint,

cooperating with Relativity throughout June and July 2015 in the hope that Relativity would find

alternate financing, stave off creditor defaults, and avoid bankruptcy. All the while, despite

Kavanaugh’s breach of the June 2015 deal he struck to keep RKA from taking action, RKA

refrained from publicly revealing Kavanaugh’s deeds or seeking judicial intervention. Likewise,

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Colbeck, its principals, and the Board remained mum as to both the lies being fed to RKA and

how RKA’s P&A Funds were all that was (barely) keeping Relativity buoyant.

  • 9. RKA’s patience ran out on July 16, 2015, when—despite his promises to

the contrary, and months of good faith efforts by RKA to help Relativity through its financial

woes—Kavanaugh issued a public statement that he would not, and never had intended to, make

good on his clear obligations and promises to RKA. After repeatedly throwing Kavanaugh and

Relativity a lifeline to atone for their fraud, and after being rebuffed and fed self-serving lies,

RKA was left with no other choice. Accordingly, on July 24, 2015, RKA filed the original

complaint in this matter.

  • 10. Most recently, in a subsequently retracted press release, Kavanaugh turned

on his co-conspirators and shockingly claimed that RKA’s P&A Funds were (and had always

been) provided to Relativity for “working capital” and general corporate expenses, and that any

misunderstanding was the fault of Colbeck and its principals—not him. In light of additional

details regarding the Defendants’ scheme, RKA now submits this amended complaint premised

on Defendants’ (i) fraud, (ii) fraud in the inducement, (iii) conspiracy to commit fraud,

(iv) negligent misrepresentations, (v) conversion of funds, and (vi) breach of covenants of good

faith and fair dealing, and seeks actual damages incurred and accruing in excess of $110 million

on account of their actions.

PARTIES 1

  • 11. RKA is a limited liability corporation, organized under Delaware law,

with its principal place of business in New York, that agreed to provide, and provided, financing

  • 1 The facts as pled in this Amended Complaint reflect Relativity’s corporate form prior to its filing for bankruptcy.

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to the Film SPEs, pursuant to the terms of certain agreements described further below.

  • 12. Defendant Kavanaugh is the founder and CEO of Relativity, and is the

main signatory in charge of the operation of the Film SPEs. He resides in California.

  • 13. Colbeck Capital Management, LLC is a financial advisory firm organized

under the laws of Delaware and headquartered in New York. Colbeck Capital, LLC and Colbeck

Capital Partners IV, LLC are limited liability companies organized under the laws of Delaware

and headquartered in New York. Colbeck specializes in media-related investments, including in

companies such as MindGeek, the owner of pornography aggregators Pornhub, YouPorn and

RedTube. Colbeck participated in Relativity’s debt financings in 2011 and 2012, and exited

most of these investments prior to Relativity filing for bankruptcy in July 2015. As described

further below, Colbeck worked hand-in-glove with Kavanaugh to induce RKA to invest in

Kavanaugh’s Ponzi scheme.

  • 14. Defendant Matthews has been an officer of Relativity since May 28, 2013,

when he became its Chief Strategy Officer. Since then, he has also acted as its Chief Financial

Officer (“CFO”) and Co-Chief Operating Officer (“Co-COO”). Matthews resigned from his

position as CFO and Co-COO as of October 5, 2015. 2 As described further below, in these roles,

he made deliberate and false representations to RKA regarding Relativity’s use of P&A Funds,

actively furthering the Defendants’ scheme. He resides in California.

  • 2 Relations between Matthews and Kavanaugh have apparently soured. Matthews recently filed an objection to the confirmation of the proposed Chapter 11 plan in the bankruptcy case involving Relativity and its related entities in the Southern District of New York (the “SDNY Bankruptcy”) to the extent that the plan rejects a mutual release of claims he had executed with Relativity on June 26, 2015. See Objection of Andrew Matthews to Proposed Rejection of Certain Executory Contracts Pursuant to the Second Amended Plan of Reorganization and Section 365 of the Bankruptcy Code, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1388, Jan. 25, 2016. Notably, Matthews had sought that mutual release of claims following fears that instructions from Kavanaugh to never communicate with FTI Consulting (the crisis and turnaround manager retained by the Debtors in connection with the SDNY Bankruptcy) unless in the presence of Kavanaugh or other senior Relativity executives had caused him to breach his obligation to cooperate with FTI or his duties to Relativity. Id. ¶ 18.

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15.

Defendant Shamo has been Relativity’s Co-COO since November 1,

  • 2012. Shamo joined Relativity in 2009 and has previously served as its Executive Vice President

of Corporate Affairs and General Counsel. As described further below, in these roles, he made

deliberate and false representations to RKA regarding Relativity’s use of the P&A Funds,

actively furthering the Defendants’ scheme. He resides in California.

  • 16. Defendant Colodne is a founder and Managing Partner of

Colbeck. Colodne served on Relativity’s Board of Directors from about 2012 until May 27,

  • 2015. As described further below, while serving as a Director, and in his capacity as a

representative of Colbeck, he made deliberate and false representations to RKA regarding

Relativity’s use of the P&A Funds, actively furthering the Defendants’ scheme. He resides in

New York.

  • 17. Defendant Beckman is a founder and Managing Partner of Colbeck.

Beckman served on Relativity’s Board of Directors from about 2012 until May 27, 2015. 3 As

described further below, while serving as a Director, and in his capacity as a representative of

Colbeck, he made deliberate and false representations to RKA regarding Relativity’s use of the

P&A Funds, actively furthering the Defendants’ scheme. He resides in New York.

  • 18. Defendant Aho is a partner at Colbeck and personally recruited investors,

including RKA, to provide funding to Relativity. Specifically, Aho marketed the investment

  • 3 Although, in recent communications with RKA, Beckman has denied his directorship on Relativity’s Board, press coverage based on statements or releases issued by Relativity itself contradict these assertions. See, e.g., Ben Fritz, Relativity Back in Business with Debt Backed by Ron Burkle, L.A. TIMES, May 31, 2012, available at http://articles.latimes.com/2012/may/31/entertainment/la-et-ct-relativity-loan-burkle-20120531 (noting that as part of a 2012 financing deal with Colbeck, Beckman would be joining Relativity’s Board along with Colodne); see also Todd Cunningham, Two Relativity Board Members Resign After Clash with CEO Ryan Kavanaugh, YAHOO, THEWRAP, May 27, 2015, available at https://www.yahoo.com/movies/s/two-relativity-board- members-resign-clash-ceo-ryan-210953390.html (discussing a statement by Relativity that Beckman and Colodne had resigned from the Relativity Board).

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opportunity to RKA and worked to structure, negotiate, and close the P&A facility between

Relativity and RKA. Aho played a key role in Defendants’ scheme by making myriad materially

false statements to RKA regarding the transaction.

  • 19. Defendant Wilson is interim President of Relativity. Wilson joined

Relativity in 2006 and has previously served as Executive Vice President and Head of Business

Development at Relativity during its involvement with RKA until November 5, 2015, when he

became interim President. As described further below, in his various positions at Relativity,

Wilson made deliberate and false representations to RKA regarding Relativity’s use of P&A

Funds, actively furthering the Defendants’ scheme. He resides in California.

  • 20. Defendant Tooley was the President of Relativity from September 30,

2011 until November 5, 2015. As described further below, while serving as President, he made

representations to RKA regarding Relativity’s use of P&A funds, actively furthering the

Defendants’ scheme. He resides in California.

  • 21. Defendant Mnuchin was the Non-Executive Co-Chairman of Relativity’s

Board of Directors from October 2014 to May 2015. He joined the board when Dune Capital

Management, a private investment firm he founded, purchased debt and equity in Relativity. In

his capacity as a director, Mnuchin played a key role in making representations to RKA

regarding Relativity’s use of P&A Funds, actively furthering the Defendants’ scheme. Mnuchin

was also the CEO and Chairman of OneWest Bank—a lender to Relativity—at the time

Relativity’s Ponzi Scheme collapsed. Beginning in June 2015, with Relativity’s bankruptcy

looming, OneWest Bank began sweeping what amounted to $50 million from Relativity’s bank

accounts that likely included some or most of RKA’s commingled P&A Funds. Accordingly,

Mnuchin was in a unique position, affording him knowledge of both Relativity’s precarious

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financial position and the ability to ensure certain creditors—namely, OneWest Bank—were able

to siphon away funds that had been commingled with RKA’s P&A Funds.

  • 22. John Does 1-6 are various officers and directors of Relativity, Relativity

Holdings, LLC, and the Film SPEs, who conspired, and aided and abetted, Kavanaugh and

Colbeck in carrying out their scheme and whose identities will be determined through further

discovery.

JURISDICTION

  • 23. Jurisdiction is proper under New York Civil Practice Law and Rule

(“CPLR”) § 302 in that Kavanaugh, Colbeck, and the other Defendants transact business within

the state of New York. Jurisdiction is also proper under CPLR § 302 because Kavanaugh,

Colbeck and the other Defendants committed tortious acts within the state, and committed

tortious acts without the state causing injury to RKA within the state.

FACTUAL ALLEGATIONS

  • 24. Relativity is a privately held global media company located in Beverly

Hills, California. Relativity has numerous affiliates and subsidiaries, including the Film SPEs,

which finance, produce, advertise, and distribute films. Through Relativity’s business structure,

each Film SPE is responsible for a single film. For instance, “RML Solace Films, LLC” is a

Film SPE principally responsible for the filming and marketing of the movie Solace. In this way,

each Film SPE is (or at least, ostensibly should be) an independent legal entity with separate

expenses and a distinct balance sheet.

  • 25. Numerous expenses are associated with the theatrical release of a motion

picture. One expense, as discussed above, is P&A. Entities organized for the purpose of

releasing movies (such as the Film SPEs) generally have P&A budgets for the release of each

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film that are distinct from the film’s production budgets. Thus, these entities often seek and

secure separate loans to finance this P&A. These loans are ordinarily the last financing incurred

by the Film SPE prior to the release of a film, and P&A lenders usually provide this financing in

return for a guarantee that they will be the first lenders repaid through a film’s box office

receipts. 4 Therefore, P&A lenders bear the risk if a film does not generate sufficient revenue to

recoup their P&A investment, but enjoy the benefit of being the first to be repaid. Typically,

P&A expenses are also financed after the film has been developed and produced, minimizing the

risks associated with non-completion.

  • 26. P&A loans are not general corporate loans. Nor are such loans a general

line of credit to provide studios (like Relativity) with working capital. In fact, P&A loans differ

from these other cash sources in (at least) two relevant ways: first, while general corporate loans

can be used for a variety of purposes, including financing corporate expenses and growing the

business, P&A loans are (as the name implies) made explicitly for the marketing of a film;

second, the repayment risk of a general purpose loan is tied to the financial success of the parent

company, while the repayment of a P&A loan is tied to the box office success of the film for

which the P&A funds were loaned. 5 Thus, P&A loans are discrete, asset-based loans targeted for

a very narrow set of uses.

