The fallout from Digital Domain Media Group’s bankruptcy continues with investors in the troubled special effects and 3D conversion firm taking the former CEO, the company’s auditors and other executives to court for fraud. Having lost millions in the James Cameron-founded company just before it went under last September, Iroquois Master Fund and Kingsbrook Opportunities Master Fund late last week filed a six claim complaint (read it here) against John Textor, his wife Deborah, various DDMG directors and auditors SingerLewak LLP. The plaintiffs are seeking compensatory damages as well as interest, legal fees and “such other and further relief as the Court may deem just and proper.” The complaint in New York State Supreme Court alleges common law fraud, aiding and abetting fraud, negligent misrepresentations and omissions, negligence, breach of the implied covenant of good faith and fair dealing and civil conspiracy.

“The Director Defendants’ assurances that DDMG had sufficient cash and available borrowings to support its operations through 2012 and into 2013 and that Company was likely to turn cash-flow positive in the latter half of 2012 were materially false and misleading,” says the 61-page complaint. DDMG filed for Chapter 11 protection last fall with less than $50,000 on hand. Soon afterwards the Oscar-winning company, which was working on several Hollywood features when it collapsed, saw its assets sold off for nearly $37 million plus various patents.

However, it was in the months just before the plug was pulled at DDMG that Iroquois and Kingsbrook say they were scammed by cooked books and smooth talkers. Early last summer the investment companies purchased 142,858 shares of the company’s common stock and 57,143 warrants as well as call options covering 209,524 shares of Digital Domain stock for an aggregate price of $1,000,006 each. This 2012 offering raised more than $10.5 million from the plaintiffs and other investors but even that wasn’t enough to save DDMG. To add insult to injury, in the May 17 filed complaint the plaintiffs also allege that in a scheme to pump up DDMG’s “essentially worthless” stock, as the filing says, CEO Textor had secretly taken out a $10 million loan to manipulate the company’s stock. The previously hidden loan was from Palm Beach Capital. Textor used the money to buy 25% of DDMG’s IPO offering to inflate its worth as the company sought to expand into animated features and other new ventures. Palm Beach Capital are named as defendant in the complaint. In a further twist on the money trail, the filing alleges that Textor, who quit as CEO as the company headed towards Chap. 11, defaulted on the loan. The plaintiffs are represented by Arthur Abbey, Karin Fisch, Jeremy Nash and Nancy Kaboolian of NYC firm Abbey Spanier.