Settling For Nothing: Fertitta Enterprises Gets Off With Slap on The Wrist For Bankruptcy Fraud

By: Rich Bergeron

      It always amazes me to see how much history repeats itself. Nearly the same scene that's depicted in the photo above unfolded at the Fertitta-owned Red Rock Resort and Casino recently. This time around, the banquet featured the entire current crop of Xyience employees celebrating a new settlement agreement to end the company's bankruptcy battle with the trustee's counsel Jon Backman.

    The settlement is disappointing when you look at how long the proceedings dragged on and how much promise there seemed to be in taking the Fertittas to trial. My own relationship with Mr. Backman was sometimes contentious. I often asked him what could be done for the shareholders.  He always told me they would probably recover very little or next to nothing. I pressed my own motion to suspend the bankruptcy before Backman took the case on for Trustee David Herzog.

     There were times Backman seemed to be doing whatever it took to seek justice while at other times I saw the stereotypical lawyer in him. Eventually I grew to understand he was in a tough position, but he amassed a catalog of evidence that began to build momentum leading up to the trial. He won a sanctions motion that he now has to scrap his rewards for to get a lowball settlement approved. Apparently, Backman didn't want to take his chances fighting the case in court, and he eviscerated his chances to prove that case in the settlement motion.

     Reading some of those sentences came as a real shock to me. The language had the tone of someone writing with a gun to his head. I attended a hearing in Las Vegas where Backman wiped the floor with his opposition: Attorney Greg Garman. The tide seem to be turning in the case, and my own experience with Garman led me to believe he really had no idea why his clients should have to pay for stealing the company out from under the shareholders. He knew the law, but he he didn't seem to know the case that well. He certainly didn't grasp the real circumstances that made this bankruptcy a borderline criminal conspiracy.

     Paying out anything to the trustee came at a price for the Fertittas, I suppose. I wouldn't doubt the negotiations featured discussions on how the settlement motion would be written to absolve the Fertittas and their employees of all possible implications of guilt or culpability. Just like the gangsters in suits depicted in the photo above, the Fertitta brothers have to appear respectable and spotless in the public eye while running their rackets behind the scenes.

   Mr. Backman seemed ready for trial recently, and he let me know at one point that I'd probably read about it in the papers before he could tell me how it was going. He didn't quite get that one right, because I'm the one writing about what happened rather than reading about it anywhere. If I weren't around, the Fertittas might have slipped this one right under the radar. That's unfortunate, but it's the world we live in. Thanks to people who continue to look the other way and let crooks be crooks, crime really does pay for gangsters in business suits these days. Just take a few hours and sort through this blog someday. Research the Fertitta bloodline. 50 cent was over at Floyd Mayweather's gym Tuesday being a ham for the cameras, but if he really wanted to find out how to be a gangster he should have been talking to Lorenzo and Frank Fertitta III. From their machine gun-toting security details to their stubble-ridden tough-guy mugs, these guys are the picture of organized crime in Las Vegas evolved to a totally new dimension.

   It really is depressing to see a company stolen right out from the investors who built it, but even more disgusting is how the Fertittas are planning to fold Xyience into Zuffa. They are literally and figuratively driving it like they stole it.

Russell Pike (parody)

     The company's current PR staff even made it a point to disavow any connection to the company's original founder, Russell Pike, when Pike was recently convicted of Tax Evasion to the tune of owing an estimated $1.5 million to Uncle Sam. Pike will be sentenced in July. By then, the Fertittas will be making millions emulating his original model of doing business: sponsor the UFC's fighters and the UFC to sell more low-rate supplements and other assorted overpriced items. The only thing they didn't do that Pike did was seek investors. The Fertittas and their insider friends wanted all the spoils for themselves. The UFC brass wanted a supplement company tied to the organization for a long time. Now they have one.

