How Donald Trump’s Finance Chief Got Messed Up With ‘Masterminds’
Zach Galifianakas and Donald Trump have more in common than recent one-on-ones with Hillary Clinton.
When film studio Relativity Media filed for bankruptcy protection in July 2015, the collateral damage nearly included Masterminds, a bank heist comedy that had been scheduled to be released just weeks later. Off screen, the film’s road to the theaters involves its own set of real life twists, including allegations of self-dealing and a number of boldfaced business names.
Masterminds, which co-stars Zach Galifianakis and Kristen Wiig, finally comes out this weekend, being released by what some are calling Relativity 2.0 after the company recently emerged from bankruptcy. The real life cast of characters from the world of finance involved with the film are just as big named and odd coupled, including billionaire and long-time Bill and Hillary Clinton backer Ron Burkle, Hollywood money man Ryan Kavanaugh, and Steven Mnuchin, a hedge fund manager and former bank CEO, who in May was named the finance chair of Donald Trump’s presidential campaign. Trump has privately told supporters that if he were to win the White House, Mnuchin would be Trump’s pick for Secretary of the Treasury.
If they ever decide to make a screwball comedy about the intersection of Hollywood and Wall Street, and now Washington, this would be a pretty good story to base it on.
Film studio Relativity was co-founded in 2005 by Kavanaugh, who proclaimed that he had developed an algorithm that could predict a film’s success before it was even produced. His early results were suggested he might be right, with Relativity having a hand in either producing, distributing or helping to finance such hits as Talladega Nights, Mamma Mia, Frost-Nixon and Paul Blart: Mall Cop.
Media acclaim followed. In 2010, Fortune named Kavanaugh to its 40 Under 40 list, writing that “as Wall Street has limped away from the movie-financing business, Kavanaugh has raised more than $10 billion for projects like The Social Network.”
He also was surrounding himself with some heavy hitters from the investment world. In 2012, supermarket magnate―and longtime Clinton pal―Ron Burkle joined the Relativity board of directors, via a pair of investments from his Yucaipa Cos. (where Bill Clinton once served as an advisor and partner). And Burkle wasn’t the only one.
Enter Mnuchin. As Kavanaugh’s star was rising in Hollywood, Mnuchin also was riding into town. Mnuchin, 53, a Skull and Crossboner from Yale, got his start on Wall Street at Goldman Sachs in the mid-1980s, eventually rising to partner. He left Goldman in 2002 for hedge funds, working for George Soros and college roommate Eddie Lampert. In 2004, Mnuchin formed his own firm, Dune Capital, named for a spot near his house in the Hamptons.
Among Dune’s investments were a number of Trump projects. And like a number of others who are now supporting Trump for president, Mnuchin once was an adversary, having been sued by Trump over a Chicago skyscraper project.
In late-2008, as the financial world was collapsing, Mnuchin assembled $1.6 billion from Soros, hedge fund manager John Paulson and others, to buy failed housing lender IndyMac, in what some later called a sweet heart deal from the FDIC. And that’s what brought him to Los Angeles. Mnuchin moved west, bought a $26 million mansion, and renamed his bank OneWest. The bank later was accused of rapidly foreclosing on former IndyMac mortgage borrowers, but ended up paying a relatively modest $8.5 million in the multi-bank “robbo-signing” settlements of 2013.
While on the West Coast Mnuchin got hooked up with Relativity. The number-crunching studio and the successful hedge fund manager seemed to be a smart match. Mnuchin and his fund invested around $80 million. Kavanaugh named the financier Relativity’s non-executive chairman.
“Steven has been a trusted advisor for years,” Kanavaugh said at the time of Mnuchin, who had previously helped finance films for 20th Century Fox (including Avatar). “He brings an unrivaled perspective on the ever-increasing value of content in Hollywood and Wall Street, and his experience will prove invaluable as we continue moving toward an IPO.”
The Mnuchin relationship with Relativity, however, was complicated from the start.
Mnuchin’s OneWest lent Relativity $24.1 million in August 2014 to help produce Masterminds. That September it would loan Relativity another $14.7 million for a horror film appropriately titled The Disappointments Room ($1.4 million opening weekend box office). There also were loans for other projects.
That meant that Mnuchin was effectively was on both sides of the transactions.
