# AST in bankruptcy



## Arnold (Oct 9, 2004)

I thought this was interesting especially since their corporate office is within walking distance of where I work.


*Pumped up for bankruptcy*

Golden-based AST Sports Science is weighed down with suits over its ephedra products

By John Accola And Rachel Brand, Rocky Mountain News
October 9, 2004

For years Paul Delia, founder of Golden- based AST Sports Science Inc., sparred with government regulators and health experts over ephedra, the Chinese herbal stimulant linked to deaths and strokes.

Openly berating the Food and Drug Administration on his company's Web site, Delia complained the federal agency was feeding "misleading information and nonsense" to a gullible media.


"It's bad enough to have the unscrupulous supplement companies lying to you, but add the FDA to the mix and where do you turn?" asked Delia in his signature online column, Hard Core, in April 2001.

"Ninety-nine percent of all FDA-released information on ephedra is one-sided and lacks accepted scientific credibility."

With ephedra supplements now banned altogether, the former gym owner from Mississippi has something new to stew over: AST in U.S. Bankruptcy Court.

The company claims it's about to go broke defending itself against lawsuits, mostly over AST's discontinued ephedra product line.

But some plaintiff attorneys aren't so sure. While the bankruptcy court has put the litigation on hold, the lawyers say they see the lion's share of AST's revenues - well into the seven figures - being funneled to Delia through a group of side businesses he controls.

"Ephedra companies are running to the bankruptcy court for refuge," said Todd Macaluso, a San Diego attorney who won an $18 million ephedra judgment in May 2003 against one of AST's biggest rivals, Nutraquest Inc.

The New Jersey supplement maker, formerly known as Cytodyne, filed for Chapter 11 protection last October, citing 52 pending wrongful death and product liability suits nationwide.

Macaluso argues the Nutraquest bankruptcy is part of a scheme orchestrated by the company's president to avoid paying ephedra claims.

"The bottom line is you need to get organized," Macaluso advises plaintiff lawyers whose cases are hanging in the AST bankruptcy. "Unless there is a strong creditors committee, it could slide right through."

Taking on the FDA

Delia remains defiant, just as he was last December when the FDA, linking energy-boosting ephedra to 150 deaths and 1,000 reports of heart attacks, put AST and 61 other marketers on final notice. The FDA announced it would ban all ephedra products in four months.

Delia's response to the warning letter?

A stepped-up, two-for-one promotion to sell off AST's inventory of Dymet-adrine Xtreme, the company's flagship ephedra product.

"Buy 6 Dymetadrine Xtreme - Get 6 More Free!" read an AST three-day special on the Internet in March.

It didn't seem to matter then that AST let its product liability insurance lapse.

Today, Delia concedes that mounting "opportunistic" lawsuits over ephedra were threatening to sink his company. The first lawsuits were filed in 2001, and at least one has already been settled.

"We had become a litigation company instead of a sports nutrition research, development and marketing company," Delia told the Rocky Mountain News in an e-mail this week.

On April 30 - two weeks after the FDA's ephedra ban - AST filed for Chapter 11 reorganization in Denver's U.S. Bankruptcy Court.

The bankruptcy petition put an automatic stay to all litigation. Nine lawsuits - five involving ephedra and four potential consumer class-action cases filed over AST's now-discontinued, body-building androgen product line - portray the company as a public health menace.

The ephedra cases include allegations that AST's Dymetadrine Xtreme caused the death of a 24-year-old woman who was trying to shed pounds after giving birth to her second child. Another plaintiff is a teenager, a former football player whose stroke resulted in brain damage. He's confined to a wheelchair and eats through a feeding tube.

Delia holds his company blameless. But he says AST needs at least temporary relief from the legal morass to work on a plan to resolve the plaintiff claims and enable AST to emerge as a viable company.

Just how Delia intends to do that is unclear. In its latest court filing, AST claims assets of just $1.3 million, about the same as its total debt.

Other than his brief e-mail reply, Delia declined to answer further questions about the company's history, bankruptcy or prospects.

'Cut your losses'

Leo Weiss, a U.S. Trustee attorney, says his limited conversations with AST attorneys suggest AST would be "fat, dumb and happy, making lots of money" if not for its potential legal liability.

