Charging “breach of fiduciary duty and waste and mismanagement of Interep,” the Chapter 7 bankruptcy trustee for the defunct rep firm has sued the former directors for not less than $20 million. Any money recovered would, after expenses, go to Interep’s creditors.
Attorney Kenneth Silverman, as trustee of the Chapter 7 bankruptcy estate of Interep National Radio Sales, filed the complaint seeking damages against Interep founder and former chairman Ralph Guild, along with former directors Howard Brenner, Les Goldberg, Marc Guild, John Palmer, George Pine, Arnie Semsky, Arnold Sheiffer and Terry Bate. Also named is David Kennedy, who was brought on as CEO and a director for Interep’s final days.
The legal action details the events leading up to Interep’s collapse, beginning in January 2005 when Oaktree Capital, which had acquired a large stake in Interep’s public bonds, began pressing the Interep board to rework the company’s capital structure because of an approaching liquidity crisis. After several written exchanges with the board, Oaktree went public with its demand for a financial restructuring and charges that then-CEO Ralph Guild was being paid too much by a company that could ill afford it. In one letter to the board, Oaktree had stated that Guild’s total cash compensation of $1.05 million represented 19% of the company’s market capitalization, “which is a preposterous amount,” the letter said.
As reported then by RBR-TVBR, Guild fired back at Oaktree, accusing the firm of trying to orchestrate a hostile takeover of Interep that would “crush” its shareholders. He noted in our story at that time that Interep had retained an investment banker to advise the company on refinancing its $99 million in debt, which would come due in 2008.
The trustee’s suit against the former board members calls into question the board’s independence, claiming that Ralph Guild had instructed the board not to engage in a dialogue regarding a financial restructuring term sheet submitted by Oaktree and that he personally handle all such communications. The suit notes that several letters from Oaktree to the board had questioned the independence of the board and accused it of allowing self dealing by Guild.
A May 6, 2005 report in RBR is reprinted in part in the trustee’s complaint as evidence that media coverage was raising the question of Interep’s viability. At that time Radio One CEO Alfred Liggins and then-COO Mary Catherine Sneed told CIBC analyst Jason Helfstein that Katz was outperforming Interep. (Radio One was one of the few major groups with some stations at each of the two rep firms.) “Liggins said a healthy Interep would benefit the radio industry and Interep’s clients need to talk about the rep firm’s future. But when asked about the possibility of a client buyout, he said that didn’t appear to be feasible unless Infinity, Interep’s largest client, wants to be involved,” the story said.
As Interep worked with Allen & Co. and Long Acre Capital Management to try to put together a financial restructuring plan, the lawsuit reveals that Bob Sillerman also agreed to serve as a financial advisor to the company as a favor to his friend, Ralph Guild, and being paid only a nominal fee.
By the fall of 2005 Oaktree was offering to buy up to $2.5 million of Interep’s common stock for 75 cents per share and proposed a severance which would have given Ralph Guild $4 million in cash and $1.8 million in stock. An October 12 letter from Oaktree’s Andy Salter to Sillerman stressed that Interep, which by then had lost its Radio One stations to Katz, was in danger of other client defections and that “time was of the essence” because the company’s value to Oaktree would decline if more clients left.
At a key board meeting on November 9, 2005, the special committee of Interep’s independent directors recommended that the company accept the offer from Oaktree. Only the two independent directors, Brenner and Sheiffer, voted for the motion. Meanwhile, the board was informed that Zelnick Media was interested in bidding for Interep’s independent sales rep business only, but would need at least three months to raise funds and do its due diligence, and that another company, referred to as “Shamrock,” might be interested in bidding for the entire company.
By December there were proposals being considered from Zelnick and Stephen Unterhalter. According to the lawsuit’s account of a December 20th board meeting by telephone, Ralph Guild accused Allen & Co. of leaking confidential information to Oaktree and of trying to force Interep to accept the Oaktree offer. The special committee of independent directors was disbanded, Allen & Co. discharged and Guild himself was allowed to negotiate directly with Oaktree.
On December 27, 2005, Oaktree sent an email offering settlements to Guild and to his sons and son-in-law who were employed by Interep. The lawsuit states that the value of those proposed settlements amounted to $5.85 million for Ralph Guild, $1.248 million for Marc Guild, $1.201 million for Adam Guild and $562,000 for Philip Brown.
That didn’t move things forward, and the board was instead considering whether or not to pay any break-up fees to Oaktree so it could accept another transaction. But meanwhile, the lawsuit states, the entire month of February 2006 was lost to the negotiations because Ralph Guild and his family traveled to India for more than a month.
But while the Guilds were traveling, Interep announced that it had filed with the SEC to suspend registration of its common stock as a cost-saving measure. The same issue of RBR notes that Interep was working to save its rep contracts at Susquehanna Radio and ABC Radio, both of which had been bought by Katz clients. (Those efforts proved to be unsuccessful.)
By March 2006 the lawsuit said Ralph Guild advised the board that he was meeting with potential investors, including Alta Communications, Gabelli & Co., Fieldstone Capital Group, Robank and others. But he also had a meeting in Los Angeles with Oaktree.
By that point Oaktree’s offer was to buy out other shareholders for $1.10 per share and on April 20, 2006 another major holder of Interep’s stock and bonds, Silver Point Capital, urged the board to accept the offer. But no action was taken and Oaktree withdrew its offer on April 24th. Interep issued a public statement that Oaktree was trying to “acquire the company at a discount” and said it was pursuing other options.
Nonetheless, negotiations continued with Oaktree, while the suit says Ralph Guild advised the board of other possible transactions under consideration, with not only Zelnick, but also Emmis Broadcasting, Clarion Capital and Tamares Private Equity.
In the end, though, no transaction ever came to be and Interep filed for Chapter 11 bankruptcy reorganization on March 30, 2008. After failing to accomplish a restructuring, the case was converted to Chapter 7 liquidation on October 24, 2008 and Silverman was appointed trustee.
He now claims that the officers and directors of Interep had failed in their fiduciary duties to ensure that the company was properly capitalized and managed and that the directors failed to operate independently. “In fact, defendants wasted, mismanaged and otherwise squandered Interep’s assets,” the lawsuit charges.
The complaint seeking at least $20 million in damages tells the scenario of Interep’s demise almost totally from the point of view of Oaktree Capital. No doubt the defendants will tell a quite different story when their response is filed.
Ironically, the trustee’s complaint was filed almost simultaneously with a statement from Ralph guild, Arnold Semsky and Howard Brenner seeking to have the bankruptcy judge allow the insurance company for Interep’s directors pay their legal fees – a move which has been opposed by the trustee. It appears their legal bills will now be getting much larger.
Les Goldberg had also asked the judge to remove him from the case, noting that he had left the board years before the bankruptcy proceedings.
RBR-TVBR observation: It appears this is not the final chapter. RBR-TVBR was recently subpoenaed for information relating to stories about former Interep employees who formed Spanish Television Sales and signed former clients of Interep’s Spanish TV rep firm, Hispanic Independent Television Sales (HITS). RBR-TVBR readers already know all that we know, but the trustee clearly has Spanish Television Sales in his sights. So there could be claims coming that former employees improperly took business away that rightly belonged to the company that bought HITS from the bankruptcy estate. Part of the sale price of HITS was tied to the new owner being able to sign former clients to new contracts.