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PRIDE, Xyience, Zuffa, and you

By Zach Arnold | February 21, 2008

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Special guest opinion/editorial by Leland Roling of MMA-Analyst.com

One of the bigger stories so far this year has been the emergence of two scandals that have earned the attention of hardcore fans and the MMA community as a whole. The purchase of PRIDE from Dream Stage Entertainment in the early part of last year sent waves of bliss to the fans who wanted to see the dream matchups that they’ve always discussed with fellow fans for many years. It also managed to bring on the present lawsuit that was filed by Zuffa against the former Dream Stage Entertainment management. Taking a backseat to the DSE lawsuit, Xyience, the UFC’s main sponsor for years, has come under fire for its sudden bankruptcy and subsequent infusion of capital from the Fertittas. Why should the casual fanbase care about the inner workings of Zuffa and the related scandals? The end product may eventually be a victim of the consequences.

PRIDE vs. UFC sings a much different tune

The old rivalry continues to rage on between the two promotions, but in a much different manner than before. At one time, both organizations were powerhouses in their respective markets. PRIDE flourished in the Japanese market in providing entertaining matchups and relevant battles between fighters of rank. It created some huge ratings alongside K-1 to solidify its standing as a perennial contender in the war for drawing power among the Japanese audience. The UFC began the MMA buzz in the States by combining solid marketing, a reality series, and personalities in and out of the cage. Fighters like Chuck Liddell, Tito Ortiz, and Randy Couture drove the UFC to where it is today.

Now, the UFC is the big dog in the market. Although the Japanese scene is reemerging as a potential powerhouse in the MMA world, the UFC still manages to draw big pay-per-view numbers, the best matchups, and a stable of fighters that includes nearly all of the elite talent in the world. It may not stay this way for very long.

The lawsuit filed by Zuffa on February 1st outlined some of the sentiments that some writers and fans had been talking about when Zuffa bought PRIDE last year. Zuffa claims:

Because plaintiffs are involved in the gaming industry, defendants were required to cooperate with and submit to background checks and drug tests to ensure compliance with the regulatory requirements of plaintiff’s gaming license. Defendants failed to cooperate with, submit to or pass such background checks, defrauding plaintiffs into entering the agreement for “millions upon millions of dollars.”

Most fans are dismissing this lawsuit due to the Fertittas’ influence in the Nevada Gaming industry, but it’s my opinion that the issue could potentially turn out to be bad news for Zuffa and the UFC. The big issue in this case revolves around the legal concept of due diligence, and it should provide us with some insight into Zuffa’s thinking when it came down to the terms of the deal, and the idea of actually going along with the buy after some potential discrepancies.

Normally, due diligence can be related to evaluating a company’s assets or determining their value. In Zuffa’s case, this applies along with the investigating the persons involved in the transaction. Sakakibara and other parties involved with the Dream Stage Entertainment management team were also said to be under investigation by the Kanagawa police (because of Seiya Kawamata’s claim filed a couple of years ago).

Hindsight is 20-20, but Zuffa’s due diligence investigation ended up being insignificant and incompetent.

If Zuffa or anyone involved with the UFC had been reading up on the dealings in Japan, they probably would have had the inkling that the underbelly of Dream Stage Entertainment had some connections to it that possibly might not bode well for Zuffa in the future. After all, DSE lost their Fuji TV deal because of a multi-month negative campaign by Shukan Gendai that centered around allegations of DSE being connected to organized crime.

“So what? The fights are still awesome…” claims the casual fanbase.

Maybe it’s a long shot, but I’ll take a stab at it. The biggest problem for Zuffa and the Fertittas in this case will be the Nevada Gaming Commission. It’s been known for years and years that being involved in financial dealings with known crime organizations will land you in front of the Control Board at a hearing regarding your license being revoked. Although it hasn’t happened in many years, it’s still a fear for the Fertittas in this case. More perplexing is the fact that the lawsuit claims that because the defendants were uncooperative, Zuffa should obtain monies from the defendants for defrauding them.

