Lionsgate Argues It Had No Duty to Disclose SEC Probe Over War With Carl Icahn

"The market ultimately proved the board right" about Icahn, says the studio in a bid to dismiss a shareholder lawsuit.
Billy Farrell/ Press
Carl Icahn

With word that $7.5 million is of "economic insignificance" and some pride of having bested corporate raider Carl Icahn, Lionsgate on Thursday moved to dismiss a shareholder class-action lawsuit for failing to disclose a Securities and Exchange Commission investigation.

In 2010, Icahn made a takeover bid for Lionsgate, which caused the studio behind movies like The Hunger Games and television shows like Mad Men to issue new shares with the effect of diluting Icahn’s stake. Lionsgate was then successful at beating back Icahn's lawsuit over the matter in British Columbia, and the widely-publicized battle ended.

But in March 2014, Lionsgate came to a $7.5 million settlement with the SEC over some of the public disclosures related to the transactions made in the Icahn takeover fight. As part of the deal, Lionsgate admitted wrongdoing. Four months later, some investors brought a securities claim alleging Lionsgate intentionally failed to tell its shareholders about the SEC investigation. This time, Lionsgate says it has no such obligation to speak up.

Lionsgate has now filed a motion to dismiss the lawsuit.

"No court has ever held that any statute or regulation imposes an affirmative duty to disclose a government investigation before the agency has even decided to institute proceedings," says Lionsgate's memorandum. "To the contrary: this Court has held that the SEC rules do not require disclosure of government investigations. This rule recognizes the obvious fact that agency staff conducting an investigation lack the authority to bring any charges. Staff investigations, by their very nature, are preliminary; they often result in no charges being brought at all. A rule that required premature disclosure of a staff investigation would essentially require a company to declare itself guilty..."

Lionsgate also shrugs its shoulders at the $7.5 million, doubting the amount is a material amount under settled law and SEC regulations and saying it "represented a fraction of a percent of Lions Gate’s total assets at the time—again, 0.27 percent, to be precise."

There might have been a time when Lionsgate knew of the investigation and didn't know exactly how much it would be paying. That's not discussed in the bid to dismiss the shareholder suit. But Lionsgate does say that investors already knew about the payment before the settlement was even announced because when the company reported $18.7 million in general and administrative expensive for the prior quarter before the announcement, it did so by noting it "included an accrual related to an anticipated settlement of a legal matter that goes back several years."

Did investors connect the dots that this related to Icahn? Who knows, but Lionsgate also thinks that there's good reason why investors should move on given history.

About the Icahn takeover bid, Lionsgate's memo states, "The market ultimately proved the board right. For example, in February 2010, Icahn launched a tender offer at $6.00 per share; in March 2014, the company’s shares were trading above $30.00."

The stock went up to $31.73 on the day it announced an increase in general and administrative expenses, it says.

"Nor was there a significant impact on the stock price when the SEC settlement was disclosed," it adds. "On March 12, 2014, the day before Lions Gate announced the SEC settlement, Lions Gate’s stock price closed at $33.26 per share. On March 13, 2014, Lions Gate’s stock closed at $32.20 per share, id.—a drop of only three percent, well within the normal ups and downs of the stock."

Lionsgate admits that the stock dropped down to $30.33 a few days later — implying that the plaintiffs are seizing on this number for no good reason but to try to collect as much damages that they can.

It's probably not significant to the lawsuit, but Lionsgate's stock currently trades just over $32 a share.

Twitter: @eriqgardner