There is an old adage: “Pigs get fat while hogs get slaughtered.” In the case of two of Mattress Firm's former vice presidents, Colliers International Atlanta, one of its former executives, and several developers nationwide, the outcome of a recent lawsuit will determine whether and how badly they will be punished for their alleged greed.

Per the lawsuit's allegations, Bruce Levy (vice president of real estate and construction) and Ryan Vinson (senior vice president of real estate, formerly director of new market development), were the two senior managers at Mattress Firm in charge of “real estate leasing and related construction” for the company. Levy hired Alexander Deitch, of Colliers International Atlanta, as Mattress Firm's “master broker” for the assumption of “primary broker responsibility for identifying, evaluating and brokering new site locations and advising and negotiating new leases and lease renewals on behalf of Mattress Firm.” Developer defendants, like Oldacre McDonald, LLC, paid bribes and kickbacks to Deitch, Levy and Vinson. As a result, these developers would get the largest number of Mattress Firm leases with exceptionally favorable lease terms, including above-market rents and longer than usual lease terms. The developer defendants would then flip the properties “within weeks or months after lease execution for millions of dollars in profits.” Deitch and others even created several investment entities to secretly purchase locations because they knew the sites were going to be Mattress Firm store locations. Phony and impermissible “development fees and brokerage fees” were also charged to the developers. Colliers International Atlanta was the direct recipient of millions of dollars in commissions from these bad deals and the lawsuit alleges that it also knew that Deitch secretly held an ownership interest in several properties that became Mattress Firm store locations. Described as a “nationwide bribery, kickback and fraud scheme to financially enrich themselves” at Mattress Firm's expense, the lawsuit alleges with specificity spanning 37 pages the “pay-to-play loop” that connected all of the defendants in a fraudulently symbiotic relationship. For all involved, “the higher the rent and the longer the lease duration, the more valuable the deal.”

Both Levy and Vinson admitted to Mattress Firm, upon being busted and terminated from employment, that they had received thousands of dollars in cash, first-class trips to exotic destinations, loans to purchase luxury cars and watches, as well as expensive bottles of wine.

Although the lawsuit was brought in Harris County, Texas, which is the location of Mattress Firm's Houston headquarters, any fraud scheme of note or interest these days (disturbingly) seems to have a Florida connection. In this case, one of the defendant developers is Win-Development, LLC, based in Bellaire Beach, Florida, which entered into at least 40 leases with Mattress Firm during the relevant timeframe. Principal schemer, Levy, resides in Boca Raton, Florida. One of the fraudulent investment vehicles was Preferred Developers, LLC, which is a Florida LLC with its principal office in Boca Raton.

The lawsuit sounds in several causes of action, including fraud, civil conspiracy, unjust enrichment, breach of fiduciary duty, and the aiding and abetting in the breach of Levy and Vinson's fiduciary duty. It also demands the imposition of a constructive trust. The one count of negligence is brought against only Colliers Atlanta, which is a subsidiary of Colliers International Group, Inc. It asserts, among other things, that Colliers Atlanta “failed to exercise reasonable care in the supervision and retention of Deitch” and it “knew or should have known of the wrongful acts of [Deitch].” Mattress Firm seeks punitive damages and demands a jury trial for those causes of action that are not sent to mandatory arbitration.

Today, Mattress Firm operates more than 3,400 stores across the country with Levy, Detich and Vinson having been responsible for approximately 1,500 new stores during the relevant timeframe. It all begs the following: did someone fall asleep at the switch internally at Mattress Firm to allow Levy to be the self-declared, one-man “walking [real estate] committee”? How was it possible that no one at Mattress Firm realized that the metrics for these deals were so far off the charts than the typical lease terms with regard to the above-market monthly rents and lease durations? Does Mattress Firm now conduct an audit of each and every one of those purchase/sale transactions, as well as their lease agreements? For any company, continuing internal audits are key prior to disaster striking. It is also critical to monitor, consistently and with vigor, the enforcement of policies regarding business development (e.g., lunches, dinners, gifts, deals). Mattress Firm and Colliers Atlanta each admittedly had a “code of conduct” that bound its employees to ethical regulations, but the defendants flouted these standards and illicitly ran rampant with self-serving conduct for years without any internal controls kicking in.

The discovery process will certainly reveal the existence of several, as-yet-unknown shell companies and attendant bank accounts that, hopefully for Mattress Firm's sake, still hold enough money to make it whole. There may also come a day of reckoning for the developer defendants who may have to submit to aggressive and detailed forensic accounting of their assets, bank accounts and balance sheets. Mattress Firm was acquired by Steinhoff International Holdings in August 2016 for $3.8 billion dollars including debt. Steinhoff, which has been called “Africa's IKEA,” recently announced operating profit at Mattress Firm to be underperforming. Its 2017 first-half adjusted operating margin was 4.5 percent compared to 7.5 percent across all of Steinhoff's retail operations. Is any of this failing profit tied to the fraud alleged in the lawsuit, or just market conditions?

For several of the named defendants, there is a concern that law enforcement might be interested in the scope of this fraudulent enterprise. The conduct alleged in the lawsuit flirts with the interests of law enforcement in stopping widespread fraud, money laundering, and perhaps even RICO (Racketeer Influenced Corruption Organizations Act). In the event law enforcement becomes involved, the power of the subpoena and the depth of the government bench will bring to light evidence of the defendants' wrongdoing perhaps more swiftly than the civil lawsuit. Regardless of whether justice is found in the civil or criminal arena, for Mattress Firm, I'm sure it just wants to find its motto: “Save Money. Sleep Happy.”

Katie Phang is a partner on Berger Singerman's dispute resolution team in Miami.​