INDEX NO.

652592/2015

FILED: NEW YORK COUNTY CLERK 03/09/2016 09:23 PM

NYSCEF DOC. NO. 19

RECEIVED NYSCEF: 03/09/2016

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK
RKA Film Financing, LLC,
AMENDED COMPLAINT
Plaintiff,
Index No. 652592/2015

- against Ryan Kavanaugh, Colbeck Capital

Management, LLC, Colbeck Capital, LLC,
Colbeck Partners IV, Jason Colodne, Jason
Beckman, David Aho, Ramon Wilson,
Andrew Matthews, Greg Shamo, Tucker
Tooley, Steven Mnuchin, and John Does 16,
Defendants.

Plaintiff RKA Film Financing, LLC (together with its lender-investors, RKA),
by and through its attorneys, Latham & Watkins LLP, for its complaint against Defendant Ryan
Kavanaugh (Kavanaugh), Defendants Colbeck Capital Management, LLC, Colbeck Capital,
LLC, and Colbeck Partners IV (collectively, Colbeck), Defendant Jason Colodne (Colodne),
Defendant Jason Beckman (Beckman), Defendant David Aho (Aho), Defendant Ramon
Wilson (Wilson), Defendant Tucker Tooley (Tooley), Defendant Greg Shamo (Shamo),
Defendant Andrew Matthews (Matthews), Defendant Steven Mnuchin (Mnuchin), and John
Does 1-6 (collectively, with each of the other Defendants, the Defendants), hereby alleges the
following:
NATURE OF THE ACTION
1.

This case is about a con manRyan Kavanaughwho through

dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate
their funds. Time and again, Kavanaugh induced his victims to invest hundreds of millions of

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dollars to prop up his failing entertainment company, Relativity Media, LLC (Relativity), in
what amounted to a classic Ponzi scheme.
2.

Colbeck, a financial advisory firm, was integral to Kavanaughs scheme.

Specifically, Colbeck and its principals leveraged Colbecks role as (i) an equity investor in
Relativity, (ii) a lender to Relativity, and (iii) an agent and advisor to Relativity to aid and abet
Kavanaughs recruitment and deception of investors (like RKA) to keep the Ponzi scheme afloat.
Two principals of ColbeckJason Colodne and Jason Beckmansat on Relativitys Board of
Directors and operated hand in hand with both Relativity and Kavanaugh to raise additional
capital for Relativity through lies and deliberate misinformation in a desperateand ultimately
public and unsuccessfulattempt to salvage their own investments in Relativity.
3.

One of the victims of this Ponzi scheme was RKA, a financing company.

Kavanaugh, Relativity, and Colbeck and its principals each courted RKA to invest about $81
million on the express condition that RKAs funds would be used solely for print and advertising
(P&A) expenses relating to certain Hollywood films (the P&A Funds). These films were
financed, produced, and marketed by special purpose entities set up and controlled by Relativity
(the Film SPEs). RKA made its investment after extensive due diligence and based on specific
and repeated assurances from, among others, Kavanaugh, Matthews (Relativitys CFO), and
Colbeck and its principals that Relativity and the Film SPEs would only use the P&A Funds for
P&A expenses incurred by the Film SPEs.
4.

Unbeknownst to RKA, however, Kavanaugh, Colbeck, and its principals

never intendedas they now admitthat Relativity would use the P&A Funds as
promised. Instead, from the outset of their scheme, Kavanaugh, along with a complicit and
negligent Board of Directors and set of senior officers, repeatedly represented to RKA that its

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P&A Funds would be used solely for P&A expenses of certain filmsknowing full well that
said funds were to be used as a working capital facility for Relativity, and failed to disclose the
same to RKA. In turn, the Defendants converted and misappropriated the P&A Funds, using
them for myriad personal emoluments, salaries, bonuses, the fulfillment of Relativity contract
debts, and other general corporate expenses. To further their scheme, Kavanaugh and Colbeck
caused RKAs P&A Funds to be listed on Relativitys balance sheet to create the appearance of
financial stability and liquidity for their otherwise cash-strapped entertainment company. In so
doing, they hid the breadth and depth of their fraud from their current and future investors and
used the P&A Funds as their own personal piggy bank.
5.

In April 2015, RKA sensed for the first time that the litany of promises

and representations made by Kavanaugh and his compatriots had been hollow. So, RKA
attempted to verify exactly how the Film SPEs had spent their recently drawn-upon P&A Funds.
Suspiciously, Kavanaugh and his team resisted this effort. Given Kavanaughs uncooperative
posture, RKA confronted Kavanaugh, Matthews, and Wilson (Relativitys Executive VP of
Business Development) about the suspected fraud. Each vehemently denied any malfeasance
and, instead, doubled down by assuring RKA (yet again) that Relativity was in healthy financial
condition and that RKAs P&A Funds had only been spent on P&A. When RKA asked to
inspect Relativitys books and records to verify these claims, Kavanaugh and his cohorts
repeatedly pivoted and stated that they were unable to provide the backup for their assertions,
(supposedly) because Relativitys staff was focused on an imminent fundraising deal. In
actuality, Kavanaugh and his team refused RKAs demands for basic information in order to
prevent RKA from uncovering their unravelling Ponzi scheme, the breadth of their
misrepresentations, and Relativitys imminent insolvency.

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6.

When Kavanaugh, Matthews, and Wilson finally provided RKA with

Relativitys alleged balance sheets and financial statements, they materially misreported the
financial health of Kavanaughs companies and failed to account for the whereabouts of RKAs
$73.6 million in drawn-upon P&A Funds. Only after continued diligence and inquiry, and in
spite of roadblocks erected by Kavanaugh and the other Defendants to conceal their fraud, did
RKA discover that Kavanaughs house of cards was on the verge of collapse.
7.

In desperate conversations with RKA, between about April and June 2015,

Kavanaugh and certain officers and directors of Relativity, including Matthews, finally admitted
their fraudulent scheme to RKA. Specifically, they divulged that they had (i) converted the P&A
Funds and spent them contrary to the verbal and written representations made to RKA prior to its
investment and (ii) used the P&A Funds as a general line of credit to fund their Potemkin
Village: Relativity. With their scheme revealed, Kavanaugh begged RKA to give him one last
shot to make good on his promises. Dubious of Kavanaughs veracityyet hoping in good faith
that Kavanaugh could fix the damage he had doneRKA endeavored to find an amicable
resolution and give Relativity the opportunity to find alternative funding to keep itself
afloat. Ultimately, on June 5, 2015, RKA agreed to refrain temporarily from asserting fraud and
other legal claims by striking a good faith deal with both Kavanaugh and Relativity.
8.

Again, Kavanaugh and his syndicate of fraudsters did not live up to their

word, failing to deliver on their June 5, 2015 promises. Yet, RKA showed further restraint,
cooperating with Relativity throughout June and July 2015 in the hope that Relativity would find
alternate financing, stave off creditor defaults, and avoid bankruptcy. All the while, despite
Kavanaughs breach of the June 2015 deal he struck to keep RKA from taking action, RKA
refrained from publicly revealing Kavanaughs deeds or seeking judicial intervention. Likewise,

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Colbeck, its principals, and the Board remained mum as to both the lies being fed to RKA and
how RKAs P&A Funds were all that was (barely) keeping Relativity buoyant.
9.

RKAs patience ran out on July 16, 2015, whendespite his promises to

the contrary, and months of good faith efforts by RKA to help Relativity through its financial
woesKavanaugh issued a public statement that he would not, and never had intended to, make
good on his clear obligations and promises to RKA. After repeatedly throwing Kavanaugh and
Relativity a lifeline to atone for their fraud, and after being rebuffed and fed self-serving lies,
RKA was left with no other choice. Accordingly, on July 24, 2015, RKA filed the original
complaint in this matter.
10.

Most recently, in a subsequently retracted press release, Kavanaugh turned

on his co-conspirators and shockingly claimed that RKAs P&A Funds were (and had always
been) provided to Relativity for working capital and general corporate expenses, and that any
misunderstanding was the fault of Colbeck and its principalsnot him. In light of additional
details regarding the Defendants scheme, RKA now submits this amended complaint premised
on Defendants (i) fraud, (ii) fraud in the inducement, (iii) conspiracy to commit fraud,
(iv) negligent misrepresentations, (v) conversion of funds, and (vi) breach of covenants of good
faith and fair dealing, and seeks actual damages incurred and accruing in excess of $110 million
on account of their actions.
PARTIES1
11.

RKA is a limited liability corporation, organized under Delaware law,

with its principal place of business in New York, that agreed to provide, and provided, financing

The facts as pled in this Amended Complaint reflect Relativitys corporate form prior to its filing for
bankruptcy.

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to the Film SPEs, pursuant to the terms of certain agreements described further below.
12.

Defendant Kavanaugh is the founder and CEO of Relativity, and is the

main signatory in charge of the operation of the Film SPEs. He resides in California.
13.

Colbeck Capital Management, LLC is a financial advisory firm organized

under the laws of Delaware and headquartered in New York. Colbeck Capital, LLC and Colbeck
Capital Partners IV, LLC are limited liability companies organized under the laws of Delaware
and headquartered in New York. Colbeck specializes in media-related investments, including in
companies such as MindGeek, the owner of pornography aggregators Pornhub, YouPorn and
RedTube. Colbeck participated in Relativitys debt financings in 2011 and 2012, and exited
most of these investments prior to Relativity filing for bankruptcy in July 2015. As described
further below, Colbeck worked hand-in-glove with Kavanaugh to induce RKA to invest in
Kavanaughs Ponzi scheme.
14.

Defendant Matthews has been an officer of Relativity since May 28, 2013,

when he became its Chief Strategy Officer. Since then, he has also acted as its Chief Financial
Officer (CFO) and Co-Chief Operating Officer (Co-COO). Matthews resigned from his
position as CFO and Co-COO as of October 5, 2015.2 As described further below, in these roles,
he made deliberate and false representations to RKA regarding Relativitys use of P&A Funds,
actively furthering the Defendants scheme. He resides in California.
2

Relations between Matthews and Kavanaugh have apparently soured. Matthews recently filed an objection to
the confirmation of the proposed Chapter 11 plan in the bankruptcy case involving Relativity and its related
entities in the Southern District of New York (the SDNY Bankruptcy) to the extent that the plan rejects a
mutual release of claims he had executed with Relativity on June 26, 2015. See Objection of Andrew Matthews
to Proposed Rejection of Certain Executory Contracts Pursuant to the Second Amended Plan of Reorganization
and Section 365 of the Bankruptcy Code, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y.
Bankr.), Dkt. 1388, Jan. 25, 2016. Notably, Matthews had sought that mutual release of claims following fears
that instructions from Kavanaugh to never communicate with FTI Consulting (the crisis and turnaround
manager retained by the Debtors in connection with the SDNY Bankruptcy) unless in the presence of
Kavanaugh or other senior Relativity executives had caused him to breach his obligation to cooperate with FTI
or his duties to Relativity. Id. 18.

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15.

Defendant Shamo has been Relativitys Co-COO since November 1,

2012. Shamo joined Relativity in 2009 and has previously served as its Executive Vice President
of Corporate Affairs and General Counsel. As described further below, in these roles, he made
deliberate and false representations to RKA regarding Relativitys use of the P&A Funds,
actively furthering the Defendants scheme. He resides in California.
16.

Defendant Colodne is a founder and Managing Partner of

Colbeck. Colodne served on Relativitys Board of Directors from about 2012 until May 27,
2015. As described further below, while serving as a Director, and in his capacity as a
representative of Colbeck, he made deliberate and false representations to RKA regarding
Relativitys use of the P&A Funds, actively furthering the Defendants scheme. He resides in
New York.
17.

Defendant Beckman is a founder and Managing Partner of Colbeck.

