4-16-2012
Emmis preferred shareholders say Jeff Smulyan hatched a brazen scheme. Shareholders Kevan Fight, Corre Opportunities Fund, Zazove Associates, DJD Group, and First Derivative Traders have filed a civil action in U.S. District Court, alleging Emmis CEO Jeff Smulyan and the Emmis Board ignored SEC rules, did not file proper documentation, took part in back-room deals, and tried to coerce preferred stockholders into "total return swap" arrangements in an effort to take control of the company and eliminate all the rights of the preferred shareholders.
The complaint says Emmis
CFO Pat Walsh approached several preferred shareholders with what was described as a "prisoner's dilemma": a proposal to repurchase preferred stock at $15.00 per share and treat those shares as retired. "Emmis devised a plan to repurchase the shares yet keep the vote alive." The upset shareholders are saying the shares were not retired, and that the shareholders who took the money also entered into an agreement assigning their voting rights to Emmis, giving the company more power. The result was the creation of "zombie shares," according to the complaint.In late 2011, Emmis made a deal with Sam Zell. Zell bought $35 million in unsecured notes at an interest rate of 23 percent. The money would be used to purchase back preferred stock. By December, 56.8 percent of the preferred stock was repurchased and $28.5 million of Zell's $35 million was drawn. The complaint says, "Emmis' use of total return swaps is deceptive and manipulative. Emmis has fraudulently secured for itself to vote shares of preferred stock that should be retired. The threat was starting to become clearer: the terms were take it or leave it, time was running out, and there was a limited number of lifeboats for preferred stockholders."
The angry preferred shareholder group has asked a court to invalidate many of the steps Emmis has taken to get control of over two-thirds of the voting power. They say it is a plan to strip preferred shareholders of all rights and privileges in a rigged vote.
Emmis has not paid a dividend on the stock, totaling $26.1 million, since December of 2008. Emmis is also dealing with a possible delisting from the NASDAQ, being that the stock has fallen below $1. Emmis issued the following statement last night: "We believe that the allegations are completely without merit and we intend to vigorously defend the matter and our actions."
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