By Julie Reynolds
Hedge fund Alden Global Capital admitted in court filings last week that its newspaper holding company has diverted hundreds of millions of dollars from struggling Digital First Media newspapers into Alden-managed investments.
The cash siphoning, engineered through obscure subsidiary companies created after Alden became the news chain’s majority shareholder in 2012, came as thousands of workers were laid off and newspapers stripped of real estate and other assets to help finance Alden’s often risky investments.
Executives at the profitable newspapers have cited industry-wide economic pressures as the sole reason behind the gutting.
Now the admission by the company’s owner that it deliberately siphoned many millions away from the newspaper chain casts doubt on that claim.
Some Digital First worksites have endured staff reductions of more than 40 percent in the last two years alone. Venerable nameplates have vanished or been consolidated into what industry observers call “ghost newspapers,” including the Oakland Tribune, now reborn as a section in the regional East Bay Times.
The court documents were in response to a Delaware lawsuit filed against Digital First’s corporate entity — called MNG Enterprises — by another hedge fund, Solus Alternative Asset Management, which owns a 24 percent minority stake in the newspapers.
Solus claims that Alden/DFM suddenly stopped providing financial statements and other information it says it has a right to as a fellow shareholder. It also alleges collusion between Alden and the news chain’s management to divert millions into investments unrelated to media or newspapers. While Alden admitted the investments took place, it denied the collusion, without citing evidence or explanation.
Among the cash diversions Alden admits to in the March 19 filing are the following:
- In December 2014, DFM transferred $10 million into the Alden Global CRE Opportunities Master Fund LP, based in the Cayman Islands. It’s unclear what this money was used for, but months later the same fund invested roughly $80 million in Homex, a bankrupt developer charged by the Securities and Exchange Commission with committing the biggest real estate fraud in Mexican history.
- As of June 2016, DFM had invested $248.5 million of workers’ pension funds in Alden-controlled affiliates. (After workers became aware of the insider investments, management gradually withdrew the pension dollars from Alden.)
- In late 2016, DFM subsidiary Strategic Investment Opportunities LLC, which Alden manages, invested $158 million in the Fred’s Inc. pharmacy chain, a gamble that has since lost more that $131 million in value.
Other admissions in the documents confirmed findings that DFM workers have known or suspected:
- Twenty Lake Holdings, which has been positioned as an independent firm that sells newspaper buildings and land across the U.S., is in fact an Alden affiliate.
- Alden took part in an insider “sale/leaseback” in which Twenty Lake bought a property from a DFM paper — possibly from the Denver Post — and then leased it back to the newspaper.
- In 2018, DFM is currently trying to acquire more debt, partly to divert even more money into InvestmentCO, a firm it created in a 2016 “reorganization.”
- DFM newspapers have already contributed “real estate, cash, cash equivalents, and other assets” into InvestmentCO, and in 2016 took out a $225 million loan to fund the company and pay off another debt.
Amazingly, Alden-DFM neither confirmed nor denied that Alden is the “controlling” shareholder in the newspaper chain — despite overwhelming evidence — by saying that was “a conclusion of law” that required no response. But Alden admits its president Heath Freeman has been a director of the news chain since 2011 (he’s now listed as its vice chair), and that four of Digital First’s five board members are connected to Alden.
Alden did admit it owns more than 50.1 percent of the chain, and the court documents show that at least five other Alden-controlled companies are shareholders as well, including several based in the secrecy-loving Cayman Islands. Solus claims that only Alden and these five subsidiaries signed onto a 2017 “shareholders’ agreement” that left Solus out of the decision-making.
Alden also did not specifically deny that DFM routed 70 million Euros into another Cayman Island-based Alden fund for “Investment in Greek Sovereign Debt.”
It did admit it stopped providing financial reports to minority shareholder Solus after June 30, 2017, and that it stopped holding conference calls.
The response did contain some denials, however.
Alden denied Solus’ allegation that InvestmentCO was another secret company that was “purposefully obfuscated” to benefit Alden. And it denied all of Solus’ allegations of improperly withholding information, stating simply that the complaint “exceeds the permissible scope of a demand” and “fails to state a claim upon which relief can be granted.”
This last is stunning considering that Solus is not suing for money (at least not yet), but is asking to see the financials and documents it was privy to before Alden admittedly stopped sharing them last year. Solus is especially interested in the activities of InvestmentCO.
While it’s possible this lawsuit will end with a quiet settlement, it has already revealed — and put on the record — the mechanisms and tactics Alden is deploying to drain hundreds of community newspapers across the U.S. of their lifeblood.
It’s also possible Alden is gearing for a fight. For an obscure case in an obscure Delaware court, it’s noteworthy that the hedge fund hired as consultants what is arguably the nation’s most powerful, high-profile law firm: Washington D.C.-based Akin, Gump, Strauss, Hauer & Feld.
Meanwhile, the Delaware Chancery Court has set a tentative one-day trial date of May 24. If the case does proceed, depositions and discovery may provide our only deep glimpse inside Alden’s secret practices that have been so devastating to communities across the U.S.