Beckman served on Relativitys Board of Directors from about 2012 until May 27, 2015.3 As
described further below, while serving as a Director, and in his capacity as a representative of
Colbeck, he made deliberate and false representations to RKA regarding Relativitys use of the
P&A Funds, actively furthering the Defendants scheme. He resides in New York.
18.

Defendant Aho is a partner at Colbeck and personally recruited investors,

including RKA, to provide funding to Relativity. Specifically, Aho marketed the investment

Although, in recent communications with RKA, Beckman has denied his directorship on Relativitys Board,
press coverage based on statements or releases issued by Relativity itself contradict these assertions. See, e.g.,
Ben Fritz, Relativity Back in Business with Debt Backed by Ron Burkle, L.A. TIMES, May 31, 2012, available at
http://articles.latimes.com/2012/may/31/entertainment/la-et-ct-relativity-loan-burkle-20120531 (noting that as
part of a 2012 financing deal with Colbeck, Beckman would be joining Relativitys Board along with Colodne);
see also Todd Cunningham, Two Relativity Board Members Resign After Clash with CEO Ryan Kavanaugh,
YAHOO, THEWRAP, May 27, 2015, available at https://www.yahoo.com/movies/s/two-relativity-boardmembers-resign-clash-ceo-ryan-210953390.html (discussing a statement by Relativity that Beckman and
Colodne had resigned from the Relativity Board).

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opportunity to RKA and worked to structure, negotiate, and close the P&A facility between
Relativity and RKA. Aho played a key role in Defendants scheme by making myriad materially
false statements to RKA regarding the transaction.
19.

Defendant Wilson is interim President of Relativity. Wilson joined

Relativity in 2006 and has previously served as Executive Vice President and Head of Business
Development at Relativity during its involvement with RKA until November 5, 2015, when he
became interim President. As described further below, in his various positions at Relativity,
Wilson made deliberate and false representations to RKA regarding Relativitys use of P&A
Funds, actively furthering the Defendants scheme. He resides in California.
20.

Defendant Tooley was the President of Relativity from September 30,

2011 until November 5, 2015. As described further below, while serving as President, he made
representations to RKA regarding Relativitys use of P&A funds, actively furthering the
Defendants scheme. He resides in California.
21.

Defendant Mnuchin was the Non-Executive Co-Chairman of Relativitys

Board of Directors from October 2014 to May 2015. He joined the board when Dune Capital
Management, a private investment firm he founded, purchased debt and equity in Relativity. In
his capacity as a director, Mnuchin played a key role in making representations to RKA
regarding Relativitys use of P&A Funds, actively furthering the Defendants scheme. Mnuchin
was also the CEO and Chairman of OneWest Banka lender to Relativityat the time
Relativitys Ponzi Scheme collapsed. Beginning in June 2015, with Relativitys bankruptcy
looming, OneWest Bank began sweeping what amounted to $50 million from Relativitys bank
accounts that likely included some or most of RKAs commingled P&A Funds. Accordingly,
Mnuchin was in a unique position, affording him knowledge of both Relativitys precarious

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financial position and the ability to ensure certain creditorsnamely, OneWest Bankwere able
to siphon away funds that had been commingled with RKAs P&A Funds.
22.

John Does 1-6 are various officers and directors of Relativity, Relativity

Holdings, LLC, and the Film SPEs, who conspired, and aided and abetted, Kavanaugh and
Colbeck in carrying out their scheme and whose identities will be determined through further
discovery.
JURISDICTION
23.

Jurisdiction is proper under New York Civil Practice Law and Rule

(CPLR) 302 in that Kavanaugh, Colbeck, and the other Defendants transact business within
the state of New York. Jurisdiction is also proper under CPLR 302 because Kavanaugh,
Colbeck and the other Defendants committed tortious acts within the state, and committed
tortious acts without the state causing injury to RKA within the state.
FACTUAL ALLEGATIONS
24.

Relativity is a privately held global media company located in Beverly

Hills, California. Relativity has numerous affiliates and subsidiaries, including the Film SPEs,
which finance, produce, advertise, and distribute films. Through Relativitys business structure,
each Film SPE is responsible for a single film. For instance, RML Solace Films, LLC is a
Film SPE principally responsible for the filming and marketing of the movie Solace. In this way,
each Film SPE is (or at least, ostensibly should be) an independent legal entity with separate
expenses and a distinct balance sheet.
25.

Numerous expenses are associated with the theatrical release of a motion

picture. One expense, as discussed above, is P&A. Entities organized for the purpose of
releasing movies (such as the Film SPEs) generally have P&A budgets for the release of each

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film that are distinct from the films production budgets. Thus, these entities often seek and
secure separate loans to finance this P&A. These loans are ordinarily the last financing incurred
by the Film SPE prior to the release of a film, and P&A lenders usually provide this financing in
return for a guarantee that they will be the first lenders repaid through a films box office
receipts.4 Therefore, P&A lenders bear the risk if a film does not generate sufficient revenue to
recoup their P&A investment, but enjoy the benefit of being the first to be repaid. Typically,
P&A expenses are also financed after the film has been developed and produced, minimizing the
risks associated with non-completion.
26.

P&A loans are not general corporate loans. Nor are such loans a general

line of credit to provide studios (like Relativity) with working capital. In fact, P&A loans differ
from these other cash sources in (at least) two relevant ways: first, while general corporate loans
can be used for a variety of purposes, including financing corporate expenses and growing the
business, P&A loans are (as the name implies) made explicitly for the marketing of a film;
second, the repayment risk of a general purpose loan is tied to the financial success of the parent
company, while the repayment of a P&A loan is tied to the box office success of the film for
which the P&A funds were loaned.5 Thus, P&A loans are discrete, asset-based loans targeted for
a very narrow set of uses.
A.

Kavanaugh and Colbecks Ponzi Scheme

27.

Beginning in or about 2011, Kavanaugh, at the helm of Relativity, began

courting debt and equity investments to acquire smaller movie studios. Of relevance here,

In industry parlance, this is often known as last in, first out financing.

The financial stability of a studio may, of course, affect the studios ability to release a film for which P&A
loans have already been made; however, this repayment risk is limited because P&A is typically loaned, as here,
only after a film is completed and ready for release.

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Kavanaugh enlisted his longtime friends at ColbeckBeckman and Colodneto assist in this
endeavor. Over the next year, Beckman and Colodne (fresh off a $362 million investment in the
parent company of Pornhub, YouPorn, and RedTube) successfully structured several rounds of
financing for Kavanaugh, including a $200 million loan directly from Colbeck in November
2011 and a $350 million loan in May 2012, in which Colbeck also participated.
28.

During this period, Kavanaugh also awarded his friends Beckman and

Colodne with seats on Relativitys Board of Directors, positions that provided them front-row
seats to the operations, finances, and inner workings of Relativityand, of course, his Ponzi
scheme.6
29.

In or about 2012, the Ponzi scheme that was Relativity was in need of

additional capital to survive. Colbeck, now heavily leveraged in Kavanaughs scheme through
its debt and equity investments in Relativity in 2011 and 2012, was acutely aware of the same.
Accordingly, on information and belief, Colbeck and Kavanaugh hatched a plan to market a new
lending facility to provide the additional capital Kavanaugh would need to continue Relativitys
operations, court additional investors, and perpetuate his Ponzi scheme. Notably, Kavanaugh
and Colbeck billed the facility as a P&A facility, yet never intended to limit use of those funds
to P&A. Thus, this lending facility was a P&A facility in name only. As Kavanaugh and
Colbeck knew from the get-go, funds lent to finance the P&A expenses of specific Film SPEs
were (in truth) intended to be used to pay salaries, bonuses, overhead, and, most importantly,
bolster the financials on Relativitys books and disguise yet more debt. Beckman and Colodne,

Indeed, during September 2014 conversations with an RKA representative, Beckman confirmed that the Board
[himself included] is intimately involved and speaks with Ryan ten times per day and that there is rarely a
transaction that the Board isnt involved in, especially anything material. Beckman went on to say that there
are no serious transactions that dont involve members of the Board for any material or sensitive issues, either
formally or informally.

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of course, knew (i) how the lending facility was marketed, and (ii) how those funds were to be
used. Indeed, Colbecks position in Relativity gave them a vested interest in maintaining
Relativitys appearance as a viable enterprise so they could continue to attract fresh capital for
the company.7
30.

Kavanaugh and Colbeck chose to disguise this transaction as a P&A

facility because individual Film SPEsand not Relativitywould be considered the borrowers
of P&A Funds. Their mock-P&A facility therefore allowed Kavanaugh and Colbeck to avoid
disturbing Relativitys capital structure, adding debt to Relativitys books, or otherwise
undermining Relativitys attractiveness as a potential investment. Structuring Colbecks cash
infusion as a P&A facility also made it easier for Kavanaugh and Colbeck to court further
outside investors by offering them the chance to participate in a low risk, asset-based
lending opportunity.
31.

Even with additional infusions from the P&A facility, Relativitys

aggressive growth strategy and stale profits pushed the company to the precipice of collapsea
fact well known, and undoubtedly of great concern, to Colbeck. As Colbeck and Kavanaugh had
never used the P&A facility for P&A, Colbeck knew that an imminent collapse of Relativity all
but ensured that monies lent under the facility would be vaporizedyet they failed to disclose
those material facts to RKA. Simply put, Colbeck knew it was holding onto a time bomb with a
short fuse. To continue their scheme, while also reducing their own financial exposure, Colbeck
(including Beckman, Colodne, and Aho) and Kavanaugh developed a plan to hand off the risk of
participating in the Ponzi scheme by inducing unsuspecting investors to take over the supposed

In April of 2012, Jason Colodne represented to RKA that it currently own[ed] 25% of the equity and ha[d]
invested over $200M in P&A.

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P&A facility.
32.

Specifically, Colbeck and Kavanaugh knowingly and purposefully

marketed a low risk, asset-backed P&A lending facility tied to the proceeds of films already
scheduled for release. In reality, Colbeck, and of course, Kavanaugh and his cronies, knew the
facility would continue to operate as it always had: as an undisclosed arrangement to finance
Kavanaughs slush fund. Once they found a lender to take their place, Colbeck could limit its
exposure to the risks associated with the Ponzi scheme and forestall Relativitys inevitable
collapse.
33.

In or about April 2014, Aho, acting as agent for Relativity, pitched

precisely this deal to RKA. As planned, Aho marketed the deal as a prototypical P&A facility
and hid (and failed to disclose) Colbeck and Kavanaughs plan to use the P&A Funds to finance
Relativity and perpetuate Kavanaughs Ponzi scheme.
34.

On May 21, 2014, Aho contacted a representative of RKA by email to

explain the facility. Aho explained that Relativity was looking to replace one of their existing
P&A (print & advertisement expenditures on film releases) lenders. Aho went on further to
explain that past P&A investors had advanced 70% of the P&A that Relativity spends on each
film in advance of release and that [a]t a 70% level, box office risk is minimal. Finally, Aho
stated that, given the full slate of film releases at Relativity, in general the capital stays
outstanding. Thus, from the very beginning of the deception, Aho laid out the characteristics of
typical P&A facility. Of course, Aho failed to mention that the reason capital stayed
outstanding was because the funds were being used to keep Kavanaughs company afloat.
35.

On May 22, 2014, in recognition of Colbecks role in arranging financing

for Relativity . . . and/or one of its affiliated entities, RKA and Colbeck executed a

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confidentiality agreement pursuant to which they could exchange information regarding RKAs
potential participation in Relativitys P&A facility.8 That same day, Aho held a call with RKA,
in advance of which Aho provided various documents relating to the proposed P&A facility,
including a 33-slide investor presentation titled Relativity P&A Facility Opportunity, dated
May 14, 2014 (the May Presentation).9 The presentation contained Relativitys logo at the
bottom of every slide, and Kavanaugh knew the content of each and every slide at the time the
May Presentation was transmitted to RKA.
36.