Moreover, it’s also worth noting that all this came around the time Mnuchin had inked a deal to sell OneWest to CIT Group (CIT) for $3.4 billion, but long before that mega-merger could close, with Mnuchin to be named CIT’s vice chairman.
Box Office Bust
Relativity’s finances, even with Kavanaugh at the helm and Mnuchin on the board, were lousy. By the end of 2014, the company had $1.18 billion in liabilities, against just around $560 million in assets (per court documents). Moreover, Kavanaugh claimed in an April 2015 interview that the company had secured $250 million in fresh equity funding, even though the real number was below $70 million. Kavanaugh’s famed algorithm was on the fritz.
All of the details began to leak out in late May 2015, with a New York Post report that Relativity owed creditors hundreds of millions of dollars, and that its ability to pay was in serious doubt. Shortly thereafter, two Relativity board members (who also worked at one of Relativity’s creditors) stepped down, with Kavanaugh reportedly believing that they had tipped off the newspaper.
On July 30, 2015, Relativity filed for Chapter 11 bankruptcy protection, wiping out most of Mnuchin’s $80 million investment. Days later, CIT completed its purchase of OneWest, generating a massive profit for Mnuchin and his co-investors.
Swept Under the Rug
Most major business and entertainment media reported on the Relativity bankruptcy, but none at the time realized Mnuchin’s role on multiple sides of the mess.
Mnuchin quietly resigned from the Relativity board on the same day that the hundreds of millions in debt came due (Relativity later received a slight extension). Then, less than two weeks before the bankruptcy filing, OneWest “swept” around $50 million from Relativity’s bank accounts―leaving the company unable to pay certain vendors, such as one contracted to do promotional work for Masterminds, and arguably rolling the final credits on Relativity.
OneWest seems to have had the contractual authority to do the sweep, via some seniority clauses in loan agreements with Relativity. Less clear, however, is whether Mnuchin violated his fiduciary duty to other Relativity creditors. Yes, he was more than a month removed from his role as non-executive chairman, but he still had an intimate knowledge of the company’s finances born of that position. That means he should have known that the sweep could contribute to a financial cascade effect at Relativity, precluding it from releasing Masterminds (which many considered to be Relativity’s most promising film).
Kavanaugh was livid at Mnuchin and OneWest, essentially feeling like he had been stabbed in the back by his old partner. Relativity reportedly threatened to bring a contempt motion against Mnuchin and OneWest in bankruptcy court if the “sweeps” didn’t stop immediately (according to CIT documents, it was still owned $38.5 million as of year-end 2015, based on the loans to Masterminds, The Disappointment Room and other projects). No more sweeps occurred.
Also angry was that aforementioned promotions vendor, RKA Film Financing, which earlier this year filed a civil suit whose defendants included Kavanaugh and Mnuchin. In it, RKA accused the defendants of fraud.
Mnuchin’s attorney asked that his client be removed as a defendant since he was not on Relativity’s board when the original contracts were signed with RKA, nor when Relativity filed for bankruptcy protection. RKA, however, has declined to honor that request and the court has not yet ruled on Mnuchin’s subsequent motion to dismiss.
[scribd id=325682254 key=key-JY46umYuzgLYMjwbLlxU mode=scroll]
Today, Relativity is out of bankruptcy with Kavanaugh still in charge. CIT Group has been repaid in full, and the RKA fraud lawsuit is still pending against all defendants.
But, most importantly, Masterminds is being released. One source close to RKA believes that this film’s success or failure will be a harbinger of Relativity ultimate fate, despite Kavanaugh’s recent claim that he has secured $117 million in new funding from Chicago billionaire Joe Nicholas (Nicholas declined comment, and Kavanaugh’s penchant for exaggerating financing commitments is well documented).
“When Lazarus rose from the dead he was a different person, but he didn’t last too long,” says the source, who adds that Masterminds would need to gross around $400 million in order to make RKA whole (as RKA only gets a percentage of the gross).
If the film proves wildly successful, then perhaps all will be forgiven. Kavanaugh can go back to being a wunderkind. Mnuchin can keep dialing for dollars, and if Trump wins start practicing his signature.
But if it fails—and so far, based on the early reviews, it’s not looking good— or is even just mildly successful, then this whole ugly mess comes back to the fore when the court case heats up again. And that might be fitting, given that Masterminds is based on a real-life unlikely robbery success story gone bad.