The Distortion of Truth in the Lederer Files, Part VI

This is the sixth installment in a series of articles designed to bring attention to some of   the contradictions and misrepresentations contained in the Howard Lederer interviews, specifically those conducted with Pokernews.com, now dubbed the Lederer Files and a follow up interview on TwoPlusTwo’s Pokercast. The series will, in each installment, point out key comments that should be remembered. All of those comments will come together in the final chapter of the series to paint a better picture of the story that the facts really tell.

To reiterate, Parvis had asked how they planned to communicate the details of the financial state of the company to the shareholders, and Lederer says there is no thought of trying to hide it. There was a call that included the Board, corporate counsel, and Bob Wolfe held on April 21st, “and we just shared the numbers with everyone on that call.” He then goes on to be unsure as to when the first membership meeting was held, but that it was the 25th at the earliest, maybe the 27th. He also says he spoke to a number of members privately, and though he asked them to keep things in confidence, he recognized that it might be unrealistic to think that happened.  

The first full member call didn’t occur until May 1st. But there were shareholders contacted prior to this, not just by Lederer but by others who were on the April 21st call as well. Not every member received individual calls, but multiple sources have reported that during those calls between April 21 and May 1, the true financial position of the company was still being misrepresented to some members. Some of these were corrected prior to the call on May 1 but it is not clear that all of them were.

For some members, the call on May 1, 2011 would be their first communication from management since Black Friday. Although Lederer, in his interview, seemed unsure as to who ran the call, members involved in the call remember clearly that Lederer steered that call, and virtually every call after that as well. This was the call that Lederer called out Perry Friedman for having his attorney on the call, even though Friedman was not the only member with counsel present. As already noted, Lederer also concedes that by the next call, another nine or ten members also had their own attorneys take part in calls. In each of these instances at least some members knew that the “story” had already changed at least once as to the dollar amount that might be needed to get the company back on track.

Lederer tells Parvis that there was a lot of anger and that, “in situations like that it’s very difficult to get people to take responsibility for the problem. And people have to take responsibility for the problem before they really feel like they need to fix the problem.”

Yet Lederer himself insisted that the membership not talk about responsibility. According to sources, Lederer vehemently refused to even consider discussing looking into who might be responsible for the financial position the company now found themselves in. There is evidence to support that on more than one occasion, and in fact repeatedly, Lederer expressed to members the notion that “now is not the time” as far as finding out what happened to the money and that a time will come for finding out who was responsible, but that that time will come only after there is a good deal in place for the players. That deal is in place now for the players. Lederer still insists that he has spent no energy in investigating what really happened and who was specifically responsible.

It should be noted that this was the first full member call to have taken place since October 2008. There is evidence to support that members had requested that calls happen after October 2008, with requests of at least quarterly calls, but the Board never scheduled any.

In his interview, Howard spoke about some of the potential investors that were at the table early.  He was correct to say there were many that were interested in those first weeks and months. Many never made it past just a couple of phone calls, others signed NDA’s and started preliminary talks, still a few more began some limited due diligence. One such potential investor, outed by Howard by name in the video interview, was the Jack Binion group. While Howard’s recollection of why that deal did not move forward may be pristine as to some facets and hazy as to others, there are others that have a more vivid recollection of what transpired on those member calls. As Howard said, the Binion term sheet eventually provided for a 40% dilution of owners’ shares for a cash infusion of $ 150 million (there had been earlier discussions of $300M for 51%). In some versions members were invited to invest alongside Binion in the deal and in other versions members were required to invest their own money along with Binion. The part that Howard neglected to mention was that even with only 40% ownership in the company, Binion wanted control. This included the right to seat his own board of directors, replace the CEO and others, and hire and fire as he pleased. Though Binion would not be able to sell the company without consent from the current owners, neither could the current owners sell their own shares or the entire company without Binion’s consent. This was not a palatable option so early in the negotiations, with Ray in particular wanting to maintain control. Further issues included Binion not wanting to move forward without a settlement from the DOJ.

The DOJ settlement was a problem for several potential investors, and there were problems with the members as well. As any deal would be influenced by the ultimate settlement amount, some members wanted to know the progress of any settlement discussions. Sources confirm that on at least one occasion, one member aggressively demanded to know the status of negotiations, and was informed that that would not be possible because the members who had attorneys on the calls had not entered into joint privilege agreements with the company. When challenged on this issue, additional reasons were given, including a concern that members could leak the number, possibly leading to criminal consequences for the members.   Some potential investors got as far as signed NDA’s, but the Board, during those early months, did not receive what they called an ‘acceptable’ term sheet to offer to the members.  Binion’s group did do substantial due diligence and some sources say that some unexpected things turned up. Lederer was very much pushing the Binion deal to members for weeks, suggesting that maybe the control issue was something that could be renegotiated. Other members were wary of the deal because Binion was “Howard’s guy”.