The May Presentation clearly stated that the investment opportunity was a

low-risk loan that would be used solely for the P&A expenses for select films, and no other
purpose whatsoever. Indeed, the opening Executive Summary slide of the presentation set
forth as much:

[t]he structure [of the P&A financing] is as follows: [t]he

proceeds will be used to finance the P&A needs for Relativitys
releases for the next 12 months;

[t]he facility will provide separate/uncrossed P&A loans for the

upcoming films and will be repaid in first position from film
receipts . . .;

[t]he facility caps draws at 70% of each films P&A needs (i.e.,
risk is limited by a 30% first loss position held by Relativity);

[t]he amount of P&A spend on a film . . . includes: [r]elease prints

. . . [and] [m]arketing and [a]dvertising: Trailers, Television, Print
campaign, Radio Outdoors, Publicity campaign, Personal
appearance tours; and

P&A is considered to have a senior risk profile as it is the last

The confidentiality agreement described above is no longer binding and states in relevant part, This Agreement
shall terminate on the earlier of (i) two years from the date hereof and (ii) the execution of definitive
documentation with respect to a Transaction[.]

The presentation contained information provided by a number of sources, including certain members of
Relativity Media, LLC. (May Presentation at 2).

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expense to be funded on a given film before release and the first to

be repaid off-the-top from proceeds from exploitation in all
markets.
(May Presentation at 4) (emphases added).
37.

Throughout the May Presentation, Aho and Relativity represented that the

P&A loans would be the last funds spent before a film is released:
P&A expenses are incurred after the film is in the can (i.e., the
production of the film is complete), and therefore P&A is not
subject to completion risks associated with either the development
or production of motion pictures.
(Id. at 9) (emphasis added).
38.

For the avoidance of any doubt, Aho and Relativity memorialized that

representation in a simple diagram:

(Id. at 9).

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39.

In addition, Colbeck and Kavanaugh represented that (i) RKAs facility

was only for P&A and (ii) that the P&A facility proceeds had flowedand would continue to
flowfrom Relativity directly to the Film SPE for the marketing and distribution of each film:

(Id. at 12).10
40.

Along with the May Presentation, Aho circulated a financial model to

further explain how the P&A facility operated. Consistent with the May Presentation, the model
clearly showed that each Film SPE would draw, receive, and use the P&A funds associated with
the release of each respective film.
41.

10

At the time they made them, Kavanaugh, Aho, and Colbeck knew that

Notably, Kavanaugh and others specifically told RKA that it could and should not send funds directly to the
Film SPEs because Relativitys contracts with its vendors were only with Relativity, which received benefits
and discounts from those vendors by virtue of its purchasing power.

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these representations were a complete fiction and that Relativity had no intention of placing any
restrictions on the use of this money. Indeed, at the time, Kavanaugh, Aho and Colbeck all
clearly understood that the previous P&A facility had been used in precisely this manneri.e.,
as a working capital facilityand the same would be true for RKAs P&A Funds. Again,
Colbeck and its members on Relativitys Board failed to disclose the same to RKA.
42.

On May 24, 2014, on a call with various representatives of RKA, Aho

again referenced and reaffirmed the representations in the May Presentation, emphasizing the
senior risk profile of the P&A facility because P&A would be the last expense funded and
the first expense repaid. The May Presentation and other representations made to RKA were
(again) in line with a prototypical P&A facility, yetas was later discoveredwere flatly
contradicted by Kavanaugh, Beckman, Colodne, and Ahos true intentions. Indeed, each knew
that the previous P&A facility had never operated in such a manner, and would not for RKA,
either.11
43.

11

On May 30, 2014, on behalf of Kavanaugh and with Colbecks blessing,

Indeed, in its own court filings, Relativity has repeatedly admitted that it never earmarked funds exclusively for
P&A expenses, and routinely drew upon P&A funds for other purposes. See, e.g., Complaint, Relativity v. RKA
Film Financing, LLC, 23, 33 ([U]nder [its prior] facilities . . . Relativity was allowed to and did draw funds
against the P&A Expenses budgeted [for general corporate purposes] . . . The funds received from the RKA
P&A Facility [were] used no differently than [had] been customary since 2012); 7 ([That] those [P&A
Funds] were supposed to have been specifically held earmarked for payment of particular incurred print and
advertising expenses [is] a notion that contradicts the terms of the lending facility and the parties past
practices.) Even Relativitys own consultant, Tim Coleman of The Blackstone Group, in affidavits submitted
in Bankruptcy Court, initially stated incorrectly (although understandably) that Relativity used RKAs P&A
facility to finance the print and advertising budgets associated with films produced and distributed by
[Relativity]; a statement he and Relativity were forced to retract given its clear falsity. Compare Declaration
of Timothy R. Coleman in Support of Debtors Motion for Entry of Interim and Final Orders (I) Authorizing the
Debtors to (A) Obtain Post-Petition Financing and (B) Use Cash Collateral; (II) Granting the Prepetition
Lenders Adequate Protection; (III) Scheduling a Final Hearing; and (IV) Granting Related Relief, In re
Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 24 14-15 n.2, July 30, 2015,
with Amended Declaration of Timothy R. Coleman in Support of Debtors Motion for Entry of Interim and Final
Orders (I) Authorizing the Debtors to (A) Obtain Post-Petition Financing and (B) Use Cash Collateral; (II)
Granting the Prepetition Lenders Adequate Protection; (III) Scheduling a Final Hearing; and (IV) Granting
Related Relief, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 257 14, Aug.
21, 2015.

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Aho provided RKA with an updated version of the May Presentation. That presentation repeated
Colbecks and Relativitys earlier (mis)representations regarding the P&A facility, and put a
gloss on the potential P&A investment, describing it as one in which (i) the P&A Funds would
be restricted and segregated, (ii) the P&A Funds had been and would be funded through
Relativity to the Film SPEs solely for their use on P&A expenses, and (iii) RKA would be
exposed to minimal risk because it would provide the last in and first out funding.
44.

Also on May 30, 2014, Aho held a conference call with representatives of

RKA, as well as Relativity, including Wilson and Matthews. On the call, Aho, Wilson,
Matthews, and RKA discussed and reaffirmed the components of the P&A facility, even though
Aho and the Relativity crew knew them to be false. Aho explained that the funds would be
loaned and specifically earmarked for P&A expenses related to films scheduled for release
(typically 90-120 days from when the funds were drawn) by the Film SPEs and that they would
be repaid first out of box office and other proceeds related to those films. When the topic of
Relativitys financial statements or projections was broached, Matthews became irritated,
insisting that such information was immaterial to RKAs investment decision because the P&A
facility, by its very nature, would fund only narrow asset-backed loans, the repayment of which
would not depend on Relativitys financial performance or stability.
45.

On June 2, 2014, in an effort to emphasize the low risks associated with

the P&A facility, Aho provided RKA with projected earnings for Relativity through 2016,
reflecting strong financial performance. During these discussions, however, Colbeck knew of
but actively conspired to concealRelativitys poor financial condition and intent to
misappropriate the P&A Funds to prop up the Ponzi scheme.
46.

Communications between RKA and Aho, Matthews, and Wilson

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continued through June 2014. For example, Matthews and Wilson were frequently called upon
to bolster the scheme by providing false assurances to RKA that the loans were low risk, assetbased loans. Indeed, on numerous calls, Aho and Matthews stressed that the investments were
bullet proof, because the funds would be used solely to bring films to market, and RKA would
be first in line to be paid with proceeds from each films release. These representations were
sanctioned byand at the behest ofboth Kavanaugh and Colbeck.
47.

During this period, Kavanaugh not only spoke directly with RKA about

the financial health of Relativity, but also laid out his plans for how he planned to use the P&A
facility. Specifically, Kavanaugh explained that Relativity had between eight and ten films on
its release schedule, and that these P&A funds would be earmarked for marketing and
distributing those films.
48.

Thus, throughout May and June 2014, through emails, presentations, and

numerous telephone calls with RKA, Kavanaugh, Colbeck, Wilson, and Matthews crafted and
perpetuated a pure fiction to induce RKA to fund Kavanaughs scheme.
49.

In late June, after two months of negotiations, RKA agreed to finance the

P&A of certain Relativity films in an amount of $58.5 million.

B.

Kavanaugh and Colbeck Memorialize Their Misrepresentations to RKA

50.

On June 30, 2014, RKA and certain Film SPEs (with Kavanaugh as their

signatory) entered into a P&A financing agreement (the Funding Agreement). As explained
below, the Funding Agreement memorialized in writing each of the promises Kavanaugh,
Matthews, Wilson, Colbeck, and Aho made to RKA throughout April, May, and June 2014.
Specifically:
a.

Further underlying the representations of Kavanaugh, Matthews,

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Wilson, Colbeck, and Aho that RKA was specifically (and only) financing a P&A facility that
provided separate/uncrossed P&A loans, the Funding Agreement states that the P&A Funds
could be used only for P&A expenses incurred by a specific Film SPE of a specific qualifying
film. Specifically, Section 1.3 of the Funding Agreement provides that, other than fees, costs,
expenses, and refinancing of pre-release loans, the proceeds of each advance of a loan [of P&A
Funds] . . . shall be made available solely for . . . [t]he payment or reimbursement of P&A
Expenses paid, committed or incurred (or to be paid, committed or incurred) by the [Film SPEs]
for the P&A Picture for which such Loan was borrowed . . . . (emphasis added). For the
avoidance of any possible doubt, it further provides that the P&A Funds shall not be made
available for any other purpose. (emphasis added).
b.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho, that P&A expenses were limited to the standard costs and expenses
related to the release of prints of the films and associated marketing and advertising expenses,
the Funding Agreement expressly defines P&A Expenses as the aggregate Release Print
Costs and Advertising Costs for the P&A Picture.12
c.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A loans held a senior risk profile and (accordingly) were
last in, first out financing, the Funding Agreement set forth an explicit payment priority (or
waterfall) structure.13
d.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A loans were discrete asset-backed loans, the repayment
12

See Funding Agreement 15.71; see also id. 15.97 (Release Print Costs); 15.3 (Advertising Costs); 15.74
(P&A Picture).

13

See Funding Agreement 2.2 (Interest; Payment Priority).

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of which did not depend on Relativitys financial performance or stability, but rather only the
gross receipts of a specific qualifying film, the Funding Agreement required Relativity to
maintain both specific collection and cash management protocols as to each qualifying film,14
and separate books and records for each Film SPE in accordance with GAAP (i.e., Generally
Accepted Accounting Principles).15
e.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that RKA would receive a perfected first lien security interest in the
proceeds of each specific qualifying film, the Funding Agreement set forth that each P&A loan
was secured by a security interest in the corresponding qualifying film.16
f.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho as to when a given film qualified to receive P&A Funds, the Funding
Agreement states that said funds could only be drawn after the production of a specific
qualifying film was complete. For the absence of any doubt, the Funding Agreement required
that Relativity affirm in writing that a specific qualifying film met certain Eligibility Criteria and
had a fixed theatrical release date.17 Further, the Funding Agreement states that no P&A Funds
would be borrowed for any film with a theatrical release date later than September 30, 2015.18
g.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that both RKA and Relativity had skin in the game, sharing the

14

See Funding Agreement 6 (Collection and Cash Management).

15

See Funding Agreement 9.1 (Books and Records).

16

See Funding Agreement 7 (Security Interest).

17

See Funding Agreement 15.35 (defining Eligibility Criteria); id. at Ex. P-2 (setting forth model P&A Picture
Declaration Notice).

