Mnuchin’s Loans to Failed Movie Studio Face Scrutiny

  • Mnuchin served on Relativity Media board while running OneWest
  • His bank previously loaned millions to Kavanaugh’s company

When a movie studio couldn’t repay an almost $80 million loan, it put Steven Mnuchin in an awkward position. He ran the lead lender, OneWest Bank. He was also co-chairman of the borrower.

The conflicts didn’t end there. Mnuchin ran a hedge fund that owned a stake in the Hollywood studio, Relativity Media LLC. And he owned a three-engine jet with Relativity founder Ryan Kavanaugh that had been zooming in the spring of 2015 to Aspen, Cabo San Lucas and Maui, federal aviation records show.

Steven Mnuchin

Photographer: Albin Lohr-Jones/Pool via Bloomberg

One day before the loan matured that May, Mnuchin resigned from Relativity’s board. Then his Pasadena, California-based bank seized about $50 million from Relativity accounts, recouping some of its loan and helping tip the company into bankruptcy, according to court filings. Mnuchin and his hedge fund investors saw their equity investments wiped out.

As Donald Trump’s choice to run the Treasury Department, Mnuchin may face questions about how he managed those conflicting roles when the Senate holds hearings on his confirmation. A research file on Mnuchin that circulated among Democratic Party officials in May, later published by WikiLeaks, devotes one of its six pages to his bank’s entanglement with Relativity.

Read More: A Businessweek profile of Steven Mnuchin

Republicans hold 52 seats in the Senate, enough to confirm Mnuchin without Democratic support. Still, Democrats have vowed to scrutinize his business dealings, as well as OneWest’s foreclosure practices, while liberal groups are mounting a campaign to pressure a pair of Republican senators to withhold approval. No date has been set for the hearings.

“Credit is extended in this fashion all the time,” Tara Bradshaw, a spokeswoman for Mnuchin, said of the Relativity loans. “The institutions and people who do so, including Steven Mnuchin, follow the law regarding it.”

Insider Loans

Mnuchin, 54, took steps to manage the conflict. He recused himself from OneWest’s dealings with the studio while serving on its board, his spokesman said last year, and he ultimately cut all ties with Relativity. The loans to the movie company were made before Mnuchin joined Relativity’s board, although one was later increased in size, securities filings show.

The Office of the Comptroller of the Currency, which monitors insider lending, was aware of Mnuchin’s dealings with Relativity and allowed them to take place, according to three people with knowledge of the OCC’s activities. The agency declined to comment.

Ryan Kavanaugh

Photographer: Patrick T. Fallon/Bloomberg

OneWest recouped almost all of the money it loaned to Relativity. Still, the situation was unusual, according to Stephen R. King, who advises banks on complying with insider-lending rules at Wolf & Co. in Boston.

“In my 25 years of experience, I’ve never had a CEO of one of these financial institutions own another company” that was a borrower, he said.

Each quarter, banks are required to tell the Federal Deposit Insurance Corp. how much credit they’ve extended to insiders and their affiliates. During the time Mnuchin served on Relativity’s board, the amount of insider lending OneWest reported ballooned to $398 million in March 2015, FDIC records show. As a share of the bank’s capital, that exceeded 94 of the country’s 100 biggest institutions at the time. The records show lending to four different OneWest insiders, but they don’t indicate who or what the loans were for.

Hollywood Financier

By the time Mnuchin started doing business with Kavanaugh in 2012, he was already a prominent Hollywood financier whose hits included one of the biggest-grossing movies of all time, 2009’s “Avatar.” A former Goldman Sachs Group Inc. partner, Mnuchin specialized in multi-film deals with studios such as 20th Century Fox.

He was also a budding banker, leading a group of investors who bought the failed IndyMac Bancorp in 2009 and resurrected the mortgage provider as a commercial lender known as OneWest. The bank started lending to the movie industry and, in 2012, arranged a $202.5 million syndicated credit facility for Relativity, secured by the cash flow from its film library, bankruptcy court documents show.

Founded in 2004, Relativity was the brainchild of Kavanaugh, who piloted his own helicopter and partied with stars such as Bradley Cooper and Leonardo DiCaprio. He touted sophisticated computer models that predicted how much his movies would earn. Many were flops, and the company relied on infusions from a series of wealthy investors to stay afloat.

