More from the observing attorney, who notes judge asked an interesting question at the very end.
Greg Plotts, of Aaronson
NRA’s outside auditor. This witness was poor, hesitant and defensive.
Yael Fuchs, for NY AG
You management letter doesn’t identify noncompliance with conflict of interest? No. Or excess benefits? No.
Spray asked you to give additional attention to ILA? Yes. But report lists nothing wrong with Cox or Lehman? Yes.
2019 tax return, we helped with disclosures. Disclosure related to Schedule J. It says NRA has written policy for first class travel, but return also says NRA didn’t have those policies. Aarsonson didn’t recommend that disclosure, right? Don’t know.
Email exchange to NRA. Sch L disclosures. Adjustments made to 990, answered no and added a narrative. Tedrick says we have no policy on charter travel, Should we say “other” or give more description? NRA staffer replies we have policy on 1stclass, not on charter travel. Reply says fill in in a narrative. But NRA didn’t follow instructions? Doesn’t look like it did.
990—says excess benefits reported for Cox. You draft that? No. You play any role? We reviewed. Did you verify accuracy? No. Same for Lehman, LaPierre, Phillips.
Craig Spray did not sign 2019 990 for NRA, but did sign for other NRA entities? Believe so. Create any concerns for you? (Long pause). Not really. Usually the CFO signs? Any officer can sign. Most common that CFO signs? Depends, but usually.
Did you interview LaPierre in connection 2019 audit? No. 2020? Have had conversations. Interview in accord with generally accepted accounting principles? Long pause. Not required. Did an interview. His view of risk, any fraud allegations, etc. In room? No, had calls. One time Brewer was on line. How often talk alone? One time.
Ask about assessment of risk? He felt controls in best shape ever have been, in full compliance with law.
Engaged to do 2020 audit. 2019 was completed in March? Yes. But 2020 not finished? Delayed by bankruptcy.
Worked with Spray. He was compliance oriented? Yes. Requested additional procedures? Yes. Spray no longer with NRA, I heard about Jan 2021, think Tedrick told me. Ask why? Yes. Tedrick didn’t know reasons. Later I was told health reasons, by Charles Cotton, and by LaPierre.
NRA has no functioning treasurer? Yes. NRA better off without Spray? Don’t know.
You not told of bankruptcy filing before filed? Not told. No liquidity issues? No.
Acosta for AM, questions
2019 was financial audit? Yes. Other types are internal controls, compliance regulations, whole list. Not part of 2019? No. Internal controls audit, described, testing internal controls and giving opinion.
Familiar with 100K policy for procurement? Yes. Requires signatures? Yes. Aware if law or accounting firms excluded from it? Not aware. Should they be? Depends.
Assisted NRA with 2019 990? Yes. Schedule L? No. Know they hired tax attorney, don’t know who prepared.
LaPierre reimbursed for 2020? Don’t know. If not yet reimbursed, would raise concerns? Not any certain concerns. Not reimbursed for 2019 that we are aware of. You think he didn’t incur any? Don’t know. Entire year 2020? I’d expect him to have expenses. Good practice to have him not reimbursed in 2020? Depends.
Hypothetical NRA gave law firm $5 million. Would it concern you what it is being used for? Would look into. Concern you if not used only for law services? I’d want to know more. Paid in four hours? Want to know more. Raise a red flag? Yes.
Contract for Aaronson. 100K. Business case analysis? Don’t see it is. Says payment over 100K requires signature officers. Does policy require signature of treasurer, too? Don’t know. Says RSM no longer wanted to provide NRA accounting services? RSM told me. That raise red flag? Yes.
Concern you if law firm paid over $20 million without business case analysis. Would have to look into.
Spray good treasurer? Yes. Told left for health reasons. If he testified was actually fired, would raise red flag? Yes.
Examined internal controls? Looked into sample, over a hundred.
Document says audit not designed to test internal controls? Yes. Only look at samples? Yes. And if detect something to NRA? Audit committee. But if NRA doesn’t disclose transaction? Not able to detect.
Standard language in all engagement letters? Yes.