  • A. Kavanaugh and Colbeck’s Ponzi Scheme

    • 27. Beginning in or about 2011, Kavanaugh, at the helm of Relativity, began

courting debt and equity investments to acquire smaller movie studios. Of relevance here,

  • 4 In industry parlance, this is often known as “last in, first out” financing.

  • 5 The financial stability of a studio may, of course, affect the studio’s ability to release a film for which P&A loans have already been made; however, this repayment risk is limited because P&A is typically loaned, as here, only after a film is completed and ready for release.

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Kavanaugh enlisted his longtime friends at Colbeck—Beckman and Colodne—to assist in this

endeavor. Over the next year, Beckman and Colodne (fresh off a $362 million investment in the

parent company of Pornhub, YouPorn, and RedTube) successfully structured several rounds of

financing for Kavanaugh, including a $200 million loan directly from Colbeck in November

2011 and a $350 million loan in May 2012, in which Colbeck also participated.

  • 28. During this period, Kavanaugh also awarded his friends Beckman and

Colodne with seats on Relativity’s Board of Directors, positions that provided them front-row

seats to the operations, finances, and inner workings of Relativity—and, of course, his Ponzi

scheme. 6

  • 29. In or about 2012, the Ponzi scheme that was Relativity was in need of

additional capital to survive. Colbeck, now heavily leveraged in Kavanaugh’s scheme through

its debt and equity investments in Relativity in 2011 and 2012, was acutely aware of the same.

Accordingly, on information and belief, Colbeck and Kavanaugh hatched a plan to market a new

lending facility to provide the additional capital Kavanaugh would need to continue Relativity’s

operations, court additional investors, and perpetuate his Ponzi scheme. Notably, Kavanaugh

and Colbeck billed the facility as a “P&A facility,” yet never intended to limit use of those funds

to P&A. Thus, this lending facility was a “P&A” facility in name only. As Kavanaugh and

Colbeck knew from the get-go, funds lent to “finance the P&A expenses” of specific Film SPEs

were (in truth) intended to be used to pay salaries, bonuses, overhead, and, most importantly,

bolster the financials on Relativity’s books and disguise yet more debt. Beckman and Colodne,

  • 6 Indeed, during September 2014 conversations with an RKA representative, Beckman confirmed that “the Board [himself included] is intimately involved and speaks with Ryan ten times per day” and that “there is rarely a transaction that the Board isn’t involved in, especially anything material.” Beckman went on to say that there are no serious transactions “that don’t involve members of the Board for any material or sensitive issues, either formally or informally.”

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of course, knew (i) how the lending facility was marketed, and (ii) how those funds were to be

used. Indeed, Colbeck’s position in Relativity gave them a vested interest in maintaining

Relativity’s appearance as a viable enterprise so they could continue to attract fresh capital for

the company. 7

  • 30. Kavanaugh and Colbeck chose to disguise this transaction as a P&A

facility because individual Film SPEs—and not Relativity—would be considered the borrowers

of P&A Funds. Their mock-P&A facility therefore allowed Kavanaugh and Colbeck to avoid

disturbing Relativity’s capital structure, adding debt to Relativity’s books, or otherwise

undermining Relativity’s attractiveness as a potential investment. Structuring Colbeck’s cash

infusion as a “P&A” facility also made it easier for Kavanaugh and Colbeck to court further

outside investors by offering them the chance to participate in a “low risk,” “asset-based”

lending opportunity.

  • 31. Even with additional infusions from the “P&A” facility, Relativity’s

aggressive growth strategy and stale profits pushed the company to the precipice of collapse—a

fact well known, and undoubtedly of great concern, to Colbeck. As Colbeck and Kavanaugh had

never used the P&A facility for P&A, Colbeck knew that an imminent collapse of Relativity all

but ensured that monies lent under the facility would be vaporized—yet they failed to disclose

those material facts to RKA. Simply put, Colbeck knew it was holding onto a time bomb with a

short fuse. To continue their scheme, while also reducing their own financial exposure, Colbeck

(including Beckman, Colodne, and Aho) and Kavanaugh developed a plan to hand off the risk of

participating in the Ponzi scheme by inducing unsuspecting investors to take over the supposed

  • 7 In April of 2012, Jason Colodne represented to RKA that it “currently own[ed] 25% of the equity and ha[d] invested over $200M in P&A.”

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“P&A” facility.

  • 32. Specifically, Colbeck and Kavanaugh knowingly and purposefully

marketed a low risk, asset-backed P&A lending facility tied to the proceeds of films already

scheduled for release. In reality, Colbeck, and of course, Kavanaugh and his cronies, knew the

facility would continue to operate as it always had: as an undisclosed arrangement to finance

Kavanaugh’s slush fund. Once they found a lender to take their place, Colbeck could limit its

exposure to the risks associated with the Ponzi scheme and forestall Relativity’s inevitable

collapse.

  • 33. In or about April 2014, Aho, acting as agent for Relativity, pitched

precisely this deal to RKA. As planned, Aho marketed the deal as a prototypical P&A facility

and hid (and failed to disclose) Colbeck and Kavanaugh’s plan to use the P&A Funds to finance

Relativity and perpetuate Kavanaugh’s Ponzi scheme.

  • 34. On May 21, 2014, Aho contacted a representative of RKA by email to

explain the facility. Aho explained that Relativity was “looking to replace one of their existing

P&A (print & advertisement expenditures on film releases) lenders.” Aho went on further to

explain that past P&A investors had advanced “70% of the P&A that Relativity spends on each

film in advance of release” and that “[a]t a 70% level, box office risk is minimal.” Finally, Aho

stated that, given the full slate of film releases at Relativity, “in general the capital stays

outstanding.” Thus, from the very beginning of the deception, Aho laid out the characteristics of

typical P&A facility. Of course, Aho failed to mention that the reason capital stayed

“outstanding” was because the funds were being used to keep Kavanaugh’s company afloat.

  • 35. On May 22, 2014, in recognition of Colbeck’s role in “arranging financing

for Relativity

. . .

and/or one of its affiliated entities,” RKA and Colbeck executed a

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confidentiality agreement pursuant to which they could exchange information regarding RKA’s

potential participation in Relativity’s P&A facility. 8 That same day, Aho held a call with RKA,

in advance of which Aho provided various documents relating to the proposed P&A facility,

including a 33-slide investor presentation titled “Relativity P&A Facility Opportunity,” dated

May 14, 2014 (the “May Presentation”). 9 The presentation contained Relativity’s logo at the

bottom of every slide, and Kavanaugh knew the content of each and every slide at the time the

May Presentation was transmitted to RKA.

  • 36. The May Presentation clearly stated that the investment opportunity was a

low-risk loan that would be used solely for the P&A expenses for select films, and no other

purpose whatsoever. Indeed, the opening “Executive Summary” slide of the presentation set

forth as much:

“[t]he structure [of the P&A financing] is as follows: [t]he proceeds will be used to finance the P&A needs for Relativity’s releases for the next 12 months”;

“[t]he facility will provide separate/uncrossed P&A loans for the upcoming films and will be repaid in first position from film

receipts

.”;

“[t]he facility caps draws at 70% of each film’s P&A needs (i.e., risk is limited by a 30% first loss position held by Relativity)”;

“[t]he amount of P&A spend on a film

includes: [r]elease prints

[and] [m]arketing and [a]dvertising: Trailers, Television, Print campaign, Radio Outdoors, Publicity campaign, Personal

appearance tours”; and

 

“P&A is considered to have a ‘senior risk’ profile as it is the last

  • 8 The confidentiality agreement described above is no longer binding and states in relevant part, “This Agreement shall terminate on the earlier of (i) two years from the date hereof and (ii) the execution of definitive documentation with respect to a Transaction[.]”

  • 9 The presentation contained information provided “by a number of sources, including certain members of Relativity Media, LLC.” (May Presentation at 2).

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expense to be funded on a given film before release and the first to be repaid ‘off-the-top’ from proceeds from exploitation in all markets.”

(May Presentation at 4) (emphases added).

  • 37. Throughout the May Presentation, Aho and Relativity represented that the

P&A loans would be the last funds spent before a film is released:

P&A expenses are incurred after the film is “in the can” (i.e., the production of the film is complete), and therefore P&A is not subject to completion risks associated with either the development or production of motion pictures.

(Id. at 9) (emphasis added).

  • 38. For the avoidance of any doubt, Aho and Relativity memorialized that

representation in a simple diagram:

expense to be funded on a given film before release and the first to be repaid

(Id. at 9).

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39.

In addition, Colbeck and Kavanaugh represented that (i) RKA’s facility

was only for P&A and (ii) that the P&A facility proceeds had flowed—and would continue to

flow—from Relativity directly to the Film SPE for the marketing and distribution of each film:

39. In addition, Colbeck and Kavanaugh re presented that (i ) RKA’s facility was only for

(Id. at 12). 10

  • 40. Along with the May Presentation, Aho circulated a financial model to

further explain how the P&A facility operated. Consistent with the May Presentation, the model

clearly showed that each Film SPE would draw, receive, and use the P&A funds associated with

the release of each respective film.

  • 41. At the time they made them, Kavanaugh, Aho, and Colbeck knew that

  • 10 Notably, Kavanaugh and others specifically told RKA that it could and should not send funds directly to the Film SPEs because Relativity’s contracts with its vendors were only with Relativity, which received benefits and discounts from those vendors by virtue of its purchasing power.

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these representations were a complete fiction and that Relativity had no intention of placing any

restrictions on the use of this money. Indeed, at the time, Kavanaugh, Aho and Colbeck all

clearly understood that the previous P&A facility had been used in precisely this manner—i.e.,

as a working capital facility—and the same would be true for RKA’s P&A Funds. Again,

Colbeck and its members on Relativity’s Board failed to disclose the same to RKA.

  • 42. On May 24, 2014, on a call with various representatives of RKA, Aho

again referenced and reaffirmed the representations in the May Presentation, emphasizing the

“senior risk profile” of the P&A facility because P&A would be the “last expense funded” and

the “first expense repaid.” The May Presentation and other representations made to RKA were

(again) in line with a prototypical P&A facility, yet—as was later discovered—were flatly

contradicted by Kavanaugh, Beckman, Colodne, and Aho’s true intentions. Indeed, each knew

that the previous P&A facility had never operated in such a manner, and would not for RKA,

either. 11

  • 43. On May 30, 2014, on behalf of Kavanaugh and with Colbeck’s blessing,

  • 11 Indeed, in its own court filings, Relativity has repeatedly admitted that it never earmarked funds exclusively for P&A expenses, and routinely drew upon P&A funds for other purposes. See, e.g., Complaint, Relativity v. RKA Film Financing, LLC, ¶¶ 23, 33 (“[U]nder [its prior] facilities

Relativity was allowed to and did draw funds

The funds received from the RKA

. . . against the P&A Expenses budgeted [for general corporate purposes]

. . . P&A Facility [were] used no differently than [had] been customary since 2012”); ¶ 7 (“[That] those [P&A Funds] were supposed to have been specifically held earmarked for payment of particular incurred print and advertising expenses [is] a notion that contradicts the terms of the lending facility and the parties’ past practices.”) Even Relativity’s own consultant, Tim Coleman of The Blackstone Group, in affidavits submitted in Bankruptcy Court, initially stated incorrectly (although understandably) that Relativity used RKA’s P&A facility “to finance the print and advertising budgets associated with films produced and distributed by [Relativity];” a statement he and Relativity were forced to retract given its clear falsity. Compare Declaration of Timothy R. Coleman in Support of Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to (A) Obtain Post-Petition Financing and (B) Use Cash Collateral; (II) Granting the Prepetition Lenders Adequate Protection; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 24 ¶¶ 14-15 n.2, July 30, 2015, with Amended Declaration of Timothy R. Coleman in Support of Debtors’ Motion for Entry of Interim and Final Orders (I) Authorizing the Debtors to (A) Obtain Post-Petition Financing and (B) Use Cash Collateral; (II) Granting the Prepetition Lenders Adequate Protection; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 257 ¶ 14, Aug. 21, 2015.