Last time I checked, Zuffa still went through with the deal even though there were questions regarding due diligence. Was Zuffa in a reckless hurry to buy the PRIDE assets and ensure that no one else would be able to obtain them? It’s hard to understand why Zuffa didn’t know that the fighter contracts were non-transferrable, the Japanese employees were uncooperative, the video library is rumored to be mostly owned by Fuji TV, and the brand name was completely tainted in Japan before the UFC ever got involved in buying the promotion.

The NGC may look at this improper investigation of the PRIDE assets and person(s) behind DSE as a red flag, and begin their own investigation into the buyout. If that wasn’t enough, let’s add on an entirely different scandal to the pile.

Xyience, the energy drink that crumbles your foundation?

The scandal that involves Xyience is a bit trickier in a sense that many analysts feel that Zuffa hasn’t broken any actual laws, but their actions would fall under “questionable business practices”. To get a good sense of the entire situation, check out Ryan Harkness’s interview with Rich Bergeron. I’ll spare you the extensive history of Xyience and delve more into the present picture.

The main issue in the Xyience scandal revolves around the $350 million dollar financing loan that Zuffa was able to obtain from major lending brokerages. One of the major stipulations in obtaining such a loan was to solidify the company’s standing as a mainstay in the market. A way to do that is by having a sponsor who is in good standing and in a working relationship with your company. That sponsor was Xyience.

The problem: Xyience’s financing came from the Fertittas. Adam Swift reported in a series of Sherdog articles that companies connected to the Fertittas, such as Zyen and Bevanda Magica LLC, helped out Xyience. Reportedly, the Fertittas actually loaned the money to Xyience for that company to stay afloat, and was able to obtain the financing to finalize the payments on the PRIDE purchase and give large dividends to White and themselves.

Where’s the problem?

The standing of their main sponsor Xyience. Xyience was supposedly on the edge of a financial cliff and the only money keeping it alive was the Fertittas’ own money. This could potentially blow up in Zuffa’s face as we move more into 2008.

The wound gets bigger. Rich Bergeron claimed in a radio interview with Ryan Harkness that after the loan, a deal was struck with Xyience for an amount that was nearly identical to the amount of money that Zuffa had put back into the company to save it from going under. (Bergeron reiterated this accusation in his court counterclaim against Xyience yesterday.) The deal essentially gave the money that Zuffa loaned to Xyience back to the Fertittas.

Enter another Fertitta company into the mix (Zyen), and we get even more questionable business practices from Zuffa’s owners. Xyience owed the UFC around $12 million dollars, so suddenly a company called Zyen loaned them the amount of money they needed. Now, Xyience owes Zyen a bunch of money that they cannot pay on. Xyience defaults and Zyen would then seize all of the assets.

We can continue even further on the laundry list of problems. The history of the Fertittas, White, Pike, and their wives is interesting to say the least. The Fertitta brothers, White, Pike’s wife, and Dana’s wife all went to the same school. Past CEO’s of Xyience were either business associates with the Fertittas or a “friend of a friend” of the brothers.

In a sense, this entire web of questionable actions by Zuffa and company is becoming even bigger than the PRIDE scandal. It points toward allegations (by Bergeron and others) of potential fraud and possibly opens themselves up to some huge lawsuits from angry shareholders and other parties involved in the transactions. Once again, I bring up the potential for the NGC to get involved as well. I believe this case, if the allegations made by Bergeron and others are true, is possibly more damaging and threatening to their gaming license. Unlike a civil court, the NGC can revoke based on a “lack of ethical business practices”. There have been cases in NJ where this was exactly why gaming licenses were revoked and the NGC followed suit with their own investigations.