Xyience "Round 2" will flash the new marketing model at us all on free television soon by posting the Xyience logo back in the middle of the mat once again on May 5th for the UFC on Fox 3 card. It will be the first time the company's held that position on the mat since I helped expose how the Fertittas created a false bidding war for the middle of the mat space. Xyience defaulted on a multi-million dollar payment plan for that ad space while they were steaming toward bankruptcy, and the Fertittas had to know the company couldn't meet the terms of such a deal when they put ink to paper on it.

Money coming out one Fertitta pocket and going back into another would be a common theme through the case, and I kept finding new areas where the Fertittas found ways to pay themselves without any intention of their moves ever being made public. Yet, even when I exposed much of this behavior, they managed to get away with it all and did not even have to suffer a real civil penalty. These guys have become the kings of insider dealing, influence peddling, and lawyering up to beat the band.

      Lorenzo and Frank Fertitta managed to erase billions in Station Casinos debt through the bankruptcy courts, and they bought all their over-leveraged properties back for a bottom dollar bid at the tail end of the process. They used Xyience as a trial run, an experiment of sorts. It wasn't long before the lesson learned came to be: bankruptcy can be extremely profitable if you play the game correctly. I arrived in Vegas on my last trip out during a time period where Station Casinos was still on the way out of bankruptcy. They were advertising a car a day give-away. Later on I read some reorganization paperwork that showed Station Casinos simply defaulted on the payments to the dealerships involved. The dealerships no doubt wrote off the losses as part of their insurance program, and the folks with the free cars made out like bandits. It's the kind of magic that can only happen in Las Vegas.



This is why the Fertittas themselves are very rich individuals who always make the Forbes list. This is what business-suited gangsters do. There's nothing better than selling something you got for free. As casino owners, the Fertittas must maintain a resolute appearance as upstanding young men who are law-abiding citizens. Billions of dollars could literally be at risk if they were ever caught up in any kind of criminal charges. Bankruptcy fraud seemed like a fair charge when I first levied it against them with a motion to suspend the bankruptcy. Their juice and my lack of an attorney led to a judge paying my motion no heed. The Fertittas steamrolled the company through bankruptcy with relative ease. It was like a bank robbery broadcast on national television where a million tips come in because everyone knows the robbers. Yet, nobody gets cuffed in the long run. Nobody is told to pay for their transgressions or provide any relief to those who suffered through these long years hoping something tangible would come out of the court process.

 I currently have a motion seeking $150 million in relief for sanctions against a wide array of parties implicated in the bankruptcy. There has never been an appropriate hearing on that motion, and it would require a ton of testimony to do it right. It's not a task I take lightly, and it would be a gargantuan effort to bring that hearing to fruition. Still, I am determined to do what it takes to play my part in this and provide whatever shred of justice I can.

Xyience Bankruptcy Hearing Yields No Decision On Sanctions For Now: Lorenzo Fertitta Suit May Be In Pipeline

By: Rich Bergeron

CLICK HERE FOR AN ARTICLE ON THE LATEST LEGAL WRANGLING IN THE LAS VEGAS REVIEW JOURNAL

An adversary case filed in Nevada bankruptcy court by the trustee's counsel for Xyience against Fertitta Enterprises, Zyen, and Zyen's General Manager William Bullard is suddenly getting very interesting. A contentious hearing Friday, October 30th in the case addressed a sanctions request for discovery violations. The hearing gave way to suggestions from Trustee's Counsel Jon Backman that Lorenzo Fertitta could be named in an entirely new future complaint as a result of what his recent, last-ditch discovery efforts uncovered.

Bankruptcy Judge Lloyd King seemed to take some limited interest in the sanctions motion and made some remarks indicating he agreed with Backman's factual take on the situation. Still, he made no final decision on the motion and asked for supplemental briefs from both sides regarding the procedural technicalities involved. Judge King also indicated that a follow up hearing featuring witness testimony would likely have to be held to determine the direction and breadth of any sanctions that could possibly apply. The judge also later set a proposed trial date for the existing case in April, 2012.

