Lawsuits and Pro Sports and Sports Business

Squabble threatens ABA's credibility

February 19, 2007

Rival board members are at war over the future of the American Basketball Association just as the Indianapolis-based professional league appeared to be on the cusp of breakthrough growth.

The bizarre legal battle pits the likes of league co-founder Joe Newman, a 69-year-old Indianapolis entrepreneur, against such notables as retired National Basketball Association bad boy and TV host John Salley.

Both sides are trying to oust the other. Amid a flurry of legal actions and regulatory filings, it's difficult to tell who is in control or where majority ownership could land.

"I've seen squabbles among board members," said David Williams Russell, chairman of the business services group for the local Harrison & Moberly law firm. "But you usually don't have one board member suing another. It just doesn't happen. This is a complete mess."

The ABA--a 21st century incarnation of the league that spawned the Indiana Pacers in the 1960s--has grown in fits and starts. Newman and local attorney Richard Tinkham, who started the league in 2000, have struggled to draw attention to the ABA in the crowded world of professional sports, but seemed to be making headway. In December, the ABA acquired Souvall-Page & Co., a publicly traded Utah company with no assets. The move allowed the ABA to go public, positioning it to raise capital for expansion, without incurring the expenses of an initial public offering. In return, Souvall-Page's shareholders received a minority stake in the league.

In late January, ABA signed a deal with Spalding to sponsor and supply basketballs to the league. And this month, Hollywood moviemaker New Line Cinemas started production of "Semi-Pro," a movie about the ABA starring Will Ferrell and Woody Harrelson.

With a dramatically reduced player pay scale and revised business model focused on regional play and fewer travel expenses, the league has grown to 47 franchises in the United States, Mexico and Canada, with plans to add 20 more next season. Newman said more than half the league's teams are profitable.

Fortune magazine this month profiled the league, and Salley, who serves as the ABA's commissioner, brought the league publicity through his role as co-host of the nationally televised "Best Damn Sports Show Period."

"We've grown faster than any sports league in history," Newman said.

But the recent infighting is a definite black eye, sports business experts said, and couldn't come at a worse time.

"This is a very dangerous situation for the ABA," said David Morton, a sports marketing consultant and principal of locally based Sunrise Sports Group. "In professional sports, stability equals credibility. This certainly doesn't bode well for either."

If the battle rages long, it could hurt the league's prospects with new franchise owners, prospective broadcast partners and sponsors, Morton said.

Infighting came to a head Jan. 31 when three of the league's five board members tried to remove Newman as chairman and CEO, according to a company filing with the Securities and Exchange Commission.

ABA board member Thomas E. Doyle, a Maryland attorney and owner of the ABA Maryland Nighthawks, called a special meeting and voted with Salley and board member David Howitt to oust Newman, the filing said. Salley is a co-owner of the ABA's Hollywood Fame. Howitt is an Oregon businessman.

The other two board members--Newman and Tinkham, a founder of the original ABA and Indiana Pacers--called the meeting unlawful. They own more than 48 percent of the league.

But questions abound about who ultimately will control it .

According to an SEC filing, Doyle and A.J. Discala, principal of Beverly Hills, Calif.-based Brax Capital Group LLC, have an agreement with Newman and Tinkham to allow Doyle and Discala to boost their ownership in the company to more than 51 percent.

If that comes to fruition, legal experts said, the tables in this battle would be turned.

Doyle's group already is acting as if it has control.

Newman said he got a letter Feb. 1 from a Florida attorney claiming to be acting on behalf of the ABA, and notifying him that he had been fired as the league's CEO.

Newman and Tinkham quickly rallied a handful of other league owners to form a majority to oppose Doyle's and Salley's group. Salley, Doyle and Howitt own a combined 6.96 percent of ABA stock. They are supported by Discala's Brax Capital, which owns 9.1 percent of ABA stock.

Newman filed a federal lawsuit against Doyle's group Feb. 12 seeking a temporary restraining order and preliminary injunction to retain his status as chairman and CEO. Newman said not enough notice was given for the meeting and that minority owners had no right to attempt to overthrow the majority.

"They thought they had a [majority] advantage, and they were very wrong," Newman said. "This was an attempted hostile takeover, and it has been 100-percent thwarted."

The lawsuit calls Doyle's posse "a renegade group ... seeking to hijack--for their own personal interests--control of a public company." It calls the defendants' actions "a display of outrageous conduct reminiscent of the Watergate era's Saturday night massacre."

Doyle's group issued a press release Feb. 5 announcing that Newman had been dethroned, stirring chatter on Internet message boards focused on basketball and the ABA. A few days later, Doyle's group notified the SEC that Newman had been fired.

In recent weeks, ABA shares have seesawed, perhaps because of rampant speculation. In early January, the stock took a sudden upswing, hitting $2.71 per share, before falling to 80 cents Feb. 15.

Newman said his opponents' moves were against federal securities laws and the company's bylaws.

In retaliation, Newman and Tinkham moved to oust the other three directors. Securities attorneys say that was an unusual move, because shareholder votes usually are needed to elect or remove directors of public companies.

Doyle and Howitt did not return calls seeking an explanation of what's at the heart of their dispute with the ABA's founders. Salley also could not be reached.

"In connection with the removal of Mr. Newman," an SEC filing says, "the board of directors intends to establish a special committee to review all agreements executed by Mr. Newman ... to ensure such agreements were properly authorized by the board of directors."

The filing doesn't say which agreements might be at issue. In December, the league hired Big Apple Consulting USA Inc. to provide "investor management services" through December 2008. Under the deal, Big Apple would receive $1.8 million.

Last month, the league signed a consulting agreement with Cioffi Business Management Services. Under the one-year deal, Cioffi would receive $102,000 plus 550,000 shares of ABA stock.

While squabbles among officers and board members of public companies are not uncommon, this level of rancor is, said Harrison & Moberly's Russell.

While a majority of board members can fire a company's CEO, they likely would have difficulty making it stick unless they had the support of most shareholders, said Russell, an arbitrator with the National Association of Securities Dealers.

"This is the kind of messy war that happens in small, closely held private companies," Russell said. "Now that the ABA is public, they find everyone looking over their shoulder. This kind of exposure can be detrimental to business."

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