Even for the sometimes strange world of network marketing, the meltdown at Zrii LLC is extraordinary.
Thirty-five employees have resigned, including the entire top level managers at the promoter of a drink based on health claims from the juice of an Indian fruit. The executives left after a failed attempt to force CEO William F. Farley to resign and after their offer to buy the company was rejected.
Farley also terminated the contracts of top-level independent distributors and has sued some of those involved. He accuses them of trying to sabotage the company and extort a price for it far below the worth of a multilevel marketing company that had more than $40 million in business in 2008.
Now, up the air is the survival of Zrii less than a year since its public debut in a showy convention in Salt Lake City. Farley insists the company is sound and without debt. Those who left -- top officers who had intimate knowledge of Zrii's inner workings and access to financial data -- say it teeters on the edge.
The dissident group ascribes the meltdown to Farley's arrogance, bull-in-a-china-shop management, treatment of Zrii as his own personal cash box, and even personal behavior they deem inappropriate. But even more serious are allegations of possible illegal practices, including violations of sales tax laws and illegal campaign contributions to a congressional candidate. Also, they say some of Zrii's juice might not have been properly tested before shipping.
On Friday, Farley declined requests to speak on the record about the accusations. But he has filed a lawsuit in Delaware.
"The goal of this scheme was to enable defendants to coerce Zrii to agree to be acquired at fire sale values and/or make it so weak that it could not continue," the lawsuit says.
The suit also accuses the group of former insiders of entering Zrii's Draper headquarters in the middle of night on Feb. 1 to sabotage Zrii's computers and other systems, and to take documents.
The former insiders deny those allegations and go on to say that Farley's behavior at Zrii is consistent with his past.
Farley can be charmingly disarming and charismatic, but his long history in various businesses is checkered.
Farley was known in the 1980s for big leveraged buyouts, the most famous of which was for underwear maker Fruit of the Loom in 1985. He built its sales to $2 billion but was forced to resign in 1999 as the company headed for bankruptcy. A New York Times account cited a 1998 class-action lawsuit that charged Farley with selling $39 million in stock just before reporting a huge loss that some blamed on him. He also defaulted on $65 million in loans that Fruit of the Loom had guaranteed, court records say.
Farley today is battling a lawsuit in Chicago in which the Pension Benefit Guaranty Corp. accuses him of fraudulently transferring property to himself so it could not be used to satisfy his debt to a pension fund at one of his companies.
Akin to those earlier allegations, the former Zrii insiders say Farley engaged in self-dealing at the Draper-based company, drained a $1.5 million line of credit, took a personal loan of $500,000 from company funds, and spent monies from Zrii and the charitable Zrii Foundation on personal items, including landscaping for a home in Maine. At the same time, the company ran up $7.5 million in liabilities to vendors and others, they allege.
Perhaps the most serious allegation is that while the company was collecting sales taxes from its independent distributors, it had not registered in states where the sales were made and did not remit that money to the states.
Former Vice President of Finance Bart Graser has said in one of two affidavits filed with the Utah Attorney General's Office that the company through Feb. 2 had a sales tax liability of $2.7 million.
"The company deposited the funds it received as sales tax into its regular account, along with all other sales revenue, and used those funds to finance its operating needs," Graser said. He also said that Farley refused to authorize funding to pay off the tax debt when presented with a plan.
Among other allegations is that Farley approved company contributions to the congressional campaign of Rep. Jason Chaffetz that were expensed on company's books as office supplies, a violation of federal election laws. Federal Election Commission records show that former Vice President of Sales Clint McKinlay contributed $3,200 to the campaign of Chaffetz.
McKinlay, one of those who resigned, said he made the contributions using his own American Express card, which also was used for company expenses. He declined to say whether he had been reimbursed for the political contributions.
The effort to buy the company from Farley began, according to former independent distributor Keith Fitzgerald, after Farley approached him to help buy a $3 million to $4 million corporate jet for Zrii. As a purchase got close, Fitzgerald said he was called by former General Manager Kirby Zenger and told that not only was there was no money to do so, but that the company was practically insolvent.
"I was shocked," said Fitzgerald, who also puts together private-equity deals.
That's when Fitzgerald, Zenger and others created a company to buy Zrii. They were prepared to offer Farley a $500,000 down payment, then at least $300,000 a year for five years. The now ex-Zrii officials and distributors believe the offer would be generous, given the company's financial state.
Farley never considered the offer and has moved to assure remaining distributors the company is on sound footing.