Despite what Backman described as harsh conditions for collecting evidence, he explained to Judge King that what he did find so late in the game changed the whole direction of his case. Backman argued that the lack of cooperation from his adversaries made the case far more difficult to deal with. The real tragedy, he explained, is the evidence that's just impossible to uncover. "We're never going to see those emails," Backman lamented about a situation in which he sought official Xyience email servers his adversaries somehow could not produce despite rigorous attempts to force them to. "There's nothing left to compel production of."

The complicated scenario that led to the sanctions request left both sides in the legal wrangling claiming the other was being unreasonable. A previous article previewing this hearing explains the nuances of the trustee's claims. Missing and now impossible to recover email communications are at the center of the controversy. A Fertitta right hand man of sorts, William J. Bullard, became public enemy number one for Attorney Backman at Friday's hearing.

Bullard is the General Manager of Zyen, LLC, formed as a Fertitta Enterprises subsidiary to provide a loan to Xyience. Once in the chief lien position over Xyience, the Fertitta side company quickly foreclosed on the debt. Zyen then became Manzen and assumed control of Xyience after the company declared bankruptcy in early 2008. Manzen was actually a combination of the Fertitta group (Zyen) and a company made up of four individuals named Manchester Consolidated. The combined parties coordinated to enter into a payment program in order to allow Manchester to appear to be buying the company out of bankruptcy. The monthly payments from Manchester eventually stopped coming in, giving control of Xyience back to Fertitta Enterprises once again.

To add another layer of intrigue to the complicated scheme, Machester Consolidated consisted of a total of four people with two of them being former executives of Cott beverages. Cott is the manufacturer of Xenergy. Had the bankruptcy resulted in another ownership group acquiring the company, Cott might not be guaranteed a chance to continue doing business creating the company's popular drink product that touts itself as the official energy drink of the UFC.

Friday's hearing discussed emails, some of which were only discovered after the trustee had to resort to delivering a subpoena to Gordon Biersch, a brewery and restaurant chain also owned by the Fertittas and managed by Bullard. Due to what he described as a painstaking process, Backman eventually did get a hold of some crucial emails, including one he described as "one of the hottest smoking guns I've ever seen in litigation." Fittingly called Exhibit G, the email between Bullard and Lorenzo Fertitta mentioned a $150 million offer for the purchase of Xyience from the Cott Corporation. The date of the email was aligned very closely with the first $12 million in financing the Fertittas provided to Xyience to gain control of it down the line.

The offer, if company officials capitalized on it, could have helped Xyience shareholders recover some value for their shares. Instead, it seems the Fertittas were intent on locking the shareholders out at the first opportunity they could, refusing to hold scheduled shareholder meetings and neglecting to pay the first interest payment on their loan with company funds. Hundreds of shareholders lost nearly all hope of any recovery when the Cott offer morphed into a scheme involving former Cott executives and their associates pretending to purchase the company for $15 million as a "stalking horse bidder" in the bankruptcy.

Coincidentally, I have a pending motion in these proceedings under my own adversary case which seeks $150 million in relief to be granted to shareholders burned by a campaign to silence my reporting that was trying to bring the whole Fertitta scheme to light. At the time I filed that motion I had no idea this smoking gun of an email existed, but it certainly fits a pattern I've described time and again for my readers here and at xyiencesucks.com in intricate detail.

Traditional mainstream media surrounding the sport of MMA and the world of finance is really missing the boat when it comes to the meat of this story. Yet, even a publishing entity that painted the Fertittas in a more positive light in the past picked up this vein of the tale surrounding Backman's sanctions request. Forbes Magazine didn't afford the trustee's attorney the courtesy of spelling his name correctly in the piece, and the author falsely asserted there is formal mediation involved in the case, but they did make an attempt to tell the story's most important points.

Forbes didn't send anyone to the actual hearing, though. None of the local papers had reporters there, either. It was not hard to find a seat in the courtroom. This is a story that's still unfolding in a controlled environment of sorts, so damage control for the Fertittas and the UFC so far has been fairly limited.