Wednesday’s news regarding the Bergeron case brought this news:

Bergeron has been informed that federal law enforcement authorities have already been dispatched to look into this entire egregious situation and the ensuing fraud involved in trying to keep it quiet. Due to the progress of these proceedings, Bergeron may actually be in a better position to help build the government’s case through civil channels. He is committed to maintaining direct communication with federal authorities he has already contacted. The defendant and cross-claimant Bergeron is also depending on these proceedings to help over 340 shareholders regain their original investment in Xyience before Fertitta Enterprises defrauded them and locked them out of any future in the company through clear misrepresentations of intent. The complete lack of full disclosure that occurred under the direction of Fertitta Enterprises and the willful determination to eradicate Bergeron’s published reports about the ongoing fraud and collusion has produced countless victims who are relying on the results of this case and Bergeron’s reporting itself. This case may be the most promising measure to help them recover what they have lost in the process of the counter-defendants’ attempts to unjustly enrich themselves.

The key point here is that federal law enforcement authorities are now supposedly looking into Bergeron’s claims. This could potentially open the case against Zuffa, the Fertittas, and anyone else connected to the claims. The NGC would only be a few steps behind, and once again, the Fertittas could find themselves in front of the Control Board.

So, why should you care?

As a casual fan of the sport, why should you care at all about the rumblings in the legal world that revolve around Zuffa? If you only care about the end product, the PRIDE scandal probably left you wondering why anyone cared that yakuza was involved. Unfortunately, PRIDE was a perfect example of why fans should care. For all the glory that was PRIDE with its entertaining bouts and fantastic production, it all abruptly ended in a scandal. PRIDE lost their television deal, and the UFC could stand to lose even more.

The one main concern is the Nevada Gaming Control Board. Both scandals could cause them to become heavily involved in investigating claims, and it could lead to a hearing. When faced with a decision between the enterprise that made your millions or a fight promotion that is in debt, I think it is safe to say that the Fertittas would jump ship and sell the promotion.

There are other smaller issues to consider. If either case explodes into huge legal trouble for Zuffa, sponsors, fighters, and other revenue streams could jump off ship. The end product could suffer greatly, thus affecting the promotion’s ability to provide fans with meaningful fights and entertainment.

The UFC could be on the chopping block, and many fans discount the claims that the NGC would actually revoke the gaming license of the Fertittas due to their huge impact on the industry in Nevada. If history has any influence in this case, the history of the Nevada Gaming industry would imply that no one is immune. The PRIDE scandal opens the doors of Zuffa and could give us a glimpse at the dealings with DSE that could solidify the claims made by Shukan Gendai in regards to their claims that DSE was connected to organized crime in Japan. The NGC looks down upon those dealings with swift and strict discipline.

Additionally, Xyience could be the huge downfall for the Fertittas that everyone is overlooking. Allegations of fraud and claims of misrepresentation of intent in the company are among the many accusations that Zuffa has had thrown their way. If Bergeron’s case is any indication, we could see the promotion’s future in someone else’s hands.

Topics: Japan, Media, MMA, PRIDE, UFC, Yakuza | 15 Comments » | Permalink | Trackback |

15 Responses to “PRIDE, Xyience, Zuffa, and you”

  1. Grape Knee High says:

    Zach, nice summary, sometimes it’s hard to keep up with all the moving pieces.

    A few comments:

    – I don’t know exactly how deep in bed the Fertitta’s are with the NGC, but I don’t think it will matter. I find it hard to believe that the NGC will revoke licenses based on tabloid journalism from Japan. No organized crime links were ever even confirmed by the Japanese police.

    – Is Zuffa is engaging in illegal or fraudulent behavior? Doesn’t seem like it to me from your article.

    – Just because these Xyience transactions are not being made at arm’s length does not necessarily mean anything improper is going on. Business deals with friends, spouses and your own companies happen all the time, in every industry.

    – There is nothing suspect about the potential for Xyen to seize Xyience assets, as far as I can see.

    I’m not going to waste my time listening to a lunatic like Bergeron. What exactly are his claims of fraud based on anyway?

  2. Zach Arnold says:

    Zach, nice summary, sometimes it’s hard to keep up with all the moving pieces.

