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How will the Guggenheim investigation and lawsuit affect the Dodgers?

MLB is repeating its errors of the McCourt Era.

MLB: World Series-Houston Astros at Los Angeles Dodgers Jayne Kamin-Oncea-USA TODAY Sports

Remember the days of Frank McCourt? A heated divorce proceedings as well as allegations of siphoning funds for personal use, the Dodgers went bankrupt, had their finances managed by MLB, and then were sold to a Guggenheim Partners group led by CEO Mark Walter and Magic Johnson.

At the time of this whole debacle, ESPN writer Gene Wojciechowski made a prescient comment:

“One person with intimate knowledge of the 2004 negotiations and MLB vote says McCourt’s financial bona fides were in good order at the time, and that no special allowances were made relative to leverage issues... But [Bud] Selig and the owners knew that the sellers, FOX, desperately wanted to unload the Dodgers. They knew the mega-media company was willing to float McCourt a $145 million loan to complete the deal... Who’s kidding who? FOX was MLB’s national TV rights holder and Selig and the owners were trying to do it a business favor. So everybody drew smiley faces on the McCourts’ spread sheets and ledgers and hoped for the best.”

Now, fast forward to the sale to Walter. You may be telling yourself that it’s impossible for MLB to make the same mistake again—getting desperate for a good sale and overlooking the financials—but similar concerns swirled around Walter, a relative unknown who suddenly came up with the exact number, in cash. Here’s an interesting tidbit from LA Weekly in 2015:

“Guggenheim Partners had quietly become a major investment adviser, managing a pool of $125 billion. But that was other people’s money. How could Walter personally afford a $2 billion franchise — three times what anyone had ever paid for a baseball team? Guggenheim owned three insurance companies: Security Benefit Life, EquiTrust Life Insurance Company and Guggenheim Life and Annuity. Those insurers held assets to pay policyholder claims, some of which would go to the Dodgers purchase... The amount of insurance money in the deal has proved difficult to pin down.”

Some did express concern about the apparent shadiness, but not enough to actually stop the sale:

“When the deal was announced, Major League Baseball owners were astonished at the sale price — and concerned. On a conference call, reported by ESPN, some expressed reservations about the source of Walter’s cash. They worried that using any policyholder funds would invite scrutiny from insurance regulators.”

The reason for this article was because a lawsuit popped up in February of 2014 and was mysteriously rescinded after one day, and it alleges that they “took a page out of the Enron playbook, creating a fraudulent scheme through complicated accounting machinations that gave the false appearance of financial strength and stability... it committed to sell Guggenheim Insurers’ annuity products to unwitting annuity purchasers, many of whom are elderly, while concealing the adverse effects of their depletion of the funds needed to satisfy the Guggenheim Insurers’ long-term obligations to these annuity purchasers.”

This lawsuit has subsequently re-emerged in May, and its allegations would be nothing short of explosive if true (Obviously they argue the claims are “without merit”). It alleges that Guggenheim used Security Benefit Life to deceive their customers and investors about risky assets, and siphoned away the funds to pay for the Dodgers.

And let’s not get cute here, because this wouldn’t be the first time allegations have surfaced against Guggenheim.

In 2013, the SEC investigated them regarding a man named Michael Milken, otherwise known as the “junk bond king”. Guggenheim was fined $20 million by the SEC for “breach[ing] its fiduciary duty by failing to disclose that then-executive Todd Boehly took a $50m loan from Michael Milken... who was then allowed to invest in a Guggenheim-led buyout on different terms from other investors.” This ultimately led to an executive revolt inside the firm, and accusations of poor corporate culture and declining assets led many to leave.

It was then compounded by yet another SEC investigation this year, “investigating the purchases of three California mansions as well as loans to a now-bankrupt retailer involving Guggenheim Partners... The SEC’s latest enforcement investigation came after the agency received a whistleblower complaint in 2016 that highlighted an alleged culture of self-dealing at Guggenheim.”

Where does this leave the baseball world? It leaves them, at the most charitable, with an owner with possibly shaky financials and an SEC investigation, as well allegations they were using falsely-boosted assets to acquire the cash for the sale. I don’t think we’ve seen a fraudulent sale in baseball before, but if that was actually the case, it would make the McCourt ordeal look like kids fighting in the sand—this would bring damages and further debt on to a franchise that was supposedly free of it and its earlier era’s.

This is ultimately one of the side effects of the ever-increasing values of franchises. As teams becomes so expensive that a single person cannot afford it, ownership and asset management groups become appealing.

This is what made the Marlins deal a reality, another team saddled with debt, and now they have an ownership group led by another asset management mogul. If the last two decades have taught us anything, it’s that the finance sector’s dealings, if not inspected with a loupe, resemble nothing more than a house of cards using false value against what is ostensibly a real, human value in a physical team with a physical stadium, and physical fans—no financial games involved.

It’s hard to say what the conclusion of the Guggenheim investigation/lawsuit will be, but you can even see problems with them just starting to comply with debt service rules after a five-year waiver. A team in debt led by an asset management group with faltering confidence is one thing, but one that made an allegedly fraudulent sale in the first place? That would be one of the most seismic ownership events in the sport’s history, so keep this story on your radar.