Backman is on track to make this case into much more of a spectacle if he indeed names Lorenzo Fertitta in any future complaint. The subpoena of Gordon Biersch's email server information led Backman to some documents he professed to never seeing before, documents that could pinpoint Lorenzo Fertitta's role in the conspiracy to bankrupt Xyience and defraud the company's shareholders and creditors.

"Whole cases can turn on single documents," Backman reminded the judge in open court on Friday. Getting a hold of the evidence that turned his case in a completely new direction added enormous excess costs for Backman to absorb on a case he took on contingency. These very documents, had Backman acquired them earlier, could have allowed the estate to make much more progress in the complicated litigation surrounding the estate at a much earlier date in the process. Instead, Backman now has to backtrack and reflect on the countless hours of wasted time spent chasing down company email servers he could never actually obtain.

The destruction, loss, and/or failure to preserve these servers and hard drives sought by Backman leaves a gaping hole in the case. The frustrating scenario caused irreparable damage that Backman had some trouble fully quantifying for the judge Friday. During much of his argument before the court, Fertitta Attorneys Gregory Garman and Joel Schwarz busily took notes, whispered to each other, and appeared to be genuinely agitated by the accusations against them and their clients. There really isn't much hard evidence of a driven, purposeful campaign to destroy the evidence in question, but the situation is about as suspicious as it could possibly be.

Attorney Garman explained away the accusations from Garman as "outrageous" and personally referred to Exhibit G sarcastically with the same "smoking gun" label Backman applied to it. Garman provided a basic timeline and list of efforts he personally undertook to assist the trustee in finding evidence. He vehemently disputes the claims that his actions constituted the hindering of Backman's discovery efforts. Instead, he explained that he did everything in his power and his clients assisted to the best of their abilities to voluntarily provide every shred of evidence they possibly could. Garman, at one point citing his high blood pressure, seemed clearly disturbed that his reputation might take a hit because of this case. Deep into one of his rants about how cooperative and misunderstood he is, he actually had to apologize when he almost uttered my name instead of Backman's.

Even though Garman is an expert litigator and an excellent speaker, Backman's accusations and evidentiary support are clearly bothersome for the Gordon Silver attorney. During my own past interactions with Garman he's come across as overly concerned about how others perceive him professionally. He told me himself at one point earlier this year that he considers the Fertittas one of his least significant clients, but at this point the task of protecting them and their associates seems to be causing him some "xtreme" stress. He even asked the judge for a recess and extra time afterward to argue more points surrounding his purported cooperation with the discovery process that he felt Backman misrepresented. Traditionally, a lawyer bringing a motion introduces it, the opposition gets a chance to refute the claims, and the moving attorney gets the final word. Garman's protests led to another round of back and forth at this hearing, and it seemed to expose the attorney's nervousness.

My personal impression of Garman's tactics--though certainly swayed by my intimate knowledge of the case and his basic character--left me convinced that he is running out of confidence on this one. He let the judge, Backman, and the few in attendance at the hearing see him sweat Friday. Backman, even when he was at a loss for words, came across as perpetually relaxed in his tone, speaking with the conviction of someone who knows he is right.

Backman wore a sharp suit that seemed a little too big for him Friday, but he filled the courtroom with the authority in his voice. He called the evidence debacle "one of the most egregious discovery violations I've ever seen." He seemed to have trouble even fathoming a world where sanctions would not apply to what his opposition's been caught in the middle of. Judge King conceded that there was no question he had the power apply sanctions, but he also said he wanted to know "the source" of that power. There are multiple categories and tiers of sanctions based on certain litigation behavior. Whatever stream of relief is applicable here will be best suited to become the basis for a formal order on the matter. Judge King seems to be thinking ahead about not wanting his order appealed if he sides with Backman.

Backman described the discovery difficulties as a "shocking development" in the case and confessed, "I want this case to be over." He further explained he had no vendetta or personal issues with Garman or his clients. "A serious mistake was made here," he stated plainly at one point.

