League teams, here’s a quick reminder: players generally aren’t allowed to have stock. One of the world’s most recognisable professional teams, Cloud9, has been doing that for reportedly 16 months, and early Wednesday morning Riot Games announced they had fined the organisation a minimum of $US330,000 ($483,385) for their troubles.
The competitive ruling issued by Riot says that Cloud9 failed to notify Riot, the makers of League of Legends, about the issuing of restricted stock units to seven players. “[Cloud9] did not acknowledge them in the contract summary sheets that were provided to the League,” Riot says.
Teams weren’t always prevented from owning a portion of their own team. Riot added a clause in November 2017 to help transition the league towards long-term owners, effectively banning player-owners from existing at the same time. In June this year, Riot says they discovered that “several teams had signed contract extensions with players that had not been submitted”, prompting an investigation and a week-long grace period for teams to submit new contract summary sheets for any players that had resigned.
A month afterwards, Cloud9 staff provided Riot Games with a document outlining the grants of restricted stock units (RSUs) to players. At the time, Riot’s operations team for professional League processed the documents without incident, something the developer admits now should have been escalated immediately. “This was a clerical error,” Riot says. Riot began working on changes that would allow teams to issue equity to players in “certain limited situations” in August this year, which caused Riot internally to review Cloud9’s RSU filing. The developer held off the investigation until after Worlds had finished, however.
Riot’s investigation noted that “there was a generalised 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”. Riot noted that only two of Cloud9’s players had the agreement vetted by a lawyer or legal representative, and some players that received RSUs believed it was OK because other players had been issued RSUs before them, and nothing had happened.
As far as the League of Legends developer was concerned, Cloud9 should have known better. The post gets a little snarky, though, particularly since Riot admitted that Cloud9 filed the documents with them in July, only for the developer not to notice:
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.
Phrasing aside, there is a logic to preventing players from owning stock in their own teams. The general idea is that it at least forces teams to ensure players are paid monetarily, rather than being paid in shares or other things with an intangible value. Part of Riot’s ruling forces Cloud9 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”. On top of that, the team has been fined $US25,000 per player for each of the RSUs submissions, although the fine itself will be donated to an unnamed charity. Players that were issued stock have two choices: either to have their contracts renegotiated to account for the value of the RSUs, or to have the RSUs cancelled and have the team pay “certain amounts” for the RSUs.
How much this will cost Cloud9 ultimately depends on what the team does. Because the ruling also forces C9 to renegotiate contracts with players who have been issued stock options, Riot says the “total fine based on the restitution options” ranges from $US330,000 to $US605,000 ($483,385 to $886,206). The actual renegotiation process and the cost of having everything legalled could even result in the team’s bill surpassing $1 million.
Given that the off-season for professional League only began on Tuesday (Monday Australian time), an awful lot has happened. Cloud9 hasn’t officially responded to the news, instead only announcing the introduction of new players, and the departure of others. It does add some background to some of the transfers though: if you’re about to be a few hundred grand in the hole, possibly more, it’s not a bad idea to let some of those bigger contracts go.