A lawsuit involving the former owner of Hitman Fight Gear and TapouT/Authentic Brands Group is heating up. MMA Payout has obtained the lawsuit which was filed in Orange County Superior Court in California.
Earlier this month, the lawsuit, filed in 2011, was leaked to the MMA blogosphere. The lawsuit, filed by Daniel Diaz, is a salacious look at the purported inner dealings behind the TapouT brand and its eventual purchase by Authentic Brands Group (ABG)
The Lawsuit
According to the lawsuit, filed on March 29, 2011, Daniel Diaz, founder of MMA clothing brand Hitman Fight Gear is suing TapouT, ABG and other related entities as a result of claimed promises and a business deal which did not go Diaz’s way. Diaz is also suing as a member of Fight Industries, LLC (F1) (known as a derivative lawsuit where a shareholder can bring suit on behalf of the company).
Diaz’s lawsuit alleges 12 causes of action (including 4 on behalf of F1) which includes: Breach of Fiduciary Duty, Conversion, Aiding and Abetting Breaches of Fiduciary Duty for Fiduciary Gain, Fraudulent Conveyance, Breach of Employment Contract – Wrongful Termination, Unpaid Wages, Unfair Business Practices for Personal Gain and Fraud in the Inducement.
The Alleged Facts
According to the lawsuit, Diaz and his brother established “Hitman Fight Gear” in 2001. In addition, Diaz did freelance design for other brands including TapouT. In 2005, Diaz entered into a contract with Russell Lin on behalf of a brand named Roxwell. Diaz would receive a 10% commission “on anything Roxwell made for TapouT” according to the lawsuit. Diaz’s lawsuit alleges that his designs under Roxwell for TapouT were a success and his income was “steadily increasing.”
The lawsuit indicates that Marc Kreiner’s role with TapouT affected Diaz’s commissions under the Roxwell contract. According to Diaz, Kreiner attempted to undercut the Roxwell contract by attempting to lower, by 10% the cost of goods on the TapouT-Roxwell contract.
According to the complaint in 2007, Punkass and Kreiner met with Diaz regarding “Hitman Fight Gear” in an attempt to purchase the company. A limited liability corporation, F1, would be set up to purchase Hitman on behalf of TapouT. Diaz agreed to a sale of his company in exchange for 1,125,000 Class B shares of F1 and an employment contract with the company. In addition, Diaz would give up his contract with Roxwell. Diaz claims that he was led to believe that the Hitman brand would be given the backing to become as big as the TapouT brand.
However, Diaz claims that the F1 company was used for the personal benefit of Kreiner. One of the allegations claimed in the lawsuit was that Kreiner was “accepting (indeed, demanding) bribes from vendors of both TapouT and F1.” (page 9 of the lawsuit) The lawsuit alleges a “kickback” scheme which vendors would receive as high as “one dollar per t-shirt which – over the life of the contract – might pay the vendor hundreds of thousands of dollars as a “kickback” to the vendor for providing Kreiner with demanded gifts.” (page 9-10 of the lawsuit).
In addition to this claimed scheme, Diaz alleges the misappropriation of TapouT and F1 funds for Kreiner’s personal use.
Diaz claims that he was not reimbursed for business expenses, which were included in his employment contract, due to the fact that F1 purportedly lacked the money to pay him.
TapouT-ABG transaction
The lawsuit claims that after TapouT and F1 were depleted, the companies were purchased by ABG for the following:
1) the payment of some of the debt Kreiner and Caldwell managed to accumulate through their alleged scheme of skimming cash and other assets out of the company;
2) future cash payments to Kreiner and Caldwell, only, the amounts of which, were to be withheld from Kreiner and Caldwell pending the resolution of remaining creditor claims against those assets
The purported transaction would leave the companies with little or no assets to pay its creditors.
