Hartford Business Journal

16 Hartford Business Journal • February 5, 2018 • www.HartfordBusiness.com By Christopher Hoffman Special to the Hartford Business Journal T he Knights of Columbus are perhaps best known for their colorful plumed hats and the charity work done by their thousands of local councils. But there is another side to the world's largest Catholic fraternal orga- nization that gets far less attention. The group also operates a tax-exempt For- tune 1000 insurance company that in 2016 sold $8.5 billion worth of life insur- ance to its North American members. That part of the Knights — run by its parent organization from the order's fortress-like headquarters in down- town New Haven — is at the center of a bitter civil lawsuit accusing it of membership fraud, racketeering, theft of trade secrets and breach of contract. Knight leaders, court documents allege, are concealing a significant membership decline to protect their lucrative insurance business. They are doing so by preventing local councils from taking long-lapsed members off their rolls and maintaining "phantom" councils composed entirely of dead and lapsed Knights, the suit alleges. The lawsuit was originally brought in Jan. 2017 in U.S. District Court in Colorado by Boulder-based UKnight Interactive, a spurned IT vendor that says it had an agreement to become the preferred website provider for the Knights' 15,000-plus local councils. UKnight, which is using outside investment to fund its lawsuit, said it was fired in violation of an oral contract after top Knight execu- tives realized that its system would expose fraudulent membership numbers, court records say. The order then used trade secrets pilfered from UKnight to try to recreate UKnight's system in- house, the suit alleges. The Knights and their lawyers deny the order ever had a contract with UKnight and all the other allegations, calling them "scandalous" and "utterly false." "Strip away all the absurd claims, and this case boils down to a garden-variety business dispute by a website vendor that failed to close a business deal," the Knights wrote in a recent court filing. For months starting last fall, the case was on hold as the two sides tried to mediate a resolution. That effort failed in early January, and the legal warfare has resumed. Serial entrepreneur with mixed track record In 2009, Colorado businessman Leon- ard Labriola and some partners began offering website services — through UKnight Interactive — to local Knights of Columbus councils, according to the lawsuit. He and one of the partners are members of the order, and their product quickly proved popular with their fellow Knights, court papers say. It was the latest in a long line of ventures for Labriola, best described as a serial entrepreneur with a mixed track record. In 1999, his high-profile attempt to revive the fabled Indian Motorcycle brand collapsed into a years-long legal battle over who owned the trademark — a fight he ultimately lost. He later made youth football instructional videos featuring Bill Parcells and other NFL notables, and created a company to produce a hydrogen engine that failed in less than a year, according to publicly available information. In 2009, at about the same time he became involved with UKnight, Labriola declared personal bank- ruptcy, federal court records show. He emerged from bankruptcy a year later. UKnight's lawyer, Jeffrey Vail, de- fended Labriola's track record, saying that like many serial entrepreneurs, he has had both successes and failures. He added that Labriola also founded and ran a successful VCR cassette bro- kerage in the 1980s and early 1990s. In a court document filed last sum- mer, the Knights disparaged Labriola's business career. Asked if the Knights knew of his business history when their business contacts began, Knights Senior Vice President and Chief Com- munications Officer Kevin Shinkle declined comment. Promises allegedly made, broken In 2011, Labriola and his partners thought they'd hit the jackpot. In response to an inquiry from UKnight, the Knights' national organization invited Labriola and his partners to New Haven where they verbally agreed to designate UKnight as its preferred website provider for local councils, ac- cording to the lawsuit. Under the deal, the Knights would pay the company nothing, according to the suit. UKnight would make its money from fees charged to the local councils, the lawsuit says. That made the parent organization's endorse- ment critical, the suit says. The Knights, however, never fol- lowed through or provided a written contract, the suit alleges. For more than four years, the Knights strung the company along with promises that the public designation was imminent, only to postpone again and again, the suit says. The pattern continued even as the Knights deepened the relationship by having UKnight begin work on an in- house system as well, the suit alleges. In the summer of 2015, the Knights sent a consultant to the company's Tex- as office as a ruse to obtain its trade se- crets, the action alleges. The consultant showed UKnight executives an email instructing him to obtain information about their system so the Knights could hire another vendor to build it, accord- ing to court papers. Six months later, the Knights abruptly informed UKnight that the organization never had any agreement with the com- pany and it would search for another website provider, the suit says. Four months after that, UKnight saw its trade secrets in a Knights' request for propos- al to build a website, the suit alleges. UKnight's evidence in the case includes surreptitious recordings its executives made between 2011 and 2016 of telephone conversations with Knights officials, court filings show. As part of a countersuit that also alleges UKnight infringed its copyrights, the Knights are challenging the use of the recordings in the case, calling them illegal under Connecticut law, a charge that UKnight denies. In their court responses and state- ments to HBJ, the Courtroom Battle Contract dispute leads to membership fraud, other allegations against Knights of Columbus' lucrative insurance business The Knights of Columbus headquarters at 1 Columbus Plaza, New Haven. The Knights are battling a lawsuit by a jilted IT vendor accusing them of membership fraud, breach of contract and other misdeeds. Plaintiff List Interactive, Ltd., d/b/a UKnight Interactive ("UKnight"), for its Second Amended Complaint against Defendants Knights of Columbus, and David J. Kautter, in his official capacity as the (Acting) Commissioner of the Internal Revenue Service, states as follows: I. NATURE OF ACTION 1. This case involves a scheme of racketeering, fraud, deception, theft, and broken promises by the Knights of Columbus ("KC") which destroyed UKnight's business and has cost Plaintiff millions of dollars in losses. Defendant, who ostensibly runs the country's largest Catholic charitable fraternity, but in fact operates a highly-lucrative insurance company, has systematically deceived its insured-members and Plaintiff in order to prop up the viability of its business and derive substantial economic benefit to itself. 2. Additionally, this case involves a challenge to the KC's fraudulently- maintained tax-exempt status under 26 U.S.C. § 501(c)(8) directed against the Commissioner of the Internal Revenue Service, as UKnight has been damaged by the enhanced competitive environment created by KC's fraudulent tax exemption, and because exemption has permitted KC Case 1:17-cv-00210-RBJ Document 98 Filed 01/11/18 USDC Colorado Page 3 of 67 PHOTO | CHRIS HOFFMAN

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