1 | A. The Sellers Misrepresent the Nugget’s Financial Condi 2: 12. After the closing of the transaction, Wolfhound discovered that there were 3 | numerous serious and significant issues associated with SNI’s business practices and operations 4 | of the Nugget, all of which are the responsibility of the Sellers, and for which the Sellers are 5 | contractually required to indemnify Wolfhound. 6 13. For example, SNI’s accounting and finance department for the Nugget did not 7 | have adequate systems, and lacked qualified personnel and internal controls, 8 14. SNI’s gaming operations for the Nugget were deficient as evidenced by a below 9 | market slot hold and a player reinvestment program that over-rewarded customers. 10 15. ‘There were numerous errors in SNI’s financial statements relating to the Nugget, HL | which financial statements were delivered to Wolfhound by the Sellers prior fo the closing, 12] These include but are not limited to: (1) unrecorded workers’ compensation liability; (2) 13 | unrecorded medical insurance liability; (3) inventory write down; and (4) unrecorded utilities 14 | expense/liability. All of these issues were the responsibility of the Sellers both before and after 15. | the closing of the transaetion. 16 16, With respect to SNI’s unrecorded workers’ compensation liability relating to the 17 | Nugget, SNI’s August 31, 2013 internal financial statements reported a workers’ compensation 18] accrual of $141,108, representing the liability for all workers’ compensation claims incurred as 19 | of August 31, 2013 but unpaid as of that date. The balance of this account remained essentially 20. | unchanged at $141,288 as of December 15, 2013, 21 17, However, after the closing, Wolfhound became aware that the unpaid balance of 22. | alll existing worker’s compensation claims relating to the Nugget es of December 31, 2013 was 23. | actually $430,751 and exceeded the amounts reported in both the August 31, 2013 and 24 | December 15, 2013 financial statements by over $289,000, A single claim with a 2002 date of 25 | loss represents $391,571 of the total $430,751 liability. SNI specifically accrued $96,288 for 26 | this claim as of December 15, 2013. 27 18. With respect to unrecorded medical insurance liability at the Nugget, SNI's 28 | August 31, 2613 internal financial statements reported a medical insurance accrual of $396,806, renguortoraee oe. | 13127311 Sate 828 representing the liability for all unpaid medical claims as of that date. ‘The balance of this account decreased to $378,037 as of December 15, 2013. 19, However, $508,978 was paid in 2014 related to claims that acerued in 2013 or earlier. This indicates that SNI°s accrual for unpaid elaims incurred prior to December 31, 2013 was understated by $124,351. 20. With respect to inventory write down, SNI’s auditors, Grant Thorton, proposed adjustments totaling $422,760 to inventory balances at the Nugget reported by SNI as of September 30, 2013 and December 15, 2013. These write downs are applicable to the inventory balance reported as of August 31, 2013. 21. With respect to unrecorded utiliti expense/liability, upon review of SNI’s August 31, 2013 financial statements, it was determined that the Nevada Energy invoice for the service period 7/24/13 ~ 8/23/13 in the amount of $308,019 relating to the Nugget was not reported by the Sellers as a liability as of August 31, 2013 or expensed in the month of August 2013 22, That SNI was behind one month of energy costs pre-closing resulted in two months’ worth of costs having to be expensed in December 2013, the last month of the Nugget’s operations, 23. Steve Yarrow, SNI’s former CFO, prepared a schedule to supplement the December 2013 financials that detailed what he termed “expenses outside 12.15.13." That schedule included $366,200 of “power and water expenses to bring current.” 24, Based on the above, the material differences between SNI’s financial condition at closing as represented by the Sellers and the internal records of SNI, and SNI’s actual financial condition at that time, amount to at least $1,144,594, 25. ‘These material differences were concealed from Wolthound by the Sellers during the diligence process. 