Thursday, May 17, 2012

X Marks the Sport: Xyience Scam Shows Dark Side of MMA's Most Powerful Promotion

"Where ignorance is bliss, 'tis folly to be wise." Thomas Gray, Ode on a Distant Prospect of Eton College, 1742

From the oldest dimestore novels to the most current TV cop dramas, a classic element of detective stories is the old familiar line about the perpetrator always coming back to the scene of the crime.

As Xyience Inc. limped through a controversial bankruptcy process over the past few years, the Xyience and Xenergy branding was relegated to UFC fighters wielding cans of the energy drink and the and other Xyience and Xenergy logos appearing only on the outer ring of the mat or on the ring bumpers.

Saturday, May 5, 2012, marked a milestone for Xyience: a triumphant return to their old domain. Once again, the brand picked up where it left off, marking the center of the mat space for UFC on Fox 3 with the "Xenergy" (pronounced Zen-ergy) name, focusing on the company's sugar-free energy drink.

Ironically, this is the same strategy employed by Xyience Founder Russell Pike. Now facing July sentencing for being found guilty of tax evasion, Pike's been someone the current company wants to distance the brand from. Yet it was Pike who first decided to take the Xyience bar code off the mat and replace it with a Xenergy can.

Back then Pike's goal was to drum up interest in a potential buyout of the drink label while the rest of the company would continue under the Xyience name.

Though the Fertittas seem to paint Pike as the prototypical fall guy, they went to great lengths to lock the founder and his friends and family out of controlling the operation so they could bankrupt it after promising shareholders that their involvement and intervention would save the company from such a fate.  

On Oct. 2, 2007, Xyience Co-CEOs Adam Frank and Kirk Sanford informed Russell Pike, William Pike and Michael Clark (shareholders who represented 25 percent of the shares outstanding) that if they did not sign the funding consent form for the Fertitta funding and give up their voting rights, Frank and Sanford would put the company into bankruptcy.

On Oct. 3, under duress, the Pikes, Clark and other major shareholders signed the consent forms. Only 11 shareholders, who represent over 50 percent of the shares outstanding, ever saw the funding agreement before it became official.

An email sent by Fertitta Enterprises GM Bill Bullard to Lorenzo Fertitta on Oct. 4, 2007 discussed a $150 million offer from Cott Beverages to buy Xyience. This email was only found due to an intense discovery process initiated by the trustee's counsel, Jon Backman. The full text of that message is below:

By January 2008, the Fertittas perfected their scheme by foreclosing on their loan and speeding the company ship toward the iceberg of bankruptcy.

Instead of letting Cott buy the company at full price, two former Cott executives wound up agreeing to purchase the brand out of bankruptcy for $15 million through a front company called Manchester Consolidated.

Coincidentally, that purchase price was exactly 10 percent of the $150 million mentioned above. Manchester would later default on their payment plan, ceding control back to Fertitta Enterprises.

All the golden parachutes were reserved for company insiders who were in on the scheme, and over the past four years and counting the result of losing their Xyience investments tore apart innocent families, caused individuals who lost everything significant pain and aggravation, and forced a ton of folks to start over on building their once-substantial nest eggs.

The Fertittas rode into the sunset with their own supplement company that is now making record profits.
Few Mixed Martial Arts fans know the true extent of what went on behind the scenes at Xyience leading up to and throughout the ongoing bankruptcy. Wednesday, in a Las Vegas courtroom in front of a substitute judge from Hawaii, Attorney Jon Backman, the bankruptcy trustee's counsel for Xyience, settled some contentious issues with Fertitta Enterprises

The re-organized Xyience (Zyen, LLC) staff celebrated the announcement of the settlement recently with a huge catered dinner at Red Rock Casino, the most modern and luxurious casino the Fertittas own in Vegas. They're calling the next phase of the business "Xyience, Round 2."

Meanwhile, 385 original Xyience shareholders will be left with absolutely nothing once the final check is signed distributing the final dollar left in the trust.

Over 65 million shares issued in the company during their early days of rubbing elbows with the UFC will now be worth less than the paper they're printed on. Family trusts, retirement accounts and college funds were wiped out by the Fertitta takeover.  

Some say life imitates art, while others argue it's the other way around. I stumbled upon the Xyience debacle for the first time as an independent investigative reporter covering the sport of MMA in 2006. The resulting project and related litigation eventually became a significant part of my everyday life.

This site will someday make a phenomenal book and/or documentary effort. The experience proves beyond any reasonable doubt that fact is truly stranger than fiction. 

Those MMA fans who might wonder why they should care about scandals like Xyience need to look at the bigger picture. The Fertittas knew they could get away with this from the very beginning when they first pulled the trigger on this scheme. Consider this snippet from a Las Vegas Business Press article printed a month into the bankruptcy:

Attorneys for three unsecured creditors claimed that the deals were part of a "lend to own" strategy pursued by the Fertittas.

