SEC fines Lions Gate $7.5 million for debt-equity swap in takeover defence against Icahn

WASHINGTON – The Securities and Exchange Commission levied a $7.5 million fine against movie studio Lions Gate Entertainment Corp. for failing to properly disclose its role in a complex debt-equity swap that helped it fend off a hostile takeover bid from Carl Icahn in 2010.

The SEC said Thursday that Lions Gate had agreed to pay the fine and admitted wrongdoing.

A Lions Gate spokesman declined to comment.

The company had already accounted for the cost of the fine in its earnings report for its third quarter, which ended in December.

The commission said that the company orchestrated the move to put about 9 per cent of company shares in the hands of Mark Rachesky, a director friendly to management. The agency said such a large sale of stock would have required the approval of other shareholders according to New York Stock Exchange rules.

The move followed a bid by Icahn in July 2010 to take over the company for $6.50 per share.

Following a midnight board meeting, the company swapped $100 million in convertible bonds owned by Kornitzer Capital Management Inc. for similar bonds with a later maturity. Kornitzer then sold the bonds to Rachesky, Icahn’s former chief investment adviser, for $105.7 million. Rachesky immediately converted them into common shares at $6.20 apiece, boosting his stake to 28.9 per cent, compared to less than 20 per cent before the swap. Icahn’s stake fell from 37.9 per cent to about 33 per cent because the new issuance of converted shares boosted the overall share count.

Lions Gate portrayed the move in a news release at the time as a way for it to reduce debt. It did not say it was part of a takeover defence.

Icahn contested the move in various venues, including the Canadian province of British Columbia, where Lions Gate’s Canadian headquarters is based, but he failed to have the transaction annulled. Icahn later sold off his stake in Lions Gate and abandoned his takeover attempt.

Andrew Ceresney, director of the SEC’s enforcement division, said the investigation was continuing but didn’t elaborate.

Lions Gate shares fell $1.06, or 3.2 per cent, to $32.20 Thursday. They are up 39 per cent over the past year.