18

See Funding Agreement 3.2(b)(ii).

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financial obligation to pay for the marketing of a given film along with the potential returns of
providing that P&A financing, the Funding Agreement states that RKA would provide financing
of no more than 72.5% of the P&A expenses for each film released by an applicable Film SPE,
reserving the remaining 27.5% of those P&A expenses for Relativity.19
h.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that the P&A Funds would only be used in accordance with the terms
represented to RKAand as documented in the Funding Agreementthe Funding Agreement
required that each time a Film SPE requested P&A Funds from RKA, the Film SPE would
submit a Borrowing Certificate in which the Film SPE restated and reaffirmed the same.20
Thus, Kavanaugh promised, through each Film SPE, that he would adhere to the clear
restrictions on the use of the P&A Funds on at least two separate occasions: first, when he
signed the Funding Agreement on behalf of a Film SPE, and again when the Film SPE requested
and drew on P&A Funds loaned by RKA.
i.

Further underlying the representations of Kavanaugh, Matthews,

Wilson, Colbeck, and Aho that each P&A loan was made to, and for the benefit of, a specific
Film SPEand not Relativity at largethe Funding Agreement explicitly contemplates RKAs
19

See Funding Agreement 1.1 .

20

See Funding Agreement 1.2, 3. As of the date of each borrowing, each Film SPE was required to promise
that:
[T]he representations and warranties set forth in the [Funding Agreement] . . .
are on the date hereof and shall be true and correct in all material respects on
the Funding Date of the Pre-Release Loan contemplated by this Borrowing
Certificate (except to the extent (i) that such representations and warranties
expressly relate to an earlier date, in which case such representation and
warranty was true and correct in all material respects as of such earlier date, or
(ii) that any such representation or warranty is qualified by reference to a
schedule, in which case such representation or warranty is true and correct in all
respects) with the same effect as if made on and as of such date. . . .
3 (emphasis added). Each of these Borrowing Certificates was personally signed by either Kavanaugh and/or
Shamo, Relativitys Co-COO, on behalf of each Film SPE.

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wiring funds to a specific Borroweri.e., a Film SPE.21

51.

In sum, each and every material promise and representation made to RKA

by Kavanaugh, Matthews, Wilson, Colbeck, and Aho were memorialized in the Funding
Agreement (and other related documents)viz., (i) that the Film SPEs were the only entities that
could incur debts for which P&A Funds could be applied; (ii) that the Film SPEs could only
spend the P&A Funds on P&A expenses for their specific films; and (iii) that only Film SPEs
releasing movies prior to September 30, 2015 could qualify to draw the P&A Funds. RKA relied
on these reaffirmed representations in continuing to make the P&A Funds available to the Film
SPEs. A contrary understanding would have run counter to Kavanaugh, Matthews, Wilson,
Colbeck, and Ahos explicit and repeated representations to RKA, the plain terms of the Funding
Agreement, and the very justification for this financing structure (not to mention the
unambiguous naming of the funding as a P&A facility).
52.

Of course, as with the oral and written representations made to RKA in

April, May, and June 2014, each of the representations made in the Funding Agreement were
false when made. Kavanaugh, Colbeck, and their cohortsAho, Beckman, Colodne, Wilson,
Matthews, Shamo, Tooley, and Mnuchinall knew it too, and failed to disclose the same to
RKA.22

21

See Funding Agreement at Ex. B-1 & Ex. A thereto. Further, as referenced above, see supra n.10, Kavanaugh
himself required RKA to send the P&A Loans directly to Relativity. He further instructed RKA that it could
and should not send funds directly to the Film SPEs, because Relativitys contracts with its vendors were only
with Relativity (and not a Film SPE), which received benefits and discounts from those vendors by virtue of its
purchasing power.

22

Notably, this is not the first time Kavanaugh has used cash that is supposed to be earmarked and segregated for
general corporate purposes. In fact, Relativitys own crisis and turnaround managers, FTI Consulting, Inc.,
noted in bankruptcy filings: Mr. Kavanaugh continues his charade . . . in an attempt to withhold FTIs fees, to
instead use that segregated cash on the operating expenses of [Relativity] . . . . Motion of FTI Consulting, Inc.
for Entry of an Order (I) Allowing an Administrative Expense Claim for Fees and Expenses and (II) Compelling
the Debtors for Immediate Payment of FTIs Fees and Expenses, In re Relativity Fashion, LLC, et al., Case No.
15-11989 (S.D.N.Y. Bankr.), Dkt. 1135, 94-95, Dec. 16, 2015.

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53.

After closing the P&A facility with RKA, Kavanaugh, and Colbeck

immediately re-approached RKA about providing additional funding under the facility. In July,
Kavanaugh and Aho contacted RKA to inform RKA that, miraculously, Relativity was planning
to release up to 15 films in 2015, as opposed to its previous estimate of between eight and ten
films. According to Aho and Kavanaugh, RKA had a unique opportunity to upsize its $58.5
million investment by an additional $22.5 million for the release of these additional films. Based
again on Aho and Kavanaughs representations, RKA increased its investment in August 2014.
54.

In reality, both Kavanaugh and Aho knew full well that RKAs upsized

investment would also not be used to fund P&A on any additional films. Instead, the new P&A
Funds would (again) be treated as working capital and spent on general corporate expenses, or
otherwise siphoned into the coffers of Kavanaugh and his cronies at Colbeck.
55.

Between June 30, 2014 and March 17, 2015, RKA made P&A Funds

available for ten Film SPEs to finance the P&A for ten specific films: November Man, Best of
Me, Beyond the Lights, Woman in Black 2, Black or White, Lazarus Effect, Solace, Masterminds,
Before I Wake, and Disappointments Room. In each instance, Kavanaugh and the executives at
Relativity repeatedly represented to RKA that the P&A Funds were being used solely by the
Film SPEs for P&A expenses incurred by each respective Film SPEs film, and therefore not as
Relativitys working capital. Further, the members of the Relativity board, including Beckman,
Colodne, and Mnuchin, knew (or were negligent in not knowing) exactly how these funds were
being misappropriated.
C.

Kavanaugh and Colbecks Scheme Begins to Unravel

56.

In or about February 2015, representatives of RKA participated in a call

with Wilson regarding Relativitys planned release schedules for four films for which P&A
Funds had been drawn but that had not yet been released. Wilson stated that Relativity had
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begun shifting a number of film release dates into the spring and summer of 2015 due to
unspecified delays, notwithstanding the fact that Relativity had already drawn several millions of
dollars of P&A Funds for two of the unreleased films: Solace and Before I Wake.
57.

By mid-March 2015, Kavanaugh caused two additional Film SPEs to draw

upon the remaining P&A Funds to fund P&A expenses for their films: Masterminds and
Disappointments Room (together with Solace and Before I Wake, the Unreleased Films).23
The total amount of P&A Funds drawn upon for the Unreleased Films totaled approximately
$73.6 million.
58.

In late March 2015, representatives of RKA became aware of additional

but inconsistent information related to the scheduled release dates of certain Relativity films.
Specifically, RKA learned that Relativity purportedly planned to release multiple films
throughout September 2015, including some combination of the Unreleased Films and other
films for which RKA had not provided P&A funding. That information caused obvious concern
to RKA. First, the prospect of releasing multiple films within close proximity seemed like a
dubious business strategy, particularly given the likelihood that the near-contemporaneous
release of an Unreleased Film and another Relativity film might cannibalize each others box
office receipts. Second, Relativity might seek to use RKAs P&A Funds to market nonUnreleased Films.
59.

23

On April 1, 2015, RKA again discussed the release schedule with, among

Earlier the same month, representatives of RKA spoke with Wilson to explain that, pursuant to contractual
terms dictating the period of time for which such P&A Funds could lay idle in the P&A facility, RKA would be
required to retire any remaining P&A Funds not drawn upon by the Film SPEs. (In other words, the funds had
to be withdrawn by the Film SPEs or else they would be returned to the investors in RKA and removed from the
P&A facility.) However, RKA made clear during that call that its expectation was that any funds withdrawn
would be held on each Film SPEs books and allocated pursuant to Kavanaughs and Colbecks representations
and the clear terms of the relevant contracts, i.e., for P&A expenses only.

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others, Wilson. Skeptical of their prior claims regarding release dates of the Unreleased Films
and the underlying reasons for those delays, RKA requested that Relativity account for the use
and whereabouts of the P&A Funds. During that conversation, Wilson stated, for the first time,
that all cash is fungible, and therefore Relativity had a right to use the P&A Funds as it
pleased.24 Wilson further explained that, in light of Relativitys embrace of the fungible
dimension of funds in its possession (and specifically, that of RKAs P&A Funds), Relativity
purportedly could not trace when and how (or if) it had spent the tens of millions of dollars in the
P&A facility. Representatives of RKA immediately requested that Wilson provide RKA with
the then-current P&A spend and budget for each of the Unreleased Films, all of which, according
to Wilson, were still slated to be released by September 30, 2015.
60.

On April 6, 2015, Wilson and Matthews provided minimal information

regarding the P&A funds drawn for the Unreleased Films. The information raised a troubling
fact: while Kavanaugh and his cohorts had caused the Film SPEs to draw $73.6 million in P&A
Funds (net) for these four filmsthereby substantially depleting RKAs P&A Fund facilitythe
four pertinent Film SPEs had spent, in total, roughly $1.7 million on P&A, even though P&A
was the only permissible use for these loans.
61.

For instance, in August and September 2014, acting at the direction of

Kavanaugh and his cronies, and through misrepresentations to RKA, the Film SPE RML Somnia
Films LLC borrowed a combined $17,580,841 (net fees) in P&A Funds to spend on P&A for
Before I Wake. According to Relativitys reports, RML Somnia Films LLC had only paid
$161,279 for P&A, meaning it was unable to account for at least $17.4 million (or 99%) of the

24

It was also during this time period that Wilson requested that RKA call first before putting concerns it had
regarding Relativity or its P&A Funds in writing through email communications. While Wilson tried to cease
leaving a paper trail, Kavanaugh and others at Relativity clearly did not get the memo.

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P&A Funds it had borrowed.

62.

Similarly, in December 2014, acting at the direction of Kavanaugh and his

cronies, and through misrepresentations to RKA, the Film SPE RML Solace Films LLC
borrowed $13,410,510 (net fees) in P&A Funds to spend on P&A for Solace. According to
Relativitys reports, RML Solace Films LLC had paid no P&A, meaning it was unable to
account for $13,410,510 or (or 100%) of the P&A Funds it had borrowed.
63.

Then, in March 2015, acting at the direction of Kavanaugh and his

cronies, and through misrepresentations to RKA, the Film SPE Armored Car Productions LLC
borrowed $25,759,250 (net fees) in P&A Funds to spend on P&A for Masterminds. According
to Relativitys reports, Armored Car Productions LLC had paid $1,364,929 million for P&A,
meaning it was unable to account for at least $24.4 million (or 95%) of the P&A Funds it had
borrowed.25
64.

The same month, acting at the direction of Kavanaugh and his cronies,

and through misrepresentations to RKA, the Film SPE DR Productions LLC borrowed
$16,824,621 (net fees) in P&A Funds to spend on P&A for Disappointments Room. According
to Relativitys reports, DR Productions LLC had paid $218,855 for P&A, meaning it was unable
to account for at least $16.6 million (or 99%) of the P&A Funds it had borrowed.
65.

As summarized below, according to the materials provided to RKA, of the

approximately $73.6 million in P&A Funds loaned to the four Film SPEs, at least $69.4 million
of these funds had never been spent on P&A and, therefore, was supposed to have been
untouched by Kavanaugh, his cronies, Relativity, or any other Film SPEs not party to the

25

That Kavanaugh had caused both the March withdrawals was expected given RKAs communications with
Wilson; however, RKA was shocked to discover that Kavanaugh, Wilson, and Matthews could not account for
the whereabouts of any of their March withdrawals just a few short days later.