The Chicago law firm of Bell, Boyd & Lloyd filed papers alleging that Xyience's "bankruptcy case appears to being run for the sole benefit of Zyen -- the debtor's insider secured creditors."

It added: "Zyen is given a giant axe to hold over the debtor's head, while the debtor's credits are left with no opportunity to defend themselves against improper chopping."

Zyen, a Fertitta company, would have the right to make a bid for the company, the Chicago attorneys contended.

Chicago attorney Jim Morgan told the judge: "There is going to be possibly a forced sale with absolutely nothing left in the estate for unsecured creditors."

Greg Garman, attorney for the Fertitta's Zyen, rejected criticism from shareholders and unsecured creditors, even though his clients' crooked behavior was one of the main reasons why these parties were concerned in the first place. It is unlikely that Xyience shareholders will recover anything from the bankruptcy due to the large amount of debt, Garman said.

The bigger picture reveals that Xyience's bankruptcy basically served as a practice run for the much larger and more profitable Station Casinos bankruptcy. Both companies sit comfortably on the other side of bankruptcy as reorganized entities at the moment. Station Casinos just announced a $6.8 million profit for the first quarter of 2012.

The Fertittas are still rich and getting richer, but at what cost? The little people paid for it all, from the private jets to the tailored suits to the luxurious mansions.

Pension funds and savings accounts across the nation affecting countless average Americans in multiple locales were impacted negatively by the unethical and irresponsible behavior of the Fertittas and their minions. 

Too many MMA fans and even more MMA media professionals stick their heads in the sand and pretend that the UFC's primary owners are great guys, model citizens, and all-around heroes. If you look into their past, you will see that Xyience is just the tip of the iceberg.

Since their transgressions have gone unchecked for so long, these powerful Las Vegas brothers keep generating bigger and bolder schemes, enlisting high-powered local lawyers to deal with the fallout. They grease the palms of enough national political forces to insulate themselves from any federal probe, too. 

This penchant for pulling off fraud and stepping on the toes of little people most certainly carries over into their operation of the UFC at many levels. Silence is golden for the the Fertittas when it comes to the UFC, and there's millions of reasons for them to keep most of their financials private. 

This is why no fighter is making a million dollars per bout in the UFC while there are a number of boxers who can command that amount and more.

Interestingly enough, Russell Pike reportedly gave Chuck Liddell a million-dollar contract to pimp Xyience back in the early days of the company. Pike's regime also signed multiple high-caliber fighters to the brand across the MMA landscape and not just in UFC circles.

Despite his criminal tendencies, the company founder made bold moves and laid the foundation for the UFC's current symbiotic relationship with Xyience.

The Fertittas have much more cash at their disposal now as owners of Xyience, but they don't have nearly the same number of talented fighters in the sponsorship stable these days. The Fertitta-owned Xyience also now only sponsors the UFC and their own fighters instead of branching out to other MMA leagues and sports as Xyience did in past years.

The little people in the UFC to the Fertittas are the fighters, even though many of the men and women fighting for the top dog in MMA become fiercely loyal to the Zuffa, LLC organization. Few fans and media professionals realize that this is a conditioned response.

The Fertittas and Dana White fostered a leadership environment leading to a whole new class of obedient fighters who rarely rock the boat or call out their bosses for any reason at all.

Over the next ten years as MMA athletes who fought the bulk of their careers for the UFC are retiring, we may begin to see the real toll a UFC career can have on a fighter's health. By then it will be too late for the fighters suffering from the worst symptoms to negotiate for a higher per-fight pay or a piece of the royalties the UFC makes off their past fights and likeness rights

It's time for the truth to trump the lies. It's time for people to realize the Fertittas built their success off the backs of better men and women than themselves. These silver-spoon-fed brothers are much worse than whoever is responsible for JP Morgan Chase's $2 billion miscalculation the FBI jumped all over recently.

Why aren't any federal authorities taking a harder look at the tactics these billionaires are using to continuously get away with ruining the lives of average Americans who get duped into backing these economic hitmen

In reality, Bernie Madoff and Wall Street's worst scam artists are not nearly as bad as the combined negative force of the army of financial wizards in this country like the Fertittas who get away with fraud considered to be legal (or only borderline criminal) and only subject to civil penalties. And those civil penalties only apply if those damaged by the fraud can afford the world's most fantastic lawyers.

Paying law firms to cover up their worst behavior becomes cheaper for businesses and billionaires than it would cost to do business the right way: with respect and responsibility.

The roadmap to riches for the Fertittas ripped apart the lives of regular folks from all walks of life, from firefighters and teachers bilked out of retirement funds, to Xyience investors who had their shares wiped out due to Fertitta greed, to all the fighters the UFC chewed up and spit out for not fighting up to the big dog of MMA's standards.

Don't believe the hype and never forget the people who bought out and rebuilt this league will take care of themselves first and screw the little guy any chance they get if it can make them an extra buck by doing so.

The Fertitta family's Galveston gangster ancestors would be so proud to see what kind of corporate crooks these grown brothers have become. 

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