Dueling Lawsuits Filed Over a Stock Exchange for Hollywood Movies

Ryan Kavanaugh - Getty - H 2018
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Investors can bet on the performance of all sorts of things — corporations like McDonald's and Netflix, commodities such as gold and oil, currency like the American dollar and Chinese yuan, even the weather. Why not the performance of Hollywood films?

In fact, for many years, there existed a game called the Hollywood Stock Exchange, and near the end of the dot-com boom, it was purchased by the financial firm Cantor Fitzgerald, which hoped to capitalize on the data generated by tens of thousands of users betting with play money on the successes and failures of movies. More recently, some entrepreneurs hoped to transform the game into a real money exchange that would allow investors to participate in the ups and downs of movie box office, regardless of whether these investors owned a piece of the content itself.

Naturally, in an industry that has witnessed plenty of lawsuits over film investments over the years, the efforts to launch a new entertainment stock exchange have generated allegations ranging from fraud to conspiracy. If there's one sure bet in Hollywood, it's litigation.

The first of two competing and potentially settled (see update at bottom) lawsuits over this stock exchange plan was filed yesterday in Los Angeles Superior Court by Elon Spar.

Spar, who formerly ran the European and Asian divisions for Cantor Fitzgerald and also spent time as the chief of staff to the financial firm's chief executive Howard Lutnick, is suing Ryan Kavanaugh, who ran Relativity Media until the independent studio declared bankruptcy and infamously fought with an army of hedge funds who had sunk hundreds of millions for little return.

According to Spar, he had been working on the concept of a real money exchange since 2016 and was in the process of meeting with potential partners when he was approached by Kavanaugh.

"Spar had significant misgivings about partnering with Kavanaugh based on Kavanaugh's prior conduct and poor reputation in the entertainment industry ... but Kavanaugh convinced Spar to work with him by misrepresenting that he had a turnkey solution for the real money exchange concept," states the complaint. "Kavanaugh represented to Spar that his solution included financing, a robust slate of film[s] and other entertainment projects to prove the model, and substantial marketing resources and expertise."

Spar adds that Kavanaugh promised $6 million for operating costs, and that Kavanaugh's new company, Proxima, would finance the entire enterprise. Spar says that representations of hundreds of millions of dollars in capital commitments, rights controlled on 15 film development projects with A-List talent attached and a partnership with a crowdfunding company were all false.

"Kavanaugh's detailed lies induced Spar to enter a one-sided nondisclosure agreement covering specific non-public information provided by Proxima to Spar, and to devote substantial time and effort between February 2018 and April 2019 to refining plans for a movie exchange."

Spar did became CEO of the new exchange, dubbed ESX, but the situation went south.

Spar now says that Kavanaugh was essentially operating a "Ponzi scheme, using meager new investment capital to satisfy old debts, diverting corporate funds for personal use (instead of paying his employees and contractors), and manipulating the corporate books and records to conceal his misrepresentations."

On Friday, ESX — aligned with Kavanaugh — filed its own lawsuit against Spar.

Kavanaugh acknowledges approaching Cantor Fitzgerald in 2018 to discuss an acquisition of the Hollywood Stock Exchange. That's when he was directed to speak to Spar.

According to the alternative history, "As Proxima had been previously developing a business plan for the Actual Movie Exchange and had a proprietary business plan to do so, Proxima required Spar to sign a handwritten nondisclosure agreement."

Supposedly, Kavanaugh's plan impressed everyone, and Spar was eager to become CEO. Lutnick, though, allegedly requested that either he or Kavanaugh would have the power at any point to remove Spar as CEO.

Allegedly upset by this, Spar and his colleagues "convinced Proxima that they should not be in business with Lutnick/Cantor, that Lutnick was an awful partner who would certainly be always looking to 'screw' them."

ESX hired Spar as chief executive. In turn, Spar brought on others including Jason Burinescu. The team spent millions on the development of the business before Spar allegedly tried to renegotiate his compensation for better terms. Spar also went on a roadshow to raise capital for ESX, and after lining up commitments, according to the complaint, he and Kavanaugh feuded over the amount of money necessary for the business and job security for Spar and others who had left their jobs at Cantor.

Spar stopped showing up at the office, alleges the second suit, and took materials from Kavanaugh.

Now, continues the ESX complaint, Spar and Burinescu "are currently using the information they obtained as CEO of ESX and as a senior executive of ESX to poach ESX's employees, investors and other parties whom they met in their capacity as officers and fiduciaries of ESX."

Spar is suing Kavanaugh for fraud, and is also seeking a declaration that his NDA is unenforceable, that his work product isn't owned by Kavanaugh and that Kavanaugh "may not pursue development of the movie exchange concept using the operating road map that was provided to him by Spar based on Kavanaugh's fraudulent misrepresentations."

Kavanaugh's ESX in turn is suing Spar on claims of breaching contract and fiduciary duties, plus misappropriating trade secrets and committing unfair competition. Kavanaugh throws in a racketeering claim too, and demands compensatory damages of at least $25 million. 

UPDATE 6/7 5 PM PST: A source familiar with the situation now says this dispute has been resolved.