Fortress Investment Group $FIG Faces Fraud Charges

Fortress Investment Group (FIG), which is managed by Michael Novogratz, has been named as a defendant in a 48-page complaint filed with the Los Angles County Superior Court on February 8. The complaint was filed by Aramid Entertainment Fund, a film investor. It alleged that Relativity Media and Fortress “defrauded it of at least $44 million in connection with a slate of past and future films from Sony Pictures Entertainment,” reports the New York Times. In the complaint, “It described the inner workings a financial deal under which Citibank, before the 2008 financial crisis, committed $525 million to an investment fund run by Relativity and its chief executive Ryan Kavanaugh, but recently bargained its way out because of pressure from Federal officials to liquidate risky media loans.” Sony (SNE) nor Citibank, a subsidiary of Citigroup (C), were named as defendants in the suit.Relativity Media “has backed dozens of films at both Sony and Universal Pictures through its Beverly investment funds. It has since acquired both the Rogue and Overture film operations, while branching into distribution with films like “Immortals” and “Haywire,” and receiving a $14.5 million cash infusion from Fortress.” According to the complaint, “Fortress simultaneously paid Citibank $113.5 million for notes with a balance of $226 million… In all, …the transactions left Fortress with a profit of about $81.6 million, while wiping out $44 million in loans and accrued interest that were due Aramid as a so-called “mezzanine” lender in a deal that had backed Sony films like “Salt,” “Paul Blart: Mall Cop,” and the yet-to-be-released “21 Jump Street.” In its complaint, Aramid calls the Fortress-Relativity alliance “one of the greatest heist stories ever told in the movie business” – a claim it defends by recounting dealings in which Kavanaugh became a major financier in the movie business in spite of the fact that his company “did not have its own funds.”

Aramid claims that Fortress “then collected credits and fees on films that, in the aggregate, fell short of a projected return to Aramid.” Once the films failed to meet expectations, alleges Aramid, “Fortress persuaded Sony executives to terminate future obligations of the Beverly slate by agreeing to give up $6 million in payments from the first ten years of film sales, and an additional $216 million from the next 20 years of sales to television, home video and digital services.” Aramid says that the reduced terms “wiped out its own prospects for repayment, while enabling Fortress — which had earlier examined the Beverly deal while considering a transaction with Aramid — to cut deals with Citibank and Relativity.”

Relativity is the company behind such hits as “Cowboys & Aliens” (2011), “Bridesmaids” (2011), “Little Fockers” (2010) and “Nine” (2009). According to the Internet Movie Database, Relativity Media will release 9 movies in 2012, including “Wanderlust” and “21 Jump Street”. It spun off from Universal Pictures, which is owned by the Comcast Corp (CMCSA), in June. It was backed by hedge fund Elliott Management Corp. However, Paul Singer, the founder of Elliott Management, sold the majority of the fund’s stake in Relativity Media to billionaire Ron Burkle in January, retaining just a small portion of the company. Burkle owns a large stake in Barnes & Noble (BKS) and is a Director at Yahoo (YHOO), Occidental Petroleum (OXY) and Morgans Hotel Group (MHGC).

Investors in Fortress Investment Group could feel the sting if the case goes in Aramid’s favor, making it a good time to sell or short the stock. However, we are more optimistic. We think that if the case goes to the wayside, Fortress shares will pop. Besides, the company is a decent bet. As of February 9, Fortress Investment Group was priced at $4.38 a share. Analysts predict it could go as high as $7.00 a share in the next year. Fortress Investment Group is also priced low, with a forward P/E ratio of 7.77, and it has strong expected growth. Analysts predict the company’s earnings will grow at a rate of 15.00% per annum over the next five years, easily outpacing its industry’s expectations of 12.52% and its sector’s 10.15%, making it a good buy.