WWE, Toy Firm Going to the Mat

Back in 1998, World Wrestling Entertainment Inc., the glitzy promoter of spandex-clad warriors, said it was entering an “exciting new phase.”

It had signed a deal for Malibu toy company Jakks Pacific Inc. and Calabasas Hills video game maker THQ Inc. to jointly produce video games based on WWE’s star wrestlers and wild matches. Jakks was an “obvious choice,” WWE’s then-licensing chief James Bell said at the time, because it already was licensed to sell WWE toy action figures.

Now WWE alleges that Jakks was an obvious choice for another reason: Jakks had paid $100,000 in bribes to snare the video game deal -- with Bell collecting more than half the loot -- according to a lawsuit WWE filed in federal court in New York this month. In the suit, which seeks unspecified damages, WWE claims the alleged bribery scheme kept others from bidding on the license and so robbed the wrestling company of the chance of getting the best possible terms.

Jakks executives deny any wrongdoing, but the allegations cast a shadow over the toy maker, whose stock lost nearly half its value in the two days after WWE’s suit was filed.

The wrestling firm, wanting Jakks tossed out of the ring, is asking the court to void the WWE licensing pacts that have helped Jakks grow rapidly.

The suit “has clearly hurt the perception of the company in the eyes of investors and the rest of the industry,” said Sean McGowan, a toy analyst with investment firm Harris Nesbitt Corp.

It could end up hurting more than Jakks too, because Bell’s lawyer, John Williams, is calling the whole licensing business into question. Although conceding that his client is not innocent, Williams claims that trading under-the-table cash gifts for merchandise licensing deals is standard practice in the industry.

“I don’t think Mr. Bell is here to pretend that he didn’t do anything that was wrong, but I would not draw the conclusion that he fell below the industry standard,” Williams said. “Anybody who thinks this is an unusual or unique case is naive, in terms of the way business is done in that industry.”

Jakks specializes in modestly priced toys sold mainly by mass merchandisers. Using acquisitions and a deft prescience of toy trends, it has become a major player in the industry since it was started in 1995 by Chief Executive Jack Friedman and President Stephen Berman, both former THQ executives.

The company also has been tinged with controversy in the last three years, and its stock has been on a roller-coaster ride. Jakks stunned Wall Street last year, for example, by unexpectedly scaling back its growth projections shortly after selling debt securities to the market. In addition, its executives’ compensation has been assailed as unusually high relative to Jakks’ size and performance.

Friedman and Berman are defendants in the WWE suit, as is Jakks’ chief financial officer, Joel Bennett, and Bell, whom WWE fired four years ago for what the suit says were reasons unrelated to the alleged bribery scheme.

Also named as a defendant is licensing agent Stanley Shenker, whose breach-of-contract lawsuit against WWE in 2000 was what planted the seeds of the case against Jakks. WWE said it stopped doing business with Shenker that year because of an unspecified “change in business direction.”

Jakks and the three company executives said they would be “completely vindicated” of charges brought by WWE, which is based in Stamford, Conn. Shenker and his lawyer didn’t return calls seeking comment.

WWE -- formerly the World Wrestling Federation -- is a promotional and media company headed by Chairman Vince McMahon and his wife, Linda McMahon, the chief executive. Company executives declined to elaborate on the suit against Jakks.

In the suit, the wrestling company says it inked the video game deal with Jakks and THQ on the recommendation of Bell and Shenker, who at the time was working for WWE under contract. What WWE didn’t know, the suit alleges, was that Shenker was also working as an outside agent for Jakks -- in effect getting paid by both sides as the wrestling outfit and the toy company negotiated not only the video game license but also changes to Jakks’ license to sell the wrestling action figures.

The video game enterprise was a success. Sales of WWE games -- with titles like “Wrestlemania” and “Smackdown! Shut Your Mouth” -- provided a lucrative source of revenue for all three companies. But WWE might well have pocketed more, the suit says, if Jakks, Bell and Shenker hadn’t allegedly been in cahoots. “WWE was deprived of the benefit of competition,” the suit says.

According to the wrestling company, it uncovered a rash of problems with its various licenses by Shenker and Bell as Shenker’s breach-of-contract case made its way through Connecticut state court.

The judge in the case, Chase T. Rogers, agreed. She ruled that Shenker and Bell split more than $515,000 in commissions on WWE licenses with more than a dozen companies other than Jakks in the late-1990s.

She also said “there is no dispute that Bell accepted two $20,000 payments from Shenker ... of monies originating from Jakks” and that the payments “occurred during the selection of WWE’s video game license.”

Bell claimed the $40,000 was a “finder’s fee” Jakks paid them for a separate license, Rogers noted. WWE alleges in its suit that it was part of the bribery scheme to secure the WWE video game license -- and that Jakks paid an additional $20,000 bribe to Bell, through Shenker, after the license was signed.

The judge threw out Shenker’s breach-of-contract case against WWE, saying the plaintiff had “deliberately and repeatedly” lied during court proceedings and was “by his own admission,” a “serial perjurer.” And she ordered Bell to start transferring assets, totaling several hundred thousand dollars so far, to an escrow account for WWE in anticipation of a judgment against him, Williams said.

U.S. Atty. Kevin O’Connor in Connecticut reportedly is investigating possible criminal violations in connection with that suit. O’Connor spokesman Tom Carson said he couldn’t confirm or deny that a probe had been launched or that a grand jury had been impaneled.

For now, the dispute has the potential to be an earnings smackdown. In a conference call with analysts Oct. 19 to discuss Jakks’ third-quarter results, Friedman and Berman declined to comment when they were asked to describe how the WWE case might affect Jakks’ sales.

In 2003, Jakks’ profit from its video game joint venture with THQ was $7.4 million, or 30% of Jakks’ entire pretax profit for the year, according to financial statements. The venture has generated more than $42 million for Jakks since 1999. Jakks doesn’t break out results for its WWE action-figure line.

Because the rest of Jakks’ business is growing rapidly, the combined income from the WWE video game and action-figure licenses will drop to about 15% to 20% of Jakks’ total earnings this year, said analyst Arvind Bhatia of Southwest Securities Inc. He added that the plunge in Jakks’ stock after the WWE’s suit showed “the market already has assumed there is a possibility that Jakks might lose the licenses entirely.” As for WWE, it receives about $13 million a year in royalties for its video games and action figures from Jakks and THQ. That came to 3.5% of total revenue of $375 million in its fiscal year ended April 30.

THQ doesn’t break out sales of its WWE games, which are among its bestsellers. It does break out its payments to Jakks, however, which totaled $9.7 million in THQ’s fiscal year ended March 31, or 1.5% of THQ’s total sales of $640.8 million.

THQ said it was “not directly accused” of doing anything wrong in the WWE suit, and that it wasn’t aware of any wrongdoing by the others.

After WWE filed its suit, Jakks’ stock plunged from $24.15 a share to $12.96 in two days. It has since recovered somewhat, closing Friday at $15.76.

The litigation isn’t expected to interrupt holiday shipments of WWE video games or action figures this year. In discussing Jakks’ outlook for the Christmas season, Berman said last week that Jakks thought its line of WWE merchandise would “perform very well.”

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Staff writer Melinda Fulmer contributed to this report.