Pro Pitcher Says He Was Rolled for $3 Million

"On May 10, 2009 BZE invested $3,000,000 in dotFIT to acquire a 15 percent minority membership interest," the derivative complaint states. Had plaintiff known the true facts, it would not have invested in dotFIT. Based on this $3,000,000 investment, BZE entered into, among other agreements, an amended and restated operating agreement of dotFIT LLC. The operating agreement included, among other provisions, the following provisions to protect the investments of its minority members: (a) 'The allocation of percentages of ... [BZE] shall not be adjusted, reduced or diluted for any reason. ...'; (b) dotFIT's cash distributions had to repay NEFC (based on its $1 million 'equity' investment) and BZE for their capital contributions before any other member or equity holder in dotFIT received any cash distributions; and (c) BZE has to approve material amendments to the operating agreement, especially any amendments or changes that would adversely affect its investments," Zito says in the complaint. (Brackets and ellipses in original.)

Zito claims that less than nine months later the $3 million he invested in dotFIT was nearly gone, spent on "among other things, salaries for its management, 'repaying' Spruce's $600,000 'loan,' and plaintiff is informed and believes and on that basis alleges, paying NeV a purported $10,000 per month 'management' fee."

Zito claims that repaying other members before him was not dotFIT's only breach of its agreement.

"Less than nine months after BZE was induced to invest $3 million in dotFIT and despite the fact that dotFIT had not raised any more capital and already had spent almost all of BZE's $3 million investment Lafayette, without notifying BZE of its intent to do so, began to aggressively divest its interest in dotFIT," Zito says in the derivative complaint. "Plaintiff is informed and believes, and on that basis alleges that when dotFIT invested its $3 million in dotFIT, Lafayette already had devised these plans to divest at least $3 million of its investment in dotFIT and failed to disclose these plans to BZE. In so acting, Lafayette acted in its best interest and to the detriment of dotFIT and dotFIT's minority members, including BZE. Plaintiff is informed and believes, and on that basis alleges that on or about Jan. 6, 2010, Lafayette induced Spruce and/or Global Health to purchase $2 million of its loans from it for $2,173,835.53, which represented the principal and interest due on the loans. dotFIT approved the assignment of these loans from NEFC to Spruce. This sale of the purported loans from Lafayette to Spruce had the effect of diverting potential funds away from dotFIT and providing Lafayette with a return on its dotFIT investment well in advance of any distribution allowed under section five of dotFIT's operating agreement. Even though this transaction involved two insiders-i.e., the principals of dotFIT's two managing members-and allowed one of dotFIT's managing members to recoup half of its investment in dotFIT with interest before any other investor in dotFIT recouped any of its investment, this transaction was not disclosed to or approved by dotFIT's minority members."

Zito claims that two weeks after Lafayette sold its interest in dotFIT, Lafayette's puppet company NEFC sold 12.5 percent of its interest in dotFIT to pop star Madonna for $625,000. NEFC sold another 12.5 percent of its interest to Go Mav, LLC for the same price a few weeks later, according to the complaint.

Madonna is not a party to the complaint.

"As a result of these transactions, Lafayette (or NEFC or Mastrov) managed to recoup over $3.4 million of its investment in dotFIT, while retaining a $1 million 'loan' to dotFIT and 75 percent of its 'equity' investment," according to the derivative complaint. "Thus, Lafayette had less than $600,000 still invested in dotFIT, but dotFIT continued to owe Lafayette (or NEFC or Mastrov) $1 million plus interest for a 'loan' and Lafayette (or NEFC) retained a 28.05 percent ownership interest in dotFIT, but dotFIT and its minority members received nothing. No one ever disclosed to dotFIT's minority members Lafayette's intent to divest its interest in dotFIT, which divesture only benefited Lafayette and harmed dotFIT and its minority members by reducing the potential for future investment in dotFIT. With these actions, Lafayette breached its fiduciary duties to dotFIT and its minority members, as Lafayette had a fiduciary duty to ensure that dotFIT was adequately capitalized before it started using dotFIT funds to enrich its coffers."