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Aho provided RKA with an updated version of the May Presentation. That presentation repeated

Colbeck’s and Relativity’s earlier (mis)representations regarding the P&A facility, and put a

gloss on the potential P&A investment, describing it as one in which (i) the P&A Funds would

be restricted and segregated, (ii) the P&A Funds had been and would be funded through

Relativity to the Film SPEs solely for their use on P&A expenses, and (iii) RKA would be

exposed to minimal risk because it would provide the “last in” and “first out” funding.

  • 44. Also on May 30, 2014, Aho held a conference call with representatives of

RKA, as well as Relativity, including Wilson and Matthews. On the call, Aho, Wilson,

Matthews, and RKA discussed and reaffirmed the components of the P&A facility, even though

Aho and the Relativity crew knew them to be false. Aho explained that the funds would be

loaned and specifically earmarked for P&A expenses related to films scheduled for release

(typically 90-120 days from when the funds were drawn) by the Film SPEs and that they would

be repaid first out of box office and other proceeds related to those films. When the topic of

Relativity’s financial statements or projections was broached, Matthews became irritated,

insisting that such information was immaterial to RKA’s investment decision because the P&A

facility, by its very nature, would fund only narrow asset-backed loans, the repayment of which

would not depend on Relativity’s financial performance or stability.

  • 45. On June 2, 2014, in an effort to emphasize the low risks associated with

the P&A facility, Aho provided RKA with projected earnings for Relativity through 2016,

reflecting strong financial performance. During these discussions, however, Colbeck knew of—

but actively conspired to conceal—Relativity’s poor financial condition and intent to

misappropriate the P&A Funds to prop up the Ponzi scheme.

  • 46. Communications between RKA and Aho, Matthews, and Wilson

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continued through June 2014. For example, Matthews and Wilson were frequently called upon

to bolster the scheme by providing false assurances to RKA that the loans were low risk, “asset-

based loans.” Indeed, on numerous calls, Aho and Matthews stressed that the investments were

“bullet proof,” because the funds would be used solely to bring films to market, and RKA would

be first in line to be paid with proceeds from each film’s release. These representations were

sanctioned by—and at the behest of—both Kavanaugh and Colbeck.

  • 47. During this period, Kavanaugh not only spoke directly with RKA about

the financial health of Relativity, but also laid out his plans for how he planned to use the P&A

facility. Specifically, Kavanaugh explained that Relativity had “between eight and ten films” on

its release schedule, and that these P&A funds would be earmarked for marketing and

distributing those films.

  • 48. Thus, throughout May and June 2014, through emails, presentations, and

numerous telephone calls with RKA, Kavanaugh, Colbeck, Wilson, and Matthews crafted and

perpetuated a pure fiction to induce RKA to fund Kavanaugh’s scheme.

  • 49. In late June, after two months of negotiations, RKA agreed to finance the

P&A of certain Relativity films in an amount of $58.5 million.

  • B. Kavanaugh and Colbeck Memorialize Their Misrepresentations to RKA

    • 50. On June 30, 2014, RKA and certain Film SPEs (with Kavanaugh as their

signatory) entered into a P&A financing agreement (the “Funding Agreement”). As explained

below, the Funding Agreement memorialized in writing each of the promises Kavanaugh,

Matthews, Wilson, Colbeck, and Aho made to RKA throughout April, May, and June 2014.

Specifically:

  • a. Further underlying the representations of Kavanaugh, Matthews,

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Wilson, Colbeck, and Aho that RKA was specifically (and only) financing a P&A facility that

provided “separate/uncrossed” P&A loans, the Funding Agreement states that the P&A Funds

could be used only for P&A expenses incurred by a specific Film SPE of a specific qualifying

film. Specifically, Section 1.3 of the Funding Agreement provides that, other than fees, costs,

expenses, and refinancing of pre-release loans, “the proceeds of each advance of a loan [of P&A

Funds]

. . .

shall be made available solely for

. . .

[t]he payment or reimbursement of P&A

Expenses paid, committed or incurred (or to be paid, committed or incurred) by the [Film SPEs]

for the P&A Picture for which such Loan was borrowed

. . .

.” (emphasis added). For the

avoidance of any possible doubt, it further provides that the P&A Funds “shall not be made

available for any other purpose.” (emphasis added).

  • b. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho, that P&A expenses were limited to the standard costs and expenses

related to the release of prints of the films and associated marketing and advertising expenses,

the Funding Agreement expressly defines “P&A Expenses” as “the aggregate Release Print

Costs and Advertising Costs for the P&A Picture.” 12

  • c. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A loans held a senior risk profile and (accordingly) were

“last in, first out” financing, the Funding Agreement set forth an explicit payment priority (or

“waterfall”) structure. 13

  • d. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A loans were discrete asset-backed loans, the repayment

  • 12 See Funding Agreement § 15.71; see also id. § 15.97 (Release Print Costs); § 15.3 (Advertising Costs); § 15.74 (P&A Picture).

  • 13 See Funding Agreement § 2.2 (Interest; Payment Priority).

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of which did not depend on Relativity’s financial performance or stability, but rather only the

gross receipts of a specific qualifying film, the Funding Agreement required Relativity to

maintain both specific collection and cash management protocols as to each qualifying film, 14

and separate books and records for each Film SPE in accordance with GAAP (i.e., Generally

Accepted Accounting Principles). 15

  • e. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that RKA would receive a perfected first lien security interest in the

proceeds of each specific qualifying film, the Funding Agreement set forth that each P&A loan

was secured by a security interest in the corresponding qualifying film. 16

  • f. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho as to when a given film qualified to receive P&A Funds, the Funding

Agreement states that said funds could only be drawn after the production of a specific

qualifying film was complete. For the absence of any doubt, the Funding Agreement required

that Relativity affirm in writing that a specific qualifying film met certain Eligibility Criteria and

had a fixed theatrical release date. 17 Further, the Funding Agreement states that no P&A Funds

would be borrowed for any film with a theatrical release date later than September 30, 2015. 18

  • g. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that both RKA and Relativity had “skin in the game,” sharing the

  • 14 See Funding Agreement § 6 (Collection and Cash Management).

  • 15 See Funding Agreement § 9.1 (Books and Records).

  • 16 See Funding Agreement § 7 (Security Interest).

  • 17 See Funding Agreement § 15.35 (defining Eligibility Criteria); id. at Ex. P-2 (setting forth model P&A Picture Declaration Notice).

  • 18 See Funding Agreement § 3.2(b)(ii).

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financial obligation to pay for the marketing of a given film along with the potential returns of

providing that P&A financing, the Funding Agreement states that RKA would provide financing

of no more than 72.5% of the P&A expenses for each film released by an applicable Film SPE,

reserving the remaining 27.5% of those P&A expenses for Relativity. 19

  • h. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A Funds would only be used in accordance with the terms

represented to RKA—and as documented in the Funding Agreement—the Funding Agreement

required that each time a Film SPE requested P&A Funds from RKA, the Film SPE would

submit a “Borrowing Certificate” in which the Film SPE restated and reaffirmed the same. 20

Thus, Kavanaugh promised, through each Film SPE, that he would adhere to the clear

restrictions on the use of the P&A Funds on at least two separate occasions: first, when he

signed the Funding Agreement on behalf of a Film SPE, and again when the Film SPE requested

and drew on P&A Funds loaned by RKA.

  • i. Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that each P&A loan was made to, and for the benefit of, a specific

Film SPE—and not Relativity at large—the Funding Agreement explicitly contemplates RKA’s

  • 19 See Funding Agreement § 1.1 .

  • 20 See Funding Agreement §§ 1.2, 3. As of the date of each borrowing, each Film SPE was required to promise that:

[T]he representations and warranties set forth in the [Funding Agreement]

. are on the date hereof and shall be true and correct in all material respects on the Funding Date of the Pre-Release Loan contemplated by this Borrowing Certificate (except to the extent (i) that such representations and warranties expressly relate to an earlier date, in which case such representation and warranty was true and correct in all material respects as of such earlier date, or (ii) that any such representation or warranty is qualified by reference to a

. .

schedule, in which case such representation or warranty is true and correct in all

respects) with the same effect as if made on and as of such

date. . .

.

§ 3 (emphasis added). Each of these Borrowing Certificates was personally signed by either Kavanaugh and/or Shamo, Relativity’s Co-COO, on behalf of each Film SPE.

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wiring funds to a specific Borroweri.e., a Film SPE. 21

  • 51. In sum, each and every material promise and representation made to RKA

by Kavanaugh, Matthews, Wilson, Colbeck, and Aho were memorialized in the Funding

Agreement (and other related documents)—viz., (i) that the Film SPEs were the only entities that

could incur debts for which P&A Funds could be applied; (ii) that the Film SPEs could only

spend the P&A Funds on P&A expenses for their specific films; and (iii) that only Film SPEs

releasing movies prior to September 30, 2015 could qualify to draw the P&A Funds. RKA relied

on these reaffirmed representations in continuing to make the P&A Funds available to the Film

SPEs. A contrary understanding would have run counter to Kavanaugh, Matthews, Wilson,

Colbeck, and Aho’s explicit and repeated representations to RKA, the plain terms of the Funding

Agreement, and the very justification for this financing structure (not to mention the

unambiguous naming of the funding as a “P&A facility”).

  • 52. Of course, as with the oral and written representations made to RKA in

April, May, and June 2014, each of the representations made in the Funding Agreement were

false when made. Kavanaugh, Colbeck, and their cohorts—Aho, Beckman, Colodne, Wilson,

Matthews, Shamo, Tooley, and Mnuchin—all knew it too, and failed to disclose the same to

RKA. 22

  • 21 See Funding Agreement at Ex. B-1 & Ex. A thereto. Further, as referenced above, see supra n.10, Kavanaugh himself required RKA to send the P&A Loans directly to Relativity. He further instructed RKA that it could and should not send funds directly to the Film SPEs, because Relativity’s contracts with its vendors were only with Relativity (and not a Film SPE), which received benefits and discounts from those vendors by virtue of its purchasing power.

  • 22 Notably, this is not the first time Kavanaugh has used cash that is supposed to be earmarked and segregated for general corporate purposes. In fact, Relativity’s own crisis and turnaround managers, FTI Consulting, Inc., noted in bankruptcy filings: “Mr. Kavanaugh continues his charade

in an attempt to withhold FTI’s fees, to .” Motion of FTI Consulting, Inc.

