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December 8, 2010

Prospectus Hit and Run

McCourting Disaster

by Jay Jaffe

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Who owns the Dodgers? That question has hung like a storm cloud over the franchise for more than a year, ever since news of the separation between Frank and Jamie McCourt, respectively the Dodgers' chairman and chief executive officer, became public in mid-October 2009. On Tuesday, Los Angeles Superior Court Judge Scott Gordon ruled that both of the now-divorced parties do, throwing out a 2004 post-nuptial marital property agreement (MPA) which placed the team in Frank's name and the couple's seven luxury homes in Jamie's. Far from ending what's been a surreal 14-month saga, the decision threatens to prolong the agony for the Dodgers and their fans.

Questions about the McCourts' financial viability have loomed ever since their highly-leveraged purchase of the Dodgers, Dodger Stadium and the adjoining real estate from News Corporation back in 2004 at a cost of $430 million. Two months after they were approved as owners, the couple signed the MPA with the intent of shielding Jamie from creditors in case the Dodgers lost their value. As the divorce case neared trial, lawyers discovered that only three of the six signed copies of the MPA listed the Dodgers solely as his property. The other three copies did not. Ruh-roh.

Larry Silverstein, the Boston-based attorney who drafted the agreement, testified that the latter trio of copies were due to a clerical error, then admitted that he changed them to match the others without informing Jamie. Jamie, who holds an MBA from MIT's Sloan School of Management and a law degree from the University of Maryland, and who was a practicing family law attorney before she came to work for Frank, testified that she never actually read the document. Can't anyone here play this game?

That pair of unbelievable coincidences is practically par for the course in the wake of the startling revelations that have emerged in the divorce proceedings. Among them:

• The McCourts' fortune has been estimated at $1.2 billion. Frank McCourt draws $5 million a year in salary as the Dodgers' chairman. Jamie earned $2 million a year as the Dodgers' CEO, a job from which Frank fired her in November 2009.

• Frank's $5 million a year from the Dodgers is capped, but he draws additional salary from a slush fund called Blue Land Co., to which the Dodgers pay $14 million in rent.

• Drew and Travis McCourt, two of the four sons from the couple's 30-year marriage, are on the Dodger payroll for a reported $600,000, yet they're not listed in the staff directory, and their parents have not adequately clarified their official duties.

• Frank has not paid a cent in state or federal taxes since 2004.

• Jamie allegedly had an affair with Jeff Fuller, her limo driver and bodyguard, whom she took on a two-and-a-half week vacation in France at team expense.

• Jamie requested $988,845 a month in spousal support to pay the mortgages of the seven homes as well as a piece of property in Cabo San Lucas, Mexico. Frank offered $150,000 a month. Judge Gordon awarded Jamie $637,159 a month in temporary spousal support, and ordered that the Mexican property be sold.

• The McCourts' lavish expenditures included maintaining a private jet at a cost of $2 million a year, and a hairstylist who made house calls five times a week at $150,000 a year.

• The McCourts kept a 71-year-old Russian physicist and spiritual healer named Vladimir Shpunt on the payroll to send positive vibes from his suburban Boston base 3,000 miles away to "tap into the V energy." Shpunt received a stipend plus six-figure bonuses for the Dodgers making the playoffs, and at least one of the McCourts believed he'd been responsible for such moments as Steve Finley's 2004 division-clinching home run.

• The cost of the legal proceedings in the divorce case so far is upward of $20 million.

The hits keep coming. Talk about lifestyles of the rich and infamous.

The Dodgers rank among baseball's most valuable properties. According to Forbes, they're estimated to be worth $727 million, the fourth-highest valuation of any team behind the Yankees, Red Sox, and Mets. Frank's legal team estimated the value of the franchise at $800 million in court documents; Jamie's side offered an even higher figure, $1.1 billion, which takes into account future broadcasting and stadium land development.

By Forbes' estimate, the team ranked fourth in 2009 in operating income behind only the Marlins, Red Sox, and Nationals. In 2010, they drew 3,562,320 in paid attendance, more than any team except the Phillies and Yankees. Yet despite those figures, the team is $433 million in debt, and Frank has struggled to find further financing.

