Lawsuits all around -- XanGo co-founder sues, getting sued

2013-05-21T00:21:00Z 2013-07-30T06:31:28Z Lawsuits all around -- XanGo co-founder sues, getting suedCathy Allred - Daily Herald Daily Herald
May 21, 2013 12:21 am  • 

LEHI -- Competing lawsuits have embroiled the six cofounders of XanGo, as one sued the other five and the company sued the one.

XanGo cofounder Bryan Davis filed suit against cofounder and CEO Aaron Garrity in U.S. District Court on May 16, alleging that his partner committed embezzlement, fraud and racketeering.

On Monday, XanGo filed a lawsuit against Davis in 3rd District Court, alleging that Davis committed legal malpractice in drafing the company’s original operating agreement, opening XanGo up to various litigation to which it would not have been subject otherwise and putting himself in a conflicting position, since he had a signficant ownership interest in the company. It also alleges that he shared proprietary information with people outside the company.

Davis is a managing member and a member of XanGo’s board of directors and there are six founders. The lawsuit also names as defendants XanGo cofounders and board members Gary Hollister, Gordon Morton, Joseph Morton and Kent Wood and chief financial officer Nate Brown. XanGo, founded in 2002, is a privately owned international multilevel marketing company based in Lehi’s Thanksgiving Park.

Davis v. Garrity

The case document filed reads like a modern-day adventure thriller of a prosperous company’s founders succumbing to wealth and power.

Davis accused the other men of spying, threatening employees, falsifying distributor positions to siphon off funds, defrauding on XanGo taxes and their personal taxes, falsifying records, changing credit card statements, charging as business expenses to purchase grand pianos, vacations, home renovations, landscaping, electronics, expensive bicycles, scooters, oh, and an open expense account for one mistress.

And that is just an overview of the 39-page legal document.

Garrity’s attorney refuted the claim, saying the allegations are to help Davis inflate his share holdings for a greater profit.

“We are confident in refuting these unfounded allegations and we will show how Mr. Davis’ gross negligence provided the company with grounds to dismiss him and hold him accountable,” said Bryon Benevento, attorney for the other XanGo founders.

The majority of Davis’ lawsuit focuses on reported financial misdeeds, led by Garrity but emulated by others.

“At Mr. Garrity’s encouragement, the manager defendants and a handpicked number of XanGo employees began using XanGo’s assets and their corporate credit cards for their own personal benefit and the benefit of family and friends,” the lawsuit reads.

According to the lawsuit, Garrity embezzled hundreds of thousands of dollars in assets from the company, writing off clothing, medical enhancements, jewelry, event tickets, bicycles, electronics and chartered planes and vacations as business expenses. CFO Nate Brown set up secret founder accounts for Garrity and others to allow them to improperly spend XanGo assets.

The public view and Davis’ private view is puzzling, Benevento said; that will be resolved in court.

“My clients, the XanGo founders, have built a company that has been recognized as one of the best places to work in Utah. These gentlemen are committed to the hundreds of people they employ and over a million distributors whom they serve, even as Mr. Davis attempts to sully their good names and their families,” he said.

Davis also alleges in the lawsuit that Garrity’s assistant, Andrea Waterfall, with whom he was in a relationship, had a company credit card that she used for personal expenses, and that Garrity sent in fraudulent expense reports.

Other allegations include Garrity using power and influence as a founder to threaten XanGo employees into turning a blind eye to his theft and instituting what he termed a “culture of giving” at XanGo meaning that founders and employees Garrity determined were in his good graces could unlimitedly use XanGo assets for their personal benefit.

The lawsuit further reports founders are alleged to have used XanGo employment and forced qualified distributor positions to siphon XanGo assets to family members and friends.

Davis alleges the founders conspired to give themselves illicit distributions through a tax fraud scheme and that the founders also formed various competing companies with XanGo assets. He is also claiming that the founders took steps to freeze him out of the company — ignoring Davis’ objections to wrongful conduct, falsifying board minutes to reflect unanimous consent to actions to which he had voiced objections, XanGo employees were told not to talk to Davis under penalty of termination, that founders also falsely claimed to XanGo employees that he had resigned his position at XanGo and disparaged him. As a result, Davis said XanGo withheld bonus/distribution payments to Davis as well as discontinuing employee benefits.

