Section 35.1 "In determining whether to consent to the sale, assignment, or transfer of a membership or of an ownership interest in a Member Club pursuant to Section 3.5 of the Constitution, each Member Club shall be guided by the following considerationsTripp Mickle, writing in the Sports Business Journal, has done an excellent job of dissecting the fraud perpetrated by William "Boots" del Biaggio in his purchase of a 27% ownership interest in the Nashville Predators. At his core, Boots was a con desperate to gain ownership of an NHL franchise, and Mickle details his efforts to gain insider status with the League. Boots insinuated himself with high powered/high profile individuals like Mario Lemieux, leveraging the success of his venture capital firm Sand Hill Capital to gain access and provide the appearance of financial stability and integrity. After a failed attempt to buy the Pittsburgh Penguins, Boots was able to raise the funds to buy his interest in the Predators, borrowing $40MM through his company Forecheck Holdings from CIT financial and obtaining loans (unbeknownst to the NHL) from former Predators owner Craig Leipold ($10MM) and Anshutz Entertainment Group ($7MM), and the new Predators ownership group agreed to pay the interest on the CIT note as part of his buy in. In less than 90 days, the fraudulent transactions that supported the purchase by Boots started to unravel in the face of an investigation by the Securities and Exchange Commission. Boots has subsequently filed for bankruptcy and is awaiting sentencing for fraud.
(a) Whether the persons who would be holders of an ownership interest in the Member Club and the entity or entities which would hold the franchise, player contracts and/or other assets of the Member Club in question after the proposed sale, assignment, or transfer, are able and willing to commit sufficient financial resources to provide for the financial stability of the franchise.
(b) Whether the persons who would be holders of the ownership interest in the Member Club are of good character and integrity.
Section 3.5 of the NHL constitution states that "Application for the sale, transfer, or assignment of a membership or ownership interest must be made in writing to the Commissioner. Upon the receipt of such application, the Commissioner shall conduct such investigation as he deems appropriate." Upon reading the account of the fraud committed by Boots, one has to wonder what type of investigation the Commissioner conducted into the background of del Biaggio. Did his prior 1% ownership in the San Jose Sharks influence the investigation? Or his friendship with hockey luminaries like Lemieux or Luc Robataille? Or perhaps his past success in the volatile venture capital market? His success with his venture capital firm, Sand Hill Capital, made him a star in San Jose and its social circles. There was familiarity with Boots from his failed attempt to purchase the Penguins, and an investigation into his background and financial capability was surely conducted by the League at that time. That was in 2005, and his purchase of the Predators was in 2007, ample time for his finances to begin to unravel with the economy. Regardless of the depth of the investigation prior to his purchase of an interest in the Predators, the financial capability of Boots was not examined deeply enough to catch the fraud that he was perpetrating. The fact that the fraud was caught by the SEC in a routine field investigation of a brokerage firm that Boots used leads one to believe that the investigation by the NHL regarding his purchase of the interest in the Predators was cursory at best.
Compounding the situation are the loans from Leipold and AEG to Boots. At the time of his loan to Boots, Leipold was still the owner of the Predators; AEG is the owner of the Los Angeles Kings. Section 13.7(b) of the NHL constitution states: "... A multiple owner shall not make direct or indirect loans (whether secured or unsecured) to any of the member clubs in which it owns a non-controlling interest except for loans to other owners of member clubs that relate exclusively to non-hockey business, are disclosed in a prior written notice to the Commissioner and are determined by the Commissioner prior to consummation of the loan not to provide any party to the transaction with increased control or influence over the hockey operations of any Member Club or the ownership interest in a Member Club of any owner." Commissioner Bettman expressed surprise at the discovery of $17MM in side loans executed by two existing NHL owners to Boots, without which his purchase of an interest in the Predators would not have been possible. Both existing owners had something to gain from these loans- Leipold got the sale of the team to local buyers to close and AEG was going to use Boots to attempt to relocate the Predators to its newly completed Sprint Center in Kansas City, which did not, and still does not, have an anchor tenant. Section 6.3(j) of the NHL constitution states that the penalties for any violation of the constitution or by-laws results in the potential penalties of: expulsion or suspension from the League; cancellation of the contract that the individual has with a Member Club; imposition of a fine not to exceed $1MM; or loss of draft choices. To date, no penalties have been forthcoming to Leipold or AEG.
Now we pick through the rubble of the Boots fraud. What happens to the Predators and the operation of the hockey club? At the Skate of the Union meeting, David Freeman, Chairman of the ownership group stated that this situation would have no impact on the operation of the Predators. It's out there, but nothing will happen until the bankruptcy trustee overseeing the del Biaggio bankruptcy decides to do something about the ownership interest that is tied up in the bankruptcy proceedings. The bankruptcy trustee has an obligation to get the maximum value for this asset, but how will that be determined? Is this interest valuable to someone willing to assume a minority stake in the Predators? In my opinion, that market has certainly become more limited coincidental with the contraction of the U.S. economy. One can look at Tom Hicks and his efforts to sell a minority interest in the Dallas Stars to raise cash. To date, he has had no serious offers and has tabled that effort. I would submit that the existing ownership can possibly pick up Boots interest in the Predators for less than the debt that is owed on that ownership interest. CIT Financial has written off the loan they made to Boots, and will look to recover as much as possible through the bankruptcy court. No interest is being paid on this loan as the bankruptcy proceeding places these payments in abeyance. Leipold and AEG will lose their respective loans to Boots, As unsecured creditors, they are on the bottom of the food chain, so to speak. Unsecured creditors get paid only after the secured creditors get paid. Given the extent of the fraud and the debt on most of Boots assets, I would doubt they will see anything back on these loans.
It is obvious that there was a breakdown in the vetting process with Boots. This breakdown has been an embarrassment to the NHL and has resulted in huge losses for CIT, AEG, and Leipold. And until it is resolved, there is a cloud hanging over the Nashville Predators until the issue of Boots ownership is determined by the bankruptcy court. I would look for any potential new owner to undergo much more detailed scrutiny before they receive approval from the league.