By Jordan Kobritz
Paul Beeston, a former president of the Toronto Blue Jays and MLB, is also a chartered accountant in Canada. He once tried to explain how businesses — including baseball teams — could engage in creative accounting.
“I can turn a $4 million profit into a $2 million loss and get every national accounting firm to agree with me,” he famously — and accurately – said.
Jeffrey Loria, who last year sold the Miami Marlins for $1.2 billion to a group that includes Derek Jeter, is a Beeston disciple.
On February 16, Miami-Dade County filed a 64-page lawsuit against Loria (MIAMI-DADE COUNTY VS MIAMI MARLINS, L.P. and MARLINS TEAMCO, LLC, L: 2018-004718-CA-01) accusing him of engaging in “self-serving” and “fuzzy math” designed “to deceive the public.” The lawsuit stems from a 2009 agreement to construct a 37,000-seat, retractable roof stadium for the Marlins in Miami’s Little Havana neighborhood at a cost of $634 million. The Marlins agreed to contribute about $155 million to the stadium construction costs, $35 million of which was in the form of annual rent payments.
As part of the stadium deal, Loria also agreed to pay the County and the City of Miami, which also participated in the construction cost of the stadium, a declining percentage of the profits on the sale of the Marlins if the team was sold during the ensuing decade. The profit-sharing clause was designed to discourage Loria from “flipping” the team as it increased in value from having a new stadium largely funded by South Florida taxpayers. For the final year of the deal, 2018, Miami-Dade was entitled to about four percent of the profits and the City of Miami approximately one percent.
In addition to suing Loria, the County joined the new ownership group as a defendant, a move designed to preserve assets from which to recoup any potential judgment against Loria. As a condition of the team’s sale, Loria and the new owners agreed to allocate $50 million of the sale price to an escrow fund to cover any claims from unknown creditors of the seller. Miami-Dade asked for an injunction to prevent either side from tapping into the fund until the County’s claim is decided.
The suit was filed after Loria claimed a $141 million loss on the sale of the team. Five days after the County filed their suit, the City of Miami also sued Loria. Both parties claim that under the terms of the 2009 agreement, Loria is required to provide them with a detailed calculation of the proceeds of sale, prepared by independent auditors. Instead, on February 1 Loria’s lawyers and accountants handed over a five-page summary report, leaving the County and City unable to determine the accuracy of any deductions and expenses.
The summary statement is quintessential Loria. In an effort to convince the taxpayers of South Florida to build the team a shiny new stadium, Loria and his stepson, team president David Samson, pled poverty, claiming the team was losing money. A year later a Deadspin article based on leaked financial statements detailed the finances of several MLB teams, including the Marlins. The article revealed the Marlins were one of the most profitable MLB teams in 2008 and 2009, thanks to baseball’s generous revenue-sharing provisions.
The revelations created additional backlash against Loria and Samson who were already on the defensive for a number of public relations missteps since acquiring the Marlins in 2002. Perhaps the most egregious of those occurred after the team won the World Series in 2003, when Loria proceeded to trade off his high-priced stars in an effort to reduce payroll. While campaigning for a new stadium, Loria lavished back-loaded contracts on free agents in an effort to convince the populace he was committed to winning. After moving into the new stadium in 2012, Loria once again gutted the team.
Loria’s foray into MLB came in 1999 when he purchased a 24 percent stake in the Montreal Expos for $12 million. Within three years he parlayed that investment into a 94 percent stake in the team by engineering cash calls that his Canadian partners were unwilling to fund. In 2002 he fled to South Florida as part of the great franchise switcheroo that saw MLB purchase the Expos from Loria; Loria purchase the Marlins from John Henry; and Henry purchase the Red Sox from the Yawkey Estate, despite not being the high bidder. Loria is hardly an unsophisticated or naive businessman.
The agreement with the County pegged the team’s value at $250 million in 2008 and allowed it to increase by eight percent each year. However, in the report provided to the County and City, the team claimed the franchise increased by $374 million when it should have really been $180 million. Loria also claimed more than $300 million in debt and cash contributions to the franchise. The agreement also allowed the team to deduct transaction costs from the profit on the sale. It used that clause to justify the deduction of a $30 million payment to Tallwood Associates, a firm founded and operated by Loria’s financial adviser, Joel Mael, who also served as vice chairman of the Marlins.
The County questions the $30 million payment to Tallwood, asking in the lawsuit if it “…relate(s) solely to the 2017 sale of the Marlins, or were (sic) instead a fee for Tallwood’s financial services to Loria for the past 17 years, with a payment structured to reduce the net proceeds of the sale of the Team.” The payment to Tallwood understandably raised a red flag. To earn $30 million on a 5 percent commission, the profit on the sale of the Marlins should have been $600 million.
A hearing on the request for an injunction was held on February 22 before Miami-Dade Circuit Judge Beatrice Butchko. The Judge granted the injunction after determining that the five-page report failed to comply with the contractual requirement to provide a detailed financial computation. Butchko did not rule on the legitimacy of the Tallwood deduction but she seemed to take a dim view of it. “So the vice chairman of the Miami Marlins, for financial advisory fees, gets $29 million while the city and the county, under their contract terms, would get zero?” Butchko asked. “All that may end up being a proper line item. But there needs to be the documentation to back up that payment,” she said.
Butchko also authorized County and City lawyers to begin requesting financial documents from Loria through the court. Yet to be decided is whether the County and City can pursue their claims in court or will be forced to abide by the arbitration provision of the original agreement. A County attorney argued before Butchko that the arbitration provision was effectively voided by the Marlins when they failed to provide any supporting documentation during a pre-trial hearing.
Loria’s team understandable prefers arbitration to a court trial. The former would allow the Marlins’ financial information to remain confidential. A trial, on the other hand, would disclose those finances to the world, something Loria could avoid by agreeing to a settlement, however reluctant he may be to compromise.
The case is in its early stages and may not be decided for years. But until it is you can be sure it will capture the attention of the media and taxpayers, whose final bill on the stadium, including interest, is estimated to reach $2.4 billion.
The author is a former attorney, CPA, Minor League Baseball team owner and current investor in MiLB teams. He is a Professor in and Chair of the Sport Management Department at SUNY Cortland and maintains the blog: http://sportsbeyondthelines.com. The opinions contained in this column are the author’s. Jordan can be reached at jordan.kobritz@cortland.edu.
