Sunday, July 11, 2010

Fertitta Enterprises, the Fertitta Brothers, PRIDE, Zuffa, and Xyience: Inside the pattern of fraud

Xyience, Incorporated completed a sale of the company recently (see April Fools Day Sale article) through bankruptcy court, leaving creditors and investors looking elsewhere to lay the blame for the damages done to them. Fertitta Enterprises may be the first in line to face the throng of disappointed and devastated folks left in the lurch by the bankruptcy. Shareholders were promised the Fertitta funding would save the company from this fate, but instead it seems that very funding is what drove Xyience into the ground. In addition to the Xyience case, present and past litigation against Fertitta interests reveals some very troubling patterns of alleged fraudulent business activity.

The situation only gets more complicated with each day, and though adversary cases are still pending in bankruptcy court, a recent ORDER filed in the main case leaves the company in new hands “free and clear of liens.” In other words, Xyience itself may never have to pay out a dime in damages or past due bills despite all the victims the company left in the wake of its Chapter 11 filing.

Having to compile court documents of my own to illustrate a direct pattern of fraudulent behavior on behalf of the Fertittas, I recently dug up some interesting findings. First of all, I checked the financial history of Station Casinos. A great effort to take the company private came to a crescendo last year, but there is still a great deal of public information available about the major chain of casinos.

To prevent rehashing too much of the boring details here, I’ve taken the liberty of listing the following sites where more information about the financials of Station Casinos can be found:






Though the company is off the trading block, I found the following passage in my research explaining why there are still some reporting duties required:

“The Surviving Corporation will, however, continue to file periodic reports with the Securities and Exchange Commission, because the voting common stock of the Surviving Corporation will be registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, and such reports may be required by indentures governing the outstanding indebtedness of the Surviving Corporation or applicable law.”

First, let’s examine exactly what entities merged to create the newly consolidated Station Casinos under the banner of Fertitta Colony Partners (FCP): FCP is a company formed by Frank J. Fertitta III, chairman and chief executive officer of Station; Lorenzo J. Fertitta, vice chairman and president of Station; and Colony Capital Acquisitions, LLC, an affiliate of Colony Capital, LLC..

The new business entity left behind a situation not all that different from the Xyience bankruptcy. Multiple lawsuits resulted, and the recent public reporting of the financial condition of Station Casinos reveals the who, what, and why:


Roessler v. Station Casinos, Inc., et al., Case No. A532637;

Filhaber v. Station Casinos Inc., et al., Case No. A532499;

Traynor v. Station Casinos, Inc., et al, Case No. A532407;

Goldmann v. Station Casinos, Inc., et al., Case No. A532395;

Griffiths v. Station Casinos, Inc., et al., Case No. A533806; and

West Palm Beach Firefighters' Pension Fund v. Station Casinos, Inc., et al., Case No. 07-A536211.


On June 1, 2007, the plaintiffs filed an amended consolidated class action complaint (the "Amended Complaint") in the District Court against Station, Station's directors, Frank J. Fertitta III, Lorenzo J. Fertitta, Blake L. Sartini and Delise F. Sartini, Colony Capital, LLC ("Colony"), Colony Capital Acquisitions, LLC ("Colony Acquisitions") and FCP. The Amended Complaint alleges that Station's directors breached their fiduciary duties to Station and its stockholders. The Amended Complaint also alleges that Frank J. Fertitta III, Lorenzo J. Fertitta, Blake L. Sartini, Delise F. Sartini, FCP, Colony and Colony Acquisitions knowingly aided and abetted the Company's directors in breaching their fiduciary duties to the Company's public stockholders. The Amended Complaint sought an injunction preliminarily and permanently enjoining the defendants from proceeding with, consummating or closing the Merger transaction, and demanded that the plaintiffs be awarded their costs and disbursements incurred in connection with this action, including reasonable attorneys' fees and reimbursement of expenses.


In November 2007, in order to resolve the litigation and avoid further cost and delay, the Company and the individual defendants, without admitting any wrongdoing, entered into a global stipulation of settlement with plaintiffs ("Proposed Settlement"). Pursuant to the Proposed Settlement, the Company made supplemental disclosures in its Definitive Proxy Statement filed with the SEC on July 9, 2007, to address certain claims raised in the Consolidated Action. As part of the Proposed Settlement, plaintiffs' counsel applied to the Court for an award of attorneys' fees in the amount of $1.9 million, inclusive of costs and expenses. The Company agreed to pay the fees and expenses on behalf of all plaintiffs as awarded by the court in an amount up to $1.9 million.

On December 11, 2007, the District Court preliminarily approved the Proposed Settlement. Thereafter, notice of the Proposed Settlement was disseminated to more than 31,000 former shareholders of Station and published in the Wall Street Journal (national edition), the Los Angeles Times and the Las Vegas Review Journal.

None of the former shareholders objected to the terms of the Proposed Settlement. Consequently, at a hearing on February 11, 2008, Judge Mark R. Denton of the District Court approved the Proposed Settlement of the Consolidated Action.