The franchise's robust financial footing and the owners' excessive non-baseball spending, the team has been run on a relatively tight budget. Their Opening Day payroll of $95.4 million ranked 11th in the majors, $5.1 million less than in 2009, and $23.2 million less than in 2008. Factoring in bonuses and deferred money, the team averaged $108.1 million in year-end payrolls from 2004 through 2009, which ranks fifth, but even so, their spending, which is 125 percent of the MLB average, is down drastically from the News Corp era, when they spent at a clip that was 149 percent of average.

The Dodgers reached the playoffs four times in the McCourts' first six years of ownership on that budget in part because of the team's thriving scouting and player development system, headed up by Logan White, who since 2002 has drafted Chad Billingsley, Clayton Kershaw, Jonathan Broxton, Russell Martin, James Loney, and Matt Kemp, all key components in the team's success. Their cheap production offset some of general manager Ned Colletti's more boneheaded free-agent signings; most notably, the Dodgers paid injured Jason Schmidt $47 million over three years to throw a grand total of 43 1/3 innings, signed Andruw Jones to a two-year, $36.2 million deal only to release him after he hit .158/.256/.249 with three homers, and signed Juan Pierre to a five-year, $44 million deal only to bench him in mid-2008 upon the arrival of Manny Ramirez. They then shipped Ramirez to the White Sox last winter while picking up $10.5 million of his remaining $18.5 million in salary.

At the same time, the Dodgers have depleted their farm system, making in-season trades in which they surrendered higher-value prospects in order to remain payroll-neutral, a philosophy which in recent years has cost them top catching prospect Carlos Santana and third baseman Josh Bell, among others. They bypassed the opportunity to offer arbitration to two Type-A free agents who were certain to depart, Randy Wolf and Orlando Hudson, thus foregoing two first-round draft picks and two supplemental round picks and avoiding the signing bonuses that went with them. According to Baseball America, they paid a major-league low $8.5 million in signing bonuses in 2008 and 2009.

All of the key aforementioned homegrown players have now reached the arbitration-eligible phase of their careers and are taking up an increasing chunk of the team's payroll at a time when the Dodgers have few in-house alternatives to replace them. Many from that group—Martin, Kemp, Loney, and Broxton in particular—had off years in 2010 as the Dodgers slumped to 80-82, their first losing season since 2005 and just their second since 1999. Coming into the year, manager Joe Torre, who guided the Dodgers to back-to-back NLCS appearances, initially sought a contract extension to take him through 2011, but the craziness around the team soon led him to suspend talks. Despite a slow start, the Dodgers finished the first half 49-40, two games behind the Padres in the NL West, tied with Colorado for the wild-card lead. Amid a 5-13 start to the second half which bumped them down into fourth place, an undeterred Colletti dealt prospects as well as youngsters Blake DeWitt and James McDonald around the July 31 deadline for Scott Podsednik, Octavio Dotel, Ted Lilly, and Ryan Theriot, a set of moves that was quite obviously too little, too late. As the team sputtered to a 31-43 record in the second half, Colletti reversed course and waived Manny Ramirez, who departed for the White Sox on August 30, thus pulling the plug on the offense. Soon afterward, an exasperated Torre, announced his retirement.

Colletti has reportedly been given another $95 million Opening Day payroll target. He's made some significant moves to shore up the team's rotation, bringing back Lilly (three years, $33 million), Hiroki Kuroda (one year, $12 million), 2009 deadline acquisition Jon Garland (one year, $5 million), and even Vicente Padilla as a swingman for $2 million. Yet at the same time, he signed a pair of low-OBP gray-hairs for the lineup; 32-year-old Juan Uribe received a three-year, $21 million deal to play second base, and 35-year-old Rod Barajas received $3.25 million for one year after Colletti chose to non-tender Martin, who suffered a season-ending hip injury back in August and had yet to resume baseball activities. Martin earned $5.05 million in salary last year, and the Dodgers feared that the two-time All-Star could earn significantly more via arbitration. In an agonizing series of events, Colletti parted ways with a catcher who was once seen as a franchise cornerstone over a difference between the two sides of just $800,000 in guaranteed money; the Dodgers offered a deal worth $4.2 million in base salary with incentives that could take him to $6 million, while Martin's camp countered with $5 million plus incentives that would reach that same figure. At least the McCourt kids are getting paid, and their parents are well-coiffed, right?

