Texas Securities Fraud: District Court Says Houston-Based Private Equity Firm Can Proceed with Claim Over $10M Film Financing Investment

The U.S. District Court for the Southern District of Texas is allowing Small Ventures USA LP, a private equity firm based in Houston, to move forward with its Delaware fraud claim against the promoters that solicited its $10 million investment in RT Newbridge III LLC, a film financing venture. Judge Ewing Werlein Jr. also decided that the plaintiff could proceed with its Texas securities fraud claim against MLRT Film Holdings LLC, Rizvi Traverse Management LLC, and a number of individual defendants.

Small Ventures contends that the defendants made false representations that most of Newbridge’s investments, including independent movie Tekken (comprising about 30% of its portfolio), were financially healthy, when in fact they were not. Meantime, they also allegedly hid or did not reveal material facts, such as the fact that this particular film’s producer had defaulted on an $11 million loan from Newbridge and the movie wasn’t commercially viable and had received poor reviews at the Cannes Film Festival.

The plaintiff claims that to persuade the private equity firm to invest, in 2008 defendant Suhail Rizvi told Small Ventures founder William O. Perkins III that the loan Newbridge had made to produce the film was low risk because of having been over-collateralized with tax credits or foreign pre-sales. Spreadsheets were also passed on to the Small Ventures to make it appear as if the Newbridge portfolio was doing well. Several months after investment discussions began, Small Ventures decided to invest $10 million in return for a membership interest in Newbridge.

When Newbridge failed and the defendants did not collect on the Tekken loan, Small Ventures lost its investment. The plaintiff contends that if it had known the truth about the state of Tekken, it would have taken action to sell its interest so that damages could be mitigated. Small Ventures also believes that the defendants were negligent in the way that they managed the Tekken loan due to their failure to comply with the terms mandated for collection of the completion guaranty bond.

The plaintiff wants damages for what it claims was tortious conduct related to the sale, solicitation, and management of its $10 million investment. It is also contending fraud, grossly negligent and negligent misrepresentation, fraud by nondisclosure, gross negligence and negligence, breach of fiduciary duty, and claims under the Texas Securities Act.

Per the court, Small Ventures stated a fraud claim under Delaware law, which is applicable to the fraud claim, per a choice of law clause that can be found in the agreement between the parties. The court turned down the defendants’ contention that the fraud claims should be thrown out due to “no other representations” and “no reliance” clauses that could be found in the subscription agreements. It did, however, dismiss Small Ventures’ fiduciary duty claims.

Small Ventures USA, L.P. v. Rizvi Traverse Management, LLC et al, Justia Dockets and Filings

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Shepherd Smith Edwards and Kantas, LTD, LLP is a Texas securities law firm.

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