All the more curious is that at the height of AST's ephedra marketing blitz early this year, many of its rivals were pulling their ephedra products off the market.

At the time, AST vice president Denise Pederson was pleading to personal injury attorneys not to make her company their target.

"We are nearly being forced out of business," she wrote in a March letter to New York attorney Joseph Belluck, whose client suffered a stroke in September 2001 after using an AST ephedra supplement.

Pederson explained that AST, which bills itself as a designer of "performance- enhancement" and "fat burning" supplements for bodybuilders and athletes, was a small company with just 10 employees.

"Going after AST is quite simply a lost cause," she wrote, citing a backlog of ephedra litigation that has "become so easy and convenient for anyone who even sneezes these days."

Pederson, who's paid $100,000 a year as AST's No. 2 officer, suggested that Belluck "cut your losses while they are minimal.

"Perhaps your client remembers taking some other product in the last five years - from a bigger company - with insurance. Look for an investment with an actual return."

The 41-year-old Delia, however, is hardly down to his last dollar.

AST remains up and running, generating close to $5 million in sales in the first eight months of the year, according to court documents.

And while the bankruptcy statements indicate the company is squeaking by on a break-even basis, that's OK, too. Delia, AST's sole shareholder, is the company's only secured creditor.

In the first eight months of this year AST has paid Delia and several companies he controls nearly $2 million.

That includes a $200,000-a-month management contract AST has with Delia's separately owned marketing and research company, HP Management LLC.

Then there's the $23,685 monthly rent AST pays to XCR Holdings - another Delia-owned entity - for AST's sprawling headquarters in south Golden. AST also foots the $36,000 bill in annual property taxes.

Bankruptcy records also show that another Delia-owned company, LED Partners, provides a revolving $1.5 million line of credit to AST.

Two months before filing for Chapter 11, AST made a $750,000 payment to LED, reducing the company's outstanding balance to $360,000.

Delia first to be paid

No matter what plan of reorganization AST files, LED stands to be the first to be paid.

All told, for the 12 months before the April bankruptcy, AST reported sales of roughly $7.6 million. Of that, Paul Delia paid himself or other companies he controls about $3.3 million, nearly half AST's revenue.

"AST's payments appear to be grossly improper," said John Goldsmith, a Florida attorney spearheading a class-action lawsuit against AST for falsely advertising Andro. "Upon analysis that may not be true, but on its face, it is very, very suspect."

San Antonio attorney Ben Bingham, who specializes in bankruptcy and consumer class-action cases, agreed to review AST's bankruptcy filings for the Rocky Mountain News.

He said the case raises several red flags. Missing in the bankruptcy paperwork are contracts of Delia's management agreement as well as the tenant lease.

"Essentially, AST is acting as the trustee in its own bankruptcy," Bingham said.

Bingham said Delia's $2.4 million annual management fees and AST's pricey lease appear excessive for a $7 million- a-year consumer goods company with eight employees. "You'd think they'd be five or 10 percent," said Bingham, referring to Delia's management fees.

Usually, such self-dealing transactions would be scrutinized by a creditors' committee. If something appears amiss, the committee can ask the bankruptcy judge to appoint an outside trustee or independent examiner.

But none of AST's unsecured creditors, who include plaintiffs with ephedra-spawned injury claims, have taken that road - yet.

At the first creditors' meeting on June 4, just one showed up - AST's outside accountant Daniel Zebarth, also listed as the company's registered agent.

"We basically have no interest in a committee," announced trustee attorney Weiss.

Nonetheless, some plaintiffs' lawyers, upon learning in recent weeks of Delia's AST side agreements, have been circling the company with questions.

Lee Kutner, AST's bankruptcy counsel, said he's talking to plaintiff attorneys "every day."

"They are very involved . . . (but) we dispute every one of their claims," he said.

A week ago, Belluck, the New York plaintiff attorney, filed a motion to have Delia produce copies of AST's corporate income tax returns dating back four years. Belluck also is seeking records and written agreements involving transferred assets between AST and Delia-affiliated entities.