Diaz claims that ABG discovered the conduct claimed by Diaz when ABG conducted its “due diligence” prior to purchasing TapouT and F1. Diaz claims that ABG used this information against TapouT and F1 (and to Diaz’s detriment due to his interest in F1) as leverage in negotiations by driving down the purchase price. In addition, Diaz states that ABG attempted to buy his “silence” through an employment contract with the new ABG TapouT entity. When Diaz refused, he believed that ABG went around Diaz. This led to, as Diaz alleges in the lawsuit, the diminution in value of F1 rendering his shares in the company worthless.
The Underground post
Earlier this month TapouT and ABG went into court seeking the return of stolen documents and disqualifying Diaz’s attorneys. The reason for this was due to an internet posting on MMA.tv (also known to most as The Underground) in which an article was posted which detailed the lawsuit. A link to the article has been taken down. This was about the same time that details of the original lawsuit hit the twittershpere. The internet post was discovered by an attorney for TapouT/ABG and a request to cease and desist was made to Diaz’s attorneys.
Prior to the posting, the parties agreed to a protective order during the discovery process which essentially means that the documents produced to each side would remain confidential. Among the documents produced included information related to the purchase of TapouT. Lawyers for TapouT claim that Diaz published information that were deemed confidential. In addition, TapouT lawyers state that the comments section after the article included information provided by Diaz which only would have been known by those privy to the documents under the protective order.
Some of the information has been released by others via twitter and/or other web sites. Essentially, the inflammatory information Diaz provides relates to the claimed indebtedness of TapouT prior to its sale to ABG. Also, some of the comments include information already identified in the Complaint related to the claims of a “kickback” scheme.
Despite the post and comments section, the court decided against immediate punishment for Diaz. The Minute Order provided by the court stated the order sought by TapouT was denied. The order did not include an explanation.
Payout Perspective:
The lawsuit appears to be heating up and there is a trial date set for this September. The lawsuit is obviously personal for Diaz and the posting on The Underground reflects this. The allegations against TapouT and ABG are serious and there may be more coming out of this lawsuit which may reveal a lot about one of the biggest brands in MMA.
Wow! Where to start? OK, so Diaz became an employee of F1 which is a subsidiary of Tapout, he was given some number of class B shares which may not be voting shares, and if they were voting shares, unclear how many were issued in total, as in what % of the total voting shares he owned.
Once you become an employee with some non-controlling fraction of voting shares, you essentially lose control of the direction of the company, and have to rely on the 4 corners of the employment agreement for your remuneration. If some claimed promise is not in there, then Tapout has no obligation to Diaz to do anything with his brand, like make it an equal to Tapout. Particularly when there was more than likely a merger/integration clause in the employment agreement. Diaz will need strong evidence of any contrary intent, and why he signed an agreement which did not spell out any extraneous promises.
Regarding the fraud, theft, co-mingling of assets, conversion, misappropriation etc., by Tapout, Diaz should have alerted the state authorities when he learned of it. What was he doing staying mums about corruption in the ranks of Tapout and F1? The events occurred in 2007, so Diaz was long aware of Tapout’s or its owners’ misuse of F1 funds, but waited till 2011 to file his action. He should have made records of all misuses of funds, resigned, and contacted the company attorney, who is obligated to disclose the fraud under federal law, or obtained his own counsel.
Anything in the employment agreement though, Diaz should win.
This is really just a lesson to make sure you conduct all negotiations with your legal counsel present at all times. And if he was receiving any, then Diaz did not receive the legal advice that was in his best interest.
Anyway, imho this will end in settlement; too messy for trial.
Lets not forget to add that tapout old and new is in violation of contract with all of their fighters for not providing royalty reports on signature merchandise that the fighters where to be paid a share of the sales on. And wont provide the fighters with the original production invoices on those goods either. Why?
Hey Dan,
Did you go with us to Rosarita Beach, Mexico several years back? I cant remember but this was when Hitman was sorta new. Big Truck with AR-15 on back window. Your buddy got so sick you would’nt allow him inside the truck he puked all the way into us border in back of truck lol. If that was you, how ya been man?