THE USUAL SUSPECTS PART TWO: CORPORATE CROOKS ON BOTH SIDES OF XYIENCE BANKRUPTCY

Posted on | July 28, 2008 | 25 Comments

By: Rich Bergeron

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International Money Laundering, Conspiracy to Commit Fraud, Credit Card Fraud, Bank Fraud, Civil RICO charges, Insider Trading, Securities Fraud, and the list goes on and on. These are just some of the crimes going on behind the scenes in the corporate world today.

Mixed Martial Arts is not immune from this underhanded double-dealing by business-suited bag men. The Xyience and UFC partnership is a prime example of how a sports empire can get caught up in serious financial impropriety at best and outright fraud at worst. More information has come to light regarding all the players engaged in the Xyience bankruptcy from day one of Fertitta Enterprises control right up to the here and now of the present and ongoing bankruptcy.

Recently I’ve been sidelined from tracking the Xyience saga due to bogus defamation litigation filed against me over a year ago now. I got back on track in the last few weeks, and some digging I did revealed some crucial ties to past bad behavior for a few more “usual suspects” engaged in the ongoing Xyience bankruptcy scheme. It will either be a miracle or a case of absolute incompetence on the government’s part if no indictments are handed down regarding all the “usual suspects” in this whole mess. I use the term “usual suspects” because the principal players who have been most active in defrauding investors and the bankruptcy system all have patterns of exhibiting the same crooked behavior before. They keep on getting away with screwing people over, and they’ve become so good at it that they are like the go to guys for fraud, and they obviously executed the game plan perfectly because of all that prior experience.

Sources who reached out to me informed me of several new company names to look into and some lawsuits to check out regarding both Global Cash Access and Manchester Consolidated Corporation. One source recommended I pay particular attention to Manchester’s Anthony Pallante and his penchant for bilking previous investors in his companies. These key sources gave me a new perspective on this burgeoning scandal that is still showing signs of ongoing fraudulent dealing. At the same time, the level of GCA Holdings’ involvement in a much more massive scandal makes their involvement in the Xyience debacle look like small potatoes.

The current operators of Xyience still walking the company through what is essentially a fraudulent bankruptcy process are all tied to devious behavior involving at the very least unjust enrichment. Manchester Consolidated is made up mostly of four individuals (click here to see their own “Team” page and learn about the four folks who make up the whole company).

Fertitta Enterprises is meanwhile not surprisingly owned and operated chiefly by the Fertitta family, now famous in Las Vegas and throughout the world for their billions in net worth and their brash business bravado. Casino empires, residential developments, and deep mma interests are just a few of the Fertittas’ favorite things. These Las Vegas icons wield incredible financial and political power.

The cooperation of at least three separate groups of connected individuals and/or corporate entities in the Xyience Bankruptcy is now readily apparent and obvious.

First, the Fertitta Enterprises buy-in/takeover of Xyience came with a promise that the money would be used to fund ongoing operations and prevent bankruptcy. Shareholders swallowed the deal because the alternative was to bankrupt the company immediately.

The whole scheme seems even more blatantly orchestrated when the questionable background of Manchester Consolidated and its principals becomes apparent. Manchester bought Xyience out of bankruptcy in hastily arranged “stalking horse bidder” fashion. We will provide more on Manchester’s background later in the next “usual suspects” installment.

The third tier of the scandal involves international and highly illegal Global Cash Access activity, which Karim Maskatiya, Robert Cucinotta, Kirk Sanford, Omer Sattar, and Kathryn Lever all played principal roles in. All but Cucinotta came to be involved in Xyience in some capacity before the company went bankrupt. Karim Maskatiya and Kirk Sanford sank money into the Fertitta-driven Xyience “bailout” and Omer Sattar came on board to run the company through the bankruptcy process.

Global Cash Access provides gaming patrons access to cash at casinos through automated cash machines, credit card cash advances, point-of-sale debit card transactions, check verification and warranty services, and money transfers. Fertitta Enterprises hired the company to outfit a number of their most significant casinos (see first usual suspects report) and later tapped a group of GCA executives for inclusion in the Fertitta $12 million Xyience buy-in.