Zito claims Spruce invested an additional $1.9 million into dotFIT, and again the company's controllers characterized Spruce's investment as loans rather than capital.

"Thus, with these transactions defendants and each of them allowed Spruce to invest more than $4 million in dotFIT, but Spruce (or entities he controls) and Lafayette (or NEFC) conspired to divert $2,173,835.53 in potential investments from dotFIT to Lafayette (or NEFC or Mastrov), thereby enriching Lafayette (or NEFC) while leaving dotFIT indebted for the entire $3.9 million," the derivative complaint states. "dotFIT's management, including Spruce and Lafayette (or NEFC), has maintained that these $3.9 million in loans (plus Lafayette's or NEFC's or Mastrov's other $1 million loan) must be repaid before dotFIT's minority members may recoup any of their investment. Lafayette (or NEFC or Mastrov) further caused Madonna and Go-Mav to purchase its equity, rather than investing $1.25 million directly into dotFIT, thereby further diverting funds from dotFIT for their own benefit. With these transactions, defendants and each of them placed their interests above dotFIT's and its minority members' interests, thereby breaching their fiduciary duties."

Zito claims that Lafayette and NeV furthered diluted whatever value dotFit had by giving a free license for its software to HFPN, another company owned almost completely by Lafayette and Global Health.

"In other words, dotFIT's managing members owned and controlled HFPN. In addition, the same attorney appears to have represented both companies on the transaction. As a result, dotFIT's managing members were required to closely scrutinize this transaction to ensure its fairness and obtain independent approval of it from dotFIT's minority members, but dotFIT's managers failed to do either. Two weeks later, on June 20, 2010 dotFIT and HFPN entered into a second agreement, whereby dotFIT retained HFPN to assist in the sale and licensing of the software. According to the terms of this agreement and despite the fact that dotFIT just gave HFPN the right to use the software for free, dotFIT had to pay HFPN for these services. Thus, dotFIT's managing members caused dotFIT to provide its assets to HFPN for free, but made dotFIT pay for HFPN's services," Zito says in the complaint.

HFPN found a buyer for dotFIT in February 2011, and Zito claims that NeV orchestrated a four-party deal for the sale between itself, HFPN, dotFIT and a company called ShareCare. ShareCare is an online interactive Q&A platform that allows healthcare experts to answer health and wellness questions.

Neither ShareCare nor its creators-WebMD founder Jeffrey T. Arnold and Dr. Mehmet Oz of television fame-are parties to Zito's lawsuit.

Zito claims that in June 2011, NeV presented dotFIT stakeholders with a document that it claimed spelled out the deal it negotiated with ShareCare.

"In this transaction overview, NeV represented that ShareCare would acquire the software and all of the assets of HFPN for 6 percent of its fully diluted common stock, which had an implied value of $15 million. In exchange for the software, dotFIT was to receive $6 million of the $15 million in stock. NeV misrepresented the deal in this document, as dotFIT ultimately received no more than a 1 percent interest in ShareCare, or stocks purportedly valued at $2.25 million (and realistically no more than $700,000). In early June 2011, dotFIT requested that its minority investors, including BZE, approve the ShareCare deal. dotFIT sent its minority investors, including BZE, a consent agreement and a cursory summary of proposed terms. This document, however, did not provide the minority investors, including BZE, with any details concerning the ShareCare deal, and to the extent that it explained the ShareCare deal, it misrepresented it, including omitting among other things HFPN and Clark's involvement in it," Zito says in the complaint. (Parentheses in original.)

Zito says he asked for more information about the deal before he gave his consent. He says Clark and a Lafayette/NeV executive told him no offering or negotiation documents existed-and then proceeded to consummate the deal without any minority consent.

