Emmis Communications Sues Hedge Fund Alden Global For Profiteering

In September, Jeff Smulyan, CEO and founder of radio broadcaster Emmis Communications, sued Alden Global saying it broke its promise to Smulyan to team up with him and take Emmis private.

In February, Alden Global took its turn at the courthouse. In a strongly worded complaint, it sued Emmis for completely ignoring its fiduciary obligations to investors such as Alden Global in making a loan to Smulyan so he can pay his legal fees for his suit against Alden Global.

Twisty enough for you? But there is more.

Not to be outdone, Emmis Communications just filed a lawsuit in a New York court against Alden Global and its manager, Randall Smith, saying they violated the “short swing” rules of the securities laws.

Emmis says that in February and March 2010 Alden Global, which holds about 1.6 million shares of Emmis stock or about 10.6 per cent,  engaged in a series of cash settled equity swaps which the law sees as equivalent to buying stock. The hedge fund then terminated those swaps less then six months later in April 2010 and reaped a profit of about $310,000.

That, the complaint says, was a violation of the short swing rules which say that a large shareholder of a public company cannot make a trade in its stock less than six months after the shareholder’s last trade in the same stock.  The rule is designed to prevent insiders, such as large stockholders, from squeezing profits from their privileged inside position at the company.

It is the $310,000 of profits Alden Global presumably made in the “short swing” that Emmis now wants to claw back.

Emmis shares were actually up a tiny bit on Monday, closing at$1.033, up from $1.01 on Friday. Now Emmis trades at around $1.02 a share.

The Alden Global fund implicated in the suit is the Alden Global Distressed Opportunities Fund launched in early 2009 by Randall Smith. Its stated strategy is tapping into financially troubled finance companies in the U.S.  At inception, the fund charged 2% management fee and a 20% incentive fee with a minimum investment requirement of $2 million.

The suit is Emmis Communications Corp v. Alden Global Distressed Opportunities Fund, LP, Case 1:11-cv-01946-RJS (New York, Southern District Court)

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