Inside the ring, Ultimate Fighting Championship combatants are prohibited from head butting, eye gouging, biting and kicking the kidneys with a heel. Outside the ring, apparently, everything goes, something that Xyience Inc., an energy-drink maker that was once a key sponsor of UFC, and both its shareholders and unsecured creditors have painfully learned.
Xyience is on the verge of liquidating. Its assets were sold for $15 million to Manchester Consolidated Corp. in April and Judge Mike Nakagawa of the U.S. Bankruptcy Court for the District of Nevada in Las Vegas confirmed its wind-down plan on Aug. 26.
But fisticuffs, and worse, are far from over. Litigation surrounds the former maker of the power drink known as Xenergy and the seemingly endless cast of characters involved in its creation, its day-to-day management and its descent into Chapter 11.
There's the lawsuit that Xyience shareholders have filed against the company's former management and lenders alleging breach of fiduciary duty and other misconduct. Separate litigation pits Xyience's unsecured creditors against Zyen LLC, a distant cousin of UFC that provided the company prepetition financing and then tried to foreclose on its assets. Then there's the Xyience bankruptcy estate's lawsuit against a blogger, Rich Bergeron, and his countersuit against the company, and Fertitta Enterprises Inc., whose principals also own UFC.
The strange complications don't end there. Because Xyience shareholders will be wiped out under the liquidation plan, their standing in their lawsuit is now questionable. In addition, Xyience's liquidating trustee, Biff Leonard, has yet to decide whether to pursue further legalities for the estate. Less than a year ago, Xyience's logo, with its Chinese symbols, graced the floor of UFC's octagonal ring. It was removed after the Nov. 17 match between Rashad Evans and Michael Bisping.
For Las Vegas-based Xyience, the high-profile branding from UFC helped it stand out against such rivals as Red Bull, Monster, RockStar, Adrenaline and Full Throttle, especially among males aged 18 to 34. UFC's bloody, frenetic mix of jiujitsu, judo, karate, boxing, kickboxing and wrestling makes it the second-most popular sport among that group.
UFC is owned by Zuffa LLC, Italian for a fight or brawl without rules, which is owned by brothers Frank and Lorenzo Fertitta, two Station Casinos Inc. executives who bought UFC in 2001 for a mere $2 million.
It would take a few years for the Fertittas' world to collide with that of Russell Craig Pike, who shortly after his release from jail created Xyience in May 2004. Pike started the company as a powders-and-pills sports supplement entity before introducing a line of energy drinks in 2006.
Pike wasn't an unknown in Vegas. He had started E-Destiny, an Internet shopping site comparing prices of business supplies that eventually shut down. He also founded Advanced Cart Technology Inc., which made the carts used to bring drinks to gamblers in casinos.
Pike had spent time in jail after pleading guilty to grand theft and forgery in California's Orange County Superior Court in 1987. He eventually ended up in Las Vegas and found investors for Advanced Cart. By mid-1996, however, he was again in trouble, filing for personal bankruptcy protection in Nevada on June 11 of that year.
Six days later, Advanced Cart filed for Chapter 7 in the Las Vegas bankruptcy court, felled by manufacturing costs that outstripped orders, according to Advanced Cart's debtor counsel, David Winterton of David J. Winterton & Assoc. Ltd.
Pike also pleaded guilty to a money laundering charge on Oct. 13, 1998, in U.S. District Court in Las Vegas and was sentenced to almost five years in federal prison and three years of supervised release. He was also ordered to pay $2.4 million in restitution.
"Pike has a history of fraudulent activity," says Winterton. "He has a history of his companies failing, either in bankruptcy or out of bankruptcy."
Attempts to reach Pike by e-mail were unsuccessful. But the Xyience situation didn't start to unravel until 2006. The company that year received a $32 million equity investment, of which $10 million was a convertible note, from the Brush Monroe Fund, a private equity firm operated by AA Capital Partners Inc., court papers said.
After the U.S. Securities and Exchange Commission filed a lawsuit against AA Capital on Sept. 7, 2006, the receiver appointed to take control of the company didn't renew Xyience's financing, leading it to default on the note.
Since a default triggered a conversion of the note into 16 million shares of Xyience stock, Xyience's officers and directors decided the best thing to do was to buy Brush Monroe's note and the Xyience shares. So on Oct. 20, 2006, Xyience signed a deal with Florida broker-dealer Pointe Capital LLC, to raise $30 million at $5 per share. According to the Xyience shareholders' lawsuit, Crown Capital Partners Inc. agreed to provide Xyience with $12 million to $25 million in financing, including a $5 million bridge loan from a Crown Capital-controlled company, Darlis Investments.