. . . instead use that segregated cash on the operating expenses of [Relativity]

. . . for Entry of an Order (I) Allowing an Administrative Expense Claim for Fees and Expenses and (II) Compelling the Debtors for Immediate Payment of FTI’s Fees and Expenses, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1135, ¶¶ 94-95, Dec. 16, 2015.

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53.

After closing the P&A facility with RKA, Kavanaugh, and Colbeck

immediately re-approached RKA about providing additional funding under the facility. In July,

Kavanaugh and Aho contacted RKA to inform RKA that, miraculously, Relativity was planning

to release up to 15 films in 2015, as opposed to its previous estimate of between eight and ten

films. According to Aho and Kavanaugh, RKA had a unique opportunity to “upsize” its $58.5

million investment by an additional $22.5 million for the release of these additional films. Based

again on Aho and Kavanaugh’s representations, RKA increased its investment in August 2014.

  • 54. In reality, both Kavanaugh and Aho knew full well that RKA’s upsized

investment would also not be used to fund P&A on any additional films. Instead, the new P&A

Funds would (again) be treated as working capital and spent on general corporate expenses, or

otherwise siphoned into the coffers of Kavanaugh and his cronies at Colbeck.

  • 55. Between June 30, 2014 and March 17, 2015, RKA made P&A Funds

available for ten Film SPEs to finance the P&A for ten specific films: November Man, Best of

Me, Beyond the Lights, Woman in Black 2, Black or White, Lazarus Effect, Solace, Masterminds,

Before I Wake, and Disappointments Room. In each instance, Kavanaugh and the executives at

Relativity repeatedly represented to RKA that the P&A Funds were being used solely by the

Film SPEs for P&A expenses incurred by each respective Film SPE’s film, and therefore not as

Relativity’s working capital. Further, the members of the Relativity board, including Beckman,

Colodne, and Mnuchin, knew (or were negligent in not knowing) exactly how these funds were

being misappropriated.

  • C. Kavanaugh and Colbeck’s Scheme Begins to Unravel

    • 56. In or about February 2015, representatives of RKA participated in a call

with Wilson regarding Relativity’s planned release schedules for four films for which P&A

Funds had been drawn but that had not yet been released. Wilson stated that Relativity had

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begun shifting a number of film release dates into the spring and summer of 2015 due to

unspecified delays, notwithstanding the fact that Relativity had already drawn several millions of

dollars of P&A Funds for two of the unreleased films: Solace and Before I Wake.

  • 57. By mid-March 2015, Kavanaugh caused two additional Film SPEs to draw

upon the remaining P&A Funds to fund P&A expenses for their films: Masterminds and

Disappointments Room (together with Solace and Before I Wake, the “Unreleased Films”). 23

The total amount of P&A Funds drawn upon for the Unreleased Films totaled approximately

$73.6 million.

  • 58. In late March 2015, representatives of RKA became aware of additional

but inconsistent information related to the scheduled release dates of certain Relativity films.

Specifically, RKA learned that Relativity purportedly planned to release multiple films

throughout September 2015, including some combination of the Unreleased Films and other

films for which RKA had not provided P&A funding. That information caused obvious concern

to RKA. First, the prospect of releasing multiple films within close proximity seemed like a

dubious business strategy, particularly given the likelihood that the near-contemporaneous

release of an Unreleased Film and another Relativity film might cannibalize each other’s box

office receipts. Second, Relativity might seek to use RKA’s P&A Funds to market non-

Unreleased Films.

  • 59. On April 1, 2015, RKA again discussed the release schedule with, among

  • 23 Earlier the same month, representatives of RKA spoke with Wilson to explain that, pursuant to contractual terms dictating the period of time for which such P&A Funds could lay idle in the P&A facility, RKA would be required to retire any remaining P&A Funds not drawn upon by the Film SPEs. (In other words, the funds had to be withdrawn by the Film SPEs or else they would be returned to the investors in RKA and removed from the P&A facility.) However, RKA made clear during that call that its expectation was that any funds withdrawn would be held on each Film SPE’s books and allocated pursuant to Kavanaugh’s and Colbeck’s representations and the clear terms of the relevant contracts, i.e., for P&A expenses only.

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others, Wilson. Skeptical of their prior claims regarding release dates of the Unreleased Films

and the underlying reasons for those delays, RKA requested that Relativity account for the use

and whereabouts of the P&A Funds. During that conversation, Wilson stated, for the first time,

that “all cash is fungible,” and therefore Relativity had a right to use the P&A Funds as it

pleased. 24 Wilson further explained that, in light of Relativity’s embrace of the fungible

dimension of funds in its possession (and specifically, that of RKA’s P&A Funds), Relativity

purportedly could not trace when and how (or if) it had spent the tens of millions of dollars in the

P&A facility. Representatives of RKA immediately requested that Wilson provide RKA with

the then-current P&A spend and budget for each of the Unreleased Films, all of which, according

to Wilson, were still slated to be released by September 30, 2015.

  • 60. On April 6, 2015, Wilson and Matthews provided minimal information

regarding the P&A funds drawn for the Unreleased Films. The information raised a troubling

fact: while Kavanaugh and his cohorts had caused the Film SPEs to draw $73.6 million in P&A

Funds (net) for these four films—thereby substantially depleting RKA’s P&A Fund facility—the

four pertinent Film SPEs had spent, in total, roughly $1.7 million on P&A, even though P&A

was the only permissible use for these loans.

  • 61. For instance, in August and September 2014, acting at the direction of

Kavanaugh and his cronies, and through misrepresentations to RKA, the Film SPE RML Somnia

Films LLC borrowed a combined $17,580,841 (net fees) in P&A Funds to spend on P&A for

Before I Wake. According to Relativity’s reports, RML Somnia Films LLC had only paid

$161,279 for P&A, meaning it was unable to account for at least $17.4 million (or 99%) of the

  • 24 It was also during this time period that Wilson requested that RKA “call first” before putting concerns it had regarding Relativity or its P&A Funds in writing through email communications. While Wilson tried to cease leaving a paper trail, Kavanaugh and others at Relativity clearly did not get the memo.

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P&A Funds it had borrowed.

  • 62. Similarly, in December 2014, acting at the direction of Kavanaugh and his

cronies, and through misrepresentations to RKA, the Film SPE RML Solace Films LLC

borrowed $13,410,510 (net fees) in P&A Funds to spend on P&A for Solace. According to

Relativity’s reports, RML Solace Films LLC had paid no P&A, meaning it was unable to

account for $13,410,510 or (or 100%) of the P&A Funds it had borrowed.

  • 63. Then, in March 2015, acting at the direction of Kavanaugh and his

cronies, and through misrepresentations to RKA, the Film SPE Armored Car Productions LLC

borrowed $25,759,250 (net fees) in P&A Funds to spend on P&A for Masterminds. According

to Relativity’s reports, Armored Car Productions LLC had paid $1,364,929 million for P&A,

meaning it was unable to account for at least $24.4 million (or 95%) of the P&A Funds it had

borrowed. 25

  • 64. The same month, acting at the direction of Kavanaugh and his cronies,

and through misrepresentations to RKA, the Film SPE DR Productions LLC borrowed

$16,824,621 (net fees) in P&A Funds to spend on P&A for Disappointments Room. According

to Relativity’s reports, DR Productions LLC had paid $218,855 for P&A, meaning it was unable

to account for at least $16.6 million (or 99%) of the P&A Funds it had borrowed.

  • 65. As summarized below, according to the materials provided to RKA, of the

approximately $73.6 million in P&A Funds loaned to the four Film SPEs, at least $69.4 million

of these funds had never been spent on P&A and, therefore, was supposed to have been

untouched by Kavanaugh, his cronies, Relativity, or any other Film SPEs not party to the

  • 25 That Kavanaugh had caused both the March withdrawals was expected given RKA’s communications with Wilson; however, RKA was shocked to discover that Kavanaugh, Wilson, and Matthews could not account for the whereabouts of any of their March withdrawals just a few short days later.

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Funding Agreement:

   

P&A FUNDS

P&A

MINIMUM

FILM

P&A

BUDGETED 26

PROVIDED

(NET FEES)

EXPENSES

PAID

UNSPENT

P&A FUNDS

Solace

$28,000,000

$13,410,510

$0

$13,332,085

 

$29,923,100

$16,824,621

$218,855

$16,493,834

Disappointments Room Masterminds

$38,000,000

$25,759,250

$1,364,929

$23,646,180

Before I Wake

$25,935,225

$17,580,841

$161,279

$15,928,245

         

TOTAL

$121,858,325

$73,575,222

$1,745,063 27

$69,400,344

  • 66. The fact that $69.4 million (over 94%) of the P&A Funds—or about 99%

of the Unreleased Films’ total P&A budgets—had not been spent on P&A raised obvious

questions for RKA as to what Kavanaugh and his team were doing with these funds and how

they were using them. What RKA learned a few days later was even more troubling.

  • 67. On April 9, 2015, representatives of RKA spoke with Wilson and

Matthews to again discuss the continuing delays in release schedules for the Unreleased Films.

During that phone call, Wilson and Matthews stated that Kavanaugh and Relativity were

principally focused on releasing a limited number of films, including Masterminds, Autobahn,

and Kidnap. Wilson and Matthews did not mention the remaining three Unreleased Films, for

which RKA had already provided nearly $50 million in P&A Funds for supposed imminent

releases. When later pressed by RKA, Wilson and Matthews responded that, notwithstanding

prior representations to the contrary, (i) Solace would not be released, and (ii) Disappointments

Room and Before I Wake would likely not be released until after September 30, 2015.

  • 26 P&A Budget as represented to RKA by Relativity at the time of each draw of P&A Funds.

  • 27 Recent communications with representatives of the Debtors in Relativity’s Chapter 11 Proceeding in the Southern District of New York confirm that as of July 10, 2015, $3.08 million had been spent on P&A for these four films, and as of October 27, 2015, only $3.9 million had been spent on P&A for the same films. See Relativity P&A Schedules, dated July 10 and October 27, 2015. Notably, the Debtors in that proceeding received debtor-in-possession financing and other cash injections; the additional P&A spending between July and October, therefore, did not even utilize RKA’s P&A Funds.

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  • 68. If this were true, it meant that Kavanaugh and Relativity’s Board of

Directors had caused three of the Film SPEs to draw nearly $50 million in P&A Funds for

movies that either would not be released by the agreed-upon deadline, or worse, would never be

released at all. Of course, a film that is never slated for release would hardly require millions in

P&A Funds, a fact that Kavanaugh and Colbeck very well knew, but kept hidden from RKA.

  • 69. Equally troubling was the fact that, in the case of Disappointments Room,

Kavanaugh and his cronies had represented just three weeks earlier that the film would be

released by September 30, 2015. This representation, made numerous times, qualified the

relevant Film SPE to draw upon nearly $17 million in P&A Funds during March 2015. Upon

information and belief, at the time they made these representations and directed the Film SPE to

draw upon these funds, Kavanaugh and his cronies knew (or were negligent in not knowing) that

Disappointments Room would not be released prior to September 30, 2015. Nonetheless, they

represented as much in order to draw upon the P&A Funds and convert them for their own use.