The XanGo board’s attorney said the accusations are fabricated because Davis is attempting to extract an inflated buyout from them for his shares in the company. Benevento said several months ago, the XanGo board offered Davis a separation agreement due to his ongoing failure to fulfill his responsibilities and that Davis has failed to show up for work yet still expects a regular paycheck.

Garrity has also misused XanGo’s security department to retaliate against Davis, Angel, leaders and founders of competing MLMs and XanGo distributors and employee, according to the suit; Garrity allegedly asked Justin Barrett to use his access to law enforcement databases to find information on these individuals that was not on public record, which information Garrity could then use to his advantage. He also requested that the XanGo Security Department obtain non-traceable wireless accounts for him for the purpose of online corporate intelligence gathering, dissemination of information and posting defamatory comments about competitors, distributors, employees and others. A bogus account was illegally created under the fictitious name “John Gable.”

Fact or fiction?

“We deem Mr. Davis’ lawsuit to be without merit — nothing more than an attempt to embarrass his partners and their families and force a higher settlement,” Benevento said.

Bryan Davis’ attorneys were not available for comment.

XanGo v. Davis

“The XanGo board has been developing legal action for some time now as their efforts to reach a settlement agreement with Bryan stalled as he pushed for an inflated payment,” said Richard J. Armstrong, Kirton McConkie Attorneys at Law.

According to this lawsuit, Davis pulled an operating agreement off the Internet and used it instead of creating a specific document for XanGo, thus opening the company up to the Angel Investors lawsuit. But the alleged misconduct does not stop there. He also gave the company poor legal advice after misrepresenting his international experience, according to the lawsuit, thus costing the company millions of dollars in lost sales in Europe and millions of dollars in attorneys fees.

“Mr. Davis had acted with gross negligence in failing to properly register the company’s product in the EU,” the lawsuit reads. “Recognizing his gross negligence in registering the company’s product in the EU, Mr. Davis attempted to control the damage of his actions by purchasing expensive gifts for the top distributors in Germany, as well as flying the top German distributor to the United States.”

Then in 2012, the lawsuit alleges, Davis asked the board members if would continue to be paid his six-figure salary if he went on an LDS mission. The discussion reportedly became a demand from Davis: buy him out, agree to let Davis buying them out or be sued, “which he threatened to do to ‘destroy the company,’” according to the lawsuit. At the same time he “refused to engage meaningfully with the company,” spent more money and used the company’s legal resources to assist his daughter’s boyfriend.

At that point, according to the lawsuit, XanGo fired Davis. He remained on the board of managers, however, and contacted top distributors and employees, reporting telling that that he was no longer with XanGo and that Xango “is destined to fail.”

The lawsuit also pointed to inappropriate communications between Davis and a female distributor, spending company money on gifts for this woman and his disclosure of confidential financial information to a competitor.

“The actions of Mr. Davis as alleged herein have been grossly negligent or constitute willful malfeasance,” the lawsuit reads. “Indeed, Mr. Davis’ actions as alleged herein were taken in order to force the company into buying him out of the company for an overinflated price.”

Angel Investors v. XanGo

Angel Investors became concerned about the management of XanGo— they owned 1 percent of the company — and on April 18, 2006, sent a demand letter to XanGo requesting that Angel Investors be allowed to inspect the books and records of the company. On Oct. 11, 2006, Angel Investors filed an action against XanGo in 4th District Court, claiming breach of contract and breaches of fiduciary duties against XanGo. The group sought a court ordered inspection and judicial dissolution of the company. On June 19, 2007, Angel brought a shareholder derivative suit on behalf of XanGo, alleging breaches of fiduciary duties by the founders for hundreds of thousands of dollars from the company for their own personal benefit. In 2011, the lawsuit was settled out of court.

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