"They have reported large transactions or payments," Belluck said. "We're just at the beginning of looking at those."

Delia, a fitness buff and self-described motorcycle champ, founded AST just seven years ago. The company formulates, packages and markets a variety of muscle-enhancing, weight loss powders and capsules - both through stores and the Internet.

Fancifully named products include Ny-Tro PRO-40, a selection of protein shake powders for $39.96, and Creatine HSC - "the most scientifically advanced creatine supplement available."

A 4-pound container goes for $33.56.

'Jury was mortified'

Delia shuns publicity.

A week ago, two News reporters approached Delia, dressed in jeans and a sweatshirt, as he was walking his dog in front of the company's foothills headquarters. The modern, 17,000-square- foot stucco building, located in a small business park, includes a warehouse in the back and a gym for the company's eight employees, who include one of Delia's relatives.

"We're not an interesting story," he said. "We're a small company, and this is a private matter."

Delia said plaintiff lawyers are unhappy about the bankruptcy because it's holding up their cut of potential settlements.

"We're not having an interview right now," he said. "I'll tell you about it when it's over."

Before Chapter 11, AST had already reached confidential out-of-court settlements with other plaintiffs.

In early 2004, AST negotiated a cash settlement with a former California police officer, Mark Hagen, who suffered a stroke in February 2002 after taking Dymetadrine Xtreme.

The stroke left Hagen, who used the supplement on and off for 18 months while taking the prescription painkiller Vicodin, with brain damage affecting his speech, vision and mobility.

Hagen's suit went to trial this summer with remaining co-defendant Fox Nutrition Corp., a Los Angeles retailer and AST distributor. It ended with a $6.9 million verdict, but the award was reduced by 40 percent because the jury concluded Hagen was partly responsible for his injuries.

Jurors found the product's label had inadequate directions for the supplement's use. They said Fox Nutrition should have done a better job warning customers.

Hagen's attorney, John Tiedt, said Delia's video deposition in the trial "shocked" the jury. In the tape, Delia explains how he designed the formulation of Deymetadrine Xtreme and determined the dosage levels.

"Mr. Delia has no medical license, no college degree," Tiedt said. "Yet his company sold this product with reckless abandon and lied to the public by saying it was safe, a product never subjected to human safety studies. The jury was mortified."

The tape, which remains under a protective court order AST sought after citing trade secret concerns, demonstrated Delia is no simple huckster, but a calculating businessman who relentlessly marketed a dangerous, untested product, Tiedt said.

"Delia has lived a life of telling the public one thing and delivering something that is entirely different," he said.

Tiedt suspects AST's management agreements with Delia and subsequent Chapter 11 filing are a well-thought-out strategy intended to insulate Delia from liability.

He also questions the annual AST revenue statements presented to the bankruptcy court. General Nutrition Co., the mammoth health nutrition retail chain, doesn't typically cut deals with companies generating revenues under the $10 million mark, Tiedt said.

Nutrition Business Journal - a dietary supplement business magazine - estimates AST brings in $20 million to $25 million a year. The estimates are based on industry surveys, talks with suppliers and retailers and its own experience.

"I would question everything Paul Delia is doing," Tiedt said. "In my book, nothing he has done has passed the smell test."

Delia's lawyer, Lee Kutner, says his client just wants to put this episode behind him.

Delia could have taken a simpler path by folding AST, leaving him the option of starting a new business under a different name. He could have sold everything, liabilities included.

Instead, AST continues to operate, under a financial restructuring that might include a settlement fund for resolving plaintiff claims to the satisfaction of all parties.

"He wants to try and make it work," Kutner said. "He's doing the noble thing."


AST Sports Science Inc. at a glance

??? Headquarters: 120 Capital Drive, Golden, CO 80401

??? Founded: 1997, by Paul Delia

??? Products: Prohormones, protein powders and bars, amino acids, creatine, body-building videos and performance-enhancement accessories

??? Bankruptcy: Filed April 30, 2004

??? Lawsuits pending: Five ephedra product-liability cases, including one wrongful death lawsuit, as well as four suits seeking class-action status for false marketing of AST's andro supplements

??? Assets: $1.327 million

??? Liabilities: $1.307 million

Source: Bankruptcy filings, AST Sports Science Web page and Rocky Mountain News research

Ephedra cases against AST Sports Science

Blumberg vs. AST Nutritional Concepts, Syntrax Innovations, and Sho Me Natural Products

??? Filed: July 2001 in Florida

??? Allegations: Product liability; no further information available

??? AST response: Denies allegations.

