USA Rugby: The Enron of Rugby

The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure

The purpose of these highlights are not to dig too deep into the financials of USA Rugby, as I’m not an expert auditor, but to highlight the strategic missteps starting from January 25th, 2013 during the tenure of, Nigel Melville as CEO, and the Chairmanships of Kevin Roberts and Bob Latham.

Photo (from left to right) Nigel Melville, Kevin Roberts, Bob Latham

In 2013 USAR initiated the three-year plan under the #workforit campaign, it stated that there were 115,000 current members of USAR with a growth goal of 8% per year, and the end goal for that period was to be a total membership of 145,0001. I can tell you right now that this was not achieved, and in fact there was a drastic failure with how this idea was executed. The final 2016 numbers were 117,139 members2. This makes me wonder what occurred over that period of time. I recall rugby being noted as, “the fastest growing youth sport in America”, with a 60% increase in participation. Elizabeth Campbell wrote in 2014 that rugby in the US grew 14% per year since 20123, but the numbers didn’t really add up. My conclusion is that rugby in the United States enjoyed tremendous growth at the high school and youth levels, but then suffered severe losses at the senior club levels. In certain locales it could be said that our growth, had it been executed well, could have been significant across all platforms.

Starting on January 25, I read Chairman Kevin Roberts remarks where he stated that this was “the end of the beginning”4. Did that mean that 2012 must have been a great year, or were they lying to themselves? Through two CFOs and the Audit Committee Chair, Rob King, the board would be under the impression that USAR would take in $250,000 for 20125, and eventually the board would be briefed the same projections for 2013 and 2014. The draft for the end of year financials were being looked at and given the thumbs up. USAR secured a sponsorship deal with AIG that allowed the union to cover the settlement with former kit sponsor Kooga6, and the hosting of the Junior World Trophy. The disruption of the kit sponsor deal, because it may or may not have been lucrative, was not smart by the board at the beginning of Roberts tenure as Chairman. As can clearly be seen from USAR’s financials from 2007-2015 there were deficit spending each year. In 2012, where there was a stated surplus, there was actually a deficit of $-514,7807. When a corporation terminates a sponsorship they need to be in a strong position to win the lawsuit and have their legal fees covered. As stated, USAR did not have the cash to fight legal battles without going to the membership with a dues increase, or find ways to tremendously increasing revenues. Additionally that year, USAR passed two IRS and one USOC audit. During each audit that USAR had passed, the union had been in compliance with the IRS and well ahead of most governing bodies. What cannot be understood is the Audit Committee Chair stating that there would be a surplus in 2012.

On April 19, 2013 two things occurred, the Bylaw Review Committee recommended to the board a reorganization of the USA Rugby Congress, and the whispers of the formation of a professional league with board member, Will Chang, as an investor from one of three groups. The rumored league was to compete across national borders with teams from Canada. Each group had desired an exclusive sanction, but USAR and Rugby Canada decided that the governing bodies would support sanctioning the competition, but not provide an exclusive agreement8. I’m concerned for the reason to reorganize the Rugby Congress and, why this was even a board issue. As of this meeting we had allegedly secured a kit sponsorship deal with Nike. I dug around a ton and couldn’t find any news regarding this. It’s unfortunate, because that could have pushed the USAR brand for the distant future. What is ironic, is with the current composition of the board, they were unwilling to provide an exclusive sanction on April 2013, but in 2015 they would approve an exclusive sanction for North American Rugby, LLC.

