Xyience Bankruptcy Trustee Finds Damning Evidence Against Fertittas, Pushes For Sanctions This Friday

Posted on | September 29, 2011 | No Comments

By: Rich Bergeron

Forbes dropped a gem of a story on their Web-site on September 13th about new claims leveled at the men who bankrupted Xyience. Allegations brought by the company’s bankruptcy trustee, represented by Attorney Jon Backman, point to an effort to hinder the trustee in acquiring evidence in a case against Fertitta Enterprises, Zyen, and Zyen’s General Manager William Bullard. What’s worse, recent documents in the case reveal that company officials at Xyience and Fertitta Attorney Greg Garman hatched and executed a deceptive plot to hide or deny access to the most incriminating material.

Unfortunately, despite all this dedicated trust lawyer’s hard work, the Forbes piece didn’t even spell his name right. BACKMAN will ask the court for sanctions this Friday in what could be one of the most important hearings in the case so far.

One man mentioned repeatedly in the documents filed by the trustee recently is Michael Levy. Levy still works as a general manager of sorts at Xyience these days and goes by the title of Chief Financial Officer. Page 6 of a September 1, 2011 sanctions motion describes how Levy reacted to an inquiry about electronic data:

If it were a criminal case, Backman’s claims could be considered obstruction of justice. Much of the controversy behind his bold claims is a direct result of the refusal of key parties to turn over critical evidence. A big issue arose when the company servers came into play. Suddenly these crucial servers containing countless emails were damaged after a system crash and would have to be repaired for 10-12,000 dollars. Constant delays seemed to plague the process by which Backman sought to seize and examine these servers and comb them for information pertinent to his case.

Despite the roadblocks thrown up by his adversaries, Backman did manage to find a few nuggets of gold while panning for truth. A company called PC911 handles much of Xyience’s computer issues. A technician from PC911 named Chad Stone (and he’s not smooth like Keith Stone) admitted to lying to support the case in a signed declaration. The admissions came during a subsequent deposition on May 4, 2011. The Trustee’s Counsel called Stone’s written declaration “Pure Fiction.” Backman went as far as to suggest that if the legal system’s design didn’t protect Stone, Xyience computer specialist Devin Keays would have a case for defamation against Stone based on his false testimony about Keays. Keays was forced out of the company during Xyience’s push to bankruptcy in early November of 2007. Stone falsely suggested Keays was the one to blame for the server issues.

According to the Trustee’s September 1, 2011 motion:

During a Times Square meeting on November 15, 2007, within two weeks of Keays leaving the company, Adam Frank and Kirk Sanford told me personally that bankruptcy was the only solution for Xyience. Emails and other electronically stored information from this time frame is crucial to the trustee’s case. If there are full backups of the servers available, they may contain some huge bits of communication between company officials like: Former Co-CEOs Adam Frank and Kirk Sanford; Zyen General Manager William Bullard; Fertitta Enterprises Owners Lorenzo and Frank Fertitta III; Fertitta Enterprises Lawyer Greg Garman; and CFO Michael Levy.

Eventually, the company that reportedly had possession of the drives and servers in question analyzed them, and another contracted company provided a detailed report of what they found. Upon looking at the resulting report, Devin Keays informed Backman that the company that checked the drives analyzed the wrong ones and did the work on drives the trustee already had all the information from. Apparently there was some kind of bait and switch game going on. Another Las Vegas based firm examined all the drives and found none of them had any signs of containing email server information. So the electronic information Backman initiated a campaign to discover was never even on the target drives company officials led him to. Was it a simple mistake or a bold-faced lie that led to these developments? The trustee’s counsel asserts that it doesn’t matter how the mishap occurred, because the evidence shows the company, their attorneys, Bullard and Levy all had a duty to preserve evidence pertaining to the bankruptcy and failed to do so. Backman calls his adversaries’ behavior in the situation “by no means innocent or excusable.”

Another snippet from the September 1, 2011 sanctions motion filed by Backman in the case explains further:

The motion further alleges that the principals involved in obscuring, eliminating, or inadvertently misplacing evidence in this scenario should essentially know better. At worst, they possibly engaged in this scheme intentionally, with the specific purpose of confusing and confounding the trustee’s campaign to discover the truth behind the forced bankruptcy plot. Whatever the case, Backman requests compensation for being sent on the wild goose chase due to the responsibility of the named parties to protect and preserve the electronically storied information that is now unaccounted for. Backman asserts, “…defendants and their counsel repeatedly, routinely, unabashedly, and unapologetically have violated the discovery rules relating to electronically stored information as such rules are set forth in the Federal Rules of Civil Procedure and the controlling case law, and have been for many years.”

