The Distortion of Truth in the Lederer Files, Part VII

This is the seventh 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 Matt Parvis of 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.

In early June 2011, some of the owners gathered together at a Las Vegas address of one of those owners. Sources say that discussions took place about the state of the company, the lack of progress of the current board to get a deal done to settle with DOJ, repay players, and keep the company functioning in a profitable way. The members also wanted a new Board to be seated so that shareholders would feel more comfortable sending in money, whether to repay debts or to help recapitalize the company. The consensus among this group of owners was that it would be necessary to remove the current Board of Directors, (Ferguson, Lederer, Bitar and Furst), and seat a new Board comprised of (different) members and outside Board members as well. Removing Ray Bitar as CEO of the company was also part of the plan moving forward.  

Another meeting was scheduled a day or two later with more members to discuss this in more depth. The members invited to this meeting constituted what the members believed to be a majority of voting shares. Decisions were made to move forward by hiring an independent attorney to represent the interest of these members to be sure that actions to remove the Board were in keeping with any parameters for doing so as stated in the operating agreement, and to assure that the process could not be challenged later.

According to Lederer:

“there was a group pretty much led by Phil Gordon and his attorney….that they seemed certain that the Board had somehow participated in creating the shortfall, like actively,–had known about it, and had approved these distributions.”

In fact, the group that planned the first meeting did not include Phil Gordon at all.  After that meeting however, sources say Gordon was tasked by the members to find an attorney for the shareholders at the meeting, to act in their interests, someone that could be available immediately, work on the legal remedies available to those members, create the proper documents and come to Las Vegas on a moments notice. Such an attorney was hired by the group and he traveled to Las Vegas for the next meeting.

Lederer re-emphasises a statement that he’s made before:

“The operating agreement is clear, there is no language in there at all that says that the Board should be conducting independent forensic audits, and in fact, we were a four man Board, with the same four people for 6 years because the very membership that was pointing their fingers at the Board were unwilling to fill the empty seat or even conduct an election to elect a new Board.”

While the above is technically correct, i.e. the Board was not explicitly tasked with hiring forensic auditors,  neither were they forbidden to do so. Furthermore, evidence suggests, as already reported, that when other board members were in place (other than either Lederer, Ferguson, Furst or Bitar), they found the position was one in which they were not able to effect any changes and in fact many times, they left after one term holding the seat, or even less.  Furthermore, on at least one occasion, Lederer himself emailed the members warning them of the civil and legal liabilities that they could face if they chose to run for, and accept, a Board seat.  As for conducting elections for either new Board members or to fill any vacancies, it was not in the members purview to do this. It was up to the Board of Directors to hold the elections every year.  It is unclear whether Ferguson, Lederer, Bitar or Furst would have continued to get the requisite 50%+ of votes over the years. Without a majority of member votes, they could not have kept their seats whether another member wanted to step up or not.

Parvis then asked: “Did this group led by Phil Gordon make any headway by convincing others to follow suit and attempt to place the blame …”

To which Lederer replied: “the owners did what was always within their power to do, and that was to change the course of the company.” 

Lederer recounts how members called for a member meeting,

“and at that meeting they delivered what’s called a member written consent, a document drawn up by attorneys, in accordance the our operating agreement, and basically this document called for the removal of the four Board members, and the removal of Ray as  CEO.  And it called for a new Board to take over control of the company, and that new Board was going to be Phil Gordon, Phil Ivey and Andy Bloch.– That member consent had– they just need a majority, I think they had about 52-53% of the membership sign that. Simultaneously with that document being delivered, one other member, a guy named JK Scheinberg, who was kind of in the Phil Gordon camp, he arrived in Dublin, and he announced himself to the staff in Dublin as the new CEO.”

“It was really weird and it was very disruptive”.

Sources say that this is a misrepresentation of facts and  that the vote taken actually had over 56% of the members voting for the change in the Board. Scheinberg did arrive in Dublin as the member consent was being completed. Sources say that his trip to Dublin at that time was to confirm to the membership exactly what voting percentages each member had, in order to confirm that the vote that they believed to be a majority was in fact correct.  Sources also say that for several years, even prior to Black Friday, the questions from members about the specificity of the exact voting shares were never answered, and that they had not received any updated ‘cap table’ showing the distribution of shares of the company. In keeping with what the Board had been telling members about many other questions regarding the operation of the company for several years, namely “If you want to know, come to Dublin and you can see all of the information,” the owners did exactly that, asking  one member that was able to travel immediately, to make that trip. Furthermore, multiple sources confirm that Scheinberg did not show up and announce himself as the new CEO to the staff as Lederer claims, but rather he introduced himself as one of the owners of the company. He apparently had meetings with several key employees, and it was only after the written consent was delivered to the previous Board that Scheinberg even told anyone that he was there to help transition the new Board in and act as an interim CEO. So few people at the Dublin facility knew who he was, that many assumed he was either another potential investor doing some due diligence or even that he were a journalist.