26. These material differences and financial misrepresentations all constitute separate breaches of the Agreement. a usia731127. As stated above, Wolfhound is not a successor to the Sellers, the transaction was not a merger or a consolidation, and Wolfhound did not continue the operations of the Sellers. Nevertheless, the above-mentioned misrepresentations and/or omissions negatively impacted Wolfhound. Wolthound would not have been able (o move forward in the operation of its business without resolving these various financial misstatements and/or shortfalls created by and belonging to the Sellers. Because the Agreement contains an indemnification clause pursuant to which Wolfhound is entitled to be indemnified for all such amounts, and because Wolfhound would have been unable to move forward in its new business operations absent resolving these issues, Wolfhound paid for liabilities which were and are the responsibility of the Sellers. B, The Sellers’ Additional Breaches of the Agreement, 28. Unfortunately, the Sellers’ wrongful conduct is not limited to financial misstatements and misrepresentations 29. Post-closing, Wolfhound discovered approximately $14 million in checks that had been written by SNI (the “Deceptive Checks”), The Deceptive Checks were issued by SNI before closing but were not mailed, apparently, because there were insufficient funds in SNCs account to caver the payments. 30, The Deceptive Checks were not disclosed to Wolfhound notwithstanding the clear and unambiguous language in the Agreement requiring such disclosure, 31. The Deceptive Checks represented payment for invoices for goods or serviees that were in many instances past due, and were not disclosed as liabilities on the final closing balance sheet. 32, The treatment of the Deceptive Checks by the Sellers’ constitutes a breach of at least three representations made by the Sellers in Section 6 of the Agreement, as well as a breach of the Sellers’ pre-closing covenant made in the Agreement that Sellers would continue to carry on the busi ss in its ordinary course. 33. The Sellers intentionally and fraudulently concealed the existence of the Deceptive Checks from Wolfhound prior to the closing, in order to induce Wolfhound to proceed 13127311 1026 27 28 With the transaction. 34, Even though Wolfhound is not a successor to the Sellers, the transaction was not a merger or a consolidation, and Wolfhound did not continue the operations of the Sellers, Wolfhound was forced to bear responsibility for payment of these amounts. This is because Wolfhound would not have been able to move forward in the operation of its business without resolving the issues with various third-parties created by the Sellers through the Deceptive Cheeks. 35. Because the Agreement contains an indemnification clause pursuant to which Wolfhound is entitled to be indemnified for all such amounts, and because Wolfhound would have been unable to move forward in its new business operations absent resolving the issues created by the Deceptive Checks, Wolthound paid for these liabilities, which liabilities were and are the responsibility of the Sellers 36. Additionally, SNI’s audited financial statements for the periods ended September 30, 2013 and December 15, 2013 show materially different financial results than those reflected in SNI’s unaudited balance sheet, statement of income, and statement of cash flows for the same time period 37. The results of the audit performed by Grant Thornton, SNI’s auditor, reveal that I's internal financial SNI signi antly overstated EBITDA relating to the Nugget. Although S records showed EBITDA of positive $1.4 million as of September 30, 2013, in response to discoveries made during the audit process, Grant Thomton adjusted that number downward to show EBITDA of negative $409,000, a difference of some $1.8 million. The woefully understated EBITDA resulted in Wolfhound being unable to obtain any financing for much- needed repairs and capital improvements. 38. Further, the audit by Grant Thornton uncovered the fact that SNI's internal financial records also showed Accounts Receivable balances at valuations that could not be supported, thus requiring adjustments of $275,000. 39. Moreover, Wolfhound discovered that the Sellers breached the representation and warranty contained in Section 6.15 of the Agreement pertaining to the sufficiency of assets usin Wl40. Wolthound’s initial investigation ineluded the engagement by Wolfhound of Piercy Bowler Taylor & Kem (“PBTK”) to provide an overview of the non-gaming operations of the business, 41. ‘The report provided by PBTK revealed over 100 listed material deficiencies in operations and accounting and internal controls relating to the Nugget. ‘These deficiencies represent a failure to meet normal industry practice and range from faulty, non-commercial grade MIS systems to investment in linens and towels significantly below industry averages (in that case, resulting in Grant Thornton writing down $678,000 in china, glassware, utensil and linens as part of their audit). 42. Additionally, due to the erroneous and ineomplete financial records, Wolfhound has been required to spend tens of thousands of dollars on professional fees for additional audit work. The Agreement also entitles Wolfhound to recover these fees as damages. 