JPMorgan Chase & Co. was accused of helping Sinclair Broadcast Group raid its own local sports television unit for $929 million when that affiliate, Diamond Sports Group, was likely insolvent, according to a lawsuit made public Monday.
(Bloomberg) — JPMorgan Chase & Co. was accused of helping Sinclair Broadcast Group raid its own local sports television unit for $929 million when that affiliate, Diamond Sports Group, was likely insolvent, according to a lawsuit made public Monday.
Diamond accused JPMorgan of working with Sinclair — Diamond’s parent company — to extract the cash from the sports broadcasting business as it was headed toward Chapter 11 with billions of dollars in debt, according to the complaint in Texas bankruptcy court. Diamond has separately accused Sinclair of wrongly draining $1.5 billion from the business, an allegation the parent company denies.
Specifically, Diamond alleges JPMorgan advised Sinclair to funnel roughly $929 million out of the sports broadcaster in order to repay preferred equity held by a JPMorgan affiliate. That was despite JPMorgan being “well aware” of significant challenges facing the company’s network of regional sports channels at the time Sinclair acquired the business from The Walt Disney Company in August 2019 in a deal valued at $10.6 billion, according to the lawsuit.
A JPMorgan spokeswoman declined to comment on Tuesday. Sinclair didn’t immediately return a message seeking comment on the JPMorgan lawsuit.
JPMorgan had served as Sinclair’s lead investment banker since the 1990s and required the parent company guarantee its Diamond Sports preferred equity obligations, which were incurred in connection with Sinclair’s purchase of Diamond, according to the lawsuit. Diamond claims the guarantee was an important factor in Sinclair’s decision to pay down its equity obligations to JPMorgan.
Diamond is asking its bankruptcy judge to make JPMorgan return more than $900 million and award additional damages, court papers show.
The lawsuit claims Diamond suffered a major blow before the Disney acquisition closed when it lost DISH Network LLC, a major distribution partner. Diamond subsequently lost other important customers including Youtube TV and Hulu. The complaint describes internal emails between JPMorgan employees discussing whether Diamond could fulfill its obligations after the deal closed.
According to Diamond’s lawsuit, Joseph Ferraiolo, head of JPMorgan’s Debt Capital Markets Operations and Merchant Bank Policy, allegedly expressed panic in December 2019 that the sports broadcaster would be unable to fulfill its preferred equity obligations. Richard Gabriel, a JPMorgan managing director who worked on the acquisition, responded by highlighting Sinclair’s guarantee of the preferred stock, according to the complaint.
“THAT IS WHY WE STRUCTURED [the Preferred Equity Units] THIS WAY AND DIDN’T GIVE IN TO NOT HVING A GUARANTEE FROM SINCLAIR THE PARENT COMPANY,” Gabriel said in a message in all caps, the lawsuit said. “YOUR WELCOME.”
Diamond also alleges JPMorgan advised Sinclair that having Diamond repay the preferred stock obligations — which it ultimately did — was better than buying back the local sports broadcaster’s substantial bond debt at a discount.
The lawsuit said Diamond continued to face challenges as it held discussions with creditors on options for raising cash and restructuring its balance sheet. Those talks resulted in a $635 million new money financing in March 2022, but Diamond claimed the financing wasn’t enough to rescue the business from alleged damage caused by Sinclair and JPMorgan.
Diamond filed Chapter 11 the following year and is currently working to come up with a plan to get out of Chapter 11.
The case is Diamond Sports Group LLC, 23-90116, U.S. Bankruptcy Court, Southern District of Texas.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.