The Dassault Falcon 50

Photographer: Russell Hill via Bloomberg

The ties between Mnuchin, OneWest and Kavanaugh deepened. Former talent-agency honcho James Wiatt joined the boards of both OneWest and Relativity. And in March 2014, Mnuchin and Kavanaugh registered a company in Delaware to own a Dassault Falcon 50 jet. It had a white-oak burl-wood interior and had been on the market for $2.8 million.

Backing ‘Masterminds’

In May of that year, the pair appeared together at the Cannes Film Festival to celebrate Relativity’s 10th anniversary, along with stars including Edward Norton and Zoe Saldana.

Later that summer, OneWest arranged two more loans for Relativity. The money was used to finance “Masterminds,” a comedy with Zach Galifianakis, and “The Disappointments Room,” a horror film starring Kate Beckinsale. Both movies were released last year and were box-office flops.

In October 2014, the studio announced that Mnuchin was joining as co-chairman of Relativity’s board and that he and a hedge fund he managed, Dune Capital Partners IV, would take stakes in the company. Variety reported that Mnuchin and his fund invested a total of about $80 million. His personal holding amounted to as much as 14.5 percent, one court filing shows.

“Steven has been a trusted adviser for years,” Kavanaugh said in a statement announcing the transaction.

From that point on, the OneWest board minus Mnuchin and Wiatt handled decisions involving Relativity, according to securities filings. Wiatt declined to comment.

Cash Shortages

During his time on the board, Mnuchin sought to rein in Kavanaugh’s spending, according to one person with knowledge of his service who asked not to be identified. But Mnuchin wasn’t able to fix Relativity’s chronic cash shortages. He stepped down from the board about eight months later, just before the big OneWest loan and other debts came due at the end of May.

OneWest agreed to give Relativity a few more weeks to pay, but it started sweeping money out of Relativity’s bank accounts, including from two used to compensate writers and performers, according to a declaration filed in the bankruptcy proceedings. The moves helped push Relativity into bankruptcy in July 2015.

Some faulted OneWest and Mnuchin. The New York Post reported that a Relativity lawyer accused OneWest in a letter of improperly trying to collect some cash and threatened a contempt motion. Relativity doesn’t appear to have pursued the matter, and OneWest’s actions weren’t challenged in the bankruptcy proceeding.

The other complaint involving OneWest came from RKA Film Financing LLC, a lender to Relativity. In a New York State fraud suit last year, RKA claimed that Relativity officials, including Mnuchin, misled it about the safety of a loan it made. RKA also claimed it may have been entitled to some of the cash OneWest took from the studio before the bankruptcy filing.

In response, Mnuchin’s lawyers argued that he couldn’t have taken part in any fraud because he didn’t join the Relativity board until months after RKA agreed to make the loan. The suit didn’t offer many specifics, and a judge dismissed it last year. He gave RKA until next month to amend its complaint. Christopher Clark, a lawyer for RKA, declined to comment.

After Bankruptcy

Relativity emerged from bankruptcy last year. Its reorganization plan called for OneWest, which was sold to CIT Group Inc. in August 2015, and lenders that bought pieces of the loan, to get a full recovery. Equity holders like Mnuchin and his hedge fund got nothing.

Kavanaugh doesn’t seem to have borne a grudge. A few months after the bankruptcy filing, he attended a party to celebrate Mnuchin’s engagement to actress Louise Linton, according to the Hollywood Reporter.

Last month, the Wrap reported that Kavanaugh had stepped down from daily oversight of Relativity. Earlier this month, Variety said the bulk of the company’s employees were placed on indefinite furlough. Kavanaugh and Relativity declined to comment.

As for the jet, the company that owns it, EMT Air LLC, updated its corporate registration in October. Kavanaugh’s name was removed, leaving Mnuchin as sole manager. The jet was enlisted during the Trump campaign, shuttling to swing states like Ohio and Michigan, according to flight records filed with the Federal Aviation Administration. The campaign paid Mnuchin’s aircraft company $117,000 for the trips.

— With assistance by Anousha Sakoui

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