(left to right) Nigel Melville, Will Chang, and Mike Tolkin

On August 6, 2013, Matt Hawkins left his position as male IA on the USAR Board to become the Head Coach of USA Eagles 7s. This was a poor move as they would barely maintain their core status throughout his tenure. But in 2013 Kevin Roberts and the board were delighted that they were able to stay9, which could alert you to what their expectations were. Pam Kosanke also decided to leave her position as Chief Marketing Officer, but she would later join the USAR board as the female IA. The board minutes from that year weren’t clear, but after asking around it was revealed that Kosanke wanted to continue to be the CMO for USAR and push the union forward. Unfortunately  CEO Melville was unwilling to live up to the original terms of her contract that provided for working satellite in Minnesota and commuting to Colorado when required. Bob Latham stated that the relations with the IRB had never been stronger and that the IRB wanted to grow the game in the US 10. What the IRB hasn’t done is step over a period of time and bestowed heavy grants to the countries they see as their primary growth markets, which is still a current problem. Chang would meet with the IRB, informing them of USAR’s intent to bid for the 2018 Rugby World Cup 7s in his capacity as host committee chair. At the time the only known competition for the Rugby World Cup 7s was Singapore and Wales 11. Let it be known that the USAR started laying the foundation with the IRB five years before the event would take place. Deductive reasoning would make it clear that if USAR wanted to host a Rugby World Cup we would need to begin our discussions 10 years out.

The minutes from December 20, 2014 also contained some unique information in regards to the November 1, 2014 test match with the New Zealand All Blacks. USAR had secured the test match with the All Blacks a week outside of the international window of November. There were two things that the CEO and USAR had to accomplish, first was to get all USA Rugby Eagles who were playing professionally overseas released for the match, and secondly, meet the financial demands of the All Blacks 12. The Memorandum of Understanding with the Premiership got us our players for the match, but afterwards it has been cause for many of our best players to not be available during the regular test windows.  Although it has forced the national team coaches to build depth in the roster, it has prevented the USA Rugby Eagles to ever field their best side, other than during the 2015 Rugby World Cup.  To add insult to injury, despite the sacrifices made to acquire players, the on field results was not the only disappointing outcome. The deal made to play the All Blacks involved USAR paying the All Blacks with the revenue earned with the ticket sales. This is a deal that may go down as one of the worst financial agreements made by USAR. That test match was successfully sold out and surrounding hotels saw occupancy rates they hadn’t seen for that weekend in a very long time 13. In my opinion, if this is what it takes to play teams like the All Blacks, it is not in our best interest to bring a team like that to compete. The loss of revenue is not something we can afford. USA Rugby Governing Board members, Chief Financial Officer, Rob King, and Audit chair, Jen Cope, continue to specifically refer to membership purely on a revenue basis. I understand that membership generates revenue, but this perspective from high ranking members of the board is probably a part of the culture problem. The membership should be treated as shareholders of the organization and not just revenue drivers. Comparatively, other unions generate their revenue through men’s rugby test matches.

Soldier Field; 2014 USA Eagles vs. New Zealand

As USA Sevens was starting to find success in Las Vegas, the IRB began to have issues. I’m unsure whether the IRB was having issues with UWS (breach letter) or if USAR was attempting to cause problems, as that is unclear 14. The Union did what it could to keep the stop and that’s what caused it to be renewed later on. I’m sure the IRB is more than happy now with the Stadium as the stop on the series has become one of the most successful in comparison to Wellington and Singapore. During this time Jen Cope[allowed to resign] had recently left with Jim Snyder stepping is as interim CFO. Rob King would against project another surplus for 2014 15. And began a search for a new CFO, they would eventually hire Jim Snyder as permanent CFO. During this period the Professional Rugby Business Plan from the Chang group was being finalized for review by USAR and then to be forwarded to the IRB, shortly thereafter there is no mention of a Professional until Doug Schoninger bursts on the scene. USAR began looking at the bid process for the Rugby World Cup for 2023 and 2027. The preliminary discussions for the commercial strategy had started [RIM] 16.

The theme of the June 6th, 2014, board meeting was thus: “Internationally we are now respected, the All Blacks will visit in the fall, we need to progress to a professional game as a priority and being a ‘Tier 2’ Nation is not what we want to be 17.” Membership continues to decline under the chairmanship of Kevin Roberts and regime of Nigel Melville, to the point that membership revenues are causing calculation errors for the CFO and the Audit Committee. Rob King states that USAR brought in a smaller than forecasted surplus for 2013, which I don’t know how it can be remotely correct with published financials now stating a deficit of $-503,858 18. USAR continues to pass their audits from USOC and their auditor, USAR Test matches brought in more than the forecasted revenues (Before RIM). Will Chang, Chad Keck, and Brian McLenahan were the lead builders on the commercial Strategy that would eventually bring USAR: RIM. After Review of the 7s Program, it was decided that the CEO would develop options to bring in an “experienced international coach,” we currently see the fruition of that with what Mike Friday has done 19. The following day the board elected Bob Latham as chair and appointed Will Chang as the executive committee chair over development of the new commercial entity. 20

