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Background Checks at center of Zuffa's multi-million dollar lawsuit against DSE

    Sun, 2008-02-10 16:22 — Bevois

    The UFC's purchase of Pride Fighting Championships was met by great expectations when it was announced in March 2007. Executives, fans, and fighters alike hailed the acquisition as the start of a new golden age for the sport, the beginning of an era of undisputed champions and global ascendance of MMA under the direction of Zuffa. At the time, UFC co-owner Lorenzo Fertitta told ESPN.com, "This is really going to change the face of MMA. Literally creating a sport that could be as big around the world as soccer. I liken it somewhat to when the NFC and AFC came together to create the NFL."

    While unification bouts in the light-heavyweight and middleweight divisions have materialized and many of Pride's top stars now call the Octagon home, dreams of continuing the popular Japanese MMA brand and creating an annual "Super Bowl of MMA" evaporated when Pride FC Worldwide's Japan office was suddenly closed last October.

    UFC President Dana White told media last year that the purchase of Pride was "the worst deal ever done in the history of business." He indicated efforts to reestablish the Pride brand in Japan, including finding a new television home for the company, had fallen short. Yet despite all the difficulties, he said, the deal gave Pride's new owners what they wanted.

    One week ago Pride FC Worldwide Holdings LLC and its related subsidiaries, which were created when Frank and Lorenzo Fertitta acquired the UFC's top competitor, filed suit against the company's former owners: Dream Stage Entertainment, Nobuyuki Sakakibara, Ubon, Dream Stage Holdings, and unidentified defendants to be named at a later date.

    The crux of the lawsuit, which alleges 14 claims for relief, stems from the purported failure of Pride's former ownership to cooperate with background checks and drug tests as required by the agreements. The complaint states that because of the Fertittas' involvement in the Nevada gaming industry, specifically their possession of privileged gaming licenses as owners and operators of Station Casinos, it was "essential" for the selling parties "to undertake certain post-closing actions."

    Section 5.3 of the asset purchase agreement expressly required that the defendants, particularly Sakakibara, "submit to and pass any reasonable background checks." However, according to the complaint, the selling parties "have repeatedly and consistently failed to submit basic information to and have materially obstructed the Investigator in the conduct of its background checks and due diligence investigation of, among others, Sakakibara and Ubon."

    Pride Worldwide alleges that "the Selling Parties never intended to comply with this material term, thereby defrauding the Purchasing Parties into entering into the AP Agreement, the Consulting Agreement, the Non-Compete Agreement, and the other related transactional documents and into paying the Selling Parties millions upon millions of dollars." Notice of breach was first provided on August 22, 2007.

    The complaint specifically cites a series of articles published in Shukan Gendai magazine, which linked the previous ownership of Pride with organized crime in Japan, as heightening the necessity of the parties to cooperate with the investigation. Because of their failure to cooperate, Sakakibara and Ubon were ultimately found "unsuitable to conduct the Business and perform the services as anticipated under the AP agreement and the Consulting Agreement." According to the filing, Sakakibara and Ubon received more than $1.5 million in consulting fees through September 2007.

    Pride Worldwide alleges two other specific breaches, including the failure to provide "account information from April 2007 to the present of all transactions into and out of the fan club membership account and any other accounts, deposit collections repositories, payment processing funds or any other revenue collection accounts, including all documents, customer information, transaction reports, bank account statements, and related information." This breach has "further jeopardized and diminished the viability and operational condition of the Business," according to the complaint.

    Also cited is the former owners' failure to arrange for the termination of agreements relating to the master disc rights for the "Pride" and "Victory" theme songs, as well as other fighters' theme songs and their transfer to Pride Worldwide.

    The complaint also alleges that the former owners breached a seven-year non-compete agreement. Because of the "breaches, misrepresentations, and other wrongful actions as set forth," Pride Worldwide is asking that the court discharge it from any further payment obligations under the Consulting Agreement, refund the millions of dollars already paid under the agreements and discharge it from any further obligations under the asset purchase agreement, including the duty to maintain Pride post closing.

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