By the end of 2006, however, Xyience had only received the $5 million in financing from Darlis, so Adam Roseman, the chief executive of ARC Investment Partners LLC, an investment company hired to raise money, brought in Adam Frank, a partner in a development company, Edge Group LLC. Roseman later became a board member. Frank also promised to put $1 million into Xyience. But according to the shareholders' lawsuit, Frank failed to keep his promise.
Pike resigned as Xyience CEO in January 2007 but remained on its board until Feb. 21. Roseman took the reins and, along with Patrick Brauckmann, the CEO of Crown Capital and another Xyience board member, began trying to raise money by selling the Xyience stock that they did not own for $2.50 a share -- even as Pointe Capital was selling shares at $5 per share, the shareholder suit asserts.
But Xyience failed to raise enough money. When Xyience tried to roll out Xenergy on a national basis, the CEO was Bill Underhill and Jan Hall was the chief operating officer. They resigned in May 2007, however, after failing to generate the estimated $29 million needed to execute the company's marketing plan, court papers said.
By that June, with Frank and Kirk Sanford running the company, Xyience owed $25 million to trade creditors and $18 million to its noteholders. It had more than 130 distributors, including major mass-market customers such as Kroger Co., 7-Eleven Inc., General Nutrition Centers Inc., Kmart Corp. and Wal-Mart Stores Inc. But by December, only 27 customers remained and sales slipped from $2.7 million to $1.4 million, says a source close to Xyience shareholders.
Frank and Sanford cut Xyience's work force to 53 from 88, scaled back its business plan and searched for capital so the company could continue production. According to Xyience, the only company willing to provide the struggling company with a loan was Zyen, an affiliate of the UFC that was the Fertittas created specifically to provide Xyience with a loan.
On Oct. 4, 2007, Zyen provided Xyience with a $12 million senior convertible note priced at 15% and warrants for 10% of the company. "I think that Frank and Sanford have an unfair bad rap," says Xyience debtor counsel Laurel Davis of Fennemore Craig PC. "They worked very hard for no salary."
By the time Zyen provided the money, Xyience was embroiled in a lawsuit against Bergeron, a self-employed journalist and blogger, over posts he wrote about it. In the lawsuit, filed in the Eighth Judicial District Court in Clark County, Nev., on July 18, 2007 (it became part of the bankruptcy proceedings on March 20), Xyience seeks $25 million in damages for defamation, tortious interference with prospective economic advantage, intentional interference with contract and injunctive relief.
The state court on Sept. 6, 2007, ordered Bergeron to remove posts and articles from the Internet. Bergeron had written on MySpace.com and his Web site ultimatefightnews.com that Xyience was under investigation by the SEC and that it had created shell corporations to divert investor funds to benefit certain directors and board members, according to court papers. An SEC spokesman says he's not authorized to confirm or deny any sort of investigation of Xyience.
Pike then resurfaced, leading several other creditors in putting Xyience into Chapter 11 involuntarily on Jan. 3. The company responded 15 days later with a voluntary petition. But the drama didn't end there.
According to court papers, Xyience was in the final stages of negotiations with a group of shareholders who were going to provide the company with a $7.5 million loan when talks were derailed by a "campaign of intimidation and death threats" led by Pike and shareholders Terry Cardenas, Ronald Solomon and Ric Klingenberg.
On Dec. 19, Klingenberg and his brother, David Bergstrom, "stormed into the Xyience office, cornering CFO Michael Levy in an office and refusing to allow Levy to depart until their demands were met," court documents say.
Klingenberg and Bergstrom demanded a $20,000 payment and promised to "return the next day with guys who had a 100% collection rate," according to court papers.
Davis says they didn't return and Levy got a temporary protective order against them. Security was hired to protect the premises, but Xyience's offices were closed for 10 days, and its accounting staff quit because they felt unsafe. "They were the only ones aware of and who witnessed the incident, because a lot of people that work for Xyience are sales agents out in the field, so they aren't in the office," Davis says.
Zyen provided a $2.69 million debtor-in-possession loan to fund the bankruptcy case, and Xyience entered into a new UFC licensing agreement, which cost $675,000. Zuffa provided Xyience with a secured loan to cover the cost. Without the agreement, Xyience would have lost $8 million in revenue because of the requirement to destroy inventory that now contains the UFC trademark.
Little was left for Xyience's unsecured creditors, who will receive no initial distribution under the liquidation plan. If there is money remaining after all other claims are paid in full, they will receive a pro-rata share of those funds. Unsecured creditors will also be paid from preferential transfers, avoidance actions and proceeds from pending litigation. Winning in court is the only way Xyience equity holders will get anything. Their lawsuit names as defendants nearly everyone who ran Xyience after Pike departed.
