MGA Sues Investment Firms for $450 Million

LOS ANGLES (CN) - Bratz dollmaker MGA Entertainment filed a $450 million lawsuit against two investment firms in its continuing battle against Deutsche Bank, Barclays and other banks over an acquisition of French toymaker that left MGA with 300 million euros of bad debt.

In its Superior Court complaint, MGA claims the banks failed to disclose that Smoby's top executive had embezzled and laundered millions from Smoby. MGA claims it acquired the French toymaker after the banks promised they would discount Smoby's massive debt.

But after MGA pumped more than 50 million euros into Smoby, the banks sued MGA in French court to recover the 300 million euros and avoid their exposure to Smoby's losses, according to the toymaker.

MGA sued Deutsche Bank , Barclays Bank and others for damages in May 2011.

Now MGA has sued EOS Partners and Redwood Capital Group, claiming they knew that the lenders hoped to "spring a lawsuit on MGA in France" so as to recover the Smoby's debt.

According to the 24-page complaint: "EOS and Redwood learned that the banks' intention was not to engage in good faith negotiations, but instead to get MGA on the hook for Smoby's bad debts. Despite EOS and Redwood Capital gaining this information, they withheld this information from MGA to entice MGA to proceed with the Smoby deal."

MGA claims that Smoby Group CEO Jean-Christophe Breuil contacted MGA principal Isaac Larian in 2007 to ask if he would be interested in buying the Breuil family's controlling stake in the company.

Unknown to Larian, the lawsuit states, Breuil had embezzled hundreds of millions of euros from Smoby, laundering the money through offshore accounts. The banks knew of Breuil's alleged fraud and had asked him to contact Larian to find an unwitting investor to assume the debt, MGA claims in the complaint.

"Breuil's actions could not have gone unnoticed by the banks because they held a dominant position of control and oversight of Smoby," Leila Noël, MGA's attorney at the Santa Barbara firm Cappello & Noël said after the toymaker filed its lawsuit against the banks.

When MGA invested in Smoby in April 2007, MGA says, it believed the banks when they allegedly told it they would discount the 300 million euros debt. But according to the new lawsuit, the banks were looking for an "unsuspecting investor on whom they could pin Smoby's debt."

"The banks' conduct during the sale's due diligence period led MGA to believe that Smoby was a valuable, legitimate enterprise," MGA's lawyer Barry Cappello said in a statement in 2011. "MGA relied on financial data provided by Smoby that turned out to be falsified."

Named as defendants in 2011 were Deutsche Bank, Barclays Bank, Credit Agricole Corporate and Investment Bank, Caisse Regionale de Credit, Agricole de Franche Compte, Commerzbank Aktiengesellschaft, Deutsche Bank Luxenbourg and Societe Generale.

MGA seeks $80 million in consequential damages and $350 million in general damages.

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