  • 70. In light of these facts, the next day, on April 10, 2015, RKA

representatives contacted Kavanaugh, Shamo, and others to (i) verify that all four Unreleased

Films would, in fact, be released on time, and (ii) ensure that the $69.4 million in P&A Funds

that the Film SPEs had borrowed but had yet to spend were available, segregated, and earmarked

in Relativity’s bank account for use solely on the P&A of those films, as Kavanaugh, Wilson,

Matthews, Colbeck, and Aho had promised time and time again. During that call (as on

subsequent calls on April 11 and April 12, 2015) Kavanaugh and his team scoffed at RKA’s

concerns, and stated that Wilson and Matthews had been mistaken when they represented that all

four films would not be released as scheduled. Kavanaugh also stated that the relevant P&A

Funds were safe and accounted for. Indeed, Kavanaugh represented that Relativity was

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financially sound and had $100 million in available cash. All of these statements were bald-

faced lies. When RKA attempted to verify these representations, particularly those relating to

the Film SPEs’ collective $69.4 million in supposedly unspent P&A Funds, Kavanaugh and his

cronies could provide no documents to support their claims. Rather, the $69.4 million had

completely vanished from the books of each of the Film SPEs.

  • 71. During these very same phone calls, Kavanaugh also assured multiple

RKA representatives that Relativity was executing an “imminent financing deal” that would

provide additional funding for Relativity. According to Kavanaugh, RKA had nothing to worry

about because he was marching in step with Colbeck to source additional financing, which was a

sure thing given that those at Colbeck had “signed [his] ketubah 28 .” Kavanaugh said this deal

would be completed within the week, that RKA had nothing to worry about regarding its P&A

Funds, and that Relativity was interested in keeping RKA as a long-term investor. On April 12,

when Kavanaugh was pressed for a solution to RKA’s concerns regarding the misuse of its P&A

Funds, he even stated that he believed he had a group, which included himself, that would “move

fast

. . .

and just buy out” RKA. That never happened. As RKA would soon find out, all of these

statements and representations were false and part of a subterfuge designed to placate RKA’s

valid concerns.

  • 72. Also on April 12, 2015, Kavanaugh stated to an RKA representative that

Relativity had $90 million of cash on its balance sheet and the following outstanding payables:

(i) $40 million due within 30 days; (ii) $20 to $30 million due within 31 to 60 days, but with

120-day terms; and (iii) nothing outstanding beyond then. In addition, Kavanaugh stated that he

expected Relativity to receive revenue of about $29 million within the next 30 days and $100

  • 28 A ketubah is a type of prenuptial agreement considered an integral part of a traditional Jewish marriage.

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million within the next 60 days. As Kavanaugh well knew, these statements were false and

misleading when he made them.

  • 73. On April 13, 2015, under increasing pressure to provide substantive

responses to RKA’s valid concerns, Kavanaugh explained via email to RKA that he could not

field further questions on the subject because he was in the “final stretch of closing” a $550

million refinancing of the company and would need to balance RKA’s concerns with his

fiduciary duties as a board member and officer of Relativity to “push forward” with that closing.

All of these statements were lies.

  • 74. That same day, Kavanaugh abruptly stopped taking RKA’s calls. 29 During

a call with an RKA representative, however, Beckman, discussing potential paths forward with

RKA, acknowledged that Kavanaugh and Relativity had used RKA’s P&A Funds for improper

purposes. On information and belief, Matthews, Tooley, Shamo, and the Board of Directors

participated in each of these funding decisions and knew precisely how Relativity had intended

to use these funds (or were negligent in not knowing)—both when Relativity entered into the

Funding Agreement with RKA and when it withdrew P&A Funds. At that moment, the falsity of

Kavanaugh, Wilson, Matthews, and Aho’s statements was immediately clear: Kavanaugh and

Colbeck had never intended that the P&A Funds be used solely—or even predominantly—for

P&A.

  • 75. On April 14, 2015, as the nature and scope of Colbeck and Kavanaugh’s

  • 29 Apparently, Kavanaugh routinely exhibited similar behavior following the collapse of his Ponzi scheme. As reported by consultants FTI in public bankruptcy filings, “Mr. Kavanaugh became increasingly unavailable focusing even more on his attempt to woo new investors, ignoring the immediate liquidity concerns of

. .

.

[Relativity]

. . .

.” Motion of FTI Consulting, Inc. for Entry of an Order (I) Allowing an Administrative Expense

Claim for Fees and Expenses and (II) Compelling the Debtors for Immediate Payment of FTI’s Fees and Expenses, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1135 ¶ 19, Dec. 16,

2015. Indeed, FTI worked with Relativity to develop a bankruptcy plan “[d]espite Mr. Kavanaugh’s obstructionist efforts.” Id. at ¶ 20.

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scheme came into focus, RKA sent Shamo a letter requesting access to inspect Relativity’s books

and records, in accordance with the Funding Agreement. In the letter, RKA laid out its concerns

and the reason for the inspection:

RKA has now received information and documents suggesting that Relativity Media and the Relativity [Film SPEs] have misused and misallocated RKA funds. In particular, we have well-founded concerns that Relativity Media and the Relativity [Film SPEs] have drawn upon RKA funds allocated for certain financing and advertising expenses related to Relativity films and instead misused and misapplied those funds to cover general corporate RKA believes it is in the best interest of both

expenses. . . . Relativity Media and RKA to understand how these drawdowns were allocated in order to resolve these concerns immediately before any further RKA funds are drawn upon, allocated, or spent.

  • 76. Counsel for Relativity replied the same day, but neither denied nor even

addressed RKA’s suspicion that the P&A Funds had been used for Relativity’s general corporate

purposes. Instead, Relativity challenged the propriety of RKA’s request, alleging Relativity had

not been provided reasonable notice to prepare for an inspection. Oddly, the letter also

demanded proof that RKA was entitled to make the inspection demand.

  • 77. On April 15, 2015, RKA sent two more letters to Relativity, again

attempting to review pertinent books and records. Both letters demanded an inspection on

April 16, 2015. One letter was sent by RKA’s President, and the other by RKA’s attorneys. The

former reiterated RKA’s concerns about the “misuse and misapplication of RKA funds, [neither]

of which have been substantively addressed by Relativity.” Relativity again responded that it

had insufficient time to prepare for the inspection.

  • 78. Sensing that Kavanaugh, Wilson, Shamo, and Matthews were attempting

to hide Relativity’s corporate books from review in order to prolong their scheme, RKA

requested that, at a minimum, Relativity “confirm that Relativity, LLC does not assert, and will

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not assert, any property right or other claim of ownership or interest in the funds advanced to the

various picture specific [Film SPEs] by RKA.” Relativity refused to address RKA’s concerns

that (i) the P&A Funds had been misappropriated, and (ii) Relativity claimed ownership over the

unused P&A Funds.

  • 79. On April 17, 2015, RKA again attempted to inspect Relativity’s books and

records and confirm (i) the whereabouts of the purportedly unused P&A Funds, and (ii) whether,

as RKA feared, Kavanaugh and his cronies had converted the P&A Funds drawn by the Film

SPEs, which Relativity had no authorization to spend. Through counsel, RKA wrote:

[I] am asking, for a third time, in writing, that Relativity, LLC confirm that it does not assert and will not assert any property right or other claim of ownership or interest in the funds advanced to the various [Film SPEs] by RKA.

Relativity ignored this request.

  • 80. Ultimately, on no less than six occasions, RKA asked both Kavanaugh and

his cronies to confirm that (i) Relativity held the RKA P&A Funds solely for P&A for the

qualifying films; (ii) the Film SPEs used the P&A Funds only for P&A; and (iii) Relativity made

no claim to the $69.4 million in unused P&A Funds held by Relativity for use by the Film SPEs.

On each occasion, however, Relativity refused to confirm or deny these facts. Such deliberate

obfuscation only further fueled RKA’s need for an explanation from Kavanaugh, Wilson,

Matthews, Tooley, and Shamo of where RKA’s P&A Funds had gone. In fact, Kavanaugh and

his team’s non-response all but confirmed RKA’s suspicions that these funds had been converted

and diverted for unauthorized purposes.

  • 81. Finally, on April 20, 2015, after RKA threatened litigation, Kavanaugh,

Shamo, Wilson, and Matthews purportedly permitted RKA to inspect Relativity’s records in

order to confirm that (i) Relativity would (and had always planned to) release all four of its films

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prior to September 30, 2015, and (ii) all of the P&A Funds were safe and accounted for on

RKA’s books. Kavanaugh, Shamo, Wilson, and Matthews also promised to (i) make a formal

investor presentation related to Relativity that RKA assumed would include basic financial

information; (ii) provide detailed information related to the flow of P&A Funds from RKA to

Relativity and the use of said funds; and (iii) deliver the preliminary film budgets and schedules.

  • 82. However, minutes before RKA’s representatives were to begin their

inspection, Kavanaugh and his cronies reneged on their offer and cancelled the presentation.

Instead, RKA’s representatives were moved to a conference room full of promotional materials

but devoid of any financial information that spoke to the whereabouts of the $69.4 million in

missing funds. Further, none of the materials provided any real clarity as to Relativity’s

financial stability. What limited information was provided contained gross inaccuracies and

arithmetical errors that made it apparent that information had been deleted and manipulated in

violation of various agreements with RKA. Material modifications to P&A budgets were also

apparent from the inspection. Once again, Kavanaugh and his cronies blamed their inability to

produce basic financial statements on Relativity’s efforts to secure additional funding,

notwithstanding the fact that Relativity must have had financials prepared and ready as part of

securing this additional funding.

  • 83. After the failed inspection, RKA contacted Relativity, stating:

So that there is no confusion, I will ask again: where have the tens of millions of dollar[s] gone? To date, none of the materials you have provided answer this question that has been asked, re-asked, and re-asked again.

  • 84. Relativity offered no response, but the answer was clear: Kavanaugh and

his cronies had converted RKA’s investment to keep Kavanaugh’s otherwise cash-strapped

company afloat. The funds had either disappeared entirely, or were actively being converted by

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Kavanaugh and his cronies. On information and belief, such uses included:

  • a. Relativity’s general business expenses, such as salaries, bonuses,

interest payments on other loan obligations, debt service, cash for other films’ expenses and

contracts, and the funding of Relativity’s sports agency and television studio;

  • b. the personal enrichment of Kavanaugh and his cronies, including

Kavanaugh’s multi-million dollar annual salary, and Wilson, Shamo, Matthews, Tooley,

Colodne, and Beckman’s annual compensation—which totaled at least $20 million in the last

year, including millions on lavish travel and expenses; and

  • c. the purchase, rental, payment, and maintenance of Kavanaugh,

Shamo, Tooley, Wilson, and Matthews’ personal indulgences, such as the five personal

helicopters purchased by Kavanaugh for his daily commute to work and his multi-million dollar

Malibu mansion.