Parvis:  “Did the new Board appoint him?…”

Lederer continues:

“The way the written consent works, according to the operating agreement,  is that once the written consent has been delivered to the company, which it was, there is like 10 days before it takes effect. So presumably in ten days, the old Board is gone… the new Board takes their positions on the Board and they can immediately, or maybe even this consent called for it… Ray was certainly going to be removed as CEO immediately, once the consent took effect.  At that point, this other member was going to become the CEO.”

“There was one other thing in that document that horrified me. In the history of our company the board had never been paid [for being on the Board]…this was a document that was written by Phil Gordon’s attorneys.  Phil Gordon was going to become one of the Board members, and this document, clearly, in plain English stated, that the board was going to receive a salary of   $ 20,000. per month, to be on the board, that’s per month, per person.  So $ 60,000. per month,…I questioned that, and I just said ‘Are you kidding?  We are going to pay ourselves now?’  and I think one of the answers I got back was ‘Well, you know we need to incentivize people to take board seats.’ ”

 

Another misrepresentation here according to sources. The operating agreement had to be changed in order to allow payments to be made to Board members, which was done. Another change was to allow the seating of Board members who were non-owners of the company, which was also done.  The previous operating agreement allowed only for the Board to be made up of current owners of the company. In addition, sources say that the Board member salary that Lederer refers to was specifically included to cover the payments to Board members that were not owners, as the recruitment of new Board members from outside the company would clearly have to include a salary. This is the “incentive” that Lederer conveniently misstated. In addition, sources also say that the three new board members that were owners (Gordon, Ivey and Bloch) had agreed to forego any board member payments indefinitely.

Parvis asks: Wouldn’t it be incentive enough –for the players to get paid?

Lederer replies:

“ Yes of course,  if you are going to choose to be on that Board because you are getting  $20,000 per month, I don’t think our customers want that to be the reason you are on the Board. You need to be committed at a different level. There are problems that are way too important for $ 20,000 a month to be an issue.”

” I made a lot of mistakes after April 15th, under very difficult circumstances. I think the greatest mistake I made after April 15th was not putting a stop to the silliness and putting a stop to this board… I could have killed that board in five minutes.  There were people that had signed that written consent, that I only had to turn one of them, that actually approached me afterwards and said ‘look if you think this is a bad idea, I just went along with this because they told me it had to be done, but if you disagree, I will take my name off of this thing.”

“I think our customers deserved more fight from me,  I knew it was a big mistake,  I should have known it was a big mistake. First of all, Phil Ivey is going to be on the board, he just sued the company on June 1. That didn’t make any sense to me, that was a really bad idea. I thought that Phil Gordon had demonstrated that he was sort of out for blood, and that wasn’t going to get our customers paid. Andy Bloch was actually apparently sort of a late addition to the board as a compromise, so without Andy being  on the board, they would not have gotten over 50%.”

“One thing that that written consent did demonstrate was that , yes, the owners did have control of the company, and they demonstrated that control on June 9. “

Upon receiving the written consent that would oust them from their positions, sources say that the “old Board” claimed that they would have gone voluntarily, that this vote and consent was not necessary. In fact, for several days after being advised of the action, the the sitting Board advised the other members that certain documents would have to be prepared for their departure, and once executed, that they would “voluntarily” step down, “tomorrow”.  As part of the operating agreement, the Board and the Managers of the company would be entitled to certain indemnifications. These indemnifications would include the company paying for attorneys fees  etc. for any future actions brought against those individuals on the basis of their actions as part of the Board or as Managers. The documents that the old Board requested that the new Board execute requires that this promise stay in tact, with no possible changes later, that the expected costs to cover these indemnifications be paid in advance to an escrow account (potentially millions of dollars), and that the new Board further state that they are aware of all of the prior actions of the old Board and the Managers while they held office.  These contracts were never executed and the old Board altered their stance on voluntarily leaving their positions.

Furthermore, Lederer neglected to state in the interview that as part of the agreement, Phil Ivey would be dropping his lawsuit against the company.  At least one source also states that Ivey was also preparing to repay his member loan of over $ 4 million, once the transition was completed.