For example, the shareholders' lawsuit accuses Roseman and Brauckmann of giving the proceeds of the $2.50-per-share stock sale to Key Management LLC, an entity they owned, and not to Xyience.
The shareholders also allege that Jeff Dash, Xyience's CFO from August 2006 to May 2007, knew what Roseman and Brauckmann were doing, didn't report it to the board and got paid for his silence.
And because the money never reached Xyience, production and shipment of products stopped by the middle of January 2007.
The shareholders' suit also disparages Frank and Sanford, noting that between June and September 2007, they were presented with several financial proposals for Xyience through a sale of equity with a favorable valuation while protecting existing shareholders from dilution. "In order to promote their own personal agendas, Frank and Sanford refused to pursue favorable financing that would limit shareholder dilution," the suit reads.
Richard Benenson of Brownstein Hyatt Farber Schreck LLP, counsel for both ARC Investment Partners and Roseman, refused comment. Pamela Lawson of Hunterton & Associates, counsel to Frank and Sanford, didn't return calls.
But one attorney involved in the shareholders' lawsuit who refused to be named says allegations in the complaint are factually off in many ways. Roseman "was not involved in any wrongdoing or to blame for Xyience's decline," according to a dismiss motion filed by ARC and Roseman, noting his service of only one month. "ARC is ostensibly involved as a defendant because Mr. Roseman works there; the complaint fails to explain how ARC was involved in any wrongdoing."
Zyen, too, is named in the shareholders' lawsuit, but the adversary proceeding the unsecured creditors committee brought on March 31 mainly accuses the Fertittas' vehicle of making a prepetition loan to Xyience knowing full well it couldn't make payments on it.
Xyience defaulted on it on Dec. 10, and Zyen sought to foreclose on its assets. "The Fertittas loaned the money with the understanding that there would be a subsequent equity infusion in Xyience," says counsel to both Zyen and Fertitta Enterprises, Gregory Garman of Gordon & Silver Ltd. "When management couldn't get the equity infusion, they foreclosed. Xyience said it was in a position to make regular debt payments, and it wasn't."
By defaulting on the note, Zyen would have been able to take possession of Xyience's assets, but the bankruptcy filing prevented that, says debtor counsel Davis.
Unsecured creditors, however, argue there is more to the financing than that. They say that because Zyen and Zuffa were affiliated, Zuffa's secured loan to Xyience conferred control over its inventory to Zyen.
The financing unit knew Zuffa could terminate the license before the bankruptcy filing, and if that happened, it could use the threat of trademark infringement to ensure that the debtor would never be able to sell its inventory of energy drinks, the unsecureds charge.
As a result, the committee alleges, Xyience could never operate or reorganize without Zyen's approval. "The Zuffa license accordingly provided the Fertitta family a level of control that they would not have had by means of their Zyen prepetition note alone," its lawsuit says.
Then there's the Bergeron situation. The blogger eventually countersued Xyience and Fertitta Enterprises on Feb. 12, seeking $15 million in damages because he claims he was slandered and defamed in bogus blogs connected directly to Xyience employees and associates through IP addresses. The blogs called Bergeron a homosexual and characterized his writings as a personal vendetta against Xyience, court papers say. Bergeron says in court documents that he has had to borrow money from a cousin because of extreme mental anguish and an inability to work, since he's needed to "rigorously defend the charges against him [and] restore his good name."
"The suit is nonsense," declares Garman. "Bergeron is neither a creditor or had any relationship with Xyience. He believes that the best way to do investigative journalism is to sue the company that you are trying to investigate."
The Fertittas have asked that the countersuit be dismissed, but Fennemore Craig's Davis says Nakagawa now must resolve the counterclaims Bergeron brought against the Fertittas before he can decide whether to dismiss the case.
A status conference on the shareholders committee's and Bergeron's lawsuits is scheduled for Oct. 8. In the shareholders lawsuit, Nakagawa is expected to rule on the defendants' motion to dismiss and Xyience's motion to substitute itself as the real party in interest, says the attorney close to that case. A status conference on the unsecured creditors' committee's lawsuit will take place the same day. Zyen and the Fertittas have sought dismissal for that case, too.
All the lawyer for the Xyience shareholders, Daniel Newman of Broad and Cassel, would say is that "we believe we will be able to prove the allegations through discovery," adding that Nakagawa still must decide whether the shareholders' case should be moved back to state court, where it began.
The relationship between Xyience and UFC has changed. Xenergy remains a sponsor. But a logo featuring a can of Xenergy no longer appears beneath the fighters' feet. Another drink, Bud Light, has replaced it.
Surely the ring can be an unforgiving place. Xyience shareholders and unsecured creditors hope the courts aren't, too.