  • 85. As stated above, throughout this period, Kavanaugh called several

representatives of RKA to try to dissuade them from digging deeper into his misdeeds and those

of Colbeck, Beckman, Colodne, Aho, Wilson, Shamo, Tooley, and Matthews. In each instance,

Kavanaugh assured these representatives that Relativity had cash on hand, was financially sound,

and had not misappropriated or converted the P&A Funds. Suspiciously, Kavanaugh gave

inconsistent explanations to these representatives when discussing the amount of cash available

at Relativity. To one representative, Kavanaugh reported $90 million; to another, he reported

$50 million; and then, mirabile dictu, he produced a balance sheet purportedly showing an

entirely different (and markedly higher) amount of cash on Relativity’s balance sheet. These

representations, and similar representations proffered by Shamo and others, were designed to

provide a false sense of security to RKA and stop RKA from discovering what Kavanaugh and

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his cronies had done with tens of millions of RKA’s P&A Funds. At the very least, Kavanaugh,

Wilson, Shamo, and Matthews negligently misrepresented the cash on hand at Relativity,

knowing RKA would rely on these representations.

  • 86. In the face of increasing pressure, Kavanaugh finally confirmed that

RKA’s P&A Funds had been misused. For example, on a call with an RKA representative,

Kavanaugh admitted that he and others at Relativity had, in fact, directed Relativity to use the

P&A Funds for Relativity’s own corporate purposes.

  • 87. On April 22, 2015, RKA concluded that Kavanaugh and his cohorts’

actions constituted a host of misdeeds, including fraud, conversion, negligent misrepresentation,

and breach of the covenant of good faith and fair dealing. Still, even after uncovering their

scheme, RKA refrained from initiating a lawsuit so as to afford Kavanaugh and his cronies every

opportunity to atone for their conduct.

  • 88. At the same time, RKA knew that Kavanaugh’s actions also constituted

multiple contractual defaults under the Funding Agreement. RKA refrained from declaring

Relativity in default out of consideration for the fact that such a default would have ripple effects

that would potentially jeopardize the future of Relativity. Specifically, RKA understood that a

default of the Funding Agreement would in turn cause defaults in other Relativity lender

agreements, accelerating Relativity’s outstanding debt.

  • 89. In a good faith effort to aid Relativity, and to allow Kavanaugh and his

cronies to right their wrongs, RKA contacted Relativity and informed it of RKA’s continued

concerns. Still, RKA stated its desire to reach an amicable resolution with all parties and, to that

end, informed all parties of its intention to forbear on declaring any defaults or taking any legal

action until April 28, 2015 to give them time to negotiate a resolution. At Relativity’s request,

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RKA twice extended its forbearance deadline to give Kavanaugh, his cronies, and Relativity

more time to resolve their dispute without judicial intervention or the declaration of a default and

foreclosure against Relativity. The parties struck a preliminary agreement on or about May 8,

2015.

  • 90. Numerous times between May 8 and May 30, 2015, agents of Kavanaugh

and his cronies called representatives of RKA to inform them that Relativity had purportedly

struck deals with multiple unnamed third-party investors that would be beneficial to RKA.

Kavanaugh and his cronies also assured representatives of RKA on multiple occasions that

Relativity had plenty of cash on hand to continue operations and was still planning to release all

of the Unreleased Films RKA had funded as scheduled.

  • 91. Also during these calls, astoundingly, Kavanaugh and his cronies

repeatedly pressed RKA to invest more funds into Relativity or extend RKA’s P&A Fund

facility, and blamed the slow pace of finalizing a resolution, in part, on the uncertainty

surrounding RKA’s continued involvement as an investment partner. On multiple occasions,

Kavanaugh and his cronies even attempted to make their agreement to certain terms of the deal

contingent upon RKA’s continued investment in Relativity. RKA refused to commit during this

period to any further investment in Relativity.

  • D. Kavanaugh’s and Colbeck’s Ponzi Scheme Collapses

    • 92. Negotiations continued through May 2015, with all terms for a deal

purportedly finalized by mid-month. During this period, Kavanaugh refused to either:

(i) account for any of the nearly $69.4 million in unused P&A Funds, or (ii) provide or repay any

of these unused P&A Funds to RKA. Kavanaugh and his cronies also continued to assure

representatives of RKA that additional funding to Relativity was on the way, as multiple deals

had allegedly been struck with several financing partners.

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  • 93. Then, on May 30, 2015, without any warning over the prior two months,

Kavanaugh and his cronies dropped a bombshell: Relativity was insolvent. Moreover, the

company was just hours away from defaulting on its other creditor agreements. Without (yet

another) formal forbearance agreement from RKA, Relativity would be forced to declare

bankruptcy. RKA was baffled by this prospect, as Kavanaugh had repeatedly assured

representatives of RKA that it had plenty of cash to continue operations and was well financed.

  • 94. But, as Relativity’s advisors later admitted to counsel for RKA, Relativity

had made no accounting entries into Relativity’s general ledger since April 2015 (or perhaps

earlier). 30 Thus, during the time from when RKA was attempting to negotiate in good faith with

Relativity and ascertain the whereabouts of its investments, Kavanaugh, Colodne, Beckman,

Aho, Wilson, Matthews, Tooley, and Shamo either knew the financial statements provided to

RKA, and their representations regarding them, were false when made, or, as officers and

directors, were negligent in not knowing of the falsity of these statements and representations,

and failed to disclose the same to RKA.

  • 95. In a good faith effort to allow Relativity the chance to avoid bankruptcy,

RKA agreed to negotiate two additional forbearance agreements that would provide Kavanaugh

and his cronies a one-month extension to seek alternative funding for Relativity.

  • 96. On June 5, 2015, minutes before executing the first forbearance

agreement, Relativity notified RKA that it had insufficient cash to actually fulfill the terms of its

forbearance agreements with RKA. More specifically, Relativity had only $30 million in cash

on hand. Were Relativity to provide any cash to RKA to consummate their deal, it would cause

  • 30 These advisors also later conceded that Relativity’s books were in such disrepair that in September 2015, they had been forced to begin the process of reconstructing Relativity’s financial statements from scratch.

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Relativity to violate a minimum liquidity requirement imposed by its other lenders.

  • 97. Relativity’s sudden illiquidity was yet another surprise to RKA, as only

two months earlier, Kavanaugh represented that Relativity had well over $90 million in cash on

its balance sheet. Of more concern, of course, was that if Relativity only had $30 million in total

cash to its name, Kavanaugh, Wilson, and Matthews, with the help of Colbeck and Aho, had

already converted most or all of the $69.4 million of RKA’s unspent P&A Funds. It also meant

that Kavanaugh and his cronies’ representations to RKA regarding cash on hand were

completely and utterly false and that Kavanaugh, Wilson, Matthews, Beckman, and Colodne,

among others, knew of these falsehoods or were negligent in not knowing of their falsity at the

time made.

  • 98. Equally concerning, individuals at Relativity—Kavanaugh, Wilson,

Tooley, Shamo, and Matthews—and Colbeck all knew of Relativity’s imminent insolvency well

before the bankruptcy. Indeed, by March 2015, Kavanaugh, his team, and Colbeck all knew

about the impending cash shortfall. Thereafter, with full knowledge of this material fact,

Kavanaugh and his officers caused two Film SPEs to draw nearly $43 million in P&A Funds

from the RKA facility that very same month. Thus, at the time of these draws, Kavanaugh and

his cronies knew that Relativity could not possibly continue to operate but for the improper use

of RKA’s P&A Funds. Still, they withdrew these funds without saying a word to RKA about

their intention to use them as a life raft during their March call discussing the withdrawal.

Kavanaugh and his cronies, having no intention of using these P&A Funds as promised, likely

converted these funds immediately after drawing upon them. This, of course, explains why only

$1.7 million of the $73.3 million in P&A Funds had been spent on P&A. Kavanaugh and his

cronies had used the remaining $69 million in P&A Funds to mislead investors and keep the

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company afloat.

  • 99. Notwithstanding these revelations, RKA understood that refusing to

forbear could force other creditors to declare a default on interrelated loan agreements and send

the company into bankruptcy that same day. RKA, therefore, in good faith, agreed to forgo all

immediate cash payments from Relativity and forbear for an additional week. RKA executed a

second forbearance, also on June 5, 2015, whereby Kavanaugh agreed to, among other things,

make a good-faith repayment of $7.5 million of the supposedly unused P&A Funds to RKA, by

June 29, 2015. As collateral for this payment, Kavanaugh pledged his membership shares in

RKA.

  • 100. Throughout June 2015, RKA kept in near-daily communication with

representatives of Relativity, who repeated that Kavanaugh was on the verge of closing

additional financing. Indeed, as stated by these representatives, terms had been reached, papers

had been signed, and funds had begun to come in (or would be coming in shortly). June 29,

2015 came and went with no payment from Relativity. Rather than take immediate action—as it

was clearly entitled to under the June 5 agreement—RKA worked over the next two weeks to

help Relativity broker a possible deal to avoid bankruptcy.

  • 101. Also during this period, these representatives of Relativity informed RKA

that despite assurances to the contrary, not a single one of the films for which RKA had provided

nearly $75 million in P&A Funds would be released by its agreed upon deadline. In fact,

according to these representatives, there was a chance that certain films would never be released

at all. This was the case because Kavanaugh and his cronies, having misappropriated nearly

$69.4 million in P&A Funds for other purposes, had no funds left to pay the P&A vendors to

market these films. Still, RKA stood by.

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  • 102. Finally, during this period, representatives of Relativity informed RKA for

the first time that OneWest Bank, a creditor of Relativity headed up by one of its Board

Members—Steve Mnuchin—had begun a sweep of accounts at Relativity in an attempt to recoup

its own investments. Representatives of Relativity informed RKA that nearly $50 million had

been “swept” from Relativity’s accounts since June 2015. At the time of these sweeps, Mnuchin

and the Relativity Board of Directors knew (or should have known) that the cash on Relativity’s

books seized by OneWest included a substantial portion of RKA’s P&A Funds.

  • 103. Finally, on July 15, 2015—over three months after RKA first alerted

Kavanaugh and his cronies of its suspicions of fraud—RKA sued Kavanaugh individually. RKA

alleged that Kavanaugh had breached the contract that required him to pledge his equity interest

in RKA to RKA. See RKA Film Financing, LLC v. Ryan Kavanaugh and River Birch Funds

LLC, Index No. 652481/2015 (N.Y. Sup. Ct. July 15, 2015). 31

  • 104. The next day, over a month after Kavanaugh pledged his shares of RKA as

collateral for money Relativity agreed (but failed) to pay RKA, and after months of RKA

bending over backwards to help Relativity avoid bankruptcy, Kavanaugh made the following

statement:

“I will not be making any payment to RKA, especially considering that I have

invested $70 million in Relativity over the past two years.” Kavanaugh issued a second press

release the same day, baldly alleging that “[t]here is no concern by our lenders about the

company’s P&A

spending. . .

.” This statement was an unmitigated lie.

  • 105. Apparently, RKA’s months of pleas, warnings, and threats had fallen on

deaf ears. Time and time again, RKA gave Kavanaugh leeway to atone for his actions and make

  • 31 This was not the first time that Kavanaugh had been sued for making materially false statements to his investors. For example, in 2002, an investor won a $7.7 million arbitration judgment related to Kavanaugh’s misuse of that investor’s funds, which Kavanaugh invested contrary to his clear promises and representations.

