Ellett Brothers, a major firearm industry distributor, is being accused of significant fraud and is expected to file for bankruptcy tomorrow or Monday.

According to a lawsuit filed against Wellspring Capital Management and others, Ellett Brothers borrowed $160 million and then passed the money along (plus an additional $20 million from other lenders) as cash distributions to the defendants instead of using it for the company.

Wellspring Capital Management is the defendant in this lawsuit because it controls Ellett Brothers and its parent companies, SportCo and United Sporting, and it is alleged to have caused Ellett Brothers to make the distributions.

The lawsuit further claims,

“despite a historic industry-wide increase in sales, Ellett and its many subsidiaries have lost a substantial amount of their assets and business value. As a result, its liabilities, including those owed to [the Plaintiff], now far exceed its assets. . . .

. . .

[Ellet Brothers] (and United Sporting and SportCo (together, the “Guarantors”), each of which guaranteed [Ellet Brother’s] obligations under the loans) have failed to retain sufficient property to pay the indebtedness owed to [the Plaintiff].

Indeed, despite Ellett’s insolvency and financial struggles, neither Wellspring IV nor the other shareholders that received the Fraudulent Conveyances have made any capital contributions to the company to support the business. Instead, as described more fully below, Wellspring Capital and the D&O Defendants grossly and recklessly mismanaged the business and carried out their respective roles in a manner that was devoid of reasonable inquiry and diligence in dereliction of their fiduciary duties to [the Plaintiff] as a creditor of the increasingly insolvent enterprise.”

We are interested to see Ellett Brother’s response to this lawsuit and these claims.

Gun University has heard that bankruptcy filings are imminent. We have been told that companies have reached out to Ellett Brothers in an attempt to recover unpaid inventory but have been denied.

Unfortunately, Ellett Brothers may instead be attempting to dump their inventory to raise money and may use bankruptcy as a shield against the companies trying to get their product back (or at least get paid for it).

“Ellett and its predecessors built a venerable South Carolina company prior to Wellspring Capital’s greedy and disastrous management.”

According to another article, Ellett Brothers is being sued because it “broke its promise to cover more than $280,000 worth of transition costs” when it bought AcuSport.

If you’re up for it, the lawsuit is an interesting read – especially when it gets into the breakdown of some of the emails and messages between the parties. It looks VERY damning and paint a clear picture of fraud.  Keep in mind, however, that this is just one side of the story.

UPDATE: On Friday June 7th, Ellett Brothers Giles for bankruptcy. As noted above, this was expected. However, we’ve received word that they also let most of their workforce go. This is obviously very sad to hear that the employees are paying the price for leadership’s choices.