4:56am PT by Eriq Gardner
Hollywood Party Planners Fighting $200 Million Conspiracy Lawsuit
Racketeering is no longer a tool to merely hunt mobsters. Among those currently facing claims of carrying on a pattern of illegal activities are Megaupload founder Kim Dotcom, the financiers behind The Wolf of Wall Street and a certain presidential candidate who once promised to share secrets about getting rich in the real estate industry. But entertainment industry party planners? Yes, them too as a New York federal judge on Wednesday refused to dismiss racketeering claims against former officers at XA The Experiential Agency. What's more, U.S. District Court judge J. Paul Oetken sees the possibility of "chutzpah" in the party planning space and refuses to rule out punitive damages.
CMG Holdings Group, the successor to XA, states in its lawsuit that it was once making $10 million in annual revenue working with clients such as CW Network and NBCUniversal. The business of organizing television upfronts and planning promotional events for shows on NBCU's USA Network, Bravo and the Oxygen Channel may seem as cheerful as the colorful balloons at these parties, but according to CMG, there's a seedy side.
In a complaint filed last year against Joseph Wagner, Darren Andereck, Jean Wilson, Jessie Lomma, Michael Day and Remegio Gudin, CMG says that defendants engaged in a shell game, moving money between companies, leaving it with expenses while the defendants seized the profits.
"The result of their shell game was that XA barely broke even, while Defendants’ other companies made millions, that should have gone to XA," states the complaint. "Their scheme remained hidden as defendants created fake invoices, lied to XA’s owners and to XA customers to facilitate their diversions of XA funds and resources. When XA’s owner, CMG Holdings Group Inc. started asking hard questions, Defendants quickly moved all XA’s assets, including intellectual property, such as customer lists and contracts, and physical property, such as computers and the office furniture, to a new company, HudsonGray, that they created and tried to permanently destroy XA’s servers, to conceal their crimes."
The plaintiff cited numerous examples in a 79-page lawsuit, and here's just the frosting on the cake...
In early 2014, according to the lawsuit, CMG board members hired Ron Burkhardt to figure out why the company was so severely under-performing and to improve its profitability. Around that time, former XA CEO Joseph Wagner is said to have reacted strongly to oversight that could have shed light on how money was allegedly being siphoned from the business and so he and others allegedly established HudsonGrey in secret as a competing agency. The new company, claims the plaintiff, was also set up so as to be "ready to accept NBCUniversal’s 50% deposits for each of six approved NBCUniversal/XA jobs that they intended to and did, in fact, divert."
Some of the jobs included "activations" on such shows as Dig, Satisfaction and Masters of Sex — XA claims NBCU here diverted $1.5 million of money to HudsonGray — but the biggest pot of money may have been the annual event put on by networks to showcase their new shows to advertisers.
"The size of the business diversions was enormous," states the lawsuit. "It is the largest such event of the year and, generally, the most important one in that industry. NBCUniversal’s Upfront was held at the Jacob K. Javits Convention Center in New York, on May 11, 2015."
According to the plaintiff, NBC's 2015 Upfront budget was $16.53 million.
"Subtracting costs for the venue and union labor paid for by NBCUniversal (which the Budget indicates), at a minimum, the total cost HudsonGray charged for this NBC event is $14,530,000.00," continues the lawsuit. "The industry standard margin for event planners is twenty percent – in other words, HudsonGray and the Hudson Defendants will arrogate to themselves almost $3,000,000.00 profit from this one job alone."
The plaintiff may know. The lawsuit says that XA charged NBCU roughly $6 million for the previous year's upfront, except that the money was routed to another company set up by the defendants. Through the first nine months of 2014, XA's new leaders tried to get answers from NBCU about ongoing projects only to eventually be told that September that there were no projects going on at that time.
"To the contrary, at that very time, all the jobs mentioned above were activated, approved by NBCUniversal, and in process of being produced by Andereck at HudsonGray, where Mohan sent them," states the complaint.
OK, but does this add up to racketeering?
In a motion to dismiss, the defendants say that CMG was notified of the creation of so-called shell companies like Studio AG that invoiced XA for must-haves like floral arrangements, furniture and "scenic fabrication" at events thrown for Bravo's Top Chef and other shows.
"Essentially, XA claims that its former employees stole XA clients and XA's office furniture for the benefit of HudsonGray to compete with XA; that is, a commercial dispute that often arises when employees leave one company for another," argued the defendants in their motion.
In looking at the sprawling lawsuit, Judge Oetken examines whether the plaintiff has adequately alleged predicate acts and a pattern of racketeering activity. Here, the alleged predicate acts are mail and wire fraud. Oetken points to emails among Wilson, Wagner and Andereck informing a bank and clients that Studio AG — i.e. the alleged entity set up by the defendants to cater to XA — was a part of XA. He also looks at the allegations pertaining to HudsonGray.
According to the ruling, "Among the predicate acts that strongly support the inference that the actions of the HudsonGray Defendants—HudsonGray, Wagner, Andereck, Lomma, Day, Wilson, and Gudin— were part of a scheme to defraud are: text messages describing how the HudsonGray Defendants would tell XA clients that HudsonGray was the same company as XA, just using a different name; a text message from Gudin to a temporary XA employee informing them that HudsonGray is the same [as XA] with a different name'; the porting of proprietary XA data and information to new iPhones possessed by the HudsonGray Defendants and unattached to XA’s server; and HudsonGray’s receiving payment for a project developed by and belonging to XA."
The judge also rules that for pleading purposes, the plaintiff have also plausibly alleged a pattern of racketeering and given numerous communications between the defendants, an agreement that rises to a possible conspiracy.
Some of the defendants beat claims of breaching contracts, but that's hardly solace in a dispute over party planning where the damages being sought are $20 million in compensatory damages along with trebled damages for alleged racketeering injuries. Then, there's punitive damages. CMG wants ten times compensatory damages (or $200 million).
The defendants have called this a "garden variety" business dispute, but Judge Oetken thinks otherwise.
"Based on CMG’s allegations, this case may present a rare occasion where punitive damages may potentially be justified," he writes. "CMG alleges that Defendants engaged in a comprehensive scheme over the course of five years to deprive XA of its profits and clients by working as executive officers for XA while simultaneously running separate businesses that fraudulently competed with XA... Given the chutzpah with which Defendants allegedly executed their schemes, the Court finds that the request for punitive damages is sufficient to survive the motion to dismiss."