In Tuesday's ruling Judge Gordon ruled that the MPA was not enforceable because it did not conform to California law, that there was insufficient evidence to indicate which of the two versions of the agreement represented the actual intent of the parties, and that neither McCourt's explanation about the details of the agreement was believable: "The testimony of both parties as to their lack of knowledge and attention to the details of the MPA is not credible."

The decision makes the team subject to California's community property law, by which both McCourts have equal claim on the team as part of the marital estate; unless one can buy out the interests of the other, the Dodgers could be sold. A similar situation recently occurred in San Diego, where the divorce of Padres owner John Moores forced the sale of the Dodgers' NL West rivals. Such an outcome which would be music to the ears of most Dodger fans, not to mention commissioner Bud Selig and former Dodger owner Peter O'Malley, who called for a sale back in September while saying, "The current Dodger ownership has lost all credibility throughout the city."

 As the great legal scholar Yogi Berra observed, "It ain't over till it's over." Frank is certain to appeal the ruling by claiming that he bought the team with a company he established before marriage. He may also pursue a malpractice case against Bingham McCutchen, the firm that employs Silverstein, who drafted the agreement. Even with this setback, he may have a slightly stronger hand when it comes to retaining the team than his former spouse, given that Selig and MLB's fellow owners would seem to be less likely to approve Jamie in the wake of this unrelenting soap opera. At some point, the politics of franchise ownership will likely come to the fore, and Selig and the owners could reject any potential solution that involves either McCourt. That's the ideal outcome of this mess, but it could take another year, or even longer, to come about. 

Jay Jaffe is an author of Baseball Prospectus. 
Click here to see Jay's other articles. You can contact Jay by clicking here

21 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

baserip4

Why would Selig and his cronies be less likely to approve Jamie? Because soap operas are always the woman's fault?

Dec 08, 2010 08:26 AM
rating: -2
 
BP staff member Jay Jaffe
BP staff

No. I really don't think either McCourt could get approved as a majority owner again given all of the information that's out there about them - their finances and the questions surrounding them.

Dec 08, 2010 09:22 AM
 
HankScorpio

Jay - Congrats on the BBWAA. Long overdue and well deserved.

Dec 08, 2010 08:47 AM
rating: 11
 
BP staff member Jay Jaffe
BP staff

Thank you for the kind words!

Dec 08, 2010 11:27 AM
 
Richie

So why do they seem (even) less likely to approve Jamie? I've found the uber-rich to be quite sexist; are you suggesting that's the case here with the MLB owners? Or are you just inclined to back away from that quick assertion? feel free to, if you want.

Dec 08, 2010 09:44 AM
rating: 0
 
BP staff member Jay Jaffe
BP staff

First, because they've seen the shitshow that the McCourts bring to the table, and second, yes, there's almost certainly some sexism involved in what after all has been referred to over and over as a boys club.

Dec 08, 2010 11:21 AM
 
bflaff1

Gagging at the McCourts using the Dodgers as their own personal ATM.

And Frank doesn't pay any taxes. Thanks, parasite.

Dec 08, 2010 09:44 AM
rating: 8
 
rweiler

And paying 0% in taxes, the Republican party still thinks Frank is paying too much in taxes. We live in a funny world.

Dec 09, 2010 09:18 AM
rating: 3
 
Scooter

"By Forbes' estimate, the team ranked fourth in 2009 in operating income behind only the Marlins, Red Sox, and Nationals."

I am perplexed. Does this statement mean that the Marlins had more income in 2009 than all major league teams,other than possibly the Red Sox and Nationals? This doesn't seem to make sense. What does this statement mean?

Dec 08, 2010 09:55 AM
rating: 0
 
BP staff member Jay Jaffe
BP staff

Yes, because of revenue sharing money.