Well, it did take longer than five minutes, but indeed there was a change of heart, in the eleventh hour, of some of the members that voted previously to remove the old Board.

Matt Parvis continued:  “Did the new group of three, did they get themselves to Dublin immediately?”

Lederer replies:

“Yeah, I think that Phil Ivey was already over there, –maybe in England, and within a few days… Andy Bloch and Phil Gordon flew to Dublin, and we were still having these joint board meetings.  At some point, JK had sent me an email, just saying like ‘ I’m glad there was a big bottle of Advil in your old office’.”

What Lederer also neglected to mention was that it was during these “joint board meetings” that the “old” Board shared information with the “new Board” about the real financial situation of the company.  Sources say that this was the first time that the new Board members, or probably any members, other than than the old Board, were hearing of the dire cash situation. By early June there was less than $ 10 million in the company coffers.

Lederer continues:

“…Around the 14th or 15th, four or five days after the member consent, J.K. asked for a ticket home from the company, and the company said o.k., great…When would you like a return? and he said “one way is fine”.

“I did email our main regulatory attorney, the attorney that dealt with Alderney…dealt with France…ok, please lay out… the concerns we should have as a company,  as it relates to what may end up being a very sudden and abrupt removal of Ray as the CEO. He knew about the structure of the companies, the entities, he knew a lot of stuff…And I got back an email that had like 12, 15 bullet points, there was a lot in there…’you may lose the French license and never get it back, Alderney needs to be informed before you remove Ray as the CEO, and you need to immediately have another CEO in line, you can’t operate with a CEO, and still maintain your Alderney license. And then he listed all these companies that Ray was the sole beneficiary, the sole beneficial owner on behalf of either Pocket Kings or Tiltware, and that there would have to be a smooth transition of all these ownership interests. I know that somewhere in the middle of all this, I think again around the 15th or 16th…on a joint board call,  Andy Bloch just says ‘I don’t know that this is a good idea, I don’t think I want to take my seat’. ”

“Well, so now we are in a bit of trouble…we are potentially in disastrous territory if we don’t do anything. actually if we don’t do anything, what’s going to happen…is this written consent is going to take effect and the three people that are named in the written consent are not going to take their board seats, at least Andy won’t, so we aren’t going to have a duly elected board, but the old board, the effect that the old board is gone…We would have literally been a ghost ship”.

It is unclear if Scheinberg’s departure was meant to be permanent, or if he was simply returning to the US for a prior commitment and waiting for the Resolution to go into effect.

Additionally, there is nothing in the licensing requirements from Alderney that states that the key individual on the gaming licenses must be the CEO of the company. Another responsible individual can assume the key contact role for the licenses.  Also, each of the individual companies that Lederer refers to, that Ray Bitar was the sole director of, could easily be transferred to another individual as well. Lederer himself talks about this later in another context when referring to how an Irish employee stepped up to assume a director role in many of the Full Tilt entity companies when the other director (other than Bitar) resigned.

The entire argument that Lederer puts forth in the interview, the same one he put forth to the shareholders as fact, about removing Bitar from the Board and as CEO as the reason the licenses would be revoked was flawed. Even if there was a process involving red tape that might take weeks to complete, sources say that according to the discussions surrounding the vote and the member consent, Bitar was not being forced to leave the company at all, he would have been asked to remain as a consultant or in some similar capacity.  The members accepted that he was vital to a smooth transition of teams and that, in addition to his knowledge of the day to day operations of the company, that  he was  deeply involved with those potential investors already in discussions for a sale. He was only being replaced as a Board member, a company manager and as the CEO. Lederer however, would have no further role in the operation of the company, other than as a shareholder (similarly Ferguson and Furst).

Lederer relays a conversation he had with Andy Bloch:

 ”Under what conditions would you take your board seat? Maybe that’s what we should do, lets just write down a list of  the things that you would like to see get accomplished, and then you would be willing to take your board seat and so would the two Phil’s”. And we made a list, and that included raising $30 million from the members internally, so we just had some extra cash. some extra runway to get to a deal.  If you guys are so confident that the new board is the right direction, let’s all put our money where our mouth is, and let’s put money in an escrow account, and if that escrow account gets to $ 30 million,  and we can check off all the boxes on the Ray Bitar email, and there may have been a couple of other conditions, but we called it Transition 2.0. Well, now we will put into effect this new board.   There would have been confidence shown by actual dollars, that ownership believes in this new board, and we will have dealt with the Ray Bitar concerns. And the company can move on and maybe do some wonderful things and maybe try and do a deal and get our customers paid. That was the new goal, but that never happened.”

