Former Gearbox employee (allegedly) provides "proof" that Randy Pitchford diverted funds to a personal company

[LudicrousSpeed]

Thanks a lot for this, but I'm still not sure I'm totally confident I'm understanding it properly.

So the value of the payment that 2K owes to Gearbox is variable based on performance milestones. Alright, that's not unusual. Gearbox (Randy) receives the payment, but before it's actually earned, at which point they're now holding money that still belongs to 2K. So Randy shifted that money to a separate account while it's still only in Gearbox's holding, at which point it becomes embezzlement because he's converting it to his money instead of 2K money that he simply has been given control over?

If that's the case, would it have been possible for Randy to have safely received the money and moved it to the same place after Borderlands 3 (or whatever specific title is the subject of the lawsuit)'s performance had hit the particular targets and the money had been thereby earned by Gearbox?

Click to shrink...

So, I'm going to skip addressing elements of this, because a part of the misunderstanding here starts from this:

Gearbox (Randy) receives the payment

Click to shrink...

Randy Pitchford is not the 100% owner of Gearbox. The ownership structure is discussed in the document, and as of February, it's 50% Pitchford and 50% Stephen Bahl, the CFO of the company who got the other $3m of the $15m recoupable bonus.

The next bits have me going back to old college classes about business structures and such, and so I'm going to say up front, I am not an expert in this. Fair warning.

Less about "it's flat illegal" and more "it's stupid" is that treating Randy and Gearbox as if they were one in the same is that it does something called "piercing the corporate veil". The benefit of being a corporation is that you create a legally distinct entity for your business, such that if, say, the company goes bankrupt, or someone sues the company and leaves the company with a giant debt, those debts don't become the owner's personal debts after the company is closed. To keep these benefits, you have to maintain a separation.

Where this can create legal trouble for Pitchford, however, is that managers of a corporation have fiduciary duty to the corporation. This means that they are required to act in the best interest of the company. And one of the ways to breach your fiduciary duty is by "self-dealing", using your position within the company to further your own personal interest instead of the interest of the company. Like if, say, you used your position inside a game developer to divert royalty payments from the company's accounts to your own personal accounts.

Something that makes all this uglier comes from this tweet from David Eddings, a former Gearbox employee and the voice of Claptrap until recently.



Note how there's mention that the employees have royalty shares? When Pitchford gets 2K to pay out $12m to his side business that gets to count from the 2K end as royalties, it means that money doesn't go into the pool to be shared by Gearbox's employees. Basically, it means that Randy's skimming $12m off the top before the employees get anything.

 

[.exe]

The plot thickens.

 

[Vibranium]

Gearbox could be in better shape if Randy was snapped out of the industry. It might cost their independence which would suck but from a PR and employee standpoint it would be a net positive.

If they sold to a solid publisher they'd be in a good place.

 

[Rahfiki]

Jesus the Randy hole only goes deeper

 

[SCB360]

Gearbox could be in better shape if Randy was snapped out of the industry. It might cost their independence which would suck but from a PR and employee standpoint it would be a net positive.

If they sold to a solid publisher they'd be in a good place.

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Like Microsoft perhaps?

 

[Illusion]

Is this it? Will Randy finally get caught?

... I swear reading a thread on Randy is like reading a Trump thread in Etctera.

 

[TheOldestGamer]

This guy sounds like a total douche. Hope he gets forced out. Theres been too much BS from him over the years of running gearbox.

 

[entremet]

Lol I hope Randy gets burned in this lawsuit and gets tossed out of Gearbox or forced to step down.

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He owns the company. Can't boot the owner. This ain't the NBA.

 

[Dinobot]

He owns the company. Can't boot the owner. This ain't the NBA.

Click to shrink...

If they're a publicly traded company they can. If it's private they're SOL.

 

[entremet]

If they're a publicly traded company they can. If it's private they're SOL.

Click to shrink...

They're private.

 

[etrain911]

The title of the thread reads like these allegations are highly suspect, but they seem fairly solid to me and corroborate what people like David Eddings have said in the past.

 

[Leviathan]

Mods need to remove the "allegedly" and the quotations around proof because that's not how proof or allegations work in a legal context. Just say they provided evidence.

 

[Gestault]

I'm picky about headline formatting, but the qualifications are rough enough here that I could understand people thinking it was editorially defending Pitchford. And just FYI, parentheticals usually refer to the prior statement, not the subsequent one; So someone might think it was in question that the person was even a former employee. If "allegedly" is necessary for sentence accuracy, you wouldn't use the parenthesis at all. And documents submitted as part of ongoing litigation aren't inherently biased; The whole point of documentation is that unless there's the accusation of it being falsified, it's factual. A party can easily submit documentation (often even testimony) on their own behalf and not be presumed to be biased, in a legally significant sense.

