Orange County Register owner Aaron Kushner alleges that the former owners fraudulently misstated finances of the newspaper's parent company, leading him to significantly overpay when he bought it last year.
The previous owners of Freedom Communications, however, contend that the fraud claims are unsubstantiated and are being used as a pretext to avoid paying them money still owed to close the deal.
The dispute surfaced in a lawsuit filed late last month by former Freedom shareholders. They're demanding that Kushner's holding company, 2100 Trust, cough up more than $17 million in an escrow account that was held back from the original sale.
The suit comes in response to a letter that Kushner sent to shareholders' representatives in July alleging that the prior owners committed "deliberate misconduct" that "constitutes fraud." Specifically, it said that during sales negotiations, Kushner was given inaccurate valuations for a host of crucial financial indicators. Among them, the letter said, the company low-balled its unfunded pension liabilities by $31 million.
All told, the letter alleges, Kushner faces $62.3 million in unexpected financial liabilities as a result of the deal.
"Management deliberately concealed significant, material information and made a variety of misrepresentations, all in an effort to inflate the purchase price," the letter said. "The actual value of the company is substantially less than the value paid by [Kushner] to acquire it."
A copy of the merger agreement included in the lawsuit says Kushner agreed to pay $50 million in cash and to assume various liabilities, including unfunded pension obligations valued at more than $110 million. The sale price had not been previously disclosed.
The July letter said that Kushner's firm intended to pursue fraud claims based on the allegations. However, no such legal action has been taken to date.
A spokesman for Freedom declined to comment on the shareholder lawsuit. Attorneys for the shareholders did not return calls seeking comment, nor did a spokesman at Angelo, Gordon Management, the investment firm representing their interests.
Kushner, a former greeting-card executive with no prior media experience, finalized his purchase of Freedom in July of 2012.
Since the purchase, he has embarked on a bold and ambitious plan to expand the Register and several other Southern California papers controlled by Freedom.
At a time when other newspapers are cutting back, he has more than doubled editorial staffing at the Register, invested in new sections and added new regional editions. Kushner has said he's put as much as $15 million in additional cash in the business. In August, he launched a new daily newspaper, the Long Beach Register. Last month Freedom acquired the Riverside Press Enterprise for $27.25 million.
The effort has earned Kushner plaudits from media critics, who have called him a visionary. But little is known about how financially successful the investment has been, and there have been some indications that cash is tight.
The company ceased making contributions to employees' 401(k) retirement plans last January, and in August, Kushner told employees that it had failed to meet performance goals in the second quarter. The Orange County Register set up an Internet pay wall that has significantly reduced digital revenue. Meanwhile, the paper's daily print circulation has declined slightly.
Kushner and Freedom have become caught up in a growing number of legal entanglements.
An outside advisor retained by Kushner to advise on attempted purchases of the Boston Globe and other media groups sued in New York last year, alleging he's owed nearly $14 million.
And last month, two former Freedom executives filed suit in Los Angeles County Superior Court demanding $4.5 million in severance pay. Both those cases are still pending.
The newest suit, filed Oct. 25 in Delaware, revolves around a so-called holdback from the original deal. Corporate acquisitions often allow purchasers to retain part of the purchase price in reserve for a set time period to protect against unforeseen losses.
In the Freedom deal, Kushner's holding company, 2100 Trust, set aside $17.45 million as a holdback. The agreement called for 2100 Trust to turn over that amount on July 25, the one-year anniversary of the deal's completion, barring any problems.
But a week prior to that date, attorneys for Kushner's firm sent a letter to Angelo, Gordon indicating that it was retaining the holdback "as a partial offset of the damages occasioned by [the prior owner's] fraud."
The letter highlights eight financial indicators it says were fraudulently reported in the due diligence process. Among them were unfunded pension liabilities that the prior owners said stood at $114 million. In fact, the letter states, they were $141 million.
In addition, Freedom reported that credit card charges weren't accounted for correctly, resulting in $10.25 million in additional liabilities. A calculation of savings from reduced technology overstated them by more than $6 million, the letter said.
In response, Angelo, Gordon contended that Kushner's allegations were not properly substantiated. "The letter did not include underlying documentation or spreadsheets" and "did not show calculations of the estimated losses" that produced the $62.3-million figure, the civil complaint said.
Instead, it alleges, Kushner's fraud allegations were made "presumably to circumvent" the merger agreement and allow him to retain the holdback funds.
In spite of recent speculation about Freedom's financial performance, Kushner has steadfastly defended Freedom's strategy and potential for profits.
His acquisition was financed through a loan by Crystal Financial, an independent lender. Kushner has said he has already paid off a significant portion of the note. Steven Migliero Jr., head of originations at Crystal, declined to comment on the status of the loan. Randy Lampert, who was retained to arrange the deal's funding, also declined to discuss the matter.
In a September interview with The Times, Kushner declined to share the company's balance sheet. He said Freedom was profitable in 2012, and although it had not been so far in 2013, he expected a strong 4th quarter would put it into the black.
"We're not in financial trouble. We're actively growing our business," Kushner said. "We're in perfectly fine financial positions. We're very happy with where we are."
Times staff writer Jason Felch contributed to this report.