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Funding Agreement:

$28,000,000
$29,923,100
$38,000,000
$25,935,225

P&A FUNDS
PROVIDED
(NET FEES)
$13,410,510
$16,824,621
$25,759,250
$17,580,841

EXPENSES
PAID
$0
$218,855
$1,364,929
$161,279

MINIMUM
UNSPENT
P&A FUNDS
$13,332,085
$16,493,834
$23,646,180
$15,928,245

$121,858,325

$73,575,222

$1,745,06327

$69,400,344

P&A

FILM

BUDGETED26

Solace
Disappointments Room
Masterminds
Before I Wake
TOTAL
66.

P&A

The fact that $69.4 million (over 94%) of the P&A Fundsor about 99%

of the Unreleased Films total P&A budgetshad not been spent on P&A raised obvious
questions for RKA as to what Kavanaugh and his team were doing with these funds and how
they were using them. What RKA learned a few days later was even more troubling.
67.

On April 9, 2015, representatives of RKA spoke with Wilson and

Matthews to again discuss the continuing delays in release schedules for the Unreleased Films.
During that phone call, Wilson and Matthews stated that Kavanaugh and Relativity were
principally focused on releasing a limited number of films, including Masterminds, Autobahn,
and Kidnap. Wilson and Matthews did not mention the remaining three Unreleased Films, for
which RKA had already provided nearly $50 million in P&A Funds for supposed imminent
releases. When later pressed by RKA, Wilson and Matthews responded that, notwithstanding
prior representations to the contrary, (i) Solace would not be released, and (ii) Disappointments
Room and Before I Wake would likely not be released until after September 30, 2015.

26

P&A Budget as represented to RKA by Relativity at the time of each draw of P&A Funds.

27

Recent communications with representatives of the Debtors in Relativitys Chapter 11 Proceeding in the
Southern District of New York confirm that as of July 10, 2015, $3.08 million had been spent on P&A for these
four films, and as of October 27, 2015, only $3.9 million had been spent on P&A for the same films. See
Relativity P&A Schedules, dated July 10 and October 27, 2015. Notably, the Debtors in that proceeding
received debtor-in-possession financing and other cash injections; the additional P&A spending between July
and October, therefore, did not even utilize RKAs P&A Funds.

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68.

If this were true, it meant that Kavanaugh and Relativitys Board of

Directors had caused three of the Film SPEs to draw nearly $50 million in P&A Funds for
movies that either would not be released by the agreed-upon deadline, or worse, would never be
released at all. Of course, a film that is never slated for release would hardly require millions in
P&A Funds, a fact that Kavanaugh and Colbeck very well knew, but kept hidden from RKA.
69.

Equally troubling was the fact that, in the case of Disappointments Room,

Kavanaugh and his cronies had represented just three weeks earlier that the film would be
released by September 30, 2015. This representation, made numerous times, qualified the
relevant Film SPE to draw upon nearly $17 million in P&A Funds during March 2015. Upon
information and belief, at the time they made these representations and directed the Film SPE to
draw upon these funds, Kavanaugh and his cronies knew (or were negligent in not knowing) that
Disappointments Room would not be released prior to September 30, 2015. Nonetheless, they
represented as much in order to draw upon the P&A Funds and convert them for their own use.
70.

In light of these facts, the next day, on April 10, 2015, RKA

representatives contacted Kavanaugh, Shamo, and others to (i) verify that all four Unreleased
Films would, in fact, be released on time, and (ii) ensure that the $69.4 million in P&A Funds
that the Film SPEs had borrowed but had yet to spend were available, segregated, and earmarked
in Relativitys bank account for use solely on the P&A of those films, as Kavanaugh, Wilson,
Matthews, Colbeck, and Aho had promised time and time again. During that call (as on
subsequent calls on April 11 and April 12, 2015) Kavanaugh and his team scoffed at RKAs
concerns, and stated that Wilson and Matthews had been mistaken when they represented that all
four films would not be released as scheduled. Kavanaugh also stated that the relevant P&A
Funds were safe and accounted for. Indeed, Kavanaugh represented that Relativity was

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financially sound and had $100 million in available cash. All of these statements were baldfaced lies. When RKA attempted to verify these representations, particularly those relating to
the Film SPEs collective $69.4 million in supposedly unspent P&A Funds, Kavanaugh and his
cronies could provide no documents to support their claims. Rather, the $69.4 million had
completely vanished from the books of each of the Film SPEs.
71.

During these very same phone calls, Kavanaugh also assured multiple

RKA representatives that Relativity was executing an imminent financing deal that would
provide additional funding for Relativity. According to Kavanaugh, RKA had nothing to worry
about because he was marching in step with Colbeck to source additional financing, which was a
sure thing given that those at Colbeck had signed [his] ketubah28. Kavanaugh said this deal
would be completed within the week, that RKA had nothing to worry about regarding its P&A
Funds, and that Relativity was interested in keeping RKA as a long-term investor. On April 12,
when Kavanaugh was pressed for a solution to RKAs concerns regarding the misuse of its P&A
Funds, he even stated that he believed he had a group, which included himself, that would move
fast . . . and just buy out RKA. That never happened. As RKA would soon find out, all of these
statements and representations were false and part of a subterfuge designed to placate RKAs
valid concerns.
72.

Also on April 12, 2015, Kavanaugh stated to an RKA representative that

Relativity had $90 million of cash on its balance sheet and the following outstanding payables:
(i) $40 million due within 30 days; (ii) $20 to $30 million due within 31 to 60 days, but with
120-day terms; and (iii) nothing outstanding beyond then. In addition, Kavanaugh stated that he
expected Relativity to receive revenue of about $29 million within the next 30 days and $100

28

A ketubah is a type of prenuptial agreement considered an integral part of a traditional Jewish marriage.

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million within the next 60 days. As Kavanaugh well knew, these statements were false and
misleading when he made them.
73.

On April 13, 2015, under increasing pressure to provide substantive

responses to RKAs valid concerns, Kavanaugh explained via email to RKA that he could not
field further questions on the subject because he was in the final stretch of closing a $550
million refinancing of the company and would need to balance RKAs concerns with his
fiduciary duties as a board member and officer of Relativity to push forward with that closing.
All of these statements were lies.
74.

That same day, Kavanaugh abruptly stopped taking RKAs calls.29 During

a call with an RKA representative, however, Beckman, discussing potential paths forward with
RKA, acknowledged that Kavanaugh and Relativity had used RKAs P&A Funds for improper
purposes. On information and belief, Matthews, Tooley, Shamo, and the Board of Directors
participated in each of these funding decisions and knew precisely how Relativity had intended
to use these funds (or were negligent in not knowing)both when Relativity entered into the
Funding Agreement with RKA and when it withdrew P&A Funds. At that moment, the falsity of
Kavanaugh, Wilson, Matthews, and Ahos statements was immediately clear: Kavanaugh and
Colbeck had never intended that the P&A Funds be used solelyor even predominantlyfor
P&A.
75.

29

On April 14, 2015, as the nature and scope of Colbeck and Kavanaughs

Apparently, Kavanaugh routinely exhibited similar behavior following the collapse of his Ponzi scheme. As
reported by consultants FTI in public bankruptcy filings, Mr. Kavanaugh became increasingly unavailable . . .
focusing even more on his attempt to woo new investors, ignoring the immediate liquidity concerns of
[Relativity] . . . . Motion of FTI Consulting, Inc. for Entry of an Order (I) Allowing an Administrative Expense
Claim for Fees and Expenses and (II) Compelling the Debtors for Immediate Payment of FTIs Fees and
Expenses, In re Relativity Fashion, LLC, et al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1135 19, Dec. 16,
2015. Indeed, FTI worked with Relativity to develop a bankruptcy plan [d]espite Mr. Kavanaughs
obstructionist efforts. Id. at 20.

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scheme came into focus, RKA sent Shamo a letter requesting access to inspect Relativitys books
and records, in accordance with the Funding Agreement. In the letter, RKA laid out its concerns
and the reason for the inspection:
RKA has now received information and documents suggesting that
Relativity Media and the Relativity [Film SPEs] have misused and
misallocated RKA funds. In particular, we have well-founded
concerns that Relativity Media and the Relativity [Film SPEs] have
drawn upon RKA funds allocated for certain financing and
advertising expenses related to Relativity films and instead
misused and misapplied those funds to cover general corporate
expenses. . . . RKA believes it is in the best interest of both
Relativity Media and RKA to understand how these drawdowns
were allocated in order to resolve these concerns immediately
before any further RKA funds are drawn upon, allocated, or spent.
76.

Counsel for Relativity replied the same day, but neither denied nor even

addressed RKAs suspicion that the P&A Funds had been used for Relativitys general corporate
purposes. Instead, Relativity challenged the propriety of RKAs request, alleging Relativity had
not been provided reasonable notice to prepare for an inspection. Oddly, the letter also
demanded proof that RKA was entitled to make the inspection demand.
77.

On April 15, 2015, RKA sent two more letters to Relativity, again

attempting to review pertinent books and records. Both letters demanded an inspection on
April 16, 2015. One letter was sent by RKAs President, and the other by RKAs attorneys. The
former reiterated RKAs concerns about the misuse and misapplication of RKA funds, [neither]
of which have been substantively addressed by Relativity. Relativity again responded that it
had insufficient time to prepare for the inspection.
78.

Sensing that Kavanaugh, Wilson, Shamo, and Matthews were attempting

to hide Relativitys corporate books from review in order to prolong their scheme, RKA
requested that, at a minimum, Relativity confirm that Relativity, LLC does not assert, and will

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not assert, any property right or other claim of ownership or interest in the funds advanced to the
various picture specific [Film SPEs] by RKA. Relativity refused to address RKAs concerns
that (i) the P&A Funds had been misappropriated, and (ii) Relativity claimed ownership over the
unused P&A Funds.
79.

On April 17, 2015, RKA again attempted to inspect Relativitys books and

records and confirm (i) the whereabouts of the purportedly unused P&A Funds, and (ii) whether,
as RKA feared, Kavanaugh and his cronies had converted the P&A Funds drawn by the Film
SPEs, which Relativity had no authorization to spend. Through counsel, RKA wrote:
[I] am asking, for a third time, in writing, that Relativity, LLC
confirm that it does not assert and will not assert any property right
or other claim of ownership or interest in the funds advanced to the
various [Film SPEs] by RKA.
Relativity ignored this request.
80.

Ultimately, on no less than six occasions, RKA asked both Kavanaugh and

his cronies to confirm that (i) Relativity held the RKA P&A Funds solely for P&A for the
qualifying films; (ii) the Film SPEs used the P&A Funds only for P&A; and (iii) Relativity made
no claim to the $69.4 million in unused P&A Funds held by Relativity for use by the Film SPEs.
On each occasion, however, Relativity refused to confirm or deny these facts. Such deliberate
obfuscation only further fueled RKAs need for an explanation from Kavanaugh, Wilson,
Matthews, Tooley, and Shamo of where RKAs P&A Funds had gone. In fact, Kavanaugh and
his teams non-response all but confirmed RKAs suspicions that these funds had been converted
and diverted for unauthorized purposes.
81.

Finally, on April 20, 2015, after RKA threatened litigation, Kavanaugh,

Shamo, Wilson, and Matthews purportedly permitted RKA to inspect Relativitys records in
order to confirm that (i) Relativity would (and had always planned to) release all four of its films

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prior to September 30, 2015, and (ii) all of the P&A Funds were safe and accounted for on
RKAs books. Kavanaugh, Shamo, Wilson, and Matthews also promised to (i) make a formal
investor presentation related to Relativity that RKA assumed would include basic financial
information; (ii) provide detailed information related to the flow of P&A Funds from RKA to
Relativity and the use of said funds; and (iii) deliver the preliminary film budgets and schedules.
82.