Good relationship with Ms. Rowling? Yes. Evaluated staff, she had high knowledge. Good relationship.
LaPierre 2019 expenses? Not aware of any reimbursement.
990. schedule L. Explanations for Cox, include pre-2019 transactions? Yes. Also other people.
Asked about 2019 engagement letter, appropriate for RSM to sign? Yes, as paid preparer. Were you preparer of 2019? No. NRA staff took training on 990 and filled out form on own.
Spray self-reported problems? Yes. Spray very transparent, tht could be alleged fraud expense reporting. We found control deficiencies.
Related party transactions? Got a list and made sure approved by audit committee and none needed to be disclosed that weren’t.
Why RSM refused to do NRA work? Told moving in different strategic direction. Audit partner at RSM told me.
Email, goes down timeline, to meeting. When you meet to see if provide a proposal to NRA? After meeting with NRA, we evaluated, move forward with proposal, done in October.
For NY AG
Only related party transactions you reviewed were those provided by NRA? Yes, or in board minutes. Aggregate value? (very evasive answers).
This witness did not do well under cross examination. He argued he’d reformed everything, then was faced with improper events that occurred after his alleged reforms. His choices were to appear corrupt or to appear incompetent and out of control, and he went with the second choice.
Garman, for NRA
Background. MA from Boston College in politics, VA legislature. Got Phd. Over at DNC, knew NRA people, NRA right across street. Went into NRA building, they offered me job, late 1977. State liaison for year, then director state local. 1 year, then head govt affairs, in 1980. Membership now 4.9 million. Tried convert NRA into freedom organization. Outreach to celebrities. Celebrity shoots in Hollywood, dinners, etc.
Typical workweek? Preparing days for TV interview, fundraising, friends dinners, variety of things, keep bringing in members and donations. How many hours a week? Sometimes on road 40 weekends a year, work 40-50-60 hours a week. I started friends dinners.
Hunters important community. Shikar premier hunter organization. Necklace? Wife saw, bought it for NRA to donate to Shikar auction, and I put on expense report. $1750 price, actually auctioned for $7500. Came back from that meeting with $3 million check for NRA foundation.
Allegations by NY AG, bought gifts for NRA staff. Yes, good for morale, ice cream, things like that.
Course correction? I decided it was smart management thing, 360 look at every employee and vendor to ensure in compliance NY law, internal controls. Catalyst? Changes in NY not for profit law, might even be an investigation. Best practices, checked out every whistleblower complaint.
When begin? In 2017, throughout 2018, in 2019 did compliance seminars, worked with whistleblowers. Today in much better place. 2019 audit looked at everything that came up in media, completely clean.
Course correction, you are leader? Yes, I kept us on principled path. NRA is a charity? Yes. As officer you have fiduciary duty? Yes. May receive only reasonable compensation? Don’t understand law, but my comp was always reasonable. Can’t distribute assets outside of purposes? Yes. Can’t give assets to officers except compensation? Yes.
NRA took whistleblowers seriously? Yes we did, backed them.
You never saw complaints until June 19 2020? Yes. Nearly two years after concerns memo presented to Audit Comm? Yes, that’s when I saw the entire list.
Top concerns memo. Didn’t see between when submitted in 2018 until 2020? Yes. Then says, not sure when I finally saw it.
Contract between NRA and yourself, golden parachute consulting contract. May 5, 2018. On day he signed, Brownell had two days left in term as president. His term coming to end. Contract would be in effect until 2030. About 17 million compensation total? If you were fired? Yes. Signed by Meadows, now president and SLC head? Yes. Contract approved by Bd? Don’t think so, just by Comp Committee. Contract in effect until Jan 2021.
Not submitted to Audit Comm? Don’t know.
Jan 2021, it was replaced by new contract.
NRA also entered into consulting contract with Phillips. Same day as yours.
Was Phillips paid in 2019 under that contract? Included in 2019 EVP budget? Don’t know.
Mansion deal, even after course correction, you and wife looked at houses? AM suggested, we were driven around by realtor. This was in April 2018? Yes.