Operating income is defined in the Forbes rankings as "Earnings before interest, taxes, depreciation and amortization": http://www.forbes.com/lists/2010/33/baseball-valuations-10_The-Business-Of-Baseball_Income.html

On the team pages, it notes that "Revenues and operating income are for 2009 season and include revenue sharing.": http://www.forbes.com/lists/2010/33/baseball-valuations-10_Florida-Marlins_336786.html

Dec 08, 2010 11:19 AM
 
mafrth77

Sure MLB, allow these two wackos to own a franchise! Who cares if they spend millions of the teams operating budget on hairsylists and shadowy, Rasputin-like figures?! Just don't let that horrible Mark Cuban in, he might spend that money on players.

Dec 08, 2010 10:10 AM
rating: 5
 
BP staff member Jay Jaffe
BP staff

Indeed, this is the really galling thing about the ownership process. Not that Mark Cuban has any less interest in turning a profit, or doesn't probably have some strange spending habits of his own given his enormous wealth, but it's all about public perception.

Frank McCourt appears "ownerly," saying very little about anything when he addresses the public, and taking pains to avoid rocking the boat of MLB, in part because he's beholden to Bud for having gotten into the boys club. Cuban, on the other hand, scares the bejesus out of Bud because he's a loose cannon, and hasn't greeted the prospect of ownership with the amount of solemnity and discretion which MLB seems to require.

Dec 08, 2010 11:26 AM
 
Richie

If I'm an owner, darn right I don't want to let in another owner who projects to spend extra resources on acquiring players. Attacks my bottom line in two ways; more competition in my own signing players, and fewer wins (ergo $$$) for me if he's successful.

No point in whining about agents within a system doing exactly what that system rewards. If you care, address the system. However. And good luck with that.

Dec 08, 2010 10:26 AM
rating: 2
 
Schlom

Correct me if I'm wrong but didn't the McCourt's basically buy the Dodgers by using the team as collateral?

Dec 08, 2010 10:31 AM
rating: 0
 
ScottyB

Can't divulge how I know, but I know some about the McCourt purchase of the Dodgers. Basically, they got Fox (who they were buying the team from) to finance much of the deal, in exchange for not creating a regional sports network (like NESN or YES) and in order to thumb their nose at the Disney-owned (at the time) Angels. The McCourts' purchase was the most highly-leveraged ownership deal in pro sports history. If they have even one year of poor revenues, this team is toast, financially (a la tom Hicks and the Rangers).

Dec 08, 2010 11:10 AM
rating: 0
 
Glenn B.

Disney did not own the Angels at the time, having sold the team to Arte Moreno a year before McCourt bought the Dodgers from Newscorp.

Dec 09, 2010 01:58 AM
rating: 0
 
BP staff member Jay Jaffe
BP staff

There's a broken link to the words "parted ways" in the fourth graf from the bottom. In case editorial can't get to it in a timely fashion, the proper link is:

http://espn.go.com/blog/los-angeles/dodger-thoughts/post/_/id/9646/dodgers-martin-appear-to-have-split-over-800000

Dec 08, 2010 11:29 AM
 
TJHelms

And the Giants won the World Series...

Dec 08, 2010 17:25 PM
rating: 0
 
deep64blue

Great article thanks - can you clarify what you were trying to say with this line:-

"The franchise's robust financial footing and the owners' excessive non-baseball spending, the team has been run on a relatively tight budget."

Dec 09, 2010 10:21 AM
rating: 0
 
BP staff member Jay Jaffe
BP staff

I think that sentence was supposed to start with the word "Despite" but it got lost in the editorial process.

Dec 09, 2010 10:32 AM
 
PeterBNYC

Jay: Excellent summing up of a very complex situation. We don't need a legal treatise, we need to know what happens next! The judge's ruling comes out of the "plague on both your houses" bag, and seems to me can only be complied with by selling the team. Since neither McCourt can "afford" to buy it (i.e., no one is going to offer either one of them the deal that News Corp. did), I can't think of a better outcome. One would especially like to see a new owner challenge the non-compete with News Corp. as void under the anti-trust laws! Meanwhile, in a truly unfortunate side effect of this successful surgical procedure, the patient died. That is, I don't see how LAD can avoid being effectively dismantled- the Martin non-tender is the start. I seriously doubt this demolition derby is over for years.

Dec 09, 2010 13:55 PM
rating: 0
 
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