TL;DR

Over the course of sixteen months, Cloud9 issued equity through its employee stock plan to a total of seven players in violation of League rules.

Cloud9 failed to notify the League of the restricted stock units and did not acknowledge them in the contract summary sheets that were provided to the League.

Cloud9 is being fined $25,000 per player, for a total of $175,000.

In addition, Cloud9 shall be required to make payments to certain current and former players in connection with restitution for the stock grants and must negotiate with current players to extinguish existing stock grants. Players must have independent representation in connection with these negotiations.

Prior to November 2017, there were no rules that prohibited LCS Team Owners from acting as players, or rules that prohibited players from owning a portion of the team for which they played. Previous examples of player-owners include Andy Dinh (TSM) and George Georgallidis (CLG). With the transition to long-term partners in November 2017, Rule 2.5 was added to the LCS Official Rules. This rule prohibits an Owner from being a member of a Team’s Full Team Roster. Since November 2017 the League has prohibited an owner from serving on his or her team’s Full Time Roster and this effectively makes it a violation of the Official Rules for a player to hold an ownership interest, direct or indirect, in any LCS team for which the player competes.

In mid-June 2019, the League became aware that several teams had signed contract extensions with players that had not been submitted to the League. To reestablish a baseline of accurate information and reset a baseline of expectations around prompt document submission, the League launched a week long period on June 21, 2019, where teams could submit summary sheets where any penalty for lateness would be waived.. This deadline extension for contract paperwork did not extend to any violations discovered through a team’s submissions.

During this period, several LCS teams provided updated paperwork, including Cloud9. On June 24, Cloud9 staff provided an email with ten documents attached, including contract amendments, summary sheets, and documents labeled as RSUs (grants of Restricted Stock Units) for several players. None of the amendments, nor any of the summary sheets reflected the RSU grants and the summary sheets indicated that there are no “other agreements between the team owner and players/coach relating to the release, trade, termination, trade or assignment of the player.” In July, staff from Cloud9 followed up with an additional document labeled as an RSU.

League operations received the June email from Cloud9 and processed the changes to the contract termination dates in the global contract database (“GCD”) along with those of the other teams. The league operations team filed the summary and RSU documents into the League’s archive system. This was a clerical error: the existence of the RSU documents should have been highlighted and escalated. As a result of this error, we have revised our working flow to require that a second league official review all submissions as an additional checkpoint at or shortly after the time of processing. We have also updated the summary sheets to specifically reference equity grants and other side deals for anything of value. For any document submissions that are outside of our normal League forms and operating procedures, we’ll rely upon outside counsel for additional review.

In mid-August, as part of the League’s work on a structure that would allow teams to grant equity to players in certain limited situations, League operations staff flagged these RSUs for the first time. The League made the determination to address the RSU grants in the off-season as Cloud9 was engaged in Europe at Worlds through October 18, 2019. Shortly after Cloud9’s return from Worlds, the investigation was prioritized.

Process

During the course of the investigation, League staff reviewed (i) all RSUs issued by Cloud9 to professional players at any point since November 2017; (ii) the full contracts of all players with active RSUs; (iii) the summary sheets submitted in connection with each player that received RSUs; (iv) other electronic records held by the League (calendar entries, emails, documents, etc.). In addition, the League conducted interviews with seven current and former Cloud9 players, former Cloud9 staff, representatives for some of the affected players, and Cloud9 leadership.

Findings

Cloud9 players receiving RSUs fell into two general categories – those that bargained for RSUs in lieu of salary and those that were gifted RSUs. In all cases the RSUs were not incorporated in or referenced by a Player Service Agreement or summary sheet, as required by the Official Rules. Only two of the seven players had a lawyer or other representative review the RSU grants. Of the remaining players, none were encouraged or discouraged from having representation and most satisfied themselves through conversations with Cloud9 ownership.

There was a generalized belief by players and their representatives that the RSUs were permissible because they did not believe they would be offered equity if it was against the rules. Some of the later RSU recipients identified the earlier RSU recipients as the reason they believed the grants were permissible.

During an interview, Cloud9 ownership stated that they did not understand that the RSUs to be against League rules as there was no prohibition about player equity ownership before franchising, and they were unaware of the rule change. In response to inquiries around why Cloud9 had not provided information about the RSUs to the League, Cloud9 stated that the RSUs were not part of the contract process so day-to-day staff may not have had visibility on the RSUs and upper management was not reviewing summary sheets. In other words, the explanation boiled down to the idea that one hand didn’t know what the other hand was doing.

Rule Violations

Cloud9 submitted inaccurate summary sheets for seven players as they did not reflect the existence of RSUs or side agreements between the players and Cloud9.

Seven players received equity grants in the form of RSUs in violation of League rules.

Penalties

Within 30 days, Cloud9 is directed to take action as follows:

Cloud9 is fined $25,000 per player for the combined violations of (i) submitting inaccurate summary sheets; (ii) granting players equity in violation of League rules, for a total fine of $175,000. These fines are justified for failure to make the disclosures required by the Rules and also because the grants of the RSUs violated the Rules. Per the League’s agreement with teams, the fine will be donated to charity by the LCS.

As specifically directed by the League, Cloud9 is directed to pay certain amounts to players no longer on Cloud9’s roster in an aggregate cash amount that compensates those players at prevailing fair market value.

As specifically directed by the League, Cloud9 is directed to either pay certain amounts to players currently on Cloud9’s roster to cancel the existing RSU grants, and/or to substitute for the RSU grants through renegotiation of their current contracts. The choice belongs to the player and if the player chooses to renegotiate the contract, the League will require certification that the player utilized a lawyer, agent, or other representation in connection with the renegotiation.

The total fine based on the restitution options provided to Cloud9 is between approximately $330,000 and $605,000. The variance stems from the option to renegotiate player contracts. To the extent that Cloud9 renegotiates player contracts, we expect the ultimate amount expended by Cloud9 to be in excess of $605,000, but would not consider those payments a “penalty” since Cloud9 is receiving ongoing services in exchange for those payments.