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things right. Time and time again, Kavanaugh and his cronies lied and deceived RKA and

refused to honor their commitments. In the face of the Defendants’ myriad lies, RKA has shown

marked restraint since early April 2015—attempting good faith negotiations, self-help, and

patience—before resorting to judicial intervention to put an end to this fraudulent scheme and

filing the original complaint in this action.

  • 106. Since that time, and faced with the unravelling of his Ponzi scheme,

Kavanaugh has attempted to rewrite history, both in court documents and through self-serving

public statements. Most recently, on January 22, 2016, Kavanaugh issued a press release in

which he claimed that the P&A facility was actually a “working capital” facility. 32 (That press

release was subsequently retracted, on the advice of his counsel, given its notable falsity.) The

release reads:

Statement By Ryan Kavanaugh, Chairman And CEO Of Relativity Media, Regarding RKA Film Financing

BEVERLY HILLS, Calif., Jan. 22, 2016 /PRNewswire/– Relativity Media has learned that RKA Film Financing intends to once again rehash the false and outrageous claims it has been making against Relativity Media for the last year. A basic review of the facts in this matter make it abundantly clear that RKA’s allegations are baseless and totally without merit:

Relativity Holdings, the parent company of Relativity Media, entered into a working capital facility with a group called RKA in 2014. This facility was structured in precisely the same way as Relativity’s previous two working capital facilities.

RKA Film Financing negotiated the agreement in question solely with Colbeck Capital Management, which at the time was a board

  • 32 Statement By Ryan Kavanaugh, Chairman And CEO Of Relativity Media, Regarding RKA Film Financing, dated Jan. 22, 2016, previously available at http://www.prnewswire.com/news-releases/statement-by-ryan- kavanaugh-chairman-and-ceo-of-relativity-media-regarding-rka-film-financing-300208756.html (subsequently retracted by counsel for Kavanaugh) (hereinafter “Kavanaugh 1/22/16 Release”); see also
    https://www.morningstar.com/news/djnmndjbn,paeq/PRNews_20160122AQ05669/statement-by-ryan- kavanaugh-chairman-and-ceo-of-relativity-media-regarding-rka-film-financing.html (preserving same).

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member, paid advisor and agent to the debt of Relativity. In fact Ryan Kavanaugh never met, spoke with or had any other form of contact with RKA until after the facility was closed. As Colbeck was closing the transaction with RKA, Colbeck informed Mr. Kavanaugh that RKA required that Mr. Kavanaugh put $9 million of his own money at the most junior and riskiest level of the capital structure. He later invested another $1 million of his own money, bringing his total personal investment in the facility to $10 million.

RKA has used and is continuing to misuse the restructuring process to attempt to extract Mr. Kavanaugh’s personal $10 million. This is evidenced by the fact RKA has brought no action against Colbeck, (or any other party other than Mr. Kavanaugh, who never met the parties or spoke to them until after Colbeck had closed the deal) the party with whom it actually negotiated the facility.

Furthermore, during the tenure of its facility, RKA always wired proceeds from the facility to Relativity’s working capital account, and in emails pushed Relativity to draw down more capital from the facility even when no movies were set to release.

Finally when Steven Mnuchin joined as Co-Chairman of Relativity and made a sizable investment in the company, as part of his diligence he asked Relativity’s counsel, Jones Day, to provide an opinion on all of the company’s debt facilities, including the RKA facility. Jones Day provided the opinion that the facility may be used for working capital and was and had been used in accordance with all documentation.

If RKA

has

an

issue, it

is

with the

sole

party with whom it

negotiated its agreement, Colbeck Capital.

Any rehashed claims by RKA, including the irresponsible use of provocative language like ‘fraud’ or ‘misrepresentation’ are only RKA’s latest transparent attempt to rile up the press and the court in hopes of extracting money from the wrong party. As the facts clearly demonstrate, this is not a matter between Relativity, Kavanaugh or any of its executives and RKA, but between RKA and Colbeck. 33

  • 33 Presumably Kavanaugh and his co-Defendants will claim that no cause of action for fraud lies here, but rather only a breach of contract claim. They would not be the first to advance such a defense. But as Kavanaugh and his co-Defendants know, fraud is more than a mere failure to keep one’s word, as in a simple breach of contract claim. Rather, a claim of fraud arises where, as here, a false representation of material fact is made by one party

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  • 107. For the sake of clarity, the $10 million referenced above, see supra ¶ 106,

relates to the funds that were to be invested personally by Kavanaugh—through his shell

company River Birch Funds LLC—in RKA. That structure was developed for at least two

reasons: to ensure (i) that RKA was separate and distinct from Relativity, and (ii) Kavanaugh

had a financial stake in the venture. As it turned out—and as Kavanaugh and Relativity have

admitted—when it came time to fund RKA, Kavanaugh’s personal contribution came from

Relativity and not Kavanaugh. (RKA immediately recognized that Kavanaugh was using

Relativity as his personal piggy bank at that point, as well, and brought his sleight of hand to

both Relativity’s and Kavanaugh’s attention in late 2014. Kavanaugh’s alleged contribution to

RKA was returned to Relativity by RKA, and only then did Kavanaugh personally contribute

said funds to RKA.)

  • 108. To the extent Kavanaugh and his cohorts contemplate advancing an advice

of counsel defense to countenance their fraud—as they allude to above, see supra ¶ 106—larger

concerns arise. And having now revealed said legal advice, RKA—and presumably the Court—

look forward to perusing the “[legal] opinion that [RKA’s P&A] facility may be used for

working capital and was and had been used in accordance with all documentation.” Kavanaugh

1/22/16 Release. More remarkable still is Kavanaugh’s claim that an international law firm

blessed his use of RKA’s P&A Funds for “working capital” while that same firm represented to

the Bankruptcy Court that said funds were for P&A, see infra ¶ 109 & n.34.

  • 109. Kavanaugh’s assertions are directly contradicted by public filings just a

intentionally and knowingly, intending to mislead, and that causes the other party to rely on the false representation and suffer damages. Such is the case here, where—from the get-go—Kavanaugh, Colbeck and others fraudulently marketed the P&A facility to RKA as a P&A facility so they could fund Relativity, because Kavanaugh and Relativity were unable to raise capital to support their failing business through legitimate means and open and honest disclosures to potential lenders.

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few days later by his own company in Relativity’s Chapter 11 proceeding in the Southern

District of New York, which refer to RKA as its “principal print and advertising (P&A) lender

on four (4) films to be released this year.” 34 Kavanaugh’s duplicitous suggestion, after the years

of his own and the other Defendants’ contrary representations detailed above, is as outrageous as

it is plainly false. The time for the Defendants to be held to account for their lies,

misrepresentations, and unmistakable Ponzi scheme is long overdue.

  • 34 Debtors’ (I) Memorandum of Law in Support of Confirmation of Third Amended and Restated Plan and (II) Omnibus Reply to Objections With Respect to Plan and Related Proceedings, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1472 ¶ 2, Jan. 28, 2016.

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COUNT ONE

(Fraud)

  • 110. RKA repeats and realleges paragraphs 1 through 109 above as though set

forth here in full.

  • 111. On no less than five occasions between in or about August 2014 and

March 2015, Kavanaugh and the other Defendants caused the Film SPEs to draw upon P&A

Funds totaling approximately $73.6 million for four films: Masterminds, Before I Wake, Solace,

and Disappointments Room. Kavanaugh and the other Defendants had represented (and agreed)

that the P&A Funds were required to be used solely for P&A expenses for specific films made

by the Film SPEs, and before, during, and after drawing upon these funds, Kavanaugh and the

other Defendants reaffirmed that such draws would be used only by the Film SPEs and only to

fund P&A. Throughout the course of their interactions with RKA on behalf of Relativity and its

affiliated Film SPEs, the Defendants were aware of the falsity of these statements.

  • 112. The statements Kavanaugh and the other Defendants made regarding how

the P&A Funds would be spent were material. Specifically, with knowledge of their falsity,

Kavanaugh and the other Defendants made these statements to induce RKA to make P&A Funds

available to the Film SPEs. The Defendants also knew RKA would rely upon those statements

in determining whether to make P&A Funds available to the Film SPEs. Given Kavanaugh and

the other Defendants’ close ties to, relationships with, and obligations to act on behalf of

Relativity, as well as their affirmative efforts to mislead RKA, RKA justifiably relied on the

statements and promises of the Defendants.

  • 113. Notwithstanding these promises, Kavanaugh and the other Defendants

used the P&A Funds for purposes other than financing P&A expenses. In fact, they used the

P&A Funds for general corporate purposes such as salaries, overhead, the funding of Relativity’s

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other business lines (such as its sports agency and television studio), supporting the general

solvency of Relativity, and personal luxuries for themselves.

  • 114. When confronted about how the P&A Funds had been spent, Kavanaugh

and the other Defendants repeatedly lied and continued to misappropriate these funds.

Kavanaugh and the other Defendants then knowingly and purposefully obfuscated RKA’s efforts

to understand how its funds had been drawn upon, allocated and used, in order to delay RKA’s

discovery of their misdeeds and the falsity of their statements.

  • 115. Finally, Kavanaugh and the other Defendants have, on multiple occasions,

admitted to RKA that (i) they caused Relativity to commingle and misappropriate the P&A

Funds with other Relativity funds, and (ii) they used the P&A Funds as working capital or as

they saw fit.

  • 116. The above amounts to a fraudulent scheme to misappropriate the P&A

Funds. As a result of this fraudulent scheme—and Kavanaugh and the other Defendants’

fraudulent concealment of the misuse of such funds—RKA was induced to provide

approximately $73.6 million in P&A Funds to the Film SPEs, nearly all of which has now

vanished. RKA has therefore suffered and will continue to suffer damages as a result of this

fraud.

COUNT TWO (Fraud in the Inducement)

  • 117. RKA repeats and realleges paragraphs 1 through 116 above as though set

forth here in full.

  • 118. On numerous occasions leading up to, and in the process of, the execution

of the Funding Agreement, Kavanaugh and the other Defendants represented that P&A Funds

loaned by RKA would be used solely to fund P&A expenses in accordance with Section 1.3 of

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the Funding Agreement related to films scheduled for release by the applicable Film SPEs. They

also represented that RKA would be repaid first out of box office and other proceeds, and that

given these two features of the P&A loans RKA would make under the Funding Agreement,

RKA would not be exposed to the risks associated with Relativity’s financial stability or

performance.

Kavanaugh, Colbeck and the other Defendants made these representations in

presentations, marketing materials, phone and email communications, and in the very terms of

the Funding Agreement.

  • 119. Those representations were false.

Roughly $1.7 million of the $73.6

million of P&A Funds drawn by Relativity from RKA’s P&A facility were actually spent on

P&A. Neither Kavanaugh, nor the other Defendants, nor Relativity can account for the

remainder of these funds.