Again Lederer leaves out a few key points.  While Andy Bloch reportedly stated he would feel more comfortable with the $ 30 million cushion on hand before he took a Board seat, sources say that Phil Gordon wasn’t ready to accept a board seat while the indicted Bitar was still on the Board too.. So there was an impasse. The members had already tried to raise the mentioned $ 30 million internally without much success.  The $ 30 million number was one that could have helped in two ways.  First it was the number required by one of the potential investors that the members raise to add to the $ 125- 150 million the investor was considering putting in. The second was, failing the completion of a deal with that investor, that $ 30 million was the number that the Board decided  could tide the company over, paying salaries. operating expenses, open invoices and getting payment processors (rest of world) back on track, while giving the company time to negotiate other possible deals for the sale of the company.

Lederer himself states that raising that amount of money among the members was not happening.  Sources have said that some members had arranged to commit to approximately an $ 8 million infusion of cash when the new Board was seated.  Lederer was not one of those members.

Finally, the old Board announced to the members that a new written consent must be executed. Sources say that several members had “changed their votes”, and were no longer backing the new Board taking it’s position, but potentially standing behind “Transition 2.0″.  While Andy Bloch has publicly stated that he was not comfortable continuing with sitting on the Board as originally laid out in the original consent, his vote alone would not have been enough to bring the total under 50%.  It is unclear which other members, if any, changed their votes,  but in the end, there were enough votes to carry a new consent to re-seat the old Board (Lederer, Bitar. Ferguson and Furst).  Lederer himself sent the signature pages out to members, even inviting them to his home to use his fax machine to get the documents in on time. This all occurred on the eve before the new Board would have been seated.

The old Board held their seats and the status quo continued.  The members were unsuccessful in replacing the Board. The hopes pinned on Transition 2.0 faded away as well.

Sometime in May 2011 a potential investor was introduced to the company by Phil Ivey.  This is the individual referred to as “Sam” by Lederer during the twoplustwo pokercast interview. (This investor was not discussed in the released Lederer files). Discussions with Sam Al-Amiri took place sporadically during May and June, but no agreement in writing was being reached due to Sam’s insistence on a period of exclusivity in which Sam’s firm would be conducting their due diligence.  As Lederer explained, the exclusivity caveat was a hard pill for the decision makers to swallow in the early going since they believed there were many other interested parties that would be interested in investing in or purchasing the company. The originally requested exclusivity period was six weeks, eventually reduced to three weeks.

Sam had an affiliation with a European investment group and sources say that he was making very big promises on what this group could do to get FTP out of hot water financially, including being able to fully close a deal to purchase the company in a matter of just a few weeks. Sam’s investment group, whom some people have characterized as the “white knight that got away”, was also purportedly the same group the the Los Angeles Times  claimed was set to buy the company on July 1, 2011. In fact, sources confirm that a term sheet was signed June 30, one that did indeed give Sam’s group exclusivity to work on their due diligence to purchase a majority stake in the company, even though there were still other investors interested in the company, some of which were even in Dublin at the time. This term sheet was signed just one day after Phil Ivey dropped his lawsuit against the company and also just after the AGCC suspended the operating licenses of Full Tilt.  Reportedly the deal, if completed, would have consisted of a cash infusion from the investment group sufficient to pay the company’s settlement costs to the DOJ, (resolving any monetary claims of the DOJ against the company and it’s shareholders), repayment in full for U.S. players and sufficient capital to shore-up the rest-of-world business. In return, the buyer would receive 90% of the business, including control, leaving 10% for the current shareholders.

According to sources, the DOJ settlement number was still a growing concern for the company for various reasons, not the least of which was that there still was no “meeting of the minds” between the company and the DOJ as to settlement issues. Furthermore, although Sam had discussions with the DOJ in July 2011 regarding a potential settlement, sources say that he refused to disclose to the DOJ where the money was coming from that would be used to purchase the company. Multiple sources say that various attempts to  determine whether Sam’s group even had the capital resources needed to purchase the company were inconclusive. It was never determined whether the money was available or whether the group would be trying to raise the capital post due diligence.

The exclusivity period came and went and the company was no longer operating. Sam’s group was granted additional exclusivity, twice, thru August 16, 2011. After that date, requests for extensions of the exclusivity were denied by the Board and the group was no longer considered a viable option.

Groupe Bernard Tapie entered the picture in September 2011, and it’s been well documented why that deal came and went, over more than a seven month period.

The real White Knight was PokerStars, and that deal was completed on July 31, 2012.

Next and Final Installment:  The case against Howard Lederer and the summary of inconsistencies in his interviews.