A securities class action lawsuit has been initiated against the defunct Kew Media Group (KMG) and its directors by a pair of former shareholders.

The lawsuit, which is based on a statement of claim by former Kew shareholders Alex Kan and Stuart Rath, alleges that the company’s senior managerial team – including its C-Suite, board of directors and its audit committee – failed to “properly manage and disclose fundamentally material information.”

Kew’s former directors Steven Silver (founder and CEO), Peter Sussman (founder and chairman), Geoffrey Webb (CFO), David Fleck, Maurice Kagan, Patrice Merrin and Erick Kwak are named individually in the suit, which comes nearly five months after KMG was placed into receivership following a messy unraveling.

All of the individuals made misrepresentations to the market regarding its working capital, argues the statement of claim, and also falsely represented that Kew was complying with the covenants in its credit facility, which was more than US$100 million. The claim also alleges the defendants made misrepresentations about the availability of sufficient financial resources.

The dollar figure for the damages being sought is not specified in the documents filed with the Ontario Superior Court of Justice. The claim simply states the plaintiffs seek to “recover the significant damages that were suffered by Kew’s shareholders who were left holding shares that are now worthless on account of the misconduct of Kew, its senior management and the audit committee.”

In order to initiate the class action, the applicants sought a lift stay order. This was granted by Justice Markus Koehnen of Ontario Superior Court of Justice, paving the way for the suit to proceed.

According to the claim, Toronto-based Kan purchased 1,600 Kew shares on the Toronto Stock Exchange (TSX), while Nova Scotia-base Rath purchased 30,000 shares. Both owned these shares until the company was delisted from the TSX earlier this year.

In addition to “punitive damages,” the plaintiffs are also claiming: a declaration that the  “impugned” financial filings contained one or more misrepresentations within the meaning of the Ontario Securities Act; a declaration that the individual defendants “authorized, permitted or acquiesced in the making of the misrepresentations while knowing them to be misrepresentations”; a declaration that Kew is “vicariously liable for the acts and omissions of the Individual Defendants”; and an equitable rate of interest on all sums found due and owing to the plaintiff and the class members.

Kew, formed as a special purpose acquisition company (SPAC) with a view to acquiring production and distribution firms, burst onto the scene in early 2017 with its acquisition of five Canadian production companies and Content Media Corporation (which it later rebranded as Kew Media Distribution).

“All of this growth made Kew appear to be an attractive investment, but all of these acquisitions put significant pressure on Kew’s cash flow and working capital. Unbeknownst to investors at the time, Kew masked its working capital deficiencies by accessing funds from the bank accounts of its affiliates and supplying false information to its Lenders,” said the claim.

Kew’s financial woes came to light in November 2019 as the company reported Q3 results that set alarm bells ringing for investors. Three weeks later, Kew announced it was undertaking a strategic review to explore its options, appointing a special committee to do so. At the time, Kew also said that CFO Webb had departed the company after financial filings he had overseen “contained inaccurate information regarding working capital.”

The situation worsened in January as Grant Thornton LLP, the accounting firm that conducted financial audits for Kew Media, withdrew previously released financial reports, spanning a number of years, due to an “inability to rely on the representations” made to the accounting firm by Kew. Two days later, on Jan. 16, Kew received a “cease trade order” from the Ontario Securities Commission (OSC), and was subsequently delisted permanently two weeks later.

On Feb. 28, its senior lender Truist Bank demanded repayment of all amounts owing under its senior credit facility and later that day it was announced that all Kew’s directors, including Silver and Sussman, had resigned from the company and it had been placed into receivership.

Court documents later revealed Kew’s debts to a syndicate of lenders led by Truist Bank were around US$113 million. FTI Consulting, the receivership company appointed to oversee the sale of Kew’s assets, said in April that even after selling off various Kew-owned assets, there would still be outstanding debts in excess of US$90 million.

Documents released by administrator FTI Consulting also revealed that distribution arm Kew Media Distribution owed £10.8 million (around C$18.6 million) to more than 250 entities when the company was placed into administration. Among the unsecured creditors were Shaftesbury (which the documents showed was owed approximately C$2.74 million), BGM ($2.47 million), SEVEN24 Films ($1.44 million), White Pine Pictures ($182,000) and Deluxe Toronto ($263,000).

Many of the distribution rights previously held by Kew Media Distribution have since been picked up by a pair of recently formed entities: Abacus Media and Quiver Entertainment.

All the Canadian companies formerly under the Kew umbrella (Architect Films, BGM, Frantic Films, Media Headquarters Film and Television, Sienna Films) have since found new ownership or been acquired by their founders.

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