To begin understanding the massive scale of fraud behind the actions of all these former Global Cash Access executives you have to go all the way back to a company called USA Processing, Incorporated. USA Processing was accused early on of breaching a buyout agreement. The resulting legal cases took years to resolve. Post-judgment, USA Processing still owed over 1.3 million dollars and had actually sold their interest in the company and allegedly received dividends for shares in the company they didn’t legally own along with all the other “shareholders” at the time.

Between September of 2003 and December of 2004 USA Processing, Karim Maskatiya, and Robert Cucinotta were defendants in a particular action brought by Exclusive USA Marketing Corporation. The title of the complaint says it all: COMPLAINT TO SET ASIDE FRAUDULENT TRANSFERS, CONSPIRACY, COMPLAINT AGAINST DIRECTORS APPROVING IMPROPER DISTRIBUTION TO SHAREHOLDERS BY
CREDITOR and COMPLAINT AGAINST SHAREHOLDERS FOR RECEIVING
IMPROPER DISTRIBUTION BY CREDITOR.

The case was settled late in 2004.

Another company deserving of a second look and some deep digging is M&C International. A web search for the company name brought this result from businessweek.com:

Company Overview

M&C International through its subsidiaries, provides software development and system support services. The company also provides authorizations for credit card cash advances, POS debit card transactions and ATM cash withdrawal transactions. M&C International was incorporated in 1996 and is based in San Jose, California.

643 River Oaks Parkway

San Jose, CA 95134

United States

Founded in 1996

Phone: 408-922-0635

GCA’s own Investor Relations page says this about the M&C International relationship and the GCA Holdings company history:

“We began our operations in July 1998 as a joint venture limited liability company among M&C International and entities affiliated with Bank of America and First Data Corporation. In September 2000, Bank of America sold its entire ownership interest to M&C International and First Data. In March 2004, Holdings was formed in order to hold all of the equity interests of GCA, Inc., and at that time GCA, Inc. borrowed $495 million which was used, in part, to redeem all of the ownership interests in us held by First Data and a portion of the interests in us held by M&C International. Also at that time, Bank of America corporation purchased a 4.99% interest in us from M&C International. In May 2004, M&C International sold a portion of its ownership interest in us to a number of private equity investors, including entities affiliated with Summit Partners, and we converted from a limited liability company to a corporation.”

GCA’s Kathryn Lever and Kirk Sanford, who both went on to work the Xyience bankruptcy shift, were given power of attorney over M&C International by Cucinotta in a September 22, 2005 SEC filing. http://www.secinfo.com/d14sr8.z1fBc.d.htm

Five days later M&C posted this SEC Form 4: http://www.secinfo.com/d14sr8.z1fTq.htm#1stPage

Cucinotta alone made over $80 million in Global Cash Access Holdings stock sales between October of 2005 and November of 2006.

M&C International’s relationship with GCA Holdings changed officially in February of this year:

http://www.secinfo.com/dsvrp.t2D7.htm#1stPage

That document lists no voting shares or dispositive power held by M&C International compared to a year earlier when M&C owned about 19.5 thousand voting shares:

http://www.secinfo.com/d19YC9.u2x.htm#1stPage

The departure of Kirk Sanford, Kathryn Lever, Karim Maskatiya, and Omer Sattar from GCA to Xyience is made even more sinister when the seedier side of M&C is revealed in a slew of class action complaints filed against GCA and many of its principals.

An incredibly detailed suit brought by City of Richmond Retirement System as the lead plaintiff of the class includes the following statements:

“Defendant Robert Cucinotta (“Cucinotta”) was a co-founder of GCA and, at the time of the IPO and throughout the Class Period, was a Director of GCA. In that capacity, either personally or through an attorney-in-fact, Cucinotta signed the Registration Statement and Second Registration Statement. Cucinotta beneficially owned 50% of M&C International and during the Class Period served as M&C International’s Secretary. M&C sold 2,774,870 shares of GCA Common Stock in the IPO. Cucinotta maintains his principal place of business at M&C International’s offices located at 643 River Oaks Parkway, San Jose, California, 95134.”