Another serious contender in the early months was a New York investment group. Lederer and Bitar presented information about discussions with this group to the members. It was this group that had wanted members to pledge personal assets as collateral. The amount of the required pledge seemed to vary but according to Lederer and Bitar, the investor wanted the members to pledge between $ 30-50 million. While it was understood that some members would not be able to pledge assets, sources say that Lederer was the first to arrange for an appraisal on his house as the members were being asked to complete questionnaires as to their asssets as part of the investor due diligence prior to any deal being finalized. This group also did due diligence in Dublin and offered multiple term sheets. Sources have said that this deal initially would have provided for a cash infusion of $300 million at high interest rates with an equity kicker, and owners would suffer a 15% dilution of shares. (Later offers would be for a much lower amount of capital invested into the company.) There are many “minority owners”, some with only one quarter or one half of one percent interest, several with about one, two or three percent as well.  Especially because the Board, including Lederer, was not interested in taking immediate steps to investigate who was responsible, sources confirm that one member suggested that the Board members, including Lederer, take a non pro-rata dilution for the first 10% and the additional 5% cut be amortized equally among all members. This idea was not ever seriously considered.

Sources have said that one reason that the amount of money being sought had dropped to $150 million or less was based on the information that the Board, including Lederer, presented to the membership regarding their talks with the AGCC. According to these sources, Lederer and the Board told the membership that the AGCC had completed their investigation by mid-May and that they reportedly had found no wrongdoing during the course of that investigation. (In fact their statements relevant to this time period and at all other times can be found here.) Further, it was reported that they stood behind Bitar as CEO continuing to run the non-U.S. business, that they found that the company was functioning to their satisfaction, and that the AGCC was fine with U.S. players not being paid, and the company saying that the U.S. customers should take up their issues for repayment with the DOJ. It was also relayed to the owners that AGCC was not insisting that there be enough funds on hand to cover rest of world account balances, that this was not really required according to the regulations and their license, as long as FTP was taking steps to eventually build up their cash on hand.(the AGCC regulations, which are public, do not support this claim). Lederer and the Board made it clear that despite Alderney’s assertions, it was never a consideration to not pay U.S. players, whether Alderney demanded it or not. Nonetheless, the need to not have complete player coverage for ‘rest of world’ reduced the urgency to raise the entire shortfall, and some potential investors saw this is an opportunity to reduce the amount of money that they would put into the company.   Sources have said that members were informed that the AGCC and the company’s European counsel advised that Bitar could not be relieved from his position as the CEO because he was listed as the key individual [contact] on the licenses, that if he were to be replaced as CEO, the licenses would disappear, that it was not possible to substitute another key individual for the license without months of red tape, and that the license would not be valid during that period. There is no evidence in the AGCC regulations that  this is correct.

Management and the Board talked to many other potential investors. There is at least one instance where a potential international investment group, having billions of dollars in assets, was presented as an option to some board members. This investor was well known to an employee at FTP and there were conversations that the investor could potentially offer as much cash infusion as was needed by the company to set things right. However, even though the investor was willing to sign an NDA, promised very quick due diligence and could financially manage a full bailout, not only was the signing of the NDA on the part of the company never completed, it was never presented to the members as an option.  To this day, it is believed the members were never advised that this potential investor even existed.

Finally, as to PokerStars and any early consideration for a deal that might have been able to take place, Lederer was asked about what Parvis referred to as a June contact between the two companies, when PokerStars might have been interested in entering talks. Lederer replies:

“…We knew that they could potentially be in the mix. I believe there was a text message sent to Chris [Ferguson]. I can tell you at that very early state, that Ray didn’t seem to think it was a good idea, our lawyers had a lot of reservations, actually reservations that turned out to be quite accurate. –and very early on, it didn’t seem like a great idea.”

Parvis continues: “using Ray…Ray’s credibility has to be severely in question here…looking back at the relationship with PokerStars and Full Tilt, there has to be a strong rivalry there. Was it an ego driven issue here amongst Ray that he did not want to sell the company to his biggest competitor?” And Lederer answers:

“I don’t know the answer to that question. I really don’t. I think people felt like it was a deal that just might not be able to happen, as much as we would have liked it to happen. Ray was just very adamant that he didn’t think the deal could happen, early.”

Parvis asked then: “Was the potential of the Stars deal brought to the attention of the members?”

And Lederer replied:

“I think it was discussed, yeah.”

