BLK BlackRock Inc

The investment giant fires a fund manager whose daughter got a part in a movie he financed

By Jason Zweig 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 29, 2020).

Take a break from the market turmoil to ponder the drama at a little fund run by the world's biggest asset manager. It involves allegations of fraud and forgery, not to mention a fund manager's daughter landing a part in a movie the fund financed.

We're talking about the BlackRock Multi-Sector Income Trust. In 2017, the fund, which at that time had $750 million in net assets, lent a tenth of that to a small, privately held movie company, Aviron Capital LLC. It was an unusually aggressive bet. By late 2019, the fund said the loan wasn't worth anything, for a nearly $75 million loss. In December, it filed a lawsuit against Aviron and its owner, William Sadleir.

Mr. Sadleir denies committing fraud. He does, however, admit copying-and-pasting signatures of a BlackRock fund executive onto documents to accelerate the sale of $3.2 million in movie-revenue receivables on which the fund had exclusive claim.

"I should not have done it," Mr. Sadleir said in an interview this week. "It was bad judgment on my part. I know better."

Why did the mighty BlackRock lend so much money to a small movie venture in the first place?

That question matters because giant investment firms should have fail-safe procedures in place to prevent conflicts of interest and to prevent fund managers from making arbitrarily big bets.

It also matters because investors buy a bond fund to earn steady income, not to risk losing their principal. Multi-Sector Income Trust has lost 3% in the past three months, while the bond market has earned a positive 3% return, according to Morningstar. The fund was outperformed by more than 99% of its peers over the past year, largely because of the failed bet on Aviron.

And BlackRock charges an arm and a leg for this fund -- total management expenses of 1.4% in 2019 -- in part to cover the costs of carefully researching its investments. That's 22 times as much as the firm's cheapest exchange-traded bond funds, which don't bother researching individual holdings at all.

What's more, BlackRock, under Chief Executive Laurence Fink, has set itself out in recent years as an arbiter of corporate conduct.

In a twist right out of a Hollywood screenplay, Aviron, the movie company financed by this BlackRock fund, cast the daughter of one of the fund's managers in one of its films.

As a result, the firm fired the manager, Randy Robertson, earlier this week after an extensive internal investigation, according to a BlackRock spokesperson.

In a statement, BlackRock said its fund was "a victim of fraud perpetrated by Aviron and its principal." The firm added that it is taking "vigorous steps" to recover value for the fund's shareholders and is moving to "enhance the level of oversight and due diligence related to these types of transactions."

Mr. Robertson couldn't be reached for comment. His daughter, actress Rebecca Lee Robertson, declined to comment.

BlackRock first invested in Aviron with a $12 million loan in 2015. Soon after, "we arranged for [Ms. Robertson] to meet with casting agents and managers," says Mr. Sadleir. "Anytime there was an opportunity to put her in a movie, we considered her."

Mr. Sadleir told me this week that Mr. Robertson agreed to release $10 million in financing for " After," a 2019 movie from Aviron, after the BlackRock manager learned his daughter would have a speaking role in the film.

"I can't tell you that he made the decision purely because his daughter was in the movie," says Mr. Sadleir, "but I can tell you BlackRock approved that financing after turning down the opportunity to finance several earlier movies."

Under Mr. Sadleir, Aviron has released seven films -- six financed by the BlackRock fund -- including some notable successes. "Kidnap," with Halle Berry, released in 2017, grossed an estimated $35 million at the box office worldwide. Although Mr. Sadleir says "A Private War," released in 2018, hasn't yet earned a lot of money, it was critically acclaimed.

Mr. Robertson, a 10-year veteran of BlackRock, was the firm's head of securitized assets, as well as co-manager of this fund. His conduct in relation to the Aviron investment violated BlackRock's conflict-of-interest policy, the firm said.

The BlackRock fund's investment in Aviron was unusual.

First, the commitment was extraordinarily large. In July 2017, the fund put 10% of its net assets into Aviron. No other single corporate issuer accounted for nearly as much of its assets at the time. No other BlackRock fund has ever invested in Aviron, says a BlackRock spokesperson.

Then there's Mr. Sadleir.

He served as a special assistant to the president and a deputy secretary of state under President Ronald Reagan. He founded Dayna Communications Inc., a networking-technology company that was acquired by Intel Corp. in 1997. He has been in the movie business for a decade.

However, Mr. Sadleir has had prior disputes with creditors.

A nonprofit he ran was sued in a Norwegian court in 2002 over allegations of unpaid bills and debt. The action was later settled by an unrelated third party. A 2015 lawsuit in California alleged Mr. Sadleir had "misappropriated more than $3 million in collateral," and that court in 2019 entered a judgment against him personally for $2.7 million.

Mr. Sadleir had his own explanations for these cases, telling me there was no misappropriation of monies.

With these disputes in the public record, why did the BlackRock managers regard Mr. Sadleir and Aviron as a good credit risk and a plausible bet for a tenth of the fund's assets?

One explanation: The debt was not only collateralized by Aviron's assets, but CBL Insurance Ltd. of New Zealand also guaranteed full payment of principal and interest, according to Mr. Sadleir and BlackRock. What's more, motion-picture revenues tend not to move in tandem with the stock market or other financial assets, making the Aviron debt a potentially good diversifier.

Unfortunately, CBL Insurance became insolvent and was liquidated by the New Zealand government late in 2018, voiding its guarantee of the Aviron loan.

Mr. Robertson drove the decisions about the Aviron investment all along, according to Mr. Sadleir, who says the fund manager brought his daughter to the earliest business meeting between BlackRock and Aviron at the movie company's offices in Los Angeles back in 2015.

Proponents of so-called alternative assets say that such non-traded investments offer the potential for lower risk and higher return. As the private loan to Aviron demonstrates, alternatives also offer greater potential for conflicts of interest that can be difficult to detect before it's too late.

Investors should always be wary whenever a fund puts more than a few percentage points of its assets into an obscure investment that doesn't trade, where the sunlight can take so long to reach. If something like this can happen at BlackRock, it can happen anywhere.

Write to Jason Zweig at intelligentinvestor@wsj.com

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February 29, 2020 02:47 ET (07:47 GMT)

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