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Financier in botched deal sues Emmis over loan to Smulyan

February 18, 2011

The financier that once backed Emmis Communications Corp. CEO Jeff Smulyan’s attempt to take Emmis private is making good on its promise to sue the company and its board of directors for using company money to fund Smulyan’s lawsuit against the financier.

In uncommonly sharp language, attorneys for New York-based Alden Global Capital accused the Emmis board of “a blatantly self-dealing transaction” that allows Smulyan to “pursue a personal litigation vendetta” against Alden. The lawsuit, filed on behalf of all shareholders, accuses the Emmis board of breaching its duties to shareholders and also of violating the Sarbanes-Oxley Act.

Alden’s lawsuit, filed Wednesday in a state court in New York, concerns a loan of up to $200,000 that Emmis’ board approved in December to help Smulyan pay legal expenses in a separate lawsuit pending against Alden in federal court in Indianapolis.

That lawsuit, filed in September by a Smulyan-controlled entity called JS Acquisition LLC, accuses Alden of breach of contract for backing out of its agreement to finance JS Acquisition’s $90 million buyout of all Emmis’ publicly traded shares. Alden cited a “precipitous” drop in the value of radio assets.

Kate Snedeker, a spokeswoman for Indianapolis-based Emmis, wrote Friday in an e-mail that the company believes Alden’s lawsuit is without merit. In response to Alden’s Feb. 3 letter, she wrote, “We’re confident with the board’s position on the issue, and we have equal confidence in the outcome.”

Alden threatened to sue Emmis over the $200,000 loan in a Feb. 3 letter unless the Emmis board rescinded the loan and immediately took steps to recover any funds already paid out and spent. Alden demanded a response by Feb. 11 or else said it would sue.

Alden, in its lawsuit, says it reiterated its demands in another letter on Feb. 9. In response to both letters, Emmis General Counsel Scott Enright replied by saying the matters would be considered by the Emmis board at its next scheduled meeting.

Now Alden is asking a judge to satisfy its demands, including issuing injunctions to prevent the Emmis board from transferring any funds to Smulyan and to prevent Smulyan’s JS Acquisition from spending any of the money.

“It is almost certainly because Smulyan could not obtain traditional funding for this extraordinarily risky venture that he elected to raid the coffers of Emmis—a company that is currently so cash-strapped that it has publicly disclosed that it may not be able to meet its upcoming financial covenants and debt obligations,” wrote Alden attorneys Judith Archer and Michael Swartzendruber in the lawsuit.

They added, “The directors’ decision to illegally funnel money to Emmis’s CEO in the midst of a liquidity crisis represents the sine qua non of irresponsibility and disloyalty.”

Emmis' liquidity crisis stems from looming debt obligations. On Jan. 11, the company disclosed in a securities filing that it has enough cash to get through the end of February, but made no promises for after that. It also disclosed that on Sept. 1, Emmis' debt obligations will be more restrictive, further pinching company finances.

If Emmis fails to meet those more restrictive terms, it would default on its $345 million in senior bank debt, causing it to come due more rapidly.

Emmis has said it is pursuing sales of radio stations in New York and Chicago to raise cash to meet the stricter debt terms.

Founded by Smulyan in 1981, Emmis owns more than 20 radio stations in the United States and publishes regional magazines in several cities, including Indianapolis Monthly.

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