(CN) - Sumner Redstone damaged his CBS media empire by waiting to take a massive write-down until it grew from $3.2 billion to $14 billion, according to a derivative shareholder complaint in Federal Court.
Redstone controls 81.2 percent of CBS through the National Amusements theater chain, which owed $1.6 billion in loans to banks and investors in 2008, according to the complaint.
The named plaintiff, the Iron Workers District Council of Tennessee Valley & Vicinity Pension Plan, says the debt was tied to CBS stock value, and required National Amusements to make accelerated payments on the loan principal if CBS stock price fell below a certain amount.
As CBS revenues, stock and market capitalization began to plummet in 2008, the shareholders say the company's book value increased, resulting in a multi-billion-dollar discrepancy.
The inflated book value, known as "goodwill" on financial statements, represented billions in intangible assets that CBS carried because of years of previous mergers and acquisitions, according to the complaint.
By August 2008, CBS had a book value of $21.9 billion, though its market capitalization was just $13.1 billion, according to the complaint. This prompted a Bloomberg columnist to write that the company's goodwill was apparently "more valuable than the company as a whole."
Companies typically account for their goodwill to avoid a discrepancy with market value, but "Redstone desperately wanted to avoid this write-down," according to the complaint.
Shareholders say Redstone and the board of directors should have known that the company's goodwill was inflated because of its declining market capitalization and because CBS is "no stranger to massive goodwill write-downs."
The media empire wrote down its goodwill by $9.48 billion in 2005 and by $18 billion in 2004, according to the complaint.
CBS executives avoided the write down in fiscal year 2007 because they feared it would trigger stock devaluation and violate National Amusements' loan covenants, according to the complaint.
The shareholders say CBS directors failed to note the discrepancy in an audit committee that met 12 times in 2007 and 2008 to review the company's financial statements.
When "time ran out for Redstone" in October 2008, CBS took a hefty $14.12 billion write-down and its market value fell by $1.3 billion, according to the complaint.
The dip in CBS shares triggered the National Amusements covenants, and Redstone sold $233 million of his own shares in CBS and Viacom, at below market prices, to raise cash for accelerated loan payments.
Shareholders say that Redstone, who earned $10.7 million in 2008, benefited from delaying CBS' write-down because accelerated principal payments allowed National Amusements "to avoid the crisis of liquidity."
Because CBS misled the investing public, it will have trouble raising equity capital or debt on favorable terms in the future, something known as "the liar's discount," according to the complaint.
The shareholders seek restitution and injunctive relief to improve oversight at CBS, alleging breach of fiduciary duty and waste of corporate assets. They are represented by lead attorney Thomas Amon.
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