About an internal investigation at GCA not long after Kirk Sanford and Kathryn Lever left for Xyience:

“Analysts and investors would have to wait close to a month before management addressed the public with respect to the investigation, causing the stock price to trade down to a historic low of $3.00 per share on December 5, 2007. Two days later, GCAH’s new CEO, Scott Betts (“Betts”), hosted a conference call with analysts in an effort to stem the tide. Betts first revealed during this conference call that the investigation uncovered the so-called “miscoding” of commissions, which caused the Company to report inflated financial results in at least 2005 and 2006, and further caused the Company to short-change its customers. Betts claimed that the issues related to “interpretations” of certain clauses in GCAH’s customer contracts, but that the investigation-to-date estimated that the total costs of resolving the problems, including fixing internal systems and controls, would not exceed $10 million…”

“The same day as Betts’ conference call, on December 7, 2007, a Deutsche Bank
analyst expressed serious skepticism, as follows:

What we still do not know. Though GCA’s $10mm all-in est. suggests that its financial exposure is likely to be ltd, there are too many unknowns associated w/ the ongoing investigation to put us completely at ease. At this point, it is unclear how many of GCA’s top clients may have been affected or if this type of event could trigger an exit clause in those customers’ contracts. Though GCA did not change its 2007 outlook, the fact that guidance is likely based on the same flawed methods for cal. commissions and reporting transactions questions the reliability of this outlook, in our view. We do not yet know whether the issues uncovered will warrant a financial restatement. We also note there are other pieces of the investigation that remain confidential. Add to this the series of missteps by the co. prior to the internal investigation, and we remain on the sidelines for now. Maintain Hold. (Emphasis in original).”

According to an entrenched source, Maskatiya, Sanford, and Cucinotta have all been investigated by the FBI regarding their suspected illegal behavior prior to being engaged with Xyience. A 1999 case brought against all three men, M&C International, USA Processing, and other defendants charged Civil RICO Act violations. Yet, no significant criminal charges have been filed against any of GCA’s former executive staff despite plenty of signs of serious fraud and possible international money laundering related to “mis-coding” issues with GCA cash machines and casino booths.

One source I talked to pointed to a conspiracy to alter the coding in the company’s machines that ultimately resulted in lucrative illegal returns for all those involved. That source, who fears retaliation and did not volunteer a name for printing, said that Visa regulations were violated, investors were left in the dark, commissions never went out to big clients, useless lucrative contracts were created, and the FBI reportedly came in and could not pin down any solid criminal charges despite one company employee wearing a wire for six months. There is even an alleged $9 million loan from Bank of America to Kirk Sanford the source said the FBI also investigated.

“They Cooked the books for years,” said the source about how the major players got away with everything.

The miscoding allegations are common among most of the derivative and class action suits filed against GCA and its former executives. These accusations also factored heavily in the internal investigation that began after the GCA converts to Xyience jumped ship just before the GCA stock tanked. In addition to the coding problem, investors suing GCA Holdings now say there were serious misrepresentations made by company brass in regards to the issues that crippled the company’s reputation. Company spokesmen basically maintained the “everything is OK here” attitude until it was impossible to keep the charade going. Scott Betts was one of the principals accused of making light of the company’s major issues. A Betts’ conference call transcript provides some intriguing insight on the company’s troubles to say the least. Just look at some of the confusing double speak he uses to cloud the issue:

“I can’t say that, although, the investigation of these allegations is still in progress, as of this time the investigation has not uncovered any evidence that the company, or its officers, or directors have engaged in any illegal activity or any evidence that would require the company to change any of its prior public disclosures. That’s really all I am able to say about the allegations and the investigation at this time, but let me address a few other issues that have been raised since we announced the investigation.”

So, OK, maybe he doesn’t know the double negative rule of English, but if you “can’t say” that the investigation “has not uncovered any evidence” of “illegal activity” you might as well be confessing. Note the change of subject after that statement, too.

Casino Journal reported in April of this year that Scott Betts replaced Sanford as GCA Holdings’ CEO.

