Creditors Allege Shady Insider Dealing In Midway Bankruptcy

February 15, 2009 -

When mystery man Mark Thomas acquired troubled game publisher Midway for a mere $100,000 last November, the deal raised more than a few eyebrows. It also raised questions like:

  • Who is Mark Thomas?
  • How could a company which owns popular franchises like Mortal Kombat and TNA Impact! be purchased so cheaply?

A motion filed on behalf of certain Midway creditors in U.S. Bankruptcy Court in Delaware on Friday makes those questions a matter of record and seeks to block the troubled publisher's move to spend collateral which obscure buyer Mark Thomas's Aquisitions Holding Subsidiary (AHS) put up as part of the Midway purchase.

The language of the motion, which seeks to protect the interests of holders of $150 million of senior Midway debt, comes close to alleging fraudulent insider dealing:

These cases... are tainted by highly unusual transactions by insiders of the Debtors... that, to put it charitably, require significant scrutiny... The rights and protections now offered [to AHS] are excessive and, under the circumstances, inappropriate...

The motion also digs into the shadowy relationship between former Midway owner Sumner Redstone (far left) and mysterious purchaser Mark Thomas:

[Midway] was dominated and controlled until November 28, 2008, by Sumner Redstone...

 

As recently as February 29, 2008, [Midway's] balance sheet was far less encumbered by debt... On February 29th, 2008 [Midway took three loans from Redstone-controlled entities]... just like that [Midway's] $15 million in outstanding loan indebtedness... ballooned to $90 million... to [Redstone]...

 

After the consummation of these Insider Loans... the Redstone parties sold for [$100,000] all of their [holdings] to... a very secretive individual named Mark Thomas... a person virtually unknown in the video game industry...

 

No disclosures ever have been made regarding Thomas or what, if any, relationship Thomas or his companies have with any Redstone Party... But it is safe to assume there must be a connection... given that Redstone essentially gifted [Midway for a mere $100,000]... to Thomas...

 

[Thomas stands] to reap an enormous, almost unprecedented windfall... if paid in full... the Thomas Parties will recover some 30,000% on their $100,000 investment within a matter of a few months... The Thomas Parties' return stands in stark contrast to the tens, or potentially even hundreds, of millions of dollars... that the Redstone-Thomas transaction may have stolen from [other creditors]...

Based on such language, it sounds like things could get very ugly, very quickly in the Midway bankruptcy proceedings. With that in mind, GamePolitics turned to Wedbush-Morgan analyst Michael Pachter for comment on the allegations:

The simple answer is that the unsecured creditors are alleging that the issuance of debt to Redstone secured by collateral was an “insider” deal.  The secured debt has preference over unsecured debt in liquidation, meaning that Redstone’s successor (Thomas) gets paid first.

The filing goes on to allege that when Redstone sold his equity and secured debt to Thomas, the act was a change of ownership, and triggered rules that wiped out tax losses, accelerated default provisions on the unsecured debt, and impaired Midway’s ability to refinance.

The unsecured creditors apparently don’t like the fact that Thomas was a financial buyer, and has full control now.  It is not in Thomas’ best interests to risk his big payday, and the unsecured creditors apparently believe that Thomas is going to force repayment of the debt as accounts receivable are collected.

In substance, they’re saying that Redstone orchestrated this, and they don’t like it.  They are trying to keep Thomas from pulling cash out until they get a chance to reorganize, as that could accelerate and exacerbate Midway’s troubles.

GP: We'll keep GamePolitics readers posted on developments...

DOCUMENT DUMP: Grab a copy of the creditors' motion here.

UPDATE: The Chicago Tribune has a piece on the guessing game surrounding Mark Thomas's identity (via Kotaku).


Comments

Re: Creditors Allege Shady Insider Dealing In Midway ...

Well this day was coming, the end of Midway. Unlike other companies, CAPCOM etc, they failed to truly embrace the digital age. In the sense of releasing older classic games on XBL and PSN. As well as delivering successful large franchise releases. Having only ever played 1 of their games, the great Smash TV, I don't think I'll be missing too much of Midway. their credit report was very low in 2008. Hopefully some of the people involved with games development there can find another job, good luck to all of them.

Re: Creditors Allege Shady Insider Dealing In Midway ...

So let's say that this Mark Thomas is associated with Redstone, and that the transaction was done in order to screw the creditors; what happens then? Are the creditors able to go after Redstone and Thomas, or are they stuck dealing with Midway? Are there any possible criminal charges that Thomas and Redstone should worry about? Is it possible that the transaction may be reversed?

Re: Creditors Allege Shady Insider Dealing In Midway ...

Hopefully, if this is the BS it looks like it is, we'll see this kind of corporate BS become a felony to the parties involved and finally start jailing some of these assholes.

Re: Creditors Allege Shady Insider Dealing In Midway ...

White collar crime can never be a felony, how else dose the goverment make money. :P

 


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Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

I thought it was $100K on top of Mark Thomas taking on all that debt.  Which seems pretty reasonable given all the debt Midway's in. What am I missing here?

Re: Creditors Allege Shady Insider Dealing In Midway ...

Pachter clarified it pretty well, I think.

The fear is that Thomas will get his money out first and the rest of the creditors will get screwed.

It also seems that, if Thomas (who is not a game industry person) only wants to get paid, then he will take the revenue that could go to rebuilding the company, leaving Midway nowhere.

Now when you look at these two possibilities, you have to wonder about the Redstone-Thomas relationship and how this plan got cooked up.

Re: Creditors Allege Shady Insider Dealing In Midway ...

Michael, I'm sure, has done enough research to determine who Thomas is. The Georgetown connection will lead back to relationships with Redstone, CBS, etc. that explains a lot. Also.....Thomas is a divorce attorney who goes back a ways. Think about it.

TSC

Re: Creditors Allege Shady Insider Dealing In Midway ...

I hate legal jargon, so what they think that Redstone wasn't just desperate to get out from under all that debt? (With as much as he stood to lose I'd wanna shuck it off on the first guy I met too) I mean I guess it could be some kinda fraud thing but I figured Bankruptcy was just along the line of common sense since they couldn't play in time if they wanted to. I mean if he files Bankruptcy that'd buy them time to profit off the major titles wouldn't it?

Re: Creditors Allege Shady Insider Dealing In Midway ...

well, there's no doubt that the people crying foul are pushing a position of their own. And you can bet Redstone/Thomas have tons of lawyers of their own. Ultimately, the court will decide.

As a gamer, what I'd be most concerned about is Thomas pulling all of the revenue out that he can get, leaving Midway a hollow shell. We've already seen last week that they sold off Wheelman, which was supposed to be a big release for Midway.

Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

Good to see corporate raiding is still alive and well.

--------------------------------------------------

I LIKE the fence. I get 2 groups to laugh at then.

-------------------------------------------------- I LIKE the fence. I get 2 groups to laugh at then.

Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

Another question is why they thought they could get away with this. Yes, Midway's debt and poor management have devalued it, but a hundred times more would have been a lowball offer.

Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

Very ugly might actually be an understatement.

Another question one might ask is "Was this legal?"

Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

When the whole deal came about, I thought the same thing. How can you sell something for so cheap when it has several [hundred] million in debt and virtually had no means as to make and repay the debt in the time that it had? I, also, think that this is not just an inside job, but also trying to make a fast buck in a, largely, illegal way.

Re: Creditors Allege Shady Insider Dealing In Midway Bankruptcy

Sounds like the shit is just about to hit the fan. Won't be pretty.

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