  • 120. Kavanaugh and the other Defendants knew that those representations were

false because they knew the P&A Funds would be used as working capital to fund Relativity’s

general corporate expenses. They knew this because Kavanaugh and the other Defendants were

privy to all of the details of Relativity’s financial operations, and because it had used funds

supposedly earmarked for P&A as working capital for general corporate expenses before.

Kavanaugh and the other Defendants intentionally or negligently withheld the falsity of those

representations from RKA, despite this knowledge. Ultimately, Kavanaugh and the other

Defendants, at the time they pitched and facilitated the execution of the Funding Agreement, had

a preconceived and undisclosed intention of, on behalf of Relativity, not performing under the

agreement.

  • 121. RKA relied on those representations in deciding to execute the Funding

Agreement and otherwise enter a P&A lending arrangement with Relativity. RKA was justified

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in relying on the representations of Kavanaugh and the other Defendants because it had no

independent means of determining their truth. RKA could not have discovered or known that

Kavanaugh and the other Defendants intended from the beginning to use the funds without

restriction or however else they desired.

  • 122. The enterprise described above amounts to a fraudulent scheme to induce

RKA to provide Relativity with working capital, something RKA never would have agreed to in

the absence of misrepresentations made by the Defendants. As a result of this fraudulent

inducement, RKA provided no less than $73.6 Million in P&A Funds under the Funding

Agreement—nearly all of which has now vanished. RKA has therefore suffered, and will

continue to suffer, damages as a result of this fraud.

COUNT THREE (Conspiracy to Commit Fraud)

  • 123. RKA repeats and realleges paragraphs 1 through 122 above as though set

forth here in full.

  • 124. Kavanaugh agreed with the other Defendants, as well as possible unknown

co-conspirators, and took overt acts, to use the P&A Funds provided by RKA under the Funding

Agreement for purposes other than financing P&A expenses for certain qualifying films, as

specified under the Funding Agreement. In fact, Kavanaugh and the other Defendants have used

the P&A Funds for general corporate expenses, including keeping Relativity solvent.

  • 125. Kavanaugh and the other Defendants have further conspired to perpetuate

this fraud by taking acts to obfuscate RKA’s efforts to understand how the P&A Funds were

drawn upon, allocated and used. Given the Defendants’ close relationships with, and certain of

their obligations to represent and act on behalf of, Relativity, as well as their repeated

reassurances to RKA, RKA justifiably relied on the information provided, and representations

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made, by the Defendants.

  • 126. As a result of this conspiracy and Kavanaugh and the other Defendants’

further fraudulent concealment of the misuse of such funds, RKA has suffered and will continue

to suffer damages.

COUNT FOUR (Negligent Misrepresentation)

  • 127. RKA repeats and realleges paragraphs 1 through 126 above as though set

forth here in full.

  • 128. Through the marketing, negotiation, execution, and transfer of funds

pursuant to the Funding Agreement, a special or privity-like relationship arose between the

Defendants and RKA. That relationship imposed on the Defendants duties to impart correct

information to RKA.

  • 129. Beginning in or about April 2014, Kavanaugh and the other Defendants

made numerous misrepresentations regarding the use of the P&A Funds, the amount of cash

available at Relativity, and the release dates for the four most recent films for which Film SPEs

had drawn P&A Funds. Specifically:

  • a. Kavanaugh and the other Defendants misrepresented on numerous

occasions that the P&A Funds drawn upon by the Film SPEs would be: (i) used only by the Film

SPEs; (ii) used only to fund the P&A for each Film SPE’s film; and (iii) accounted for with

separate books and records apart from the corpus of Relativity’s cash;

  • b. Kavanaugh and the other Defendants misrepresented on numerous

occasions that the release dates of each of the four films for which the Film SPEs had drawn

P&A would be prior to September 30, 2015;

  • c. Kavanaugh and the other Defendants misrepresented on numerous

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occasions that Relativity could account for all of the P&A Funds drawn upon by the Film SPEs

that were unspent on P&A; and

  • d. Kavanaugh and the other Defendants misrepresented on numerous

occasions that Relativity had sufficient cash on its balance sheet to continue operations.

  • 130. At the time Kavanaugh and the other Defendants made these

representations on behalf of Relativity and/or the Film SPEs, they either knew of their falsity or

failed to exercise reasonable care or competence in determining their accuracy. They either

actively misrepresented that, or failed to determine whether: (i) Kavanaugh and/or the other

Defendants caused the P&A Funds to be used for improper purposes; (ii) Kavanaugh and/or the

other Defendants intended to release each of the four films for which P&A Funds were drawn

prior to September 30, 2015; (iii) Relativity could account for all of the unspent P&A Funds; and

(iv) Kavanaugh and/or the other Defendants accurately represented the amount of cash on

Relativity’s balance sheet.

  • 131. RKA reasonably relied on the truth of these representations and as a result

was induced to: (i) continue making funds available for the Film SPEs to draw upon instead of

terminating its arrangement with Kavanaugh, the other Defendants, the Film SPEs, and

Relativity; and (ii) continue to negotiate an amicable resolution with Kavanaugh and the other

Defendants while Kavanaugh and the other Defendants converted the P&A Funds for general

corporate purposes. Had any of Relativity’s corporate officers or directors, or the officers and

directors of the Film SPEs, disclosed the falsity, or attempted to verify the veracity, of the

statements made on behalf of Relativity to RKA, it would have considerably mitigated the

damages suffered by RKA.

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COUNT FIVE

(Conversion)

  • 132. RKA repeats and realleges paragraphs 1 through 131 as though set forth

here in full.

  • 133. On no less than five occasions between in or about August 2014 and

March 2015, Kavanaugh and the other Defendants caused the Film SPEs to draw upon P&A

Funds totaling approximately $73.6 million for four films: Masterminds, Before I Wake, Solace,

and Disappointments Room. Through these actions, on behalf of Relativity and its affiliated

Film SPEs, the Defendants exercised unauthorized dominion over the P&A Funds provided by

RKA.

  • 134. In each instance, only the Film SPEs were authorized to use the P&A

Funds, and each was only authorized to use its P&A Funds for the P&A of its specific film.

These P&A Funds were the respective property of each of the Film SPEs, and Kavanaugh and

the other Defendants had no legal right and/or title to those P&A Funds and could not use them

for any purpose.

  • 135. Notwithstanding this fact, Kavanaugh and the other Defendants converted

these funds for salaries owed to Relativity’s top executives, the funding of Relativity’s sports and

television businesses, personal indulgences such as Kavanaugh’s collection of helicopters, and

Relativity’s general corporate purposes, such as overhead, and loan interest owed to other

lenders. Again, such use was without authorization and without right and to the exclusion of

RKA’s rights in the P&A Funds.

  • 136. As a result of such conversion, RKA has suffered and will continue to

suffer damages.

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COUNT SIX (Breach of Covenants of Good Faith and Fair Dealing)

  • 137. RKA repeats and realleges paragraphs 1 through 136 as though set forth

here in full.

  • 138. In connection with the marketing, negotiation, execution, and transfer of

funds pursuant to the Funding Agreement, on behalf of Relativity and its affiliated Film SPEs,

the Defendants owed to RKA duties of good faith and fair dealing.

  • 139. Kavanaugh and the other Defendants made numerous intentionally false

statements or negligent misrepresentations to RKA in order to induce it to allow (and continue

allowing) Film SPEs to draw P&A Funds from RKA’s P&A facility. These misrepresentations

constituted breaches of the covenants of good faith and fair dealing.

  • 140. Kavanaugh and the other Defendants also misdirected P&A Funds

intended for certain Film SPEs to Relativity. As a result, the Film SPEs were unable to spend the

P&A Funds on legitimate expenses that would enable them to adequately market their films,

thereby allowing RKA to realize a return on its investment. Instead, Kavanaugh and the other

Defendants caused said monies to be spent on unauthorized purposes such as Relativity’s general

corporate expenses, including but not limited to salaries, overhead, loan interest owed to other

lenders, the funding of Relativity’s sports and television businesses, and personal indulgences

such as Kavanaugh’s collection of helicopters.

  • 141. Despite this conduct and its effects on RKA, Kavanaugh and the other

Defendants kept their misdeeds secret in order to induce RKA to loan additional P&A Funds to

the Film SPEs until nearly all P&A Funds had been drawn from RKA’s facility. This active

effort of the Defendants, on behalf of Relativity and the Film SPEs, to conceal what had

happened to the P&A Funds also constituted breaches of the covenants of good faith and fair

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dealing.

  • 142. Kavanaugh and the other Defendants’ actions thereby deprived RKA of

the benefit of lending the P&A Funds, namely, a return on its investment. Such conduct

constitutes a breach of the implied covenant of good faith and fair dealing. As a result of such

breach, RKA has suffered and will continue to suffer damages.

COUNT SEVEN (Breach of Fiduciary Duty)

  • 143. RKA repeats and realleges paragraphs 1 through 142 as though set forth

here in full.

  • 144. In an effort to convince RKA, on behalf of Relativity and its affiliated

Film SPEs, to provide P&A Funds under the Funding Agreement, Kavanaugh and the other

Defendants sought to establish a relationship of trust and confidence with, and otherwise gain

influence over RKA. By drawing on their intimate knowledge of Relativity and its affiliated

Film SPEs, and through their web of misrepresentations, Kavanaugh and the other Defendants

succeeded. The special circumstances surrounding RKA’s ultimate agreement to provide such

P&A Funds thereby transformed the parties’ business relationship into a fiduciary one.

Accordingly, RKA was lulled into placing its trust and confidence in Kavanaugh and the other

Defendants, creating a fiduciary relationship between RKA on the one hand, and Kavanaugh and

the other Defendants on the other.

  • 145. Notwithstanding their fiduciary relationship with RKA, the Defendants

engaged in misconduct that directly caused damages to RKA. On no less than five occasions

between in or about August 2014 and March 2015, Kavanaugh and the other Defendants caused

the Film SPEs to draw upon P&A Funds totaling approximately $73.6 million for four films:

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Masterminds, Before I Wake, Solace, and Disappointments Room. In each instance, as

Kavanaugh and the other Defendants had represented, only the Film SPEs were authorized to use

the P&A Funds, and each was only authorized to use its P&A Funds for the P&A of its specific

film. Nevertheless, in direct contravention of the fiduciary relationship that had developed

between the parties, Kavanaugh and the other Defendants misappropriated these funds for

Relativity’s general corporate purposes. As a direct result of this misconduct by Kavanaugh and

the other Defendants, RKA has suffered and will continue to suffer harm.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiff respectfully demands judgment in its favor against the

Defendants:

 
  • a) for all actual damages incurred and accruing in an amount in excess of

$110 million;

  • b) awarding the Plaintiff attorney’s fees, costs, and disbursements in

prosecuting this action to the extent permitted by law; and

  • c) awarding the Plaintiff such further relief as this Court deems just and

appropriate.

Dated: New York, New York March 9, 2016

Respectfully Submitted,

LATHAM & WATKINS LLP

/s/ Christopher J. Clark Christopher J. Clark Benjamin Naftalis

885 Third Avenue New York, New York 10022 (212) 906-1200 chris.clark@lw.com benjamin.naftalis@lw.com

Counsel for Plaintiff

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