Station dodged that bullet only to face another uprising from its own former employees:

On February 4, 2008, Josh Luckevich, Cathy Scott and Julie St. Cyr filed a class action complaint in the United States District Court for the District of Nevada, Case No. CV-00141, against Station Casinos. The plaintiffs are all former employees of the Company. The complaint alleges that the Company (i) failed to pay its employees for all hours worked, (ii) failed to pay overtime, (iii) failed to timely pay wages and (iv) unlawfully converted certain earned wages. The complaint seeks, among other relief, class certification of the lawsuit, compensatory damages in excess of $5,000,000, punitive damages and an award of attorneys' fees and expenses to plaintiffs' counsel.

The latest class action complaint is peculiar to say the least when matched up with some choice quotes from Lorenzo Fertitta that I discovered on the spring of 2007 CLASS NOTES PAGE FOR NYU’S STERN BUSINESS SCHOOL:

“Of all the success we’ve had with Station Casinos, I am most proud to have been selected by Fortune magazine as one of the top 100 companies for whom to work,” said Fertitta. “We were ranked at number 18 and are up there with industry giants Nordstrom and Google. One of the best pieces of advice I’ve received is to surround yourself with good people and treat them right. Being ranked as one of the top 100 companies to work for was validation for me that we’re doing just that.”

Hypocritical though it may seem now when looking back at that statement in light of the employee suit, an even bigger whopper came later in his remarks. The follow up Lorenzo offered was just plain ironic:

“Asked to offer insider’s tips on gambling to his fellow alumni, Fertitta stepped outside his professional persona and exclaimed, ‘Yes, stop doing it! I took finance with Professor Aswath Damodaran and know that there are better ways to get a return, dollar for dollar.’”

Seems hard to believe a man who owes his fortune to gambling and casinos—built off the backs of previous generations of similar (and sometimes much more devious/illegal) business interests—would advise anyone not to gamble.

It appears there may be trouble ahead for Station Casinos because so many people seem to be taking Lorenzo Fertitta’s advice. Recent Station financial reports reveal that there may be trouble ahead for the heavily leveraged corporation. (see reports point the finger of blame at the state of the national economy, the credit and mortgage crises, and the conditions of the merger. Here’s a snippet:

“Our high leverage and debt service obligations could adversely affect our ability to raise additional capital to fund our operations, increase our vulnerability to general adverse economic and industry conditions, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations. As a result of the Merger, we are highly leveraged. Our ability to make scheduled payments on, or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to general economic, financial, competitive and other factors that are beyond our control. While we believe that we currently have adequate cash flows to service our indebtedness, if our economic performance were to deteriorate significantly, we may be unable to maintain a level of cash flows from operating activities sufficient to enable us to pay the principal, premium, if any, and interest on our indebtedness.”

The Fertittas are facing other threats due to their interests in Zuffa. Brothers Lorenzo and Frank Fertitta III own 90% of Zuffa, LLC which includes the UFC, WEC, and what’s left of PRIDE. Illustrating a common theme of complaints lodged against the famed casino magnates, a lawsuit filed by former PRIDE owners cites “fraudulent and negligent misrepresentation and breach of the covenant of good faith and fair dealing” regarding the deal that ultimately resulted in the death of the premiere MMA league. The suit came on the heels of Zuffa’s own suit against the PRIDE principals, and the fight ahead promises to get pretty ugly.

The litigation all revolves around agreements reached between PRIDE and Zuffa in mid-April to late May of 2007. The PRIDE complaint explains:

“As a result of the world-class reputation that Sakakibara created with the PRIDE brand, numerous entities were very interested is purchasing PRIDE. Included among these interested purchasers were the Fertittas. Although Plaintiffs had numerous "suitors" for PRIDE, Plaintiffs ultimately selected Defendants as the buyer for PRIDE. Although the financial amounts offered by other suitors would have exceeded that offered by the Defendants, Plaintiffs sold PRIDE to the Defendants. The biggest reason for such decision was the Defendants' insistence and promise to keep the PRIDE brand as a global top-level brand.”

Those involved in the Xyience situation as investors ratifying the Fertitta infusion of capital in November of 2007 also trusted the billionaire businessmen to maintain and build on the Xyience brand. Instead, they bankrupted Xyience and broke all their promises. Though they have a long list of excuses for why they ultimately dismantled PRIDE, Zuffa originally came out publicly with Dana White claiming they would create a “Superbowl” type event every year by coordinating both leagues and keeping both running strong. Also like Xyience, the litigation regarding PRIDE alleges that the plan all along was to destroy the business to enrich the players who made the deal happen.