Garman, in his second crack at a response to the charges against him and his clients, reported that he'd never been engaged in "such contentious litigation." He called Garman's strategy a "fabricated emergency." He insisted Backman's allegations did not mesh with the established record in the case and that he and his clients "did comply" with the discovery process. "I took this case exceptionally seriously," he said before listing off a series of numbers quantifying how many documents were turned over to Backman and when. He argued that some of the same emails Backman recovered from the Gordon Biersch subpoena were volunteered by other defendants in the case on previous occasions.

Garman went on to contend that he's gone out of his way to try to offer Backman concessions in the wake of the discovery mess. He told the court he was willing to expand the discovery process and allow further depositions of key witnesses but Backman refused these options. Garman also spent a considerable amount of time harping on the $150 million Cott offer being insignificant since it never actually materialized.

The question Garman seemed to miss in his explanation of the multi-million dollar Cott purchase offer is why it went away so fast after a meeting between Xyience insiders and the Cott folks in Canada. The deal didn't dissolve for no reason. There's no witness testimony as of this point in this litigation that adequately gives the exact reason why the $150 million offer came off the table and why it's not suspicious that people associated with Cott ended up with an ownership interest in the company anyway. Still, Garman insisted that if there was any conspiracy involved in this case it was "a conspiracy in the light of day" and his clients were open and honest about their intentions and actions.

The record simply doesn't reflect Garman's explanation as the full truth. The shifty approach to discovery adds more suspicion to what's already a clear-cut case of deceptive practices involved in the takeover and bankruptcy of Xyience by the Fertitta group. Garman also made the mistake of calling Former Xyience Co-CEOs Adam Frank and Kirk Sanford cooperating witnesses in Backman's case. Backman clarified that while Sanford and Frank agreed to provide information and evidence without the need for subpoenas and settled their own adversary cases, they are still "co-conspirators" in the case and will be treated accordingly.

Perhaps the most pretentious portion of Garman's argument on Friday was his framing of Backman as being dishonest for not holding up his end of a bargain struck at a previous hearing to split the costs of restoring computer drives that were reportedly destroyed by a system crash at Xyience. The agreement between attorneys came to pass only because the drives were represented to Backman as the ones with the company's crucial email servers contained within them. It turned out the drives were essentially worthless once they were restored and did not contain any email records whatsoever. So, essentially Garman wants full payment on a debt for services provided that were wholly misrepresented by him and his clients.

Judge King admitted not even bothering to read previous filings I presented to the court when it came time for hearings regarding those matters. I came into Friday's hearing not expecting him to give Backman much more of a fair shake. He surprised me when he picked up on a nuance neither side considered up to that point.

Focusing on Bullard's lack of record preservation related to his emails, Judge King pointed out that Bullard was savvy enough to know that being on Xyience's board of directors would require him to fulfill certain fiduciary responsibilities including keeping accurate records. Yet, at the same time, Bullard insisted that he did not save certain material because he did not anticipate being named in litigation. Bullard pointed to the liability issues he would be embroiled in as his reason for not wanting to be on Xyience's board as a formal member. So, the evidence shows Bullard purposely avoided being held accountable for accurate record keeping at one point and yet he still claims not keeping and volunteering crucial emails was an honest and innocent mistake.

Garman did not seem to have any adequate explanation for that reality. He later wondered aloud why both sides were spending so much money on a sanctions motion and requested a trial date at "the earliest possible date." Depending on how dueling summary judgment motions end up impacting the case once they are heard in December, the two sides will face each other at trial the week of April 9th, 2012. Before then, Backman will pursue some other serious evidence issues through additional motions for relief.

It's clear that Backman's approach has Garman flustered and desperate for a rush to judgment before the case gets out of hand. His clients are in a precarious position at this point, and it's not looking like conditions will ever improve. The Fertitta attorney was clearly off his game on Friday, apparently the result of knowing that the longer this case goes on, the worse he and his clients will look in the end.