NRA ever have written policy on charter flights? At end of 2019? Don’t know, but NRA security office had a policy.
Consulting payments to Kyle Weaver after course correction? Don’t know. No disgorgement of payments to him? Don’t know
Mike Marcellin, former director of affinity programs? Had consulting contract after left? Not aware. NRA paid him 700K in 2020? don’t know. Knew nothing about it. Were they examined to see if should be disgorged? Don’t know.
Marcario, got $10K month consulting contract thru 2020? Not aware, knew two-year contract, not aware someone extended. Payment settling his suit for breach of contract. You authorized payment? Took lawyer’s advice and authorized. Examined to be disgorged? Done without my knowledge.
Chief Restructuring Officer? Read contract? Yes. Creditors need assurance NRA no longer has control problems?
Parties in case need assurance of a fiduciary, independent one, overseeing? Independent from NRA? Don’t understand.
Gruber, AM questions
Your African hunt? In newspapers? Haven’t read.
Read all publicity about bankruptcy? No. Getting reports? No.
Watson, for Journey and other directors
NRA has 4.9 million members? Just under. How many are life? 55-60%. About 2.5 million? Yes. Primary voters for board? Yes. NRA provided membership services to life members? Yes, magazines, advocacy, affinity benefits. Encumbered funds to take care of life members? Yes.
Gruber to court. Know nothing of Makris releasing video from hunt.
Garman for NRA
Current compensation? $1.3 million, minus cut of 20%. Why cut? Cut during covid. No bonus last year. Gave it up.
When saw whistleblower… was that first time you heard of concerns? No heard it in 2018, asked Brewer firm to run down.
2018 employment contract, who asked for? Presented by board and counsel for bd.
CRO application? You negotiate? No, recused myself. Negotiated by attorneys and SLC.
Louis Robacheau IV, Proposed Chief Restructuring Officer
Garman, for NRA
Background. Sr manager Ankura. BA, MA business admin. Certified turnaround professional certification, and others. Worked in hospital admin. Last ten yrs almost exclusively restructuring, worked on 80-100. 20 chapter 11s.
Saltori, for AM
Conflict between mgt and you, can appeal to Special Litigation Committee. Not duty to bring to bankrupcy court? No.
Reviewed bylaws? Some of them. Your firm will be hired as representative of the company? Service company. Are you an officer as in bylaws? Not a named officer. Why? Bylaws don’t have CRO. But other officers report to you? I won’t be a designated officer. Fraser would report to me and to LaPierre.
Can you review and authorize contracts? Yes. Payments to vendors within your responsibilities? Yes. Contract says for privilege purposes, you are functional equivalent of an executive.
You independent of LaPierre? Yes. Believe he can terminate engagement? No. Bylaws art 5 sec 2(c), duties of EVP. Can’t be terminated? Can’t be. EVP can terminate engagement any time if SLC approves? Yes.
Debtor reps signed contract, one of them LaPierre? Yes.
SLC. Is special committee? Yes. Bylaws, limitations on powers of committees. None can exercise powers prohibited to executive comm.
Art VI on exec comm. It cannot adopt a fundamental change of view or basic organizational structure of NRA. Your impression? Fundmental change of view = change on 1stor 2ndamendment issues, etc. Basic policy=. Basic organizational structure=permanent and durable change in structure, as opposed to temporary.
Resolution creating SLC. No confer authority to oversee non-litigation activities? Believe this not current resolution. Think last para authorizes… additional legal proceedings.
Deposition of Robacheau. Believe CRO scope signif broader than what SLC has delegated it, for example day to day control treasury.
If SLC orders you not to investigate something, can you? If under my authority, and is of a material matter, and a post-petition fiduciary duty violation, I can raise with SLC. (Doesn’t answer question)
His deposition, if SLC tells you not to investigate, do you have power to investigate? No.
Whistleblower complaints in core functions outside your responsibility? Not if involved disbursement of cash.
