SFX Fraud Suit May Go To Trial

An 11-count lawsuit claiming Robert Sillerman froze three men out of a joint venture and stole the business plan for what eventually became SFX Entertainment will move forward on all counts to trial, a federal judge ruled July 29 in Los Angeles.

U.S. District Court Judge Ronald Lew overruled every objection made in a motion for summary judgment filed by Sillerman and SFX in the case, now scheduled to go to trial Oct. 6. Paolo Moreno, Lawrence Vavra and Gabriel Moreno filed suit against Sillerman, SFX and partner Shelly Finkel shortly after SFX went public in 2014 with a $1 billion IPO.

The trio alleges in 2012, after two years already spent developing a business plan for an electronic dance music company, they met with Sillerman to propose a joint venture to “identify, acquire, consolidate, and operate assets in the [EDM] industry,” with Sillerman financing it, according to court documents.

After those meetings, they agreed to a partnership with Sillerman in a venture that eventually morphed into SFX. After coming to what the plaintiffs call “a firm deal” on Jan. 8, 2012 – one they say promised them “millions of founders’ shares … with options and other cash compensation” – the Morenos and Vavra used their EDM connections, knowledge and acumen to acquire targeted assets for the new EDM company that resulted in “much of the [$1 billion] value of [SFX],” according to documents.

Until they were “forced out” by Sillerman, the trio say they worked full-time on the venture to “close its most important and lucrative acquisitions” including seven of eight “principal assets” defined by SFX in its initial S-1 SEC filing. The trio also claims that, in addition to the asset acquisitions, they created the “conceptual development” of the idea that became SFX. Sillerman, the suit alleges, ultimately “[took] Plaintiffs’ ownership shares for himself and continually evad[ed] Plaintiffs’ requests to honor their agreement,” according to the documents. Among the 11 counts charged are breach of joint venture/partnership agreement, breach of fiduciary duty, constructive fraud, breach of contract, fraudulent inducement, promissory fraud and unfair competition.

The Morenos and Vavra seek at least $100 million in damages and costs. The judge rejected every argument Sillerman made for summary judgment, ruling there is sufficient evidence to go forward on every count. “Defendants’ evidentiary objections are overruled either because the objections are without merit or because the Count need not rely on the objected-to evidence,” Judge Lew wrote. Cited throughout the ruling are Sillerman emails to Paolo Moreno dating to Jan. 6, 2012 that include detailed exchanges about acquisition targets and “confidential information for our new company.” In one response, Sillerman writes, “We must be fated to be together” and proposes specific terms for what he calls “our deal,” concluding, “Let’s get it done and have at it. We’re ready to go.”

According to footnotes in Lew’s ruling, Sillerman proposed that Paolo Moreno “receive 1MM shares of SFX stock,” “200K options a year for 5 years as part of your 5 year employment agreement,” “[s]alary of $300K, plus a bonus,” and “[u]sual perks appropriate to your position.” According to the email exchanges, negotiations continued and on Jan. 7, 2012, Sillerman writes: “We’re fine on these deals. Let’s go.” In the end, they allege, the Morenos and Vavra were cut out of the future SFX and never saw a dime from Sillerman, while SFX reportedly generated some $354 million in revenue in 2014.

“That SFX and Mr. Sillerman would try to deny its partnership with our clients, especially in light of the extensive documentary evidence proving that a deal was made, is appalling,” attorney John Hueston wrote in a statement to Forbes. The ruling comes at a critical time for SFX and Sillerman, who is in the midst of a tender offer to take the company private. He’s now on the clock, with an Aug. 13 deadline, to provide financing on the stock buyout or face a $31 million termination fee payable to SFX.