Parvis comes back to this later and asks : “Why do you think it took so long for a deal with Stars to get done when there is alleged interest so early on and do you feel that had you pursued a deal in the beginning stages and maybe paid a little bit more attention to the communication or whomever was reaching out from Stars that this could have been resolved sooner?”  To which Lederer replies:

“Yeah, I actually don’t think so”

“It was actually reported in the media that we did reach out to Stars at some point last summer and we did, and I think they were very excited, about the idea. They saw the opportunity, and I think they loved the idea of being able to rescue our customers, because PokerStars really cares about the poker community. They have handled themselves with nothing but the utmost professionalism in this whole mess, for themselves and ultimately for our customers. And this is another example of it. We reached out to them, and we presented the opportunity to them, there was no real conditions on the opportunity, they were going to come back with an offer, and clearly that offer was going to include them taking complete control of the company, and that was A-Okay with all of us. They came back…the answer I got was “they just can’t do it because it’s too complicated, it’s too messy,it’s potentially too expensive”.

“I think they had to say thanks but no thanks and I applaud them, they didn’t have to tell us that. They could have gone to Dublin and they could have done due diligence, they could have basically gotten a whole bunch of free information from us…They didn’t, they very respectfully and very quickly gave us a no.”

 

But Ray wasn’t the only one who didn’t seem to think it was a good idea, and the lawyers weren’t the only ones with reservations. Sources say that when some members asked why talks with PokerStars weren’t being pursued, Lederer personally expressed a belief that he expected that Isai Scheinberg would use any information he learned about the company to cause trouble for Full Tilt with the SDNY. One source quotes Howard as saying that selling the company to Scheinberg might be better than “blowing up the business” and that it would be the last call the company should consider, and even then only after the company “turns out the lights” and “goes into receivership.”

On June 1, 2011 Phil Ivey filed a civil lawsuit against Tiltware, individual John Doe defendants and unnamed affiliated corporations, seeking the courts injunctive and declaratory relief that his non-compete agreement with the company be terminated. He further was seeking damages of $ 150 million.  Part of the legal basis for his suit was that he was being constrained from entering into other prospective contractural relationships with third parties and from exploring other endorsement opportunities. According to the lawsuit, Ivey claimed that he was not aware of the “clear notice” or “repeated warnings” that FTP had received as to the legality of their US operation, per the allegations in the Black Friday complaints. According to Ivey, these contributed to the breach of contract by FTP.

It’s interesting that Ivey was then all about the breach of contract, because the time had come, two years prior, where such a breach may not have been a concern of his. According to his agreement with the company, he was required to do certain things, namely, play on the site, make his likeness available for marketing purposes, wear FTP logo and gear in public, make media appearances, and other similar obligations, even though such things would have been in his best interest regardless, as a major owner of the company and reaping in any rewards that such marketing would have made the company, via his distributions.  In September 2009, Ivey was scheduled to make an appearance in Germany at the FTP Million Euro Challenge Tour .  Although the company spent millions of dollars promoting the three stop tour, Ivey failed to appear at the first stop. Sources say that at some point  following his WSOP final table qualification in July 2009, he was refusing to do any media appearances, including to wear the FTP logo at the final table of the WSOP unless he were guaranteed to be paid an additional  bonus/salary because, he claimed, big name pros on other sites received generous compensation. Even though the appearance was already covered by his agreement, and he was receiving monthly compensation from the player pool for his sponsorship of the site as a pro, (even though, again, as a major owner of the company he already was being compensated), the company buckled and agreed to pay him. (Unconfirmed reports put this number as high as $ 1 million for ten appearances.)   He made the next appearance on schedule and sported the FTP logo at the televised final table in November.

In addition, he claims to have “suffered public ridicule, humiliation and loss of personal and professional reputation”. This humilation apparently has a number on it to make it less hurtful, namely $ 150 million. This value is coincidentally the same amount that was believed to be owed to U.S. players at the time of the complaint. Ivey made a press release claiming solidarity with players at the same time he filed his lawsuit. The release appeared on his personal website, www.philivey.com, which is not functioning right now, but “under construction”.  The release however can be seen here. While he claims to have this disdain for the fact that players were not being repaid, the $ 150 million would have gone personally to Ivey for his pain, and at no time did he ever say that he would be repaying any players from that money if he were successful in collecting it. Nor was it enough, by even half, to compensate victims worldwide.  Of course he could not collect it, because  FTP had less than $ 10 million in cash at the time. So was it about his humiliation? Was it about his non compete covenant? Or was there another reason?  Some have speculated that Ivey may have had another reason in addition to those mentioned.  He had an investor in mind that he claimed could save the day. He felt that this potential investor was not being taken seriously by the Board. This investor, by some public accounts was dubbed a possible “white knight”. There are those that believe this investor being more seriously considered was the reason Ivey filed that lawsuit, the lawsuit being his leverage for bringing his investor to the forefront. It is unclear, although highly speculated, whether Ivey would have received some compensation if this investor had been successful in completing a deal. Sources have said that that question was asked of Ivey’s attorney, but that no answer had been given.

Next Installment: The Board of Directors Overthrow Attempt and the “White Knight”