    Leland wrote it so all credit (and criticism) goes to him.

    I’m sure he’ll respond to your comments shortly.

    The one thing I will respond to that you raised is the Japanese police investigation… a top reason the investigation remained open is because the main person they wanted to talk to, Mr. I (Ishizaka), reportedly left the country.

  3. Zack says:

    I hope Xyience lives on. If there’s one thing I learned from TUF 1, its that Xyience tastes GREAT in a shake!

  4. “Is Zuffa is engaging in illegal or fraudulent behavior? Doesn’t seem like it to me from your article.”

    Well, the questionable behavior stems from the fact that Zuffa did not actually have a sponsor in good standing or even independent of Zuffa. Xyience was in terrible standing, and was about to fall off the cliff when Zuffa stepped in and was able to save it by infusing funds into it through a different company that was owned by the Fertittas. Zuffa then claimed that the UFC had a stable sponsor in good standing, and was able to use this as an indicator in the loan process for some heavy hitters in the lending industry.

    The problem here is that Xyience wasn’t a stable sponsor. Obtaining that large of a loan based on false information is curious. Of course, does that argument hold water? It may not, but it’s fairly evident that many people feel that it could easily be brought up and fought.

    “Just because these Xyience transactions are not being made at arm’s length does not necessarily mean anything improper is going on. Business deals with friends, spouses and your own companies happen all the time, in every industry”

    Very true, but the entire idea that using Zyen to put money into Xyience, and then grabbing the money back from Xyience by creating a deal with Zuffa makes it seem as if there was collaboration on both sides of the board. In reality, the Fertittas gave money to keep Xyience afloat for the loan process, got the loan, made the deal to get their money back, then Xyience defaulted on the payments so that Zuffa could get the assets.

    You’re right, it’s not a huge eye-raising issue, but when you look at some of the business practices being done, it begs the question as to what is really going on behind the scenes at both companies.

    “There is nothing suspect about the potential for Xyen to seize Xyience assets, as far as I can see.”

    It’s very suspect because it points at a potential ochestrated default of the company that raises issues with shareholders of the company who just lost their entire investment by misinterpretation of intent, which is illegal. Shareholders were told one thing, and the company ends up seized, a completely different outcome.

    Bergeron may not be as lunatic as you think, especially with the information being provided with the lawsuits coming out. It’s interesting to see things that he said in the past have come true due to the fact that his information was correct. Whether or not it is entirely true has yet to be seen.

  5. Grape Knee High says:

    Leland, thanks for the reply. I’m looking forward to see how this all unravels.

  6. Zurich says:

    Fantastic article Leland – great work!

  7. Paul Horton says:

    awesome read! Thanks for such a great site

  8. The Citizen says:

    Leland, cheers! I too doubted Mr. B, but after his interview on Fightlinker, I didn’t know what to think. Lots of questions, also the ufc is still dealing with the Randy issues, so that too on top of this will put stress on any corporation.

    Interested to see what we see in the coming months.

  9. Tim says:

    Xyience wasn’t run by the Fertita’s, it was a sponser for the UFC, so who knows?

  10. Samscaff says:

    I hope the Ferittas get buried.

    Sure, they may be fairly legit now, but the family fortune started in organized crime. They just got out at the right time.

    Plus I would like a change of management in the UFC. Everything about the UFC (other than the fights) is too stale and predictable.

  11. dragomort says:

    Very nice article that tries to shed light on some things noone else seems to look at much. It’s hard to tell the full story, but more info and new perspectives are always interesting and educational. Thanks yet again, guys!

  12. Brandt says:

    Nice read! So what happens if the UFC decides to sell? Can they find a legit buyer and sell it or will all the legal drama follow the UFC name?

  13. All I can say is WOW! I really can’t wait for the next hearing.

  14. Great write-up. This is why I enjoy visiting fightopinion.com on a constant basis. The write-ups are well out and reflects a more mature viewpoint, a stark contrast when compared to other teeny-boppper MMA websites.

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