Failed LA Club: Was it a Bailout for CEO's Friend?

Failed Los Angeles Venture: Was the failed LA club really a bail out for the CEOs friend?

In mid-2012, RCI partnered up with a west coast club operator to create a joint venture that would open a new club in Los Angeles county. RCI’s JV partner was supposed to manage the club, but RCI ended up buying him out of his stake before the club even opened. Many things about the JV didn’t appear to make strategic sense. Every other time Rick entered a new market it entered with an investment many multiples larger than the Los Angeles investment($600k): Miami: $25 million, Las Vegas: $19 million, New York: $10+ million, Philadelphia: $8 million, etc. The story for LA never quite added up. The fact that it immediately failed and was shut down within months of opening, added to the suspicion.

The Real Story:

Rick’s Partner – Rick’s partner in the joint-venture was strip club operator Charles “Jerry” Westlund. Jerry was previously convicted for six counts of evading state income taxes and two counts of forgery related to embezzling $380,000 while he was a consultant to the Bicycle Club Casino (Card Club's Political Consultant Indicted in Theft of $380,000).

Even ignoring the obvious questionable judgment of partnering with someone convicted of embezzling money, it doesn’t make sense to partner with a convicted criminal while seeking to apply for a brand new SOB license.  Local commissions have rejected Jerry’s license applications in the past due to his criminal record (Pony Liquor License Renewal Denied).

Timelines of Events:

December 20, 2011: An eviction case is filed against Jerry Westland’s 1957 Del Amo LLC by the landlord. This was the building that would eventually become RCI’s Los Angeles club. Jerry already had the property under lease and was apparently struggling to pay the rent on the building and needed someone to bail him out of his debt.

“On 12/20/2011 a Property - Commercial Eviction case was filed by Mha Prodigy Inc A California against 1957 Del Amo Llc A California in the jurisdiction of Los Angeles County Superior Courts, Governor George Deukmejian Courthouse located in Los Angeles, California.” Link

Feb  2012: Eric and Jerry attend the Super Bowl together in Indianapolis (Feb 5) and Mardi Gras in New Orleans (Feb 20)

                 

July 2012: Shortly after Eric and Jerry partied together at the Super Bowl and Mardi Gras, RCI announced it was creating a joint venture with Jerry Westlund for a Los Angeles club. RCI was to pay $600k for 50% of the club.  However, the joint venture did not own the building and had not received a SOB license. Rather than paying for half of the construction/legal costs to build out the club, RCI apparently paid $600k up front for a 50% stake in the yet to be licensed club or opened club. RCI expected the club to be open in “September or October of 2012”.

May 2013: Almost a year later RCI announced it was buying out Jerry’s 50% stake for 100,000 shares of Rick’s stock ($3m+ at current prices, $800k-900k at time of transaction). The club had still not yet opened and had not received its license. RCI now owned 100% of a small club in California that it had originally planned to have Jerry operate. RCI was supposed to benefit from Jerry’s LA-area business and political expertise, but now they have allowed him to cash out completely before the club even opened.

Aug 2012 conference call:

Q: “the new Los Angeles joint venture.  I’m wondering: what are your expectations?“

A: “I’ve talked with Jerry (Westlund) a lot on the deal.  We believe the location probably will do around $50,000 a week or about $3 million a year….we will probably make our money back cash-on-cash return of 100%, in about 12 to 18 months”

Aug 2013: The LA club finally received its license and opened. Despite Jerry telling Eric the club should do $3m in revenue and have a 12-18 month payback, the club was unsuccessful and was closed down within a year of opening.

Oct 2014: RCI sold the business for $250,000, a little over a year after spending roughly $1.5 million to buy it from Jerry.

It’s clear the Los Angeles venture was a massive failure. The question is, did management knowingly enter a bad deal to help bail out a friend, or did Jerry pull a fast one on RCI by wining and dining the CEO?