The trustee’s argument makes sense, especially considering the thorough support cases he cites. Whether or not his adversaries physically destroyed or “lost” the information by accident or on purpose, they had a defined duty to make sure the information could be made available for inspection. So, whatever happened to it and wherever it is isn’t the point. The fact is the company and their attorneys had an obligation to retain it and provide it when requested to do so. Even if there’s no smoking gun to show the disappearance of the information was willfully orchestrated by certain parties, it is incredibly suspicious that this block of communications conveniently vanished.

The primary perpetrators of the questionable conduct associated with the entire evidence debacle, according to Backman, were CFO Michael Levy, Attorney Greg Garman, and Zyen General Manager William Bullard. These individuals acted in a manner that made the server requests and other inquiries harder to fulfill, Backman reports in the September 1, 2011 sanctions motion:

An August 8, 2011 email from Attorney Garman attempts to justify the back story behind the missing evidence. He further explains that he personally participated in fruitless searches for pertinent records that Backman requested. The Garman letter is included as Exhibit 6 to Backman’s September 1, 2011 sanctions motion. The final paragraph contains language that indicates how frustrated Garman is regarding the approach of the trustee’s counsel. Garman appears to have let his emotions get the better of him when he concluded the letter with the following words:

Backman includes multiple lengthy exhibits with his motion, including snippets of deposition transcripts and other documents that lay a foundation for his claims. Part of one of the later exhibits is a peculiar letter from one of the only Xyience executives I invested any good faith in at the time just before the company changed hands and entered into the foreclosure and forced bankruptcy. William Underhill had a background in restaurant management and actually helped prosecute fraud in his former work experience. Xyience tapped him to take over the company just before the final collapse. He later resigned from the board with a shot across the bow at the tactics used to cause him to walk away so suddenly, and he sent the resignation email on Halloween, 2007. His “reluctant” formal resignation letter speaks volumes with hindsight being 20/20.

Backman’s own communication to multiple Fertitta Enterprises lawyers–directed primarily at Joel Z. Schwarz (left)–stood out among the rest as the last exhibit to his motion. The date of the email is October 20, 2010. The tone of Backman’s message is one of clear frustration with the way Schwarz and other members of his firm are actively trying to deceive him. Click here to view the most scathing paragraph of Backman’s email.

It is clear the email is a result of pent up feelings of mistrust between the tireless underdog Illinois attorney and the big city Las Vegas law dogs at Gordon Silver who are playing on a home court. These same lawyers are likely hoping the judge won’t throw the book at them this Friday. That’s when he will likely hear more about allegations that these well trained legal eagles avoided their responsibilities to the rule of law and obstructed the trustee’s formal inquiries at every turn. A hearing in Las Vegas at the bankruptcy court will allow both sides to present their arguments for or against sanctions to apply here.

Even my name made a cameo appearance in a list of emails said to be “not relevant” to the liquidation trustee’s cases. Some of the documents leading up to this last sanctions request lay out the path of evidence perfectly. A previous sanctions motion filed by Backman on August 20, 2011 featured some potent charges and even more nuggets of gold. Exhibits G (an email from William Bullard to Lorenzo Fertitta) and H (an email between Bullard and both Fertitta brothers: Frank III and Lorenzo, Click Here For Part Two) were bombshell findings, and these are the emails that were actually discovered. One can only imagine what hasn’t been found yet. Where there is smoke there is fire, and it certainly appears that these guys were ready to barbecue Xyience as soon as the coals were hot enough. The conditions were ripe. There was a way to “muzzle” Xyience Founder Russell Pike according to Bullard in that Exhibit H email message chain from August of 2007. If that’s not convincing enough evidence that something’s rotten in Denmark, consider the relevant portions of Former Co-CEO Adam Frank’s deposition transcript Backman included in Exhibit S.

Friday will be an intriguing day for the trustee if the judge on the case can see the clear pattern of deception involved here. It should be a slam dunk motion, barring any hometown cooking affecting the outcome.