43. Again, while Wolthound is not a successor to the Sellers, the transaction was not a merger or a consolidation, and Wolfhound did not continue the operations of the Sellers, Wolthound was forced to bear responsibility to resolve these various issues in order to move forward with the operations of its business. Because the Agreement contains an indemnification clause pursuant to which Wolfhound is entitled to be indemnified for all such amounts, and because Wolfhound would have been unable to move forward in its new business operations absent resolving these issues, Wolfhound paid to resolve these issues, which issues were and are the responsibility of the Sellers. C, The U.S. Department of Treasury Investigates the Nugget’s Business Practices White Under Sellers! Owi p and Control 44. When Wolfhound signed the Agreement in October 2013, Wolfhound was unaware that the United States Department of the Treasury, Financial Crimes Enforcement Network (“FinCEN”) was investigating the activities of the Sellers relating to the Nugget in order to determine whether the Sellers violated, among other things, the Bank Secrecy Act (*BSA”) and regulations issued pursuant to the BSA. vata28 45, Wolfhound first learned of the FinCEN investigation on the eve of the closing of the transaction in December 2013. Indeed, the Sellers informed Wolfhound about the FinCEN investigation at the last minute, and completely downplayed its significance. Wolfhound has no liability for any potential damages or penalties relating to the PinCEN investigation, because FinCEN is only investigating the Nugget’s business practices while under the Seller's ownership and control. Moreover, as stated above, Wolfhound is not a suecessor to the Sellers, the transaction was not a merger or a consolidation, and Wolfhound did not continue the operations of the Sellers. 46. Upon information and belief, FinCEN was (and still is) investigating whether, from 2010 through 2013, the Sellers violated the BSA’s program, reporting, and recordkeeping requirements, including whether the Sellers failed to establish and implement an effective anti- money laundering program, failed to report suspicious activity, failed to secure and retain certain required records, and lacked adequate intemal controls regarding, among other things, monitoring and reporting suspicious activity and maintaining recordkeeping requirements. 47. Upon information and belief, the U.S. Internal Revenue Service and FinCEN have alleged that the Sellers lacked a culture of compliance and routinely disregarded the BSA and other statutes and regulations. 48. The Sellers allegedly failed to file Suspicious Activity Reports (“SARs”) of Curreney ‘Transaction Reports CTR”) as required, and blatantly disregarded anti-money Jaundering compliance requirements. 49. The follo 1g events occurred while the Sellers operated the Nugget, which could have potentially been prevented with proper reporting and adherence to statutory requirements: (a) the arrest and conviction of a county official for embezzling millions of dollars, and gambling at least $1 million at the casino!; (b) the arrest of the Nugget’s former general counsel, Richard Davenport, for embezzling millions of dollars from the casino, after which Mr. Davenport pled embezzlement6 28 guilty and was sentenced to ten (10) years in prison”; and (c) the murder of a Hells Angels chapter head inside the casino, following a shootout between rival gangs, in 2011, prompting Mayor Geno Martini to declare a formal state of emergency. 50. Upon information and belief, FinCEN’s investigation relating to the Nugget is ‘ongoing, and no determination has been made 51. Upon information and belief, the penalties associated with the FinCEN investigation could be substantial. 52. Despite all of these allegations regarding the Nugget’s quality of management during the Sellers’ operation and ownership, Michonne Ascuaga, daughter of John and Rose, who served as CEO of the Nugget for 16 years until the sale of certain assets of the casino to Wolfhound, during which time she described her management style as “hands on” and inspired by her father’s legacy. was appointed to Nevada Gaming Commission in April 2015.4 53. Pursuant to the Agreement, Sellers must indemnify Wolfhound for any liability a D. The Sellers Are Responsible for Damages to Wolfhound Under the Agreement, 54, Seotion 11.2 (a) of the Agreement requires the Sellers to indemnify, save and hold ¢ oUt of the FinCEN investigation. harmless Wolfhound, its affiliates and each of their respective representatives as Follow: From and after the Closing, Sellers, jointly and severally, shall indemnify, save and hold harmless Buyer, its Affiliates