Avaya bondholders are suing the company, claiming “massive fraud.” The plaintiffs say they lost more than $125 million because the company’s board misled investors.

Filed Feb. 1 in New York State Supreme Court, the lawsuit’s plaintiffs include Angelo Gordon & Co., Canyon Partners and Mariner Investment Group.

According to Bloomberg, the investors hold “unsecured convertible notes” issued by Avaya in 2018. The investors said these notes have value of more than $100 million and are due this year.

The investors claim the problem arose when Avaya officials painted an almost ideal picture of its financial results for the fiscal quarter ending in March 2022. Then, the company “sought to raise funds by refinancing the notes.”

The suit alleges Avaya officials reached out to the plaintiffs and others to issue a new term loan while misrepresenting the company’s finances. The investors said, based on the false financial outlook, they continued to hold their convertible notes. Bloomberg reports that some invested “$80 million of new money.”

Then July hit. That’s when the term loan closed, and Avaya “disclosed it had used proceeds from the loan to repurchase $129 million of notes from other investors.”

The debt holders said the convertible notes are “substantially worthless” because trading prices have collapsed. There’s “substantial doubt” Avaya can continue.

Avaya didn’t return our requests for comment.

CEO Shuffle

COMMfusion’s Blair Pleasant

Blair Pleasant is president and principal analyst at COMMfusion. The lawsuit against Avaya did not surprise her. For some time, investors have been voicing their grievances on social media.

“I know from investor comments on Twitter that they’re very, very angry, and they feel that the company is being dishonest,” she said.

By July, former CEO Jim Chirico was no longer with Avaya. He had served 15 years in various roles at the company. Alan Masarek, a former executive at Vonage, took the helm.

Moreover, investors became angered when that leadership transition caused the “value of the leveraged loan to plummet.”

In August, the audit committee of Avaya’s board of directors began an internal investigation into the company’s third quarter financial results. At the time, Avaya said it would miss the previous earnings forecast for that quarter by more than 50%.

In the last year, Avaya’s shares have dropped 98%.