However, minutes before RKAs representatives were to begin their

inspection, Kavanaugh and his cronies reneged on their offer and cancelled the presentation.
Instead, RKAs representatives were moved to a conference room full of promotional materials
but devoid of any financial information that spoke to the whereabouts of the $69.4 million in
missing funds. Further, none of the materials provided any real clarity as to Relativitys
financial stability. What limited information was provided contained gross inaccuracies and
arithmetical errors that made it apparent that information had been deleted and manipulated in
violation of various agreements with RKA. Material modifications to P&A budgets were also
apparent from the inspection. Once again, Kavanaugh and his cronies blamed their inability to
produce basic financial statements on Relativitys efforts to secure additional funding,
notwithstanding the fact that Relativity must have had financials prepared and ready as part of
securing this additional funding.
83.

After the failed inspection, RKA contacted Relativity, stating:

So that there is no confusion, I will ask again: where have the tens
of millions of dollar[s] gone? To date, none of the materials you
have provided answer this question that has been asked, re-asked,
and re-asked again.
84.

Relativity offered no response, but the answer was clear: Kavanaugh and

his cronies had converted RKAs investment to keep Kavanaughs otherwise cash-strapped
company afloat. The funds had either disappeared entirely, or were actively being converted by

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Kavanaugh and his cronies. On information and belief, such uses included:
a.

Relativitys general business expenses, such as salaries, bonuses,

interest payments on other loan obligations, debt service, cash for other films expenses and
contracts, and the funding of Relativitys sports agency and television studio;
b.

the personal enrichment of Kavanaugh and his cronies, including

Kavanaughs multi-million dollar annual salary, and Wilson, Shamo, Matthews, Tooley,
Colodne, and Beckmans annual compensationwhich totaled at least $20 million in the last
year, including millions on lavish travel and expenses; and
c.

the purchase, rental, payment, and maintenance of Kavanaugh,

Shamo, Tooley, Wilson, and Matthews personal indulgences, such as the five personal
helicopters purchased by Kavanaugh for his daily commute to work and his multi-million dollar
Malibu mansion.
85.

As stated above, throughout this period, Kavanaugh called several

representatives of RKA to try to dissuade them from digging deeper into his misdeeds and those
of Colbeck, Beckman, Colodne, Aho, Wilson, Shamo, Tooley, and Matthews. In each instance,
Kavanaugh assured these representatives that Relativity had cash on hand, was financially sound,
and had not misappropriated or converted the P&A Funds. Suspiciously, Kavanaugh gave
inconsistent explanations to these representatives when discussing the amount of cash available
at Relativity. To one representative, Kavanaugh reported $90 million; to another, he reported
$50 million; and then, mirabile dictu, he produced a balance sheet purportedly showing an
entirely different (and markedly higher) amount of cash on Relativitys balance sheet. These
representations, and similar representations proffered by Shamo and others, were designed to
provide a false sense of security to RKA and stop RKA from discovering what Kavanaugh and

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his cronies had done with tens of millions of RKAs P&A Funds. At the very least, Kavanaugh,
Wilson, Shamo, and Matthews negligently misrepresented the cash on hand at Relativity,
knowing RKA would rely on these representations.
86.

In the face of increasing pressure, Kavanaugh finally confirmed that

RKAs P&A Funds had been misused. For example, on a call with an RKA representative,
Kavanaugh admitted that he and others at Relativity had, in fact, directed Relativity to use the
P&A Funds for Relativitys own corporate purposes.
87.

On April 22, 2015, RKA concluded that Kavanaugh and his cohorts

actions constituted a host of misdeeds, including fraud, conversion, negligent misrepresentation,

and breach of the covenant of good faith and fair dealing. Still, even after uncovering their
scheme, RKA refrained from initiating a lawsuit so as to afford Kavanaugh and his cronies every
opportunity to atone for their conduct.
88.

At the same time, RKA knew that Kavanaughs actions also constituted

multiple contractual defaults under the Funding Agreement. RKA refrained from declaring
Relativity in default out of consideration for the fact that such a default would have ripple effects
that would potentially jeopardize the future of Relativity. Specifically, RKA understood that a
default of the Funding Agreement would in turn cause defaults in other Relativity lender
agreements, accelerating Relativitys outstanding debt.
89.

In a good faith effort to aid Relativity, and to allow Kavanaugh and his

cronies to right their wrongs, RKA contacted Relativity and informed it of RKAs continued
concerns. Still, RKA stated its desire to reach an amicable resolution with all parties and, to that
end, informed all parties of its intention to forbear on declaring any defaults or taking any legal
action until April 28, 2015 to give them time to negotiate a resolution. At Relativitys request,

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RKA twice extended its forbearance deadline to give Kavanaugh, his cronies, and Relativity
more time to resolve their dispute without judicial intervention or the declaration of a default and
foreclosure against Relativity. The parties struck a preliminary agreement on or about May 8,
2015.
90.

Numerous times between May 8 and May 30, 2015, agents of Kavanaugh

and his cronies called representatives of RKA to inform them that Relativity had purportedly
struck deals with multiple unnamed third-party investors that would be beneficial to RKA.
Kavanaugh and his cronies also assured representatives of RKA on multiple occasions that
Relativity had plenty of cash on hand to continue operations and was still planning to release all
of the Unreleased Films RKA had funded as scheduled.
91.

Also during these calls, astoundingly, Kavanaugh and his cronies

repeatedly pressed RKA to invest more funds into Relativity or extend RKAs P&A Fund
facility, and blamed the slow pace of finalizing a resolution, in part, on the uncertainty
surrounding RKAs continued involvement as an investment partner. On multiple occasions,
Kavanaugh and his cronies even attempted to make their agreement to certain terms of the deal
contingent upon RKAs continued investment in Relativity. RKA refused to commit during this
period to any further investment in Relativity.
D.

Kavanaughs and Colbecks Ponzi Scheme Collapses

92.

Negotiations continued through May 2015, with all terms for a deal

purportedly finalized by mid-month. During this period, Kavanaugh refused to either:

(i) account for any of the nearly $69.4 million in unused P&A Funds, or (ii) provide or repay any
of these unused P&A Funds to RKA. Kavanaugh and his cronies also continued to assure
representatives of RKA that additional funding to Relativity was on the way, as multiple deals
had allegedly been struck with several financing partners.
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93.

Then, on May 30, 2015, without any warning over the prior two months,

Kavanaugh and his cronies dropped a bombshell: Relativity was insolvent. Moreover, the
company was just hours away from defaulting on its other creditor agreements. Without (yet
another) formal forbearance agreement from RKA, Relativity would be forced to declare
bankruptcy. RKA was baffled by this prospect, as Kavanaugh had repeatedly assured
representatives of RKA that it had plenty of cash to continue operations and was well financed.
94.

But, as Relativitys advisors later admitted to counsel for RKA, Relativity

had made no accounting entries into Relativitys general ledger since April 2015 (or perhaps
earlier).30 Thus, during the time from when RKA was attempting to negotiate in good faith with
Relativity and ascertain the whereabouts of its investments, Kavanaugh, Colodne, Beckman,
Aho, Wilson, Matthews, Tooley, and Shamo either knew the financial statements provided to
RKA, and their representations regarding them, were false when made, or, as officers and
directors, were negligent in not knowing of the falsity of these statements and representations,
and failed to disclose the same to RKA.
95.

In a good faith effort to allow Relativity the chance to avoid bankruptcy,

RKA agreed to negotiate two additional forbearance agreements that would provide Kavanaugh
and his cronies a one-month extension to seek alternative funding for Relativity.
96.

On June 5, 2015, minutes before executing the first forbearance

agreement, Relativity notified RKA that it had insufficient cash to actually fulfill the terms of its
forbearance agreements with RKA. More specifically, Relativity had only $30 million in cash
on hand. Were Relativity to provide any cash to RKA to consummate their deal, it would cause

30

These advisors also later conceded that Relativitys books were in such disrepair that in September 2015, they
had been forced to begin the process of reconstructing Relativitys financial statements from scratch.

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Relativity to violate a minimum liquidity requirement imposed by its other lenders.

97.

Relativitys sudden illiquidity was yet another surprise to RKA, as only

two months earlier, Kavanaugh represented that Relativity had well over $90 million in cash on
its balance sheet. Of more concern, of course, was that if Relativity only had $30 million in total
cash to its name, Kavanaugh, Wilson, and Matthews, with the help of Colbeck and Aho, had
already converted most or all of the $69.4 million of RKAs unspent P&A Funds. It also meant
that Kavanaugh and his cronies representations to RKA regarding cash on hand were
completely and utterly false and that Kavanaugh, Wilson, Matthews, Beckman, and Colodne,
among others, knew of these falsehoods or were negligent in not knowing of their falsity at the
time made.
98.

Equally concerning, individuals at RelativityKavanaugh, Wilson,

Tooley, Shamo, and Matthewsand Colbeck all knew of Relativitys imminent insolvency well
before the bankruptcy. Indeed, by March 2015, Kavanaugh, his team, and Colbeck all knew
about the impending cash shortfall. Thereafter, with full knowledge of this material fact,
Kavanaugh and his officers caused two Film SPEs to draw nearly $43 million in P&A Funds
from the RKA facility that very same month. Thus, at the time of these draws, Kavanaugh and
his cronies knew that Relativity could not possibly continue to operate but for the improper use
of RKAs P&A Funds. Still, they withdrew these funds without saying a word to RKA about
their intention to use them as a life raft during their March call discussing the withdrawal.
Kavanaugh and his cronies, having no intention of using these P&A Funds as promised, likely
converted these funds immediately after drawing upon them. This, of course, explains why only
$1.7 million of the $73.3 million in P&A Funds had been spent on P&A. Kavanaugh and his
cronies had used the remaining $69 million in P&A Funds to mislead investors and keep the

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company afloat.
99.

Notwithstanding these revelations, RKA understood that refusing to

forbear could force other creditors to declare a default on interrelated loan agreements and send
the company into bankruptcy that same day. RKA, therefore, in good faith, agreed to forgo all
immediate cash payments from Relativity and forbear for an additional week. RKA executed a
second forbearance, also on June 5, 2015, whereby Kavanaugh agreed to, among other things,
make a good-faith repayment of $7.5 million of the supposedly unused P&A Funds to RKA, by
June 29, 2015. As collateral for this payment, Kavanaugh pledged his membership shares in
RKA.
100.

Throughout June 2015, RKA kept in near-daily communication with

representatives of Relativity, who repeated that Kavanaugh was on the verge of closing
additional financing. Indeed, as stated by these representatives, terms had been reached, papers
had been signed, and funds had begun to come in (or would be coming in shortly). June 29,
2015 came and went with no payment from Relativity. Rather than take immediate actionas it
was clearly entitled to under the June 5 agreementRKA worked over the next two weeks to
help Relativity broker a possible deal to avoid bankruptcy.
101.

Also during this period, these representatives of Relativity informed RKA

that despite assurances to the contrary, not a single one of the films for which RKA had provided
nearly $75 million in P&A Funds would be released by its agreed upon deadline. In fact,
according to these representatives, there was a chance that certain films would never be released
at all. This was the case because Kavanaugh and his cronies, having misappropriated nearly
$69.4 million in P&A Funds for other purposes, had no funds left to pay the P&A vendors to
market these films. Still, RKA stood by.

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102.

