“You’ll make more than you can imagine.”
That's what music and entertainment mogul Robert Sillerman promised in a January 2012 email to Paolo Moreno, a promoter in the electronic dance music (EDM) industry after hearing of his business plan to buy venues around the world and create a powerhouse in the fast-growing live music genre. At the time, Moreno was proposing that he and his team would bring contacts and on the ground knowledge to consolidate the then-fragmented EDM industry, while Sillerman, the wealthy creator of LiveNation, would provide financing to fund a venture.
The result of the partnership, SFX Entertainment, was listed on the Nasdaq in late 2014 at an over $1 billion valuation and generated $354 million in 2014 revenue. However, instead of making large sums of money, Moreno and two co-plaintiffs, Lawrence Varva and Gabriel Moreno, say they were cut out and never received a dime from Sillerman or SFX, despite helping to identify seven of the eight principal assets SFX listed when going public nearly two years ago. Shortly after went public, Moreno and his colleagues sued Sillerman and SFX; a suit the company quickly called "without merit" and asked to be dismissed.
However, in a ruling on July 29, California District Judge Ronald S.W. Lew allowed all of Moreno's claims against Sillerman and SFX, including breach of contract and fraud, to move to trial. The judge also rejected all motions to dismiss, citing evidence of a partnership in SFX's earliest days, including emails where Sillerman promised Moreno "we’re fine on these deals. Let’s go,” and "let’s get it done and have at it. We’re ready to go,” in addition to specific negotiations on salary, bonuses and millions of so-called 'founders shares.' (See ruling below).
Judge Lew concluded last week that a trove of email correspondence between Moreno and Sillerman is "sufficient to create a genuine dispute of material fact as to whether an express joint venture/partnership agreement was formed. Plaintiffs’ evidence also establishes a genuine dispute of material fact as to whether an implied joint venture/partnership agreement was formed."
The plaintiffs are seeking a $100 million award in damages. The trial is slated to begin on October 6 in Los Angeles federal court.
“That SFX and Mr. Sillerman would try to deny its partnership with our clients, especially in light of the extensive documentary evidence proving that a deal was made, is appalling,” said John C. Hueston, a representative for plaintiffs at Hueston Hennigan LLP, in a statement provided to FORBES.
SFX, through a spokesperson, declined to comment when reached by FORBES.
The lawsuit comes at a turning point for SFX and Sillerman, and it adds to string of financial and operational question marks about the EDM powerhouse after a disappointing run on public stock markets.
Sillerman, a 40% shareholder of SFX, is in the midst midst of a tender offer to take the company private. However, delays to the $5.25 a share tender, in addition to a puzzling set of transactions and financial disclosures, have cast into question Sillerman's ability to complete the buyout.
The tender, originally agreed in late May, was supposed to have a customary 45-day 'go-shop' expire on July 10. However, at the last minute SFX and its banker Moelis & Co. extended the 'go-shop' by two weeks to allow potential suitors and financing sources extra time to materialize. An independent committee running SFX's sale process also gave Sillerman 15-days, instead of a previously agreed 10-days to come up with financing for the tender, which valued the company at $774 million, when including debt.
When the extended 'go-shop' expired on July 24, SFX said no competing bids were made. Nonetheless, SFX disclosed that indications of interest on some of the company's EDM assets were made, and a formal bid on those business lines could supplant Sillerman's buyout; a last minute change of course. Sillerman is now on the clock to provide financing on his buyout with a deadline of 10 a.m. on Aug 13. If Sillerman is unable to provide financing, he is liable for a $31 million termination fee payable to SFX. The company will also report second quarter earnings on Aug. 10.
That there are lingering doubts as to whether Sillerman stole the idea of SFX out from under a trio of EDM producers may only further cast into question his bid for the company, or his ability to raise outside financing.
The $100 million in damages plaintiffs are seeking would also prove a new financial challenge for SFX, after the company diluted investors in June through an equity offering to pay down debt.
Although court documents show that Sillerman promised an opportunity to make more money "than you can imagine," SFX has proven anything but for investors, and promoters taking stock when selling their venues.
Shares closed Monday trading at $3.17, roughly 40% below Sillerman's tender and 75% below the company's October 2013 IPO price.
