More details about a lawsuit filed by the Diamond Sports Group last month against the Sinclair Broadcast Group have been reported.
When first reported in July, we knew that Diamond’s lawsuit “accuses Sinclair of receiving about $1.5 billion as a result of alleged misconduct.” Diamond claimed that value “was improperly transferred” to Sinclair prior to Diamond’s bankruptcy filing in March 2023.
Details of the lawsuit, first reported by Bloomberg on Wednesday, have now emerged. The suit quotes Sinclair executive chairman David Smith as wanting to “milk” Diamond for over $100 million per year, per NextTV.
“For years after Sinclair’s 2019 acquisition of the regional sports networks now owned by Diamond, Sinclair pursued a strategy of — in the words of defendant David Smith, Sinclair’s current executive chairman and former longtime CEO and the scion of its founding family — ‘milk[ing]’ Diamond for more than $100 million annually in purported management fees ‘and whatever else I can take out of the company’ before it filed for bankruptcy,” Diamond says in its lawsuit.
In June, MLB Commissioner Rob Manfred recounted a conversation with Smith in his bankruptcy court testimony, saying Smitb told him that he would “keep this going long enough until I get my $2 billion out, OK? And then I’m going to start squeezing your clubs to take their rights fees down, OK, in order to make sure that I stay profitable in the RSN business. And if they don’t agree to that, I’m going to put the entity into bankruptcy, and then I’m going to selectively reject contracts.;”
Per MarketWatch, MLB Chief Revenue Officer confirmed the story in his testimony earlier this year, which Diamond highlighted in the suit.
MLB Chief Revenue Officer Noah Garden corroborated that story, the suit says, testifying that Smith threatened to “continue to milk [Diamond] for its fees that were owed to Sinclair and he was going to put [Diamond] into bankruptcy.”
“In this regard, at least, Smith was true to his word: that is just what he and Sinclair did,” the suit says.
The suit also discusses Sinclair’s acquisition of the RSNs back in 2019 and the debt Diamond was saddled with, along with the issuance of over $1 billion in preferred equity to JPMorgan Chase, which was subpoenaed in June by Diamond.
To fund the $10.6 billion acquisition that became the Bally Sports regional sports network, “Sinclair caused DSG to incur $8.2 billion in new debt, which in turn imposed on DSG between $400 and $650 million in annual debt service (approximately a quarter of DSG’s current annual revenues),” Diamond’s suit claims.
“Sinclair obtained additional financing by causing defendant Diamond Sports Holdings (a shell Sinclair subsidiary created for the acquisition) to issue $1.025 billion in units of what [was] purported to be preferred equity to JP Morgan Chase Financing, Inc. (JPMCFI). To induce JPMCFI to provide this financing, Sinclair guaranteed DSH’s obligations under the preferred units. DSG had no obligations whatsoever with respect to the preferred units, but Sinclair imposed on DSG the financial burden of making distributions used to fund periodic interest payments to JPMCFI and the repayment of principal well before the preferred units matured.”
Diamond’s suit outlines the “nefarious strategy” implemented by Sinclair to “transfer more than $1.5 billion in cash and other consideration.”
Speaking more broadly about Sinclair’s “nefarious strategy,” Diamond adds that during the approximately two and a half years that Sinclair “owned, controlled, and dominated Diamond in all material respects — stacking its board and management with senior Sinclair executives — Sinclair wrongfully caused Diamond to transfer more than $1.5 billion in cash and other consideration to or for the benefit of Sinclair. All of this was conceived of and implemented while Diamond’s business was, as Sinclair officers and directors knew or should have known, careening toward bankruptcy, and it continued after Diamond was unquestionably insolvent. Diamond now brings this action to recover for those fraudulent transfers, breaches of fiduciary duties, and other acts of misconduct by Sinclair and certain of its officers and directors who controlled Diamond’s affairs.”
Sinclair issued the same statement they did last month, denying the allegations from Diamond.
“Sinclair, Inc. has been informed of a lawsuit filed by Diamond Sports Group in connection with their ongoing bankruptcy proceeding. We firmly believe the allegations in this lawsuit are without merit and intend to vigorously defend against them.”
So, this all seems to be going great. With the NBA and NHL seasons only a couple of months away, this bankruptcy process and this lawsuit will be under plenty of scrutiny from the sports world.