Finally, during this period, representatives of Relativity informed RKA for

the first time that OneWest Bank, a creditor of Relativity headed up by one of its Board
MembersSteve Mnuchinhad begun a sweep of accounts at Relativity in an attempt to recoup
its own investments. Representatives of Relativity informed RKA that nearly $50 million had
been swept from Relativitys accounts since June 2015. At the time of these sweeps, Mnuchin
and the Relativity Board of Directors knew (or should have known) that the cash on Relativitys
books seized by OneWest included a substantial portion of RKAs P&A Funds.
103.

Finally, on July 15, 2015over three months after RKA first alerted

Kavanaugh and his cronies of its suspicions of fraudRKA sued Kavanaugh individually. RKA
alleged that Kavanaugh had breached the contract that required him to pledge his equity interest
in RKA to RKA. See RKA Film Financing, LLC v. Ryan Kavanaugh and River Birch Funds
LLC, Index No. 652481/2015 (N.Y. Sup. Ct. July 15, 2015).31
104.

The next day, over a month after Kavanaugh pledged his shares of RKA as

collateral for money Relativity agreed (but failed) to pay RKA, and after months of RKA
bending over backwards to help Relativity avoid bankruptcy, Kavanaugh made the following
statement: I will not be making any payment to RKA, especially considering that I have
invested $70 million in Relativity over the past two years. Kavanaugh issued a second press
release the same day, baldly alleging that [t]here is no concern by our lenders about the
companys P&A spending. . . . This statement was an unmitigated lie.
105.

Apparently, RKAs months of pleas, warnings, and threats had fallen on

deaf ears. Time and time again, RKA gave Kavanaugh leeway to atone for his actions and make

31

This was not the first time that Kavanaugh had been sued for making materially false statements to his
investors. For example, in 2002, an investor won a $7.7 million arbitration judgment related to Kavanaughs
misuse of that investors funds, which Kavanaugh invested contrary to his clear promises and representations.

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things right. Time and time again, Kavanaugh and his cronies lied and deceived RKA and
refused to honor their commitments. In the face of the Defendants myriad lies, RKA has shown
marked restraint since early April 2015attempting good faith negotiations, self-help, and
patiencebefore resorting to judicial intervention to put an end to this fraudulent scheme and
filing the original complaint in this action.
106.

Since that time, and faced with the unravelling of his Ponzi scheme,

Kavanaugh has attempted to rewrite history, both in court documents and through self-serving
public statements. Most recently, on January 22, 2016, Kavanaugh issued a press release in
which he claimed that the P&A facility was actually a working capital facility.32 (That press
release was subsequently retracted, on the advice of his counsel, given its notable falsity.) The
release reads:
Statement By Ryan Kavanaugh, Chairman And CEO Of
Relativity Media, Regarding RKA Film Financing
BEVERLY HILLS, Calif., Jan. 22, 2016 /PRNewswire/
Relativity Media has learned that RKA Film Financing intends to
once again rehash the false and outrageous claims it has been
making against Relativity Media for the last year. A basic review
of the facts in this matter make it abundantly clear that RKAs
allegations are baseless and totally without merit:
Relativity Holdings, the parent company of Relativity Media,
entered into a working capital facility with a group called RKA in
2014. This facility was structured in precisely the same way as
Relativitys previous two working capital facilities.
RKA Film Financing negotiated the agreement in question solely
with Colbeck Capital Management, which at the time was a board
32

Statement By Ryan Kavanaugh, Chairman And CEO Of Relativity Media, Regarding RKA Film Financing,
dated Jan. 22, 2016, previously available at http://www.prnewswire.com/news-releases/statement-by-ryankavanaugh-chairman-and-ceo-of-relativity-media-regarding-rka-film-financing-300208756.html (subsequently
retracted by counsel for Kavanaugh) (hereinafter Kavanaugh 1/22/16 Release); see also
https://www.morningstar.com/news/djnmndjbn,paeq/PRNews_20160122AQ05669/statement-by-ryankavanaugh-chairman-and-ceo-of-relativity-media-regarding-rka-film-financing.html (preserving same).

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member, paid advisor and agent to the debt of Relativity. In fact

Ryan Kavanaugh never met, spoke with or had any other form of
contact with RKA until after the facility was closed. As Colbeck
was closing the transaction with RKA, Colbeck informed Mr.
Kavanaugh that RKA required that Mr. Kavanaugh put $9 million
of his own money at the most junior and riskiest level of the capital
structure. He later invested another $1 million of his own money,
bringing his total personal investment in the facility to $10 million.
RKA has used and is continuing to misuse the restructuring
process to attempt to extract Mr. Kavanaughs personal $10
million. This is evidenced by the fact RKA has brought no action
against Colbeck, (or any other party other than Mr. Kavanaugh,
who never met the parties or spoke to them until after Colbeck had
closed the deal) the party with whom it actually negotiated the
facility.
Furthermore, during the tenure of its facility, RKA always wired
proceeds from the facility to Relativitys working capital account,
and in emails pushed Relativity to draw down more capital from
the facility even when no movies were set to release.
Finally when Steven Mnuchin joined as Co-Chairman of Relativity
and made a sizable investment in the company, as part of his
diligence he asked Relativitys counsel, Jones Day, to provide an
opinion on all of the companys debt facilities, including the RKA
facility. Jones Day provided the opinion that the facility may be
used for working capital and was and had been used in accordance
with all documentation.
If RKA has an issue, it is with the sole party with whom it
negotiated its agreement, Colbeck Capital.
Any rehashed claims by RKA, including the irresponsible use of
provocative language like fraud or misrepresentation are only
RKAs latest transparent attempt to rile up the press and the court
in hopes of extracting money from the wrong party. As the facts
clearly demonstrate, this is not a matter between Relativity,
Kavanaugh or any of its executives and RKA, but between RKA
and Colbeck.33

33

Presumably Kavanaugh and his co-Defendants will claim that no cause of action for fraud lies here, but rather
only a breach of contract claim. They would not be the first to advance such a defense. But as Kavanaugh and
his co-Defendants know, fraud is more than a mere failure to keep ones word, as in a simple breach of contract
claim. Rather, a claim of fraud arises where, as here, a false representation of material fact is made by one party

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107.

For the sake of clarity, the $10 million referenced above, see supra 106,

relates to the funds that were to be invested personally by Kavanaughthrough his shell
company River Birch Funds LLCin RKA. That structure was developed for at least two
reasons: to ensure (i) that RKA was separate and distinct from Relativity, and (ii) Kavanaugh
had a financial stake in the venture. As it turned outand as Kavanaugh and Relativity have
admittedwhen it came time to fund RKA, Kavanaughs personal contribution came from
Relativity and not Kavanaugh. (RKA immediately recognized that Kavanaugh was using
Relativity as his personal piggy bank at that point, as well, and brought his sleight of hand to
both Relativitys and Kavanaughs attention in late 2014. Kavanaughs alleged contribution to
RKA was returned to Relativity by RKA, and only then did Kavanaugh personally contribute
said funds to RKA.)
108.

To the extent Kavanaugh and his cohorts contemplate advancing an advice

of counsel defense to countenance their fraudas they allude to above, see supra 106larger
concerns arise. And having now revealed said legal advice, RKAand presumably the Court
look forward to perusing the [legal] opinion that [RKAs P&A] facility may be used for
working capital and was and had been used in accordance with all documentation. Kavanaugh
1/22/16 Release. More remarkable still is Kavanaughs claim that an international law firm
blessed his use of RKAs P&A Funds for working capital while that same firm represented to
the Bankruptcy Court that said funds were for P&A, see infra 109 & n.34.
109.

Kavanaughs assertions are directly contradicted by public filings just a

intentionally and knowingly, intending to mislead, and that causes the other party to rely on the false
representation and suffer damages. Such is the case here, wherefrom the get-goKavanaugh, Colbeck and
others fraudulently marketed the P&A facility to RKA as a P&A facility so they could fund Relativity, because
Kavanaugh and Relativity were unable to raise capital to support their failing business through legitimate means
and open and honest disclosures to potential lenders.

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few days later by his own company in Relativitys Chapter 11 proceeding in the Southern
District of New York, which refer to RKA as its principal print and advertising (P&A) lender
on four (4) films to be released this year.34 Kavanaughs duplicitous suggestion, after the years
of his own and the other Defendants contrary representations detailed above, is as outrageous as
it is plainly false. The time for the Defendants to be held to account for their lies,
misrepresentations, and unmistakable Ponzi scheme is long overdue.

34

Debtors (I) Memorandum of Law in Support of Confirmation of Third Amended and Restated Plan and (II)
Omnibus Reply to Objections With Respect to Plan and Related Proceedings, In re Relativity Fashion, LLC, et
al., Case No. 15-11989 (S.D.N.Y. Bankr.), Dkt. 1472 2, Jan. 28, 2016.

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COUNT ONE
(Fraud)
110.

RKA repeats and realleges paragraphs 1 through 109 above as though set

forth here in full.

111.

On no less than five occasions between in or about August 2014 and

March 2015, Kavanaugh and the other Defendants caused the Film SPEs to draw upon P&A
Funds totaling approximately $73.6 million for four films: Masterminds, Before I Wake, Solace,
and Disappointments Room. Kavanaugh and the other Defendants had represented (and agreed)
that the P&A Funds were required to be used solely for P&A expenses for specific films made
by the Film SPEs, and before, during, and after drawing upon these funds, Kavanaugh and the
other Defendants reaffirmed that such draws would be used only by the Film SPEs and only to
fund P&A. Throughout the course of their interactions with RKA on behalf of Relativity and its
affiliated Film SPEs, the Defendants were aware of the falsity of these statements.
112.

The statements Kavanaugh and the other Defendants made regarding how

the P&A Funds would be spent were material. Specifically, with knowledge of their falsity,
Kavanaugh and the other Defendants made these statements to induce RKA to make P&A Funds
available to the Film SPEs. The Defendants also knew RKA would rely upon those statements
in determining whether to make P&A Funds available to the Film SPEs. Given Kavanaugh and
the other Defendants close ties to, relationships with, and obligations to act on behalf of
Relativity, as well as their affirmative efforts to mislead RKA, RKA justifiably relied on the
statements and promises of the Defendants.
113.

Notwithstanding these promises, Kavanaugh and the other Defendants

used the P&A Funds for purposes other than financing P&A expenses. In fact, they used the
P&A Funds for general corporate purposes such as salaries, overhead, the funding of Relativitys

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other business lines (such as its sports agency and television studio), supporting the general
solvency of Relativity, and personal luxuries for themselves.
114.

When confronted about how the P&A Funds had been spent, Kavanaugh

and the other Defendants repeatedly lied and continued to misappropriate these funds.
Kavanaugh and the other Defendants then knowingly and purposefully obfuscated RKAs efforts
to understand how its funds had been drawn upon, allocated and used, in order to delay RKAs
discovery of their misdeeds and the falsity of their statements.
115.

Finally, Kavanaugh and the other Defendants have, on multiple occasions,

admitted to RKA that (i) they caused Relativity to commingle and misappropriate the P&A
Funds with other Relativity funds, and (ii) they used the P&A Funds as working capital or as
they saw fit.
116.

The above amounts to a fraudulent scheme to misappropriate the P&A

Funds. As a result of this fraudulent schemeand Kavanaugh and the other Defendants
fraudulent concealment of the misuse of such fundsRKA was induced to provide
approximately $73.6 million in P&A Funds to the Film SPEs, nearly all of which has now
vanished. RKA has therefore suffered and will continue to suffer damages as a result of this
fraud.
COUNT TWO
(Fraud in the Inducement)
117.

RKA repeats and realleges paragraphs 1 through 116 above as though set

forth here in full.

118.

