Lions Gate Admits to SEC Disclosure Failure in Icahn Bid

Lions Gate Entertainment Corp. agreed to pay $7.5 million to settle U.S. Securities and Exchange Commission claims and admitted to breaking disclosure rules as it fended off billionaire Carl Icahn’s attempt to take control of the company.

The independent film studio, run from Santa Monica, California, failed to disclose a key aspect of its defense, the SEC said in a statement today. Transactions in 2010 that put millions of newly issued Lions Gate shares in the hands of a management-friendly director were part of a strategy to solidify control, the agency said. In settling the claims, Lions Gate admitted wrongdoing, according to the SEC.

“Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” said Andrew Ceresney, director of the SEC’s enforcement division.

Since Icahn was defeated, the company has prospered. In January 2012, the company acquired Summit Entertainment, the maker of the “Twilight” movies. The studio’s first two “Hunger Games” movies generated $1.56 billion at the global box office. The stock has more than quadrupled since Icahn sold his 44 million-share stake in 2011, at $7 each.

Icahn made a series of offers for Lions Gate’s stock in 2010 and lost a shareholder vote in December of that year to put five nominees on the company’s board that year.

Pivotal Meeting

A pivotal moment in the battle came at a midnight board meeting in July 2010, just as a 10-day truce with Icahn expired. Lions Gate directors approved a deal to exchange about $100 million in convertible debt held by Kornitzer Capital Management Inc., a Shawnee Mission, Kansas-based investment firm, into new notes. Those were sold to MHR Advisers LLC, a New York hedge fund controlled by Mark Rachesky, a one-time protege of Icahn’s who had thrown his support to Lions Gate management.

Rachesky converted the notes to stock, and as a result, Icahn’s 37.2 percent stake was diluted to 32.8 percent. That was enough to tip the battle in favor of Lions Gate management.

The SEC last year changed its policy of allowing defendants to settle cases without admitting wrongdoing, saying it would seek admissions in certain cases involving particularly egregious fraud, harm or when it’s otherwise in the public interest. While most cases are still settled without admissions, the agency has secured them in high-profile cases involving hedge-fund billionaire Philip Falcone and New York-based JPMorgan Chase & Co.

Takeover Blocked

While the SEC didn’t specify the offending 2010 transactions, it said they were approved at a midnight board meeting, and allowed a management-friendly director to obtain control of about 9 percent of the company’s stock, effectively blocking the takeover bid, the SEC said.

Peter Wilkes, a spokesman for Lions Gate, declined to comment. A phone call to Icahn wasn’t returned. When he sold his stake back to the company, Rachesky and others a in 2011, he settled all litigation with Lions Gate.

Lions Gate fell 3.6 percent to $32.06 at 3:23 p.m. in New York. The stock has risen 49 percent in the past 12 months.

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