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Robert Sillerman fined $179,000 for investment fraud

The ex-SFX chief falsified financial documents and diverted the proceeds of a funding round to his personal bank accounts, alleges the SEC

By Jon Chapple on 16 Jul 2019

Robert Sillerman

SFX-era Robert Sillerman


Robert Sillerman has been charged with fraud by the US Securities and Exchange Commission (SEC), which has ordered the former SFX Entertainment CEO to pay a fine of US$179,000, as well as barring him permanently from serving as the director or officer of a business.

The SEC’s complaint, filed on 28 June, relates Sillerman’s post-SFX online publishing business, Function(x), which was quietly wound up last year after Sillerman was forced into bankruptcy by a creditor, Chicago promoter React Presents, which was owed $10 million in acquisition costs.

SFX filed for bankruptcy in February 2016 with debts of almost half a billion dollars, run up in a bid to rapidly consolidate the dance music sector (aping the roll-up of rock promoters in the early 2000s by the original SFX – now Live Nation).

Function(x) – an online news outfit specialising in clickable ‘viral’ content – ran into trouble in 2017, furloughed three quarters of its employees that September after finding itself unable to pay their wages. The lay-offs came after the company was delisted from the Nasdaq stock exchange after failing to meet the deadline for filing its quarterly report, and amid reports of unauthorised withdrawals to Sillerman from the company’s bank accounts.

Following the collapse of Function(x), the SEC (h/t Billboard) has charged Sillerman with “orchestrating an offering fraud” and “diverting offering proceeds to repay loans he had previously made to the company”.

The complaint elaborates: “Function(x), Inc., formerly an online publishing and entertainment business, incurred significant losses during the first quarter of 2017. To raise capital and fund its operations, Function(x) completed a public securities offering in February 2017, which brought in $4.8 million from investors. The complaint alleges that Sillerman fraudulently diverted $500,000 of the offering proceeds to repay certain loans he had made to Function(x).

“To induce investments in this offering, Sillerman falsely claimed that two celebrities had agreed to invest in the company”

“Then, in April and May 2017, Sillerman allegedly led efforts to raise additional money for Function(x) through a private securities offering. The SEC’s complaint alleges that to induce investments in this offering, Sillerman falsely claimed that two celebrities had agreed to invest in the company.

“The SEC further alleges that Sillerman created phony [sic] subscription documents, with forged signatures, purportedly from the two celebrities. Function(x) publicly announced that the offering had raised $10 million, which would be used for working capital and corporate expansion.

“In reality, however, the complaint alleges that Function(x) raised only half that amount and that Sillerman diverted all of the proceeds to his personal bank accounts, as further repayment of loans he had made to Function(x). Throughout his fraudulent scheme, Sillerman also allegedly ignored Function(x)’s internal accounting controls and failed to obtain approval to use offering proceeds to repay his loans.”

According to the SEC, Sillerman has agreed to pay the fine, as well as to a permanent “director-and-office bar”, pursuant to the resolution of his ongoing bankruptcy process.

The commission opened its investigation into Function(x) in November 2018, after the company was struck off the securities register for failing to file financial reports.

 


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