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Blockbuster Shareholders Make Fraud Claims

Blockbuster shareholders are seeking an SEC investigation into the company's bankruptcy filing.

(Article updated to correct misspelling of Jasbir Sandhu's name; Mr. Sandhu's name was incorrectly spelled as Sindhu in the original article.)

NEW YORK (

TheStreet

) -- Is there security fraud and manipulation in

Blockbuster's

(BLOAQ.PK)

bankruptcy filing? Shareholders seem to think so.

Shareholder Jasbir Sandhu filed a complaint with the U.S. Bankruptcy Court in the Southern District of New York earlier in the month, claiming that CEO Jim Keyes and billionaire investor Carl Icahn worked together to stymie recapitalization efforts in order to increase the return on investment for Icahn and other stakeholders.

Icahn stepped down from the board of directors back in January, citing Institutional Shareholder Services guidelines regarding how many directorships he can hold. He also sold off nearly 80% of his stake in the company.

Days prior to Blockbuster's Chapter 11 filing, it was reported that Icahn purchased $100 million in the company's debt.

Sandhu, who is being backed up by 200 other shareholders who signed a petition, is claiming Keyes purposely kept Blockbuster Express kiosks operations, Blockbuster Canada and other international assets from the bankruptcy in order to downplay the company's portfolio value. The investor said shareholder equity should have included all Blockbuster properties.

"Jim Keyes continued to create a bankruptcy fear to support Icahn's plan," Sandhu wrote in the filing. "Carl Icahn, on the other hand, continued to reduce his shareholder position to drag the prices of the bond down. Jim Keyes and Carl Icahn may have already known the exact date and outcome of Chapter 11 filing."

Other allegations include Keyes and Icahn playing a role in failing the reverse split and class conversion measures that ultimately pushed Blockbuster's stock to be delisted from the New York Stock Exchange.

Sandhu cites an article from TheWrap.com, where Keyes was quoted as saying Icahn "remains a good friend" and "could be even more helpful on the outside."

Sandhu is calling for an SEC investigation.

Aside from Sandhu's own claims, 25% of shareholders, under the leadership of Greg Maggipinto, are rallying together to file a suit against Blockbuster. The ad hoc committee is looking to raise funds for a retainer and have asked investors to contribute to an escrow account in order to file their objection to the Blockbuster bankruptcy petition.

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The group has also been calling for the resignation of Keyes prior to the bankruptcy filing, and could get its wish. Earlier in the month, reports surfaced that

Blockbuster could be looking to replace Keyes

.

But whether or not Sandhu and the ad hoc committee's allegations have merit remain questionable.

Wedbush analyst Michael Pachter says shareholders don't have much of a case. In order for shareholders to see anything, Blockbuster's assets would have to be worth more than $1 billion, he says, "and they are just not."

Blockbuster said these allegations are "ill-informed and irresponsible."

"There is simply no truth whatsoever to the letter's reckless and unsubstantiated speculation about 'insider information, security fraud and manipulation,'" Blockbuster's Secretary and General Counsel, Rod McDonald, said in an e-mail.

"In fact, these accusations are also illogical given that Blockbuster's CEO, Jim Keyes, is among the largest individual holders of the company's common stock and stands to lose a significant investment in the likely event the common stock is extinguished upon consummation of a plan of reorganization," McDonald continued.

McDonald also noted that while he cannot speak for Icahn, the investor has "acted solely as an independent outside investor" since resigning from the board at the beginning of the year.

--Written by Jeanine Poggi in New York.

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