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Broadcasting & Cable
Broadcasting & Cable
Daniel Frankel

Sinclair 'Milked' Bally Sports Subsidiary Out of More Than $1.5 Billion, Diamond Sports Group Suit Says

Bally Sports

They say you reserve your most hurtful haymakers for your family. 

In that dysfunctional spirit, Sinclair Broadcast Group's estranged, bankrupt subsidiary, Diamond Sports Group, has more than a few choice words and phrases in the lawsuit it filed against the corporate parent from which it was spun off.

Also read: Bally Sports Bankruptcy Gets Bloodier: Diamond Files Suit Against Sinclair and JP Morgan, Tries to Claw Back $1 Billion Preferred Equity Repayment 

The lawsuit is part of a campaign being waged by Diamond's secondary creditors to "claw back several billion dollars" that Sinclair allegedly "milked" from its subsidiary since it set up the operation in 2019, after its ill-fated $10.6 billion purchase of 19 Fox Sports Net channels. 

Next TV first reported on the suit a month ago. Now we've seen the full (but redacted) complaint ... and Diamond's lawyers don't hold back. 

"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. 

Also read: Sinclair CEO Chris Ripley: Despite Diamond Disappointment, Sports Is Still the Broadcaster's Crown Jewel (Bloom)

Beyond allegedly over-charging its subsidiary for management fees, Diamond also contends that Sinclair manipulated events so that preferred equity partner JP Morgan Chase was made whole on $1.025 billion while secondary creditors have had to essentially pound sand. 

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."

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."

Reached for comment Wednesday, a Sinclair rep repeated the broadcaster's statement from 28 days ago: “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.”

Meanwhile, a source working with Diamond's secondary creditors told Next TV that he fully expects Diamond to emerge intact from bankruptcy restructuring, despite seemingly austere challenges including multiple upcoming pay TV carriage renewal negotiations (with Comcast, Charter and DirecTV), as well as the soon-to-arrive deal-restructuring talks with select NBA and NHL teams

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