Scientific Games takes legal action to force third largest shareholder to comply with suitability investigations

Scientific Games takes legal action to force third largest shareholder to comply with suitability investigations

  • Howard Stutz, CDC Gaming Reports
June 16, 2019 2:59 AM
  • Howard Stutz, CDC Gaming Reports
  • Other

Scientific Games is raising suitability concerns over the gaming equipment provider’s third largest shareholder and is taking legal action that could force a redemption of the nearly 10 percent stake.

In a lawsuit filed Friday in Clark County District Court in Las Vegas, Scientific Games said Sylebra Holdings is being investigated by more than two dozen U.S. and international gaming authorities. Sylebra, which is headquartered in Hong Kong and has a significant presence in the Cayman Islands, has refused to comply with requests for information and disclosure submissions for suitability by gaming regulatory bodies.

Scientific Games Corp. lottery equipment in production.

In the lawsuit, Scientific Games said investigators found that Sylebra owned a significant stake in a Russian company with alleged ties to illegal gaming, money-laundering and financial support of terrorist organizations.

Sylebra owns more than 8.6 million shares of Scientific Games, a 9.34 percent stake. Shares of Scientific Games closed Friday at $20.68 on the Nasdaq, valuing Sylebra’s holdings at more than $177.8 million.

Scientific Games said it has attempted to regularly provide what information it can about Sylebra to gaming regulators, “consistent with its ongoing obligation to inform regulators about matters relevant to suitability.”

However, Sylebra had refused numerous requests from the company for information needed to conduct a suitability analysis under Scientific Games corporate bylaws. Under those bylaws, Scientific Games can declare Sylebra a “disqualified holder” and force a redemption or sale of the shares.

In a statement, Scientific Games spokeswoman Susan Cartwright said Sylebra “has refused to supply” basic information about the hedge fund’s own investors for more than two years.

“Scientific Games has now filed a lawsuit against Sylebra in Nevada state court asking for a ruling that Sylebra be required to provide us with the information we need to maintain the integrity and transparency our regulators expect and require of us,” Cartwright said.

“Scientific Games takes very seriously our obligation to maintain the highest standard of integrity and transparency with our regulators in Nevada, across the United States and around the world,” Cartwright said. “As part of these efforts, we must be assured of the suitability of our major investors.”

The Nevada Gaming Control Board is not listed in the lawsuit as one of the regulatory bodies investigating Sylebra. Under Nevada gaming law, any investor holding 10 percent or more of a licensed gaming company is subject to licensing or a finding of suitability.

Billionaire Ron Perelman’s investment arm, MacAndrews & Forbes, is Scientific Games largest shareholder with a 39.2 percent stake in the company, which provides gaming equipment to both casino industry and lotteries worldwide. Fine Capital Partners owns 8.7 million shares and is the company’s largest institutional investor with 9.7 percent, the second-largest investor to Perelman.

Sylebra has been an investor in Scientific Game for roughly four years.

According to Nasdaq, Scientific Games is Sylebra’s third largest investment and its only gaming ownership, listing holdings in 28 public companies.

In the lawsuit, Scientific Games called Sylebra’s capital management structure “unusual.” The hedge fund has several entities in the Cayman Islands. Sylebra does not have a website and, according to Bloomberg, is a private asset management firm. It listed three principal executives.

According to an April 2018 article in Bloomberg, Sylebra’s $1.1 billion fund “profited from bullish and bearish investments in smaller tech companies” even as the overall stock market “tanked.”

In the lawsuit, Scientific Games said it “repeatedly asked Sylebra for basic information to allow the Corporation and its Board to carry out its own suitability analysis.  Time and time again, Sylebra has refused.”

The company has not received information about the identities of the beneficial owners of Sylebra’s master fund – the entity that actually holds the Scientific Games stock – or information about Sylebra’s other funds that are deemed critical to a suitability analysis.

“Instead, Sylebra has manipulated the regulatory system by strategically timing the disclosure of information that it is willing to part with while utilizing procedural mechanisms to prevent any order requiring it to turn over the information that actually matters,” Scientific Games attorneys wrote in the lawsuit.

“This sustained pattern of obfuscation, procedural maneuvering and outright stonewalling — both in response to requests and the reasonable requests of governing regulators — raises serious questions about just what Sylebra might be trying to hide. These concerns have only increased given recent changes in ownership and management with respect to Sylebra,” according to the filing.

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.