Gerrit Pronske, for NY AG
Say you’re not officer? Not. NRA can terminate you? The SLC can. We addressed letter to Cotton, letter says he is NRA representative. Agreement says either party can terminate at any time? Yes. Not really independent fiduciary? Still would be such.
Appointment CRO necessary to this bankruptcy. Very helpful. Indep fiduciary will comfort parties in interest. But motion says it is necessary? Debtors believe that.
Fee, $1 million due on plan’s effective date. You negotiate? I proposed language. Why only pay you if plan approved andNRA consents? Logical. What if outcome good to NRA but didn’t consent? If plan favorable to creditors? Yes. Or involve sale of assets favorable to creditors but NRA didn’t consent? Or if you decided best plan is case gets dismissed? No get fee? Yes.
So big financial incentive to do what debtor wants? A plan that NRA wants? Yes.
Aware special mtg board called for Saturday to approve plan? Yes. You’ve never seen a draft of plan? Yes. I provided input to BK counsel, developed certain concepts. Portions very interested in. Will have input.
Negotiating, did you ask to report directly to the board? No. More usual to report to a committee of board.
Were involved in Mayflower case, there you reported to board? Yes. Charge no restructuring fee? Yes. Senior Living Properties LLC. Report to board? Yes. No fee there either. CRO in Four West Holdings. Reported to board, yes, no fee, no. Foundation Health Care? Think I was pre-petition CRO. Report to Bd? Board or maybe committee. No fee. Right. Ascent Group LLC? Was a transactional advisor, really as a favor. Number of other cases, you reported to Bd? Not sure we were CRO in all cases.
Why not report to bd here? Here board composition and SLC, efficiency. Nelligan probably suggested.
Joe Acosta, for AM
Could you perform restructuring outside of BK? Could renegotiate letter. Rowling and Frazer will report to you? With regard CRO responsibilities. You not authorized to fire either? Not in sole discretion.
NRA supplemental notice filed last night. Says SLC must agree to any additional personnel? Yes. Initial and additional personnel may be designated as management officers or executive. Done? Only for me. Already done? Yes. You and Mr Morton, initial employees can be designated. Says CRO is functional equivalent of executive of company. You cannot waive attorney client privilege? I’m not a lawyer. There is a dispute resolution process.
Engagement letter–core mission functions include litigation. Including NY AG suit? Yes.
Settlement of dispute under letter, you can be fired, or overridden, still say independent? Yes, can handle.
Clay Taylor, for Journey et al.
Don’t report to board? No. Can go to board without SLC authorizing, Can, after consultation with SLC.
Duties to investigate preferences? Yes. General authority over plan. Same for fraudulent transfer actions against officers? Investigating? Yes. Directors? Long pause. Any potential assets must be resolved in plan. Other insiders or their affiliates? To extent need be resolved as part of a plan. Vendors? Yes.
What if SLC disagrees? Others are investigating…. Answer question. Hypothetical assumes no investigations ongoing? You said you had power? If others are investigating, no need. Unsecured Creditors Commmitee is conducting some? And others. What others? NY AG. UCC will only pursue to unsatisfied creditors? Don’t know. UCC doesn’t represent equities or members? Yes. Also important that someone representing those investigates?
You can only report findings to SLC? Can use dispute resolution process if things need to be reported to court.
NYAG allegations, aware of? Yes. Public reporting? Yes. Members of NRA have concerns? Yes. Important to investigate to clear the air? That decision requires holistic analysis, etc. Isn’t that what you’ll have to do? Being CRO is not easy.
Can you remove management for cause. Not in sole authority. Can you go to this ct if investigation interfered with it? Is interfering breach of fiduciary duty? Depends on lots of other facts.
Ability to go to court important? Yes. Why did first two iterations of engagement letter not allow you to go to court at all? I thought I could work with SLC, they don’t intend to have these disputes.
Was UCC main driver for getting this included? Yes.
Judge asks question, to be answered in arguments Monday (no court Friday)—chapter 11 purpose is to save company from liquidation bankruptcy. Does court have jurisdiction where sole purpose is to save company from dissolution under state law, which dissolution will only occur if the state court concludes dissolution is in best interests of public?