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Muscling MusclePharm

|Includes: MusclePharm Corp. (MSLP)


A hedge fund tries to derail a rescue for MSLP.

It bashes the CEO who loaned his own company $18MM.

New investment ruse: Buy stock, seek umbrage, then sue.

    MusclePharm is for muscle men. And women. Its bodybuilder supplements and protein powders are a beloved staple of buff men and women who burn up thousand-calorie workouts in the gym. They toil to sharp grunts of exertion and the loud clanking of heavy barbells, their boulder-sized biceps bulging from beneath gaping tank tops.

    And you? All you do is watch from the treadmill, munching on a birthday-cake flavored power bar that will more than replace the calories you are trying to expend.

    MusclePharm itself could use the strength and protection offered by its own products, for it has been subjected to beating after beating in recent years. The same goes for its CEO, Ryan Drexler, a rather brave soul and latter-day Victor Kiam-type who liked MusclePharm so much he loaned it millions of dollars from his own pockets and took over as CEO—and now is taking jabs for coming to the company’s rescue.

    Drexler, age 47, suitably brawny and rugged in the role of MusclePharm’s chief, is an amateur fighter in Brazilian jujitsu, and on the Internet you can find video of him in full-contact combat; in some ways, the punches he has taken on MusclePharm’s behalf may have been worse.

    Earlier this year, it looked as if MusclePharm might finally be on the mend. Drexler had put a refinancing in place and lined up a new strategic investor to spot the company in the next round of heavy lifting, to phrase it in a fittingly muscular metaphor. This investor was to take out a portion of the debt held by Drexler and provide additional cost savings and retail distribution to help the CEO’s turnaround.

    Then the whole deal was put in danger of collapse because of a flimsy lawsuit against MusclePharm filed by a 98-pound weakling: a hedge-fund character with a record of questionable shenanigans and deceptive business practices. His name is Todd Enright of White Winston Select Asset Funds, a Boston-based hedge fund operator.

    In this litigious age, any meek geek with a lawyer can roar his objections and bring things to a halt, even at a corporate behemoth that might have crushed this pest in an earlier, more rapacious age. In the MusclePharm case, playing out in state court in Nevada, let us disregard Enright’s tainted track record and the fact that his stake in the company is small. The real outrage is that his lawsuit depicts MusclePharm’s refinancing as a scam of self-dealing orchestrated by Ryan Drexler—yet Enright acquired his stake (from Colorado-based businessman Leonard “Buck” Wessell, who appears to be allied with Enright but unwilling to take on the lawsuit himself) months after the completion of the refinancing he now challenges as unfair.

    If White Winston so disliked the terms of MusclePharm’s refinancing, which were fully disclosed months earlier, don’t buy the stock. To buy it months after the supposedly suspicious deal and turn around and sue is the ultimate whiner’s lament. Woe unto me, I am woe. It’s what an ambulance-chasing lawyer would do.

    This bogus stunt is investment by litigation target: Find a deal you detest, invest long afterward in the company where it occurred and then sue it as if you have been harmed, when you bought something intentionally that you hoped was ripping you off. Oh my, the possibilities of this strategy are endless.

    You figure Facebook’s $2 billion bet on Oculus goggles back in 2014 was a flop? Buy the stock today and file a lawsuit citing that old deal. Did you just hear of another recall at Chipotle’s because of bad romaine lettuce? Hustle on down to your nearest outlet and wolf down a salad and sue regardless of whether you get sick.

    By dull court standards, the description of Todd Enright is a lurid bodice-ripper in the 209-page response that MusclePharm filed in the case. It says he “has been found on multiple occasions to have engaged in fraud, is under federal investigation for criminal fraud, has pleaded the Fifth Amendment at least four times (including as recently as January of this year) and has repeatedly been found by the courts in those cases to have acted in bad faith (including as recently as February of this year).”

    The MusclePharm response adds that Enright’s “latest scheme, it appears, amounts to an attempt, based on false allegations fabricated out of whole cloth, to hold defendants ransom until they pay him to go away. But that attempt is not only completely unmoored from the indisputable facts and applicable law, it also, as shown below, threatens to harm MusclePharm and its businesses.”