2013 USA Eageles Women’s Rugby National Team

On August 22, 2014 a full review of the USA Eagles after the women’s national team, after an underwhelming outcome during the 2013 Women’s Rugby World Cup. The priorities for the board became clear, Bob and the remaining Tier Two Nation Representatives would work tirelessly to gain seats on the IRB Council, and it seems that the relationship between Congress and the Board was not that great 21. It was confirmed that the CEO would be replacing Matt Hawkins with Mike Friday, Nigel Melville also had to continue working with the IRB to keep the Vegas site for USA 7s, as the Host Union Agreement was complete but there appeared to still be ill-will for the Vegas stop 22. What did Wellington look like in 2014? Jim Snyder reports to the board that USAR will achieve a surplus in 2014 due to the hosting of events, but that membership continues to decline 23. The two financial themes out of the CFO whether it was Jen Cope or Jim Snyder and the Audit Committee Chair was that we’ll see a surplus. But as shown previously that did not occur, and in 214 the Union would achieve a deficit of $-314,809 24 . RIM begins to take shape as they’re seeking investors.

The overarching themes I’ve attempted to show is the fact that not only did the USAR Board lie to us, the membership, but they lied to themselves. From 2012-2014 there were projections of increased membership that the Union failed to achieve, part of that was because there were no revenues to execute the plan they had devised. In fact through that whole period and beyond in the 1Q they were clear about the significance of membership decline, membership decline is a symptom and the board did not appear to attempt a diagnosis. The CFO and Audit chair just told falsehoods to the rest of the board even though the tax documents were available to them then as they’re now available to the membership. In later meetings the USAR Board would go into executive sessions of which there is no published record, that is where even more of meat is for these decisions. To establish lines of credit, you need assets, as Will Chang had previously stated, the Union is worth $20-30,000,000 in the last Congress meeting, how? We’ve run deficits every year and the Eagles are an immature product on the marketplace of national teams. We’re in the eye of the storm.

 

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1 USAR Strategic Plan 2013-2015 , 9 and 23, 2012.
2 USA Rugby Strategy 2020, https://www.rugbystrategy.us/ , Date Accessed: 1 May 2017.
3 Elizabeth Campbell, Sold-Out Chicago Match Marks Rugby’s Rising Popularity, https://www.bloomberg.com/news/articles/2014-10-31/sold-out-chicago-match-marks-rugby-s-rising-popularity, Date Accessed: 1 May 2017.
4 USAR Board Minutes 25 Jan 2013 , 1.
5 Ibid.
6 Kurt Oeler, The USA national team, 2007-11: Part 3 — The board at sea, http://www.gainline.us/gainline/2011/12/the-usa-national-team-2007-11-part-3-the-board-at-sea.html, Date Accessed: 1 May 2017.
7 USAR 2012 Form 990, https://assets.usarugby.org/docs/about/financials/USAR_2012_990.pdf, 1, Date Accessed: 19 Apr 2017
8 USAR Board Minutes 19 Apr 2013, 2-3.
9 USAR Board Minutes 6 Aug 2013, 1.
10 Ibid.
11 Ibid, 2.
12 USAR Board Minutes 20 Dec 2013, 2.
13 USAR Board Minutes 24 Jan 2015, 2.
14 USAR Board Minutes 27 Mar 2014, 2.
15 Ibid.
16 Ibid, 2-3.
17 USAR Board Minutes 6 Jun 2014, 1.
18 USAR 2013 Form 990, https://assets.usarugby.org/docs/about/financials/2013-USA-Rugby-990-Public-copy.pdf, Date Accessed: 17 Apr 2017.
19 Ibid, 3.
20 Ibid, 4.
21 USAR Board Minutes 22 Aug 2014, 1
22 Ibid, 2.
23 Ibid.
24 USAR 2014 Form 990, https://assets.usarugby.org/docs/about/financials/2014_Form_990_Public_Disclosure_Copy.pdf, Date Accessed: 17 APR 2017.