Remember that the $350 million senior secured credit facility Zuffa received in the summer of 2007 paid for the PRIDE purchase while also providing huge dividends to the Fertitta brothers and Dana White. Yet, despite Dana White being the front man for Zuffa and spouting promises about what would happen to PRIDE, according to the Sakakibara suit it was primarily the Fertitta brothers who made the most significant vows to make the marriage happen during October, 2006 negotiations:

“During the negotiations, Lorenzo J. Fertitta told Sakakibara that for the sound growth of the entire mixed martial arts industry over the course of the next 20 to 30 years, it was essential for both PRIDE and UFC to have the same owner who would manage and maintain these two brands from a position akin to a commissioner so that appropriate order and rules could be created to protect fighters and maintain and expand the market. Based on these comments made by the Fertittas, Sakakibara was pleased that the Fertittas' seemed to share a sincere concern and understanding for the industry and the PRIDE
brand. This sincerity proved untrue based on subsequent events.”

The lawsuit claims Dana White’s culpability in the deal only came later when he allegedly revealed the true motives of Zuffa for acquiring PRIDE:

“Dana White, the president of Zuffa, was present during the initial negotiations, and later stated that the goal of the entering into the transaction with Plaintiffs was acquiring PRIDE fighters and PRIDE's video footage of prior PRIDE fights.”

Having denied several other interested parties the opportunity to purchase the league, the asset purchase agreement signed on April 17, 2007 stipulated a requirement that PRIDE be maintained as a top-tier MMA brand. The lawsuit alleges that the sale only went through (at a much lower price than other entities offered) because the former PRIDE owners were confident Zuffa would fulfill all their promises. The suit goes on to explain that there has not been a single PRIDE show since the sale and all former PRIDE employees were fired. The Japan offices closed as a result.

In addition to problems with the sale stipulations, the suit also outlines issues with the consulting agreement signed by the parties:

“While Defendants made the immediate payment portion of the Consulting Fee due to Plaintiffs, as well as three (3) Monthly Consulting Fee payments, the last monthly payment paid by Defendants to Plaintiffs was the August, 2007 payment. Defendants have not made the required Monthly Consulting Fee payments since that time. Plaintiffs have demanded payment of the Consulting Fee through letters or emails to Defendants dated October 3, 2007, October 10, 2007 and October 17, 2007, and in a Notice of Default dated November 20, 2007. Defendants have refused to pay the Consulting Fee, either on a monthly basis or in a lump sum as required by the Consulting Agreement.”

Zuffa apparently refused those payments due to the lack of background checks done on the plaintiffs in the Sakakibara suit. The lawsuit claims those checks are actually not required as part of the consulting agreement. Though mentioned in the sale agreement, the checks were designed for those former PRIDE employees retained by Zuffa after the sale, and the Sakakibara suit plaintiffs were allegedly never meant to be actually employed by Zuffa at any time. There is a gray area regarding Sakakibara’s own requirement to pass background checks, but the plaintiff claims that under Nevada Gaming Commission rules he actually obtained a license based on sufficient checks of his background that revealed he has never committed a crime.

Despite the lack of any connection between Zuffa’s operations and the Nevada Gaming Commission beyond the Fertittas being operating owners of Station Casinos, apparently there is some argument as to whether or not the former PRIDE officials should have been subject to the background checks required by Nevada Gaming Commission regulations.

Ironically, the complaint was actually filed on April 2, 2008 and dated April 1, the same day that the Xyience “auction” resulted in a purchase agreement being signed by Manchester Consolidated Corporation. The complaint seeks at least $10 million in damages.

A hearing will be held on April 28th regarding Dream Stage Entertainment’s motion to dismiss the lawsuit brought against the former PRIDE owners by Pride FC Worldwide Holdings, LLC (the entity created by Zuffa upon purchasing PRIDE).

To make matters worse for Zuffa and the Fertittas, the Randy Couture debacle rages on in three separate proceedings, including one that is now destined to be decided in the Texas courts due to HDNet’s involvement. Dallas Mavericks Owner and HDNET Pioneer Mark Cuban (see above picture) entered into the fray against Zuffa with the intention of helping free Couture from his contract in order to help make the Couture vs. Fedor fight happen under the banner of his MMA league. An order filed on April 9th granted a remand of the dispute to the 193rd Judicial District Court of Dallas County, Texas.

Despite instigating so much suffering and victimizing so many innocent people, the brothers Fertitta are still firmly in control of an empire worth billions. They even allegedly shortchanged the same people who helped them sustain that empire by toiling at their casinos day after day. Past victims tried various attempts to hold these men accountable for their financial transgressions, but so far even civil litigation has fallen short of taking them to task. While poised to get away with their latest round of fraud in a court system that may be more friendly to them than any other litigant in Nevada, the Fertittas truly live in the lap of luxury.

Take a look for yourself at the mansions they occupy (according to PRIDE suit address listings for the brothers):


Frank's Old House (Dana White Lives There Now)

FRANK'S New Neighborhood

As another famous crooked millionaire might say: “Only in America.”

Stay tuned for further reports focused on Xyience’s ongoing bankruptcy situation and the aftermath of the recent sale of Xyience’s assets to Manchester Consolidated Corporation.

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