    Fortunately for MusclePharm, the filing submitted by company’s lawyers, which include Marc Kasowitz of Kasowitz Benson Torres LLP, convinced a Nevada judge that Enright’s claims aren’t likely to be successful. The judge denied Enright’s request for an injunction that had threatened to derail any deal with the strategic investor lined up by Drexler. But the case continues, even though the court found that it was unlikely to succeed on the merits.

    The MusclePharm filing reveals other unpleasant details about Todd Enright: that he remains under investigation by the feds in Vermont; last year he was named in a civil RICO lawsuit alleging fraud; his companies have been sued eight times and accused of fraud, breach of contract and violation of securities laws; in five of those cases he has been found liable for $5 million in damages.

    Go back further, and you learn that Enright shut down the nation’s largest gay media company in 2016 amid creditors’ complaints that he had lied in court about the company’s financial health. He also filed for personal bankruptcy in 2010; and his ex-wife accused him of hiding assets in their divorce case. That last practice, by rich men seeking to rip off their estranged wives, sometimes is known as “siphoning the bison.”

    To be fair, even someone with a scoundrel’s pedigree has the right to sue when he has been wronged; it’s just that, he goes too far when he sues over a supposed wrong he knowingly embraced. Please, get some therapy.

    Ryan Drexler’s odyssey at MusclePharm illustrates the old saying about no good deed going unpunished. MusclePharm had been in business since 2008, founded by Brad Pyatt, a former kick returner for the Indianapolis Colts. He had established its macho props, charting brash expansion to four hundred products, allying with UFC fighters and signing dozens of athletes to endorsement deals totaling a daunting $45 million in obligations.

    Meanwhile, Ryan Drexler, after spending fifteen years building up the vitamin company his father had founded and then selling the company in 2007, had bought two million shares of MusclePharm stock in 2015. He joined the board in June 2015 as chairman, as MusclePharm was wobbling under Pyatt’s breakneck expansion, rising losses, late payments to vendors and other travails.

    Drexler came to the rescue with a $6 million loan in December 2015 when no one else would lend to the company. MusclePharm stock was at $2.28 a share; it is at a dollar or so lately. Then came an investigation of the company by the SEC, which fined founder Pyatt $150,000 for spending half a million bucks of shareholder money on swank retreats, golf, private jets, cars, clothes and other perks without disclosing it to investors.

    Pyatt left, Ryan Drexler took over in March 2016 and the inevitable turmoil ensued: a shakeup in management, a restructuring-reducing-refocusing, a 50% plunge in the stock price in two years, and waves of sneers and jeers from anonymous foes online. Drexler cut staff in half, reduced four hundred products to a hundred, and set out to shed expensive manufacturing deals and costly contracts with hunky endorsers.

    Thus, MusclePharm got sued by the Terminator himself: Arnold Schwarzenegger, for “non-payment of $20 million”; and Tiger Woods ($7 million), and the Manchester City Football Club ($8.3 million). It also has faced suits filed by a contract manufacturer for Combat Crunch Bars, another maker of Combat Protein and Assault Pre-Workout System, and the IRS (seeking $5 million in taxes a few years ago).

    With each new blow, MusclePharm turned to its lawyers at Kasowitz Benson to fight its adversaries, while Ryan Drexler stepped up and dipped into his own pockets: an additional loan of $11 million in November 2016 to cover a legal settlement with a contractor, and a $1 million loan in July 2017 to cover a first payment of a $3 million settlement owed to Manchester. For this, he received promissory notes convertible into 16.2 million shares of MusclePharm stock. Together with the two million shares he owns outright, it would add up to almost a 60% stake in the company.

    In his lawsuit, Todd Enright of White Winston cites this stake as part of the self-dealing it accuses Drexler of conducting. Yet Drexler has agreed to sell a big portion of the company debt he holds to the mystery investor he has been courting. This would reduce his stake and deprive him of control, solving White Winston’s objections, yet the hedge fund’s lawsuit now threatens to thwart the outcome it supposedly desires.

    That reveals the real intention here: greenmail, baby. Who knew a hedge fund could be so good at chasing ambulances?