It's been a bumpy ride for MGA Entertainment Inc. Chief Executive Isaac Larian.
The 55-year-old entrepreneur was hit last week with a federal judge's ruling that gives control of his company to a temporary receiver.
It's the latest blow to Larian in his long-running war with Mattel Inc. over ownership of MGA's Bratz dolls. Mattel seems to be winning at every turn.
The receiver, Beverly Hills attorney Patrick Fraioli, replaces the MGA board and has sweeping authority to sell company assets, investigate business transactions or even recommend that the company file for bankruptcy.
"He is charged with operating the business and to preserve, or enhance, the value of the assets," said Stephen Donell, an L.A.-based court-appointed receiver who is not involved in the case. "It's different than a situation where a receiver may be appointed to liquidate the company."
Larian said he would appeal the receivership ruling, according to a news report.
It remains unclear how long Fraioli will oversee the Bratz maker, and Larian could regain control May 18. That's when U.S. District Court Judge Stephen Larson is expected to decide whether to make the receivership permanent.
If the judge names Fraioli permanent receiver, the receiver could remain in that role until the legal tussle over the Bratz property concludes. After that, Larian would presumably regain control of MGA minus the Bratz doll line unless an appeal is successful.
"From the standpoint of MGA, it is very scary," said Dan Schechter, a Loyola Law School professor who is not involved in the case. "The judge shows every indication that he will put a permanent receiver in place."
At the moment, toy industry insiders said Larian, who has expressed confidence over the course of the litigation that he would prevail, is likely frustrated over losing his chief executive powers.
"This is new to Isaac, being on the losing side," said Jim Silver, an industry expert who has known Larian for 14 years. "He's not running his company anymore, and I'm sure he is looking at all avenues of what he can do."
In the meantime, Larson's order directs Fraioli to preserve and maximize the profits of MGA and its entities, including the company's international operations, and the Bratz assets that set off the dispute.
Fraioli declined Business Journal requests for comment, citing the judge's demand for discretion. However, according to people familiar with the situation, Fraioli is holding meetings with Larian and other MGA executives at the company's Van Nuys headquarters, determining the status of the company's finances, understanding how the Bratz products figure into MGA's bottom line, and developing an overall picture of the company's business structure. Fraioli is also talking to MGA's suppliers and distributors to explain his role as temporary receiver and calm any fears that the company may be shutting down.
The decision to put MGA into receivership was issued in a 25-page ruling issued by Larson on April 27. Larson also denied MGA's request to reduce an award of $100 million in damages to Mattel.
A Riverside federal jury awarded the El Segundo toymaker the $100 million sum in August, after finding that a Mattel designer created the Bratz name and character while working for the company and improperly took the idea to MGA.
Larson's most recent ruling also forbids MGA from manufacturing, marketing or selling Bratz products. That means a previous ruling, which had been stayed at MGA's request, is now in force. The receiver can sell Bratz products, however, if such sales will help Mattel collect what it's owed. Retailers can continue to sell MGA-manufactured Bratz products through the holiday season of this year, but in January 2010 they will have to return any unsold inventory.
A Mattel spokeswoman declined to comment for this article. An MGA spokesperson did not return requests for comment nor did Larian.
Peaks and valleys
In 1982, Larian created MGA's predecessor, ABC International Traders Inc., an electronics importer, and it filed for Chapter 11 bankruptcy in 1997, but later re-emerged as a toy company.
The Bratz dolls, with their pouty lips and provocative clothing, brought Larian success. At its peak in 2005, the line generated an estimated $2 billion in annual sales making it MGA's monster product. The company's other lines include Little Tikes and Baby Born, a baby doll line.
But in 2004, Mattel filed a lawsuit claiming that toy designer Carter Bryant drew the dolls while he was still a Mattel employee and argued that the line was Mattel's property as a result.
A federal jury in August agreed with Mattel, awarding the company ownership of the Bratz intellectual property and $100 million in damages. Mattel was awarded ownership of the dolls after the 2009 holiday season to give retailers assurance that they could purchase Bratz products.
In the past several months, Mattel raised concerns that Larian had been trying to shield MGA's assets from creditors. Larson appointed Fraioli as temporary receiver in response to Mattel's allegations. In his order, Larson wrote "good cause exists to believe that the MGA parties ... are engaging in, or about to engage in transactions, acts, practices and courses of businesses that constitute fraudulent transfers of assets and violations of Mattel's ownership."
Mattel has argued that MGA's largest creditor, Omni 808 Investors LLC, appears to be first in line to claim its assets, jeopardizing the $100 million judgment and the right to the Bratz doll line. Mattel also claims that Omni, which is headed by Beverly Hills investor Neil Kadisha, could be a friendly debt holder because it is being funded by Larian. Larson's ruling restrains Kadisha from foreclosing on the lien.
In response to Mattel's concerns, Larson asked temporary receiver Fraioli to investigate the company's finances, in particular transfers and transactions made by MGA after July 2008, which was during the trial. Many of the transactions described in Mattel's allegations took place around that time.
But the receiver's role doesn't stop at financial inquiry and oversight. Fraioli also has the power to hire employees. He can even replace Larian and other MGA executives, or hire people to oversee current MGA management. Larson gave Fraioli permission to retain accountants, attorneys and consultants to help run the company.
Meanwhile, attorneys for Mattel and MGA are preparing for a second phase of the case over claims that MGA stole Mattel's trade secrets by hiring executives away and pumping them for propriety information. MGA has countersued, alleging that Mattel infringed on its property by making a version of the Bratz doll, the My Scene fashion doll. That claim would only be valid pending a successful appeal of the ruling that the Bratz line is no longer MGA property.
Once the legal battle between the toy rivals ends, Silver, the toy industry consultant who is close to Larian, said he expects the MGA executive to launch another doll product.
"I would expect him to do a fashion doll line," Silver said. "He's going to want to compete against Barbie. Sometimes in business it's personal, and this is personal."
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