Protein pill biz dukes it out with NY hedge fund

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A New York hedge fund’s strong-arm tactics have sparked a nasty court battle with a major retailer of fitness supplements.

MusclePharm — which paid millions for endorsements from Tiger Woods and Arnold Schwarzenegger — claims Medley Capital schemed with its key supplier to drive it into the ground so they could take it over on the cheap.

Capstone Nutrition, which manufactures Muscle­Pharm’s products, sued first in May, claiming Muscle­Pharm failed to meet its purchase obligations under their manufacturing agreement and fell $22.5 million in arrears.

Those breaches caused Capstone more than $65 million in contractual damages, the suit claims.

But in a counterclaim filed last week, MusclePharm hit back at Capstone and its key financial backer, Medley.

The Denver-based company claims Medley ordered Capstone — which was already behind on shipments — to further delay deliveries and intentionally injure its business, according to Muscle­Pharm’s suit in Colorado federal court.

Medley, run by twin brothers Brook and Seth Taube, was founded in 2005 by the late Richard Medley, once a George Soros adviser, to invest in socially motivated causes.

But it changed course after its founder’s death, as the Taubes pursued for-profit investments in such areas as payday lending.

As a significant holder of debt and equity in Capstone, Medley allegedly saw “a distressed opportunity” in the $22 million payable that MusclePharm owed Capstone.

“Medley came in early this year and essentially said, `Pay it now or give us a note that converts to equity,’” said a source close to MusclePharm.

When the fitness supplement company refused Medley’s demand, the hedge fund ordered Capstone to stop deliveries — even though MusclePharm was then current on payments, according to the countersuit.

Medley tried “to leverage Capstone’s $22 million payable from MusclePharm — a payable that resulted from Capstone’s own breaches — into an opportunity to gain control of MusclePharm,” according to the complaint.

Medley told The Post it “disputes the allegations made by MusclePharm and intends to defend the lawsuit vigorously.”

Capstone said it “does not comment on pending litigation matters.”

Even before Medley entered the fray, MusclePharm contends that Capstone struggled to fulfill its deliveries on time.

Integration problems caused by Capstone’s merger with another supplement manufacturer delayed shipments to MusclePharm, according its countersuit.

MusclePharm said the problem “significantly worsened” after a revised manufacturing agreement took effect in March 2015.

Despite the delivery problems, MusclePharm posted sales of $167 million last year, a 50 percent increase over 2013 sales. It also has high visibility, due in part to an endorsement agreement with Woods, which it terminated in May.

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