Hedge Fund Alden Siphoned 100s of Millions from Newspapers in Scheme to Gamble on Other Investments, Suit Says
By Julie Reynolds
March 8, 2018 – New York hedge fund Alden Global Capital siphoned hundreds of millions of dollars from one of America’s largest news chains, a new lawsuit charges, damaging local news organizations to finance insider investment deals.
Solus Alternative Asset Management, a hedge fund that owns a 24 percent minority share in the news chain Digital First Media filed the suit Monday in Delaware alleging that MNG Enterprises, which does business as Digital First Media, began hiding its financial information from shareholders in 2017. The filing was first reported Tuesday by Law360.
Alden used the newspapers’ cash for speculative ventures, the lawsuit alleges, and invested millions in a failing pharmacy chain, risky Greek sovereign debt and other questionable investments “entirely unrelated to the company’s core businesses.”
The lawsuit’s account of millions of dollars in newspaper funds being spent to finance Alden’s independent investments hit hard in DFM newsrooms struggling after job cuts. Some worksites have endured staff reductions of more than 40 percent in the last two years alone. Venerable nameplates have vanished or been consolidated, including the Oakland Tribune, now reborn as part of the regional East Bay Times.
Executives at the still-profitable newspapers have cited industry-wide economic pressures to justify the gutting. The Solus case suggests more to the story.
In its legal filing, Solus says the news chain “contributed real estate, cash, cash equivalents, and other assets” into a secretive subsidiary called InvestmentCO, whose overlap with Alden was “purposefully obfuscated.”
Soon after Alden’s investment managers acquired the news chain, they quickly sold off newspaper office buildings and printing plants through a little-known affiliate called Twenty Lake Holdings.
The Solus complaint also describes an insider “sale/leaseback” in which Twenty Lake apparently bought a property from DFM-Alden and then leased it back to the news chain.
“The chronology of events is troubling,” the complaint states.
Alden Global president Heath Freeman did not respond to a request for comment. Editor Neil Chase, of the DFM-owned Mercury News in San Jose, and DFM’s chief operating officer Guy Gilmore also did not respond to phone messages left on Wednesday.
Mike Burbach, editor of DFM’s St. Paul Pioneer Press, said he was unaware of the lawsuit and of the existence of the InvestmentCO fund. “I’m just an editor,” he said. “They don’t tell me anything.”
Among the newspaper chain’s earliest cash infusions, the filing states, was $10 million put into Alden’s “CRE Opportunities Master Fund” in December 2014.
Months later, the same fund invested roughly $80 million in Homex, a bankrupt developer charged by the Securities and Exchange Commission with committing the biggest real estate fraud in Mexican history. Homex “reaped billions, went bankrupt and left slums across Mexico,” wrote the Los Angeles Times.
Solus also says that quarterly financial statements once provided by MNG Enterprises — before its Alden-controlled board abruptly stopped providing the information — showed that the newspaper chain invested 70 million Euros in Alden’s “Hellenic Opportunities Fund,” which sought to profit from Greece’s economic distress.
One of the most disturbing revelations was Alden’s overhaul of the company’s structure in 2016, something most of its newspaper employees knew nothing about. Some heard only of a name change as the company went from being officially known as MediaNews Group to MNG Enterprises.
But as part of this reorganization, a secretive subsidiary was formed called Investment Holdings LLP, or InvestmentCO, that was “wholly owned” by MNG.
In 2016, the company took out $225 million in credit and “used the proceeds to fund InvestmentCO” along with a secured note that was due in 2018, the filing says.
“The extent to which InvestmentCO’s activities overlap with those of Alden and its affiliates has been purposefully obfuscated,” the complaint states, adding that some of the newspapers’ real estate holdings and cash went into this mysterious company.
The filing also says the news chain became the sole owner of another company called Strategic Investment Opportunities. Last year, that subsidiary contributed the full $158 million toward Alden’s investment in the Fred’s Pharmacy chain, the filing says. (Today, the stock is only worth $30 million.)
Several of the chain’s newspapers invested $248.5 million of their workers’ pension assets in “hedge funds and managed accounts advised by Alden.”
Solus executives say they were aware of these activities because the company was providing quarterly reports and held regular shareholder phone calls.
But in 2017, the flow of information suddenly stopped.
Last year, according to the filing, the MNG board amended its 2010 stockholders’ agreement “to remove the information-rights covenant and eviscerate the company’s reporting obligations to stockholders.” The end result was the “unilateral elimination” of minority shareholders’ rights, the complaint says.
MNG Enterprises’ board was made up of five people, four of who have “a significant overlap” of interests with Alden. Among them is Alden president and co-founder Heath Freeman, who has since become the board chair of Fred’s.
The amendment, the shareholders say, was signed “specifically by Heath Freeman,” who signed for all the controlling interests.
“The 2017 Amendment eliminated any transparency into the company’s financial performance, the activities of InvestmentCO, and insider transactions involving Alden,” the filing states. “Since the 2016 reorganization and the 2017 amendment, the company’s financial reporting has been nearly useless.”
Then in January, MNG began seeking additional financing to inject more money into InvestmentCO.
On January 17, fed-up Solus executives asked MNG for the financial data they were no longer getting. On February 9, after asking and receiving a few weeks’ extra time to supply a response, the company denied most of the request.
“Solus’ expectations were severely disappointed,” the filing says. “This complaint followed.”
Now Solus is demanding that MNG and Alden provide current financial data as well as “board materials” that include “recordings, agendas, summaries, memoranda, transcripts, notes, minutes of meetings, drafts of minutes of meetings, exhibits distributed at meetings, summaries of meetings, and resolutions.” In particular, the suit is seeking documents about InvestmentCO and its activities.
Samuel Nolen, an attorney representing Solus in the case, said he was not authorized to speak about it and a spokeswoman for Solus declined to comment.
Solus is asking a judge to force MNG to supply the requested documents within five days of the order.
Featured photo: Manhattan’s Lipstick Building, where Alden Global Capital’s offices occupy the top floor. | Philip Johnson, Creative Commons