On numerous occasions leading up to, and in the process of, the execution

of the Funding Agreement, Kavanaugh and the other Defendants represented that P&A Funds
loaned by RKA would be used solely to fund P&A expenses in accordance with Section 1.3 of

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the Funding Agreement related to films scheduled for release by the applicable Film SPEs. They
also represented that RKA would be repaid first out of box office and other proceeds, and that
given these two features of the P&A loans RKA would make under the Funding Agreement,
RKA would not be exposed to the risks associated with Relativitys financial stability or
performance. Kavanaugh, Colbeck and the other Defendants made these representations in
presentations, marketing materials, phone and email communications, and in the very terms of
the Funding Agreement.
119.

Those representations were false. Roughly $1.7 million of the $73.6

million of P&A Funds drawn by Relativity from RKAs P&A facility were actually spent on
P&A. Neither Kavanaugh, nor the other Defendants, nor Relativity can account for the
remainder of these funds.
120.

Kavanaugh and the other Defendants knew that those representations were

false because they knew the P&A Funds would be used as working capital to fund Relativitys
general corporate expenses. They knew this because Kavanaugh and the other Defendants were
privy to all of the details of Relativitys financial operations, and because it had used funds
supposedly earmarked for P&A as working capital for general corporate expenses before.
Kavanaugh and the other Defendants intentionally or negligently withheld the falsity of those
representations from RKA, despite this knowledge. Ultimately, Kavanaugh and the other
Defendants, at the time they pitched and facilitated the execution of the Funding Agreement, had
a preconceived and undisclosed intention of, on behalf of Relativity, not performing under the
agreement.
121.

RKA relied on those representations in deciding to execute the Funding

Agreement and otherwise enter a P&A lending arrangement with Relativity. RKA was justified

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in relying on the representations of Kavanaugh and the other Defendants because it had no
independent means of determining their truth. RKA could not have discovered or known that
Kavanaugh and the other Defendants intended from the beginning to use the funds without
restriction or however else they desired.
122.

The enterprise described above amounts to a fraudulent scheme to induce

RKA to provide Relativity with working capital, something RKA never would have agreed to in
the absence of misrepresentations made by the Defendants. As a result of this fraudulent
inducement, RKA provided no less than $73.6 Million in P&A Funds under the Funding
Agreementnearly all of which has now vanished. RKA has therefore suffered, and will
continue to suffer, damages as a result of this fraud.
COUNT THREE
(Conspiracy to Commit Fraud)
123.

RKA repeats and realleges paragraphs 1 through 122 above as though set

forth here in full.

124.

Kavanaugh agreed with the other Defendants, as well as possible unknown

co-conspirators, and took overt acts, to use the P&A Funds provided by RKA under the Funding
Agreement for purposes other than financing P&A expenses for certain qualifying films, as
specified under the Funding Agreement. In fact, Kavanaugh and the other Defendants have used
the P&A Funds for general corporate expenses, including keeping Relativity solvent.
125.

Kavanaugh and the other Defendants have further conspired to perpetuate

this fraud by taking acts to obfuscate RKAs efforts to understand how the P&A Funds were
drawn upon, allocated and used. Given the Defendants close relationships with, and certain of
their obligations to represent and act on behalf of, Relativity, as well as their repeated
reassurances to RKA, RKA justifiably relied on the information provided, and representations

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made, by the Defendants.

126.

As a result of this conspiracy and Kavanaugh and the other Defendants

further fraudulent concealment of the misuse of such funds, RKA has suffered and will continue
to suffer damages.
COUNT FOUR
(Negligent Misrepresentation)
127.

RKA repeats and realleges paragraphs 1 through 126 above as though set

forth here in full.

128.

Through the marketing, negotiation, execution, and transfer of funds

pursuant to the Funding Agreement, a special or privity-like relationship arose between the
Defendants and RKA. That relationship imposed on the Defendants duties to impart correct
information to RKA.
129.

Beginning in or about April 2014, Kavanaugh and the other Defendants

made numerous misrepresentations regarding the use of the P&A Funds, the amount of cash
available at Relativity, and the release dates for the four most recent films for which Film SPEs
had drawn P&A Funds. Specifically:
a.

Kavanaugh and the other Defendants misrepresented on numerous

occasions that the P&A Funds drawn upon by the Film SPEs would be: (i) used only by the Film
SPEs; (ii) used only to fund the P&A for each Film SPEs film; and (iii) accounted for with
separate books and records apart from the corpus of Relativitys cash;
b.

Kavanaugh and the other Defendants misrepresented on numerous

occasions that the release dates of each of the four films for which the Film SPEs had drawn
P&A would be prior to September 30, 2015;
c.

Kavanaugh and the other Defendants misrepresented on numerous

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occasions that Relativity could account for all of the P&A Funds drawn upon by the Film SPEs
that were unspent on P&A; and
d.

Kavanaugh and the other Defendants misrepresented on numerous

occasions that Relativity had sufficient cash on its balance sheet to continue operations.
130.

At the time Kavanaugh and the other Defendants made these

representations on behalf of Relativity and/or the Film SPEs, they either knew of their falsity or
failed to exercise reasonable care or competence in determining their accuracy. They either
actively misrepresented that, or failed to determine whether: (i) Kavanaugh and/or the other
Defendants caused the P&A Funds to be used for improper purposes; (ii) Kavanaugh and/or the
other Defendants intended to release each of the four films for which P&A Funds were drawn
prior to September 30, 2015; (iii) Relativity could account for all of the unspent P&A Funds; and
(iv) Kavanaugh and/or the other Defendants accurately represented the amount of cash on
Relativitys balance sheet.
131.

RKA reasonably relied on the truth of these representations and as a result

was induced to: (i) continue making funds available for the Film SPEs to draw upon instead of
terminating its arrangement with Kavanaugh, the other Defendants, the Film SPEs, and
Relativity; and (ii) continue to negotiate an amicable resolution with Kavanaugh and the other
Defendants while Kavanaugh and the other Defendants converted the P&A Funds for general
corporate purposes. Had any of Relativitys corporate officers or directors, or the officers and
directors of the Film SPEs, disclosed the falsity, or attempted to verify the veracity, of the
statements made on behalf of Relativity to RKA, it would have considerably mitigated the
damages suffered by RKA.

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COUNT FIVE
(Conversion)
132.

RKA repeats and realleges paragraphs 1 through 131 as though set forth

133.

On no less than five occasions between in or about August 2014 and

here in full.

March 2015, Kavanaugh and the other Defendants caused the Film SPEs to draw upon P&A
Funds totaling approximately $73.6 million for four films: Masterminds, Before I Wake, Solace,
and Disappointments Room. Through these actions, on behalf of Relativity and its affiliated
Film SPEs, the Defendants exercised unauthorized dominion over the P&A Funds provided by
RKA.
134.

In each instance, only the Film SPEs were authorized to use the P&A

Funds, and each was only authorized to use its P&A Funds for the P&A of its specific film.
These P&A Funds were the respective property of each of the Film SPEs, and Kavanaugh and
the other Defendants had no legal right and/or title to those P&A Funds and could not use them
for any purpose.
135.

Notwithstanding this fact, Kavanaugh and the other Defendants converted

these funds for salaries owed to Relativitys top executives, the funding of Relativitys sports and
television businesses, personal indulgences such as Kavanaughs collection of helicopters, and
Relativitys general corporate purposes, such as overhead, and loan interest owed to other
lenders. Again, such use was without authorization and without right and to the exclusion of
RKAs rights in the P&A Funds.
136.

As a result of such conversion, RKA has suffered and will continue to

suffer damages.

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COUNT SIX
(Breach of Covenants of Good Faith and Fair Dealing)
137.

RKA repeats and realleges paragraphs 1 through 136 as though set forth

138.

In connection with the marketing, negotiation, execution, and transfer of

here in full.

funds pursuant to the Funding Agreement, on behalf of Relativity and its affiliated Film SPEs,
the Defendants owed to RKA duties of good faith and fair dealing.
139.

Kavanaugh and the other Defendants made numerous intentionally false

statements or negligent misrepresentations to RKA in order to induce it to allow (and continue

allowing) Film SPEs to draw P&A Funds from RKAs P&A facility. These misrepresentations
constituted breaches of the covenants of good faith and fair dealing.
140.

Kavanaugh and the other Defendants also misdirected P&A Funds

intended for certain Film SPEs to Relativity. As a result, the Film SPEs were unable to spend the
P&A Funds on legitimate expenses that would enable them to adequately market their films,
thereby allowing RKA to realize a return on its investment. Instead, Kavanaugh and the other
Defendants caused said monies to be spent on unauthorized purposes such as Relativitys general
corporate expenses, including but not limited to salaries, overhead, loan interest owed to other
lenders, the funding of Relativitys sports and television businesses, and personal indulgences
such as Kavanaughs collection of helicopters.
141.

Despite this conduct and its effects on RKA, Kavanaugh and the other

Defendants kept their misdeeds secret in order to induce RKA to loan additional P&A Funds to
the Film SPEs until nearly all P&A Funds had been drawn from RKAs facility. This active
effort of the Defendants, on behalf of Relativity and the Film SPEs, to conceal what had
happened to the P&A Funds also constituted breaches of the covenants of good faith and fair

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dealing.
142.

Kavanaugh and the other Defendants actions thereby deprived RKA of

the benefit of lending the P&A Funds, namely, a return on its investment. Such conduct
constitutes a breach of the implied covenant of good faith and fair dealing. As a result of such
breach, RKA has suffered and will continue to suffer damages.
COUNT SEVEN
(Breach of Fiduciary Duty)
143.

RKA repeats and realleges paragraphs 1 through 142 as though set forth

144.

In an effort to convince RKA, on behalf of Relativity and its affiliated

here in full.

Film SPEs, to provide P&A Funds under the Funding Agreement, Kavanaugh and the other
Defendants sought to establish a relationship of trust and confidence with, and otherwise gain
influence over RKA. By drawing on their intimate knowledge of Relativity and its affiliated
Film SPEs, and through their web of misrepresentations, Kavanaugh and the other Defendants
succeeded. The special circumstances surrounding RKAs ultimate agreement to provide such
P&A Funds thereby transformed the parties business relationship into a fiduciary one.
Accordingly, RKA was lulled into placing its trust and confidence in Kavanaugh and the other
Defendants, creating a fiduciary relationship between RKA on the one hand, and Kavanaugh and
the other Defendants on the other.
145.

Notwithstanding their fiduciary relationship with RKA, the Defendants

engaged in misconduct that directly caused damages to RKA. On no less than five occasions
between in or about August 2014 and March 2015, Kavanaugh and the other Defendants caused
the Film SPEs to draw upon P&A Funds totaling approximately $73.6 million for four films:

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Masterminds, Before I Wake, Solace, and Disappointments Room. In each instance, as

Kavanaugh and the other Defendants had represented, only the Film SPEs were authorized to use
the P&A Funds, and each was only authorized to use its P&A Funds for the P&A of its specific
film. Nevertheless, in direct contravention of the fiduciary relationship that had developed
between the parties, Kavanaugh and the other Defendants misappropriated these funds for
Relativitys general corporate purposes. As a direct result of this misconduct by Kavanaugh and
the other Defendants, RKA has suffered and will continue to suffer harm.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiff respectfully demands judgment in its favor against the
Defendants:
a)

for all actual damages incurred and accruing in an amount in excess of

b)

awarding the Plaintiff attorneys fees, costs, and disbursements in

$110 million;

prosecuting this action to the extent permitted by law; and

c)

awarding the Plaintiff such further relief as this Court deems just and

appropriate.

Dated: New York, New York

March 9, 2016
Respectfully Submitted,
LATHAM & WATKINS LLP
/s/ Christopher J. Clark
Christopher J. Clark
Benjamin Naftalis
885 Third Avenue
New York, New York 10022
(212) 906-1200
chris.clark@lw.com
benjamin.naftalis@lw.com
Counsel for Plaintiff

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