Something more along these lines seems accurate without being overwrought:

"New court filings from former Gearbox employee purportedly document Randy Pitchford diverting funds to a personal company"

 

[L Thammy]

So, I'm going to skip addressing elements of this, because a part of the misunderstanding here starts from this:



Randy Pitchford is not the 100% owner of Gearbox. The ownership structure is discussed in the document, and as of February, it's 50% Pitchford and 50% Stephen Bahl, the CFO of the company who got the other $3m of the $15m recoupable bonus.

The next bits have me going back to old college classes about business structures and such, and so I'm going to say up front, I am not an expert in this. Fair warning.

Less about "it's flat illegal" and more "it's stupid" is that treating Randy and Gearbox as if they were one in the same is that it does something called "piercing the corporate veil". The benefit of being a corporation is that you create a legally distinct entity for your business, such that if, say, the company goes bankrupt, or someone sues the company and leaves the company with a giant debt, those debts don't become the owner's personal debts after the company is closed. To keep these benefits, you have to maintain a separation.

Where this can create legal trouble for Pitchford, however, is that managers of a corporation have fiduciary duty to the corporation. This means that they are required to act in the best interest of the company. And one of the ways to breach your fiduciary duty is by "self-dealing", using your position within the company to further your own personal interest instead of the interest of the company. Like if, say, you used your position inside a game developer to divert royalty payments from the company's accounts to your own personal accounts.

Something that makes all this uglier comes from this tweet from David Eddings, a former Gearbox employee and the voice of Claptrap until recently.



Note how there's mention that the employees have royalty shares? When Pitchford gets 2K to pay out $12m to his side business that gets to count from the 2K end as royalties, it means that money doesn't go into the pool to be shared by Gearbox's employees. Basically, it means that Randy's skimming $12m off the top before the employees get anything.

Click to shrink...

Thanks a lot for this. I was running on the assumption that the company wasn't actually incorporated and Randy was the sole owner, so this makes a lot more sense. Looking around online, I'm seeing some reference to Gearbox as an LLC, but it seems like piercing the veil issue would also affect the limited liability granted there.

 

[Richietto]

Randy is a dirt bag.

 

[JustinH]

Like Microsoft perhaps?

Click to shrink...

Would this be possible when the company is mostly owned by seemingly just these two people? (or am I misunderstanding this?)

It does remind me of this I noticed the other day though...

Yeah, I'm of the mind that thinks Gearbox would be better off if they were just free from this bullshit, and this guy.
How much does 2K actually own of Gearbox's stuff?

Thanks to the people in the thread explaining it out for others too.

 

[shimon]

 

[MarioW]

Thanks a lot for this, but I'm still not sure I'm totally confident I'm understanding it properly.

So the value of the payment that 2K owes to Gearbox is variable based on performance milestones. Alright, that's not unusual. Gearbox (Randy) receives the payment, but before it's actually earned, at which point they're now holding money that still belongs to 2K. So Randy shifted that money to a separate account while it's still only in Gearbox's holding, at which point it becomes embezzlement because he's converting it to his money instead of 2K money that he simply has been given control over?

If that's the case, would it have been possible for Randy to have safely received the money and moved it to the same place after Borderlands 3 (or whatever specific title is the subject of the lawsuit)'s performance had hit the particular targets and the money had been thereby earned by Gearbox?

Additionally, at any point, did he have control over 2K money beyond what the absolute minimum that would be expected to be earned if the project was completed? If so, what would be the purpose of allowing that if it opens up the risk that more money would be spent than ultimately earned?

Click to shrink...

Recoupable advances on royalties are "earned" in the sense that they are typically a minimum guaranteed payment. Being recoupable means that the publisher recoups that payment out of the sales of the game before paying any further royalties on to the developer. If the sales aren't sufficient for the publisher to recoup the advance, then the developer doesn't have to pay anything they have received back, the publisher just has to take that hit.

So, when 2k pays a recoupable advance to Gearbox or Randy's private company, it isn't 2K's money any more.

There are actually very few contractual instances where a publisher can (attempt to) pull back money from a developer, and those are usually limited to instances where the developer majorly has breached/failed something particular. Most publishers don't even have such clauses in their contracts at all (in all the contracts I've done/seen, only Ubisoft has such legal provisions to actually try and get money back). Most publishing contracts are limited to holding back current and future payments in response to a (claimed) contractual breach or failed milestone approval.

 

[LudicrousSpeed]

Yeah, recoupable bonuses/advances are usually cast in the light of a minimum guarantee. Like, you're going to get paid royalties, but we'll make sure that you get paid at least $x from this deal.

If you ever read up on how recording contracts work, recoupable advances are basically the core mechanism, with the ugly side of often making artists pay for album production out of those advances.