There are at least four cases ongoing against the GCA officials who are charged with orchestrating the sophisticated skimming methods and manipulating the coding for their own personal gain. Infuriated investors have so far had to foot the bill for the selfish, irresponsible, and illegal behavior of a few bad actors that will likely go forever unpunished in the criminal courts. It seems all the “usual suspects” moved on to commit to new, even more sketchy business arrangements, starting immediately by bankrupting and selling Xyience. The aftermath they all left behind at GCA resulted in a host of civil complaints with two based in New York and two based in Nevada. Some of the complaints even name Goldman Sachs and J.P. Morgan as defendants along with famed accounting firm Deloitte and Touche.

The past activity of just about everyone involved in the Xyience bankruptcy in some first hand role reveals that just about all of them have some kind of shady, illegitimate past. This can’t be a coincidence. Another source recently pointed out that these “usual suspects” will go right on ruining lives to unjustly enrich themselves until someone stops them.

A pattern is emerging that seems to leave no room for argument as far as Xyience’s sinister side. It appears that Xyience is on its way to being abused yet again on the other side of the bankruptcy process. Our next installment in the “usual suspects” series will focus on Anthony Pallante and William Smith, the same two Manchester Consolidated Corporation executives who were former employees of Cott. Both men have been dealing with massive legal headaches regarding the bankruptcy of another company: Adsero. Smith is the only company contact listed on a page that describes the bankruptcy situation as follows:

“Adsero Corporation ceased its operations due to an involuntary bankruptcy petition filed against its principal operating subsidiary, Reink Imaging USA, Ltd., pursuant to Chapter 7 “liquidation” of the United States Bankruptcy Code. The Company, through its wholly owned subsidiary, Reink Canada Corp., continues to pursue opportunities within the imaging market place and is currently in discussions with prospective customers related to imaging products.”

Now it seems that Xyience as a corporation is doomed to perpetual association with folks who have crooked financial histories. Every time it seems they might be saved another corporate crook takes over. This time it just might be too blatantly obvious for everyone to walk away unscathed. At some point someone in an investigative capacity just has to put two and two together and solve this intricate puzzle. Maybe then the multiple victims of this major scandal will finally see justice.

Here are some interesting links to case files:

Mollenkopf Class Action Complaint:

http://www.docstoc.com/docs/978532/mollenkopf-suit

Reply from Individual Defendants regarding GCA Derivative Suit:

http://www.docstoc.com/docs/978529/GCA-Reply-to-derivative-action

This document provides an explanation as to what happened from the GCA side of the fence. Essentially the argument is that not enough evidence has been uncovered in the case by the plaintiffs in the matter. The contention is also made by the defendants that the impropriety never happened and the real issue was the internal controls weaknesses regarding commissions. They admit in the motion there were problems in that realm but deny any fraudulent activity associated with the system glitches.

Mollenkopf and Stueve Consolidated Derivative Complaint:

http://www.docstoc.com/docs/978533/Mollenkopf-and-Stueve-Consolidated-case

Stueve Derivative Complaint:

http://www.docstoc.com/docs/978536/Stueve-Case

Robert Lowinger Class Action Complaint:

http://www.docstoc.com/docs/978531/Lowinger-GCA-case

Most Recent Case: Richmond Retirement Systems Complaint:

http://www.docstoc.com/docs/978534/richmond-retirement-systems-complaint

This case includes one of the best assessments I’ve ver read of what happened at GCA:

“As with most frauds, Defendants’ motive was greed. GCAH insiders and other firms involved in and profiting from the IPO (named as Defendants herein) misstated and concealed material information in their haste to go public and cash in. In addition, as GCAH’s stock price soared after its successful and well-subscribed IPO and Secondary Offering, and rose to new highs on the strength of the Defendant-created illusion that GCAH had a burgeoning customer base and increasing revenues supported by solid internal controls and state-of-the-art technologies (which purportedly served to reduce the Company’s operating costs), Defendants reaped huge profits through insider trading on the adverse, non-public information concealed from investors.”

Stay tuned for much more on this subject and more details on the newest corporate owners of Xyience.

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