??? Status: Stayed due to bankruptcy.

Smoot vs. AST and General Nutrition Corp.

??? Filed: July 2002 in West Virginia

??? Allegations: Tracy Smoot, a healthy 24-year-old mother of two, took AST's Dymetadrine Xtreme during June and July 2000 along with her workout regimen. She was trying to lose post-pregnancy weight before going to the beach.

On July 17, 2000, Smoot collapsed in her college counselor's office. She suffered from cardiac arrest, and never regained consciousness. She died a day later.

The complaint alleges negligence, wrongful death, liability, fraud and breach of warranty.

??? AST response: Denies allegations.

??? Status: Stayed due to bankruptcy.

Brown vs. AST and Musclemaster.com

??? Filed: March 2003 in Massachusetts.

??? Allegations: On March 27, 2001, Connie Brown consumed two capsules of EPH 833, a product labeled as containing 8 percent ephedra. A day later, she was hospitalized with a hemorrhagic stroke, or bleeding in her brain. She spent two weeks in the hospital. Today, the mother of four suffers right-side weakness, sleeplessness and pain.

The complaint alleges negligence, breach of warranty and loss of consortium.

??? AST response: denies allegations.

??? Status: Stayed due to bankruptcy.

Webber vs. AST and Fitness Tech, a retailer

??? Filed: October 2003 in Massachusetts

??? Allegations: Bryan Webber was a healthy, 16-year-old National Honor Society student, football player and wrestler. He took AST's ephedra-laced Dymetadrine Xtreme before workouts.

On Oct. 27, 2000, a school day, Webber had a heart attack, suffering severe brain damage as a result of the ephedra-laced supplement. Today he requires 24-hour-a-day supervision, is wheelchair-bound and can't eat or swallow.

The complaint alleges negligence, breach of warranty and product liability by AST.

??? AST response: Denies allegations.

??? Status: Stayed due to bankruptcy.

Newberry vs. AST and A to Z Cosmetics

??? Filed: February 2004 in New York

??? Allegations: A young man, Thomas Newberry, bought AST's EPH 833 Thermogenic Intensifier from New York retailers. On Sept. 13, 2001, Newberry suffered a stroke as a result of consuming EPH 833. He now has some speech and motor difficulties and has not been able to return to normal activities.

The complaint alleges fraud, negligence and breach of warranty.

??? AST response: Denies allegations.

??? Status: Stayed due to bankruptcy.


http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_3241727,00.html


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## BoneCrusher (Oct 9, 2004)

We all knew the risks of doing any kind of sup.  You play the game you take your chances.  I hope he keeps his cash he earned it.  Is he a deceptive person selling bogus drugs without warning people of what they are taking?  Nope.


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## mmorpheuss (Oct 9, 2004)

yea thats total garbage man. I guess anyone thats not in perfect health can just look at what supplement they are taking at the time and sue, sue , sue.


Its going to be complete BS when these guys get around to vilifying creatine.


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## camarosuper6 (Oct 9, 2004)

As a big follower of AST's MAX-OT and having good results from many of their products (Dymetadrine was the best fat burner I ever used), this kinda hits hard.

I hope all goes well with them. At the same time,  I will be extremely angry if I find that this company has in any way been deceiving anyone, myself included.


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## Duncans Donuts (Oct 9, 2004)

Doh


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## Arnold (Oct 9, 2004)

camarosuper6 said:
			
		

> I will be extremely angry if I find that this company has in any way been deceiving anyone, myself included.



how so, did they not list ephedra on their bottles?


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## Egoatdoor (Oct 10, 2004)

I think its great that Delia is shielding everything from the plaintiff's attorneys by filing Chapter 11. I hope he beats them and leaves them fighting over an empty carcass.


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