and each of their respective Representatives (collectively, the “Buyer Indemnified Parties") from and against ‘any and all costs, losses, Liabilities, obligations, damages, claims, demands and expenses (whether or not arising out of third-party claims), including interest, penalties, reasonable attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing (in this Article XI, “Damages”), incurred in connection with, arising directly or indirectly out of, or resulting from: (any breach of any representation or warranty made by any Seller in this Agreement; ehitp dwar kolo com/home/headlines!3738196 biml + See hupAvaw Jo * See bip:eaming wv. wws.com J09/24hells angel owindes.aspsp wana(i) any breach of any covenant or agreement made, o to be performed, by any Seller in this Agreement; (iii) subject to Section 11.2(¢), below, the Excluded Liabilities; (iv) the Excluded Assets 53. Wolfhound has complied with all conditions in Anticle 11 of the Agreement related to making a claim for indemnification under the Agreement, including timely providing the notice required in Section 11.3. 56. Per the Agreement, the Sellers must indemnify, defend and hold Wolfhound harmless for, among other things, the aforementioned misstated financial statements and conditions, the Deceptive Checks, overstated EBITDA, improper accounts receivable, overstatement of assets, deficiencies (which were omitted/not disclosed to Wolfhound), as well as any losses, liabilities, damages or claims connected to the FinCEN investigation. 57. For example, the Sellers must indemnify Wolfhound for all liabilities arising out of the FinCE! investigation because it is an Exeluded Liability, Section 2.1(b) of the Agreement states that, other than the Assumed Liabilities, Sellers “shall retain all Liabilities related to the Business or the Property” (the “Excluded Liabil ies”). Because any potential liability related to the FinCEN investigation is not listed as one of the Assumed Liabilities, it is an Excluded Liability for which Sellers must indemnify Wolfhound pursuant to Section 11.2¢ayiii). W. CLAIMS FOR RELIEF First Claim for Relief: Breach of Contract 58. Wolfhound repeats and realleges all previous allegations in paragraphs 1-57 as if set forth in full herein, 59. The Agreement is a valid and binding contract between Wolfhound and the Sellers. 60. Wolfhound performed all requirements and conditions in the Agreement by, among other things, providing payment to the Sellers and assuming certain liabilities as set forth in the Agreement. usta2 61, The Sellers breached the representations, covenants and warranties in the Agreement. 62. Wolfhound entered into the Agreement relying upon numerous representations, warranties and covenants made by the Sellers (including representations related to SNI’s financial condition and the Nugget’s operations), which have subsequently been determined to be materially false. By way of example, Sections 6.4 and 6.5 of the Agreement contained representations and covenants about SNI’s financial condition, 63. As stated above, there were material differences between SNI's financial condition at closing as represented by the Sellers and/or the intemal records of SNI, and SNI’s actual financial condition at that time of closing. Wolfhound has sustained losses as a result of having to make significant adjustments to financial statements due to the numerous inaccuracies and/or misstatements in such statements. 64. Significant adjustments to SNI’s financial statements were made in at least the following four categories: (1) unrecorded workers’ compensation liability ($289,000); (2) unrecorded medical insurance liability ($124,351); (3) inventory write down ($422,760); and (4) unrecorded utilities expense/liability ($308,019), ‘The damages suffered by Wolfhound refated to these four categories total at least $1,144,594. 65. Additionally, and as also stated above, the Sellers breached additional Tepresentations, covenants and warranties in the Agreement, which caused damage to Wolthound, including: (1) the Sellers issued $1.4 million in deceptive checks prior to closing; (2) the Sellers overstated EIBTDA by $1.8 million in as of September 30, 2013; (3) the Sellers had at least $275,000 in accounts receivable balances that could not be supported, and required adjustments; (4) there were material deficiencies in the Nugget’s non-gaming operations; and (5) due to the erroncous and incomplete financial records, Wolfhound has been requited to spend tens of thousands of dollars on professional fees for additional audit work, which the Sellers are responsible for under Sections 6.4 and 11.2(a) of the Agreement. The damages suffered by Wolthound related to these items continue to be investigated, a