"Plaintiff is informed and believes and on that basis alleges that, without the consent of any of dotFIT's minority members, on June 14, 2011 dotFIT sold the software and related contracts-its main assets-to ShareCare for stock (10,544 shares, a 1 percent interest in ShareCare) and an assumption of liability. NeV and ShareCare claimed that a 1 percent interest in ShareCare was worth $2.25 million. This deal, which dotFIT approved based on NeV's-not dotFIT's-due diligence and for NeV's-not dotFIT's-benefit has significantly lessened dotFIT's potential future value, and significantly altered its business," Zito says in the complaint. (Parentheses in original.)

Zito says that Clark told him in selling the ShareCare deal-three days after it closed-that dotFIT would become "'more profitable significantly faster due to decreased cost structure, increased opportunity to sell supplements on ShareCare and [give dotFIT] exclusivity to utilize the ShareCare platform in the health club channel to drive supplement sales,' and that BZE 'will also get equity in ShareCare,'" according to the complaint.

The defendants finally told dotFIT's minority stakeholders of the sale to ShareCare more than a month after it went through, Zito says. He claims dotFIT told them it didn't need minority members' consent-and continued to deny the existence of negotiation documents.

That is, until March 2012, when NeV finally released the documents it had been claiming for nearly a year did not exist at all. In the documents, Zito says, he discovered that NeV negotiated the four-party deal, that it knew the ShareCare stocks it would receive as payment for dotFIT were worth $700,000, not $2.25 million, that NeV unfairly allocated the ShareCare stocks to itself and HFPN and even undervalued dotFIT's share to give itself and HFPN even more.

"In sum, in June 2011 with no due diligence of its own and with its managing members exercising absolutely no business judgment, dotFIT allowed NeV to sell its most valuable asset-the software-for a very small percentage of the stock in ShareCare and a terminable-only-for-cause license to use the software for limited purpose, while NeV allocated to itself and its subsidiary HFPN much larger percentages of stock. This unfair stock allocation benefited defendants to the detriment of dotFIT and its minority members. This transaction also made no sense for dotFIT and effectively rendered dotFIT valueless. The ShareCare deal involved self-dealing, and by agreeing to the deal defendants, and each of them, breached the fiduciary duties that they owed to dotFIT and its minority members," Zito says in the complaint.

Zito claims that even after dotFIT's sale to ShareCare, NeV continued to dilute the minority interests in dotFIT by extending another credit line of up to $2 million to the company. He claims NeV told dotFIT to use the money to pay off its vendors and continuing offering its officers above-market salaries.

NeV's final nail in dotFIT's coffin, according to Zito, involved a failed attempt in 2012 to buy EverNutrition and the EverLast brand name. Rather than allowing dotFIT to use part of the $2 million loan to pick up EverNutrition for $225,000, NeV called in $1.5 million in loans and forced dotFIT to rewrite its operating agreement to give NeV a priority waterfall return at 5 times its investment, according to the complaint.

"This desired waterfall effectively would have ensured that dotFIT's minority investors would never receive any return on their investment. In fact, this proposed deal was so one-sided that on March 8, 2012 defendant Haugen noted that he 'would not be able to sell this to any current investor,'" Zito says in the complaint.

Though the EverLast deal died, NeV continued to call in its loans to dotFIT years ahead of schedule, Zito says. He claims he wrote to dotFIT's management twice in 2012 and again this year, demanding that they pursue legal action against NeV for misrepresentations and breaches of fiduciary duty.

Defendant Haugen responded to Zito once, in August 2012. According to Zito, Haugen stated that BZE had "'presented a grossly distorted and unfair picture of dotFIT's relationship and interaction with NeV over the past four years' and that BZE's criticism of dotFIT's business practices are groundless."

Barry Zito Enterprises seeks damages of at least $3 million for breaches of contract and fiduciary duty, fraud, gross negligence, unfair business practices and civil conspiracy. It also wants injunctions to keep NeV from continuing to call in its loans to dotFIT before their due dates.

BZE is represented by Richard D. Robins and Brent G. Cheney with Parker, Milliken, Clark, O'Hara & Samuelian, of Los Angeles.

Zito has a 160-132 record and 1,797 strikeouts in a 13-year Major League career.

His best year was 2002, when he went 23-5 with the Oakland A's.

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