10:21am PT by Eriq Gardner
Trump Treasury Nominee Steven Mnuchin Dragged Back Into Fraud Lawsuit Over Relativity
Steven Mnuchin, selected by Donald Trump to be the head of the Treasury Department, has made it past the Senate Finance Committee and barring something unforeseen, appears primed to be confirmed by a Republican-led Congress. But before that happens, Mnuchin is once again facing fraud claims for his time at Relativity Media, the much-hyped film studio that emerged from bankruptcy last year only to hit more trouble after the flops of Masterminds and The Disappointments Room.
The lawsuit comes from RKA Film Financing, which loaned Relativity tens of millions of dollars for print and advertising ("P&A") expenses. The plaintiff first filed suit against Relativity CEO Ryan Kavanaugh in July 2015, and after Relativity declared Chapter 11, amended the complaint to name as defendants some of Relativity's biggest backers including Colbeck Capital, its former co-chairman Mnuchin, and several other former officers at the company.
In perhaps simplest terms, the lawsuit claims that money loaned for P&A was instead used either for personal benefit or for Relativity's general purposes.
One of RKA's problems almost from the get-go in drawing up the complaint, though, was that Relativity itself was not a defendant. And thanks to the bankruptcy, suing Relativity for contract breaches wasn't much of an option. So RKA tried to steer its various claims outside the contours of a contract to pin blame for lost money on those individuals connected with Relativity who had allegedly made various misrepresentations.
At a hearing in October, New York Supreme Court Justice Charles Ramos called the complaint a "mess," and told the plaintiff that he couldn't distinguish one defendant from the other. But in dismissing the complaint, the judge did allow RKA's attorneys at Latham & Watkins to have a "last shot" at repleading, warning, "It better be specific."
Thus comes a new 38-page version of the complaint, which describes "three phases" of an allegedly fraudulent scheme and is dressed up with multiple charts describing each of the defendants and their supposed misrepresentations matched with "reality." From a big picture standpoint, RKA claims that defendants, to induce funding a P&A facility, weren't honest about Relativity's health, operations, riskiness and future business plans.
As for Mnuchin, who had a successful and controversial career in banking before becoming a big player in Hollywood (requiring significant divestments to become Treasury Secretary), the complaint addresses the moves he made to allegedly "siphon off $50 million from Relativity" at a time when it was having trouble repaying RKA.
Mnuchin's OneWest bank had made about $160 million in financial commitments to Relativity five years ago, and according to the complaint, he had shared a "close personal relationship with Kavanaugh," including registering a company to co-own a private jet.
It's claimed that around August 2014, Mnuchin began conducting further due diligence of Relativity's finances and got an opinion from the law firm of Jones Day about Relativity's debt facilities. That October, Mnuchin became Relativity's co-chairman. As such, he's described as having had inside access to how Relativity used its P&A facility.
The complaint then quotes Mnuchin's Jan. 19, 2017 testimony to the U.S. Senate during his confirmation hearing to become Treasury Secretary that he may have "sat in with management in certain meetings to solicit potential investors in Relativity."
But it's not just a claim that he and others at Relativity induced investments from RKA with knowledge of financial troubles and without sharing such information as the Jones Day report; the lawsuit also discusses what happened after May 29, 2015, the day that Mnuchin resigned as co-chairman.
"One day later—on May 30, 2015— a loan from OneWest came due," states the amended complaint. "Relativity defaulted on that loan, and Mnuchin immediately began seizing approximately $50 million from Relativity’s accounts to recoup his bank’s loan to Relativity. Specifically, Mnuchin caused OneWest to 'sweep' Relativity’s accounts with full knowledge that the siphoned funds (i) included a substantial portion of RKA’s P&A funds and (ii) had been misappropriated. To be sure, Mnuchin’s resignation from Relativity’s Board a single day before this misappropriation was intended to make the 'sweeps' look legitimate. OneWest did not lose money when Relativity declared bankruptcy."
Relativity's Chapter 11 filing happened on July 30, 2015, just a few weeks after Mnuchin's resignation and Relativity telling RKA that it had insufficient cash to fulfill the terms of a forbearance agreement.
"Throughout June 2015, RKA maintained near-daily communication with Relativity, which repeated that Kavanaugh was close to obtaining additional financing," continues the complaint. "The true, undisclosed purpose of these lies was to allow Mnuchin to further misappropriate RKA’s funds."
The allegation section of the complaint concludes by discussing a press statement that Kavanaugh issued on Jan. 22, 2016, which was at the time promulgated for the purpose of demonstrating why RKA's allegations were "baseless and totally without merit."
Kavanaugh explained that the agreement with RKA was one for a "working capital facility" and that it was structured the same way as Relativity's previous working capital facilities. The press release also came forward with the revelation that "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."
RKA asserts that this wasn't the purpose of its funding and that it was never told about the Jones Day opinion justifying a larger use of its money. Thus, it claims that Kavanaugh "conceded that the Defendants defrauded RKA."
We've reached out to Kavanaugh will provide any statement that come.
Mnuchin spokesman Barney Keller responded to the amended complaint.
"The claims against Steven Mnuchin are the same frivolous claims that were previously rejected by the court," said Keller. "RKA never once spoke with, corresponded with or otherwise dealt with Mr. Mnuchin. RKA's allegations are preposterous, don't deserve coverage...and Mr. Mnuchin's inclusion in this complaint is gratuitous and insulting. On November 12th Mr. Mnuchin’s counsel wrote to RKA and warned them that if they re-asserted these baseless claims against Mr. Mnuchin, he would seek sanctions from the court. Mr. Mnuchin intends to follow through on that warning.”