Audit, Lawsuit Trip Up DC Shoes’ Smooth Ride

They were two California dudes with dreams of never growing up.

Not that Ken Block, a snowboarder, and Damon Way, a skateboarder, minded hard work. They just wanted it to be fun.

So as an alternative to college, marriage and what they saw as the suburban nightmare, the twentysomethings in 1993 started DC Shoes Co., a maker of shoes for skateboarders, and built it into a $100-million enterprise.

Knowing they were short on financial skills, that same year they hired the father of a high school friend. At the time, Clayton Blehm was a 58-year-old unemployed accountant living above his daughter’s garage. He began by coming in to DC Shoes a few hours a week to help the boys crunch numbers. He eventually became a co-owner and chief financial officer.

The Vista, Calif.-based company expanded quickly, making shoes with names such as “Danny Boy” and “Boxer,” and began a line of surf wear. Despite its growth, DC Shoes was able to retain its appeal with skate kids and fashion-conscious youth.

“They were started as a hard-core skate brand but have crossed over into surf and are still considered hard-core skate,” said Sean Smith, a managing director of the Surf Industry Manufacturers Assn., a San Clemente-based trade group.

But now, along with success, Block, 35, and Way, 31, have crashed into some real grown-up problems. Not only is the Internal Revenue Service auditing the firm, DC Shoes also is in the middle of a $140-million court battle with the 69-year-old Blehm, who alleges that he was wrongfully terminated because of his age.

The audit, which was started last year, still is underway, according to DC Shoes counsel Brian A. Wright. IRS officials did not return phone calls seeking comment.

Blehm’s lawsuit, filed in October in San Diego County Superior Court, contends that DC Shoes fired him in June because he was “an older, high-salaried employee.” He maintains that he didn’t fit the young, hip image that Australian surf wear firm Billabong International Ltd. wanted for DC Shoes when it expressed interest in buying the company in May. In the end, the deal didn’t go forward.

Blehm is seeking $140 million in damages from a group of defendants, including Billabong and DC Shoes. Blehm’s attorney, Larry Campitiello, said his client was not available for comment. Block and Way, who also are named in Blehm’s suit, would not comment on the case. But Block issued a statement, saying: “We have a good team of lawyers and accountants dealing with these issues. They have done a good job handling matters so Damon and I can concentrate on our jobs -- product development, marketing and brand positioning.”

For its part, Billabong has denied any wrongdoing in connection with Blehm’s ouster. The company “believes there is no substance to the claim and that it is frivolous,” it said in a filing with the Australian Stock Exchange.

On Nov. 18, a cross-complaint was filed by DC Shoes, Block and Way, alleging the Blehm had committed fraud and breached his fiduciary duty.

“We are confident the facts will show that the only meritorious claims in this lawsuit are those set forth in DC’s cross-complaint,” said Wright, the company’s counsel.

In their suit, Block and Way allege that Blehm, who was responsible for monitoring all financial, accounting and tax functions of the company, overpaid himself and used DC Shoes to “financially support his friends, acquaintances and family members.”

They also claim that he took out a $500,000 loan from the firm in February to buy a house. The loan was due in 15 days, but he never repaid the money, the suit maintains.

The suit also contends that Blehm “unlawfully charged tens of thousands of dollars in personal expenses to the corporate credit card issued” in his name and then “instructed employees at DC Shoes not to discuss his financial improprieties with Way and Block under the threat of termination of employment.”

Judge Thomas P. Nugent has yet to set a trial date.

The acrimony between Blehm and his young partners is a far cry from the feelings that were prevalent during earlier days at the company -- a time lionized in a new book compiled by Blehm’s son, Eric, called “Agents of Change: The Story of DC Shoes and Its Athletes.”

“May the DC Shoes story inspire you as it has me,” Eric Blehm writes in the foreword to the 256-page book, which was published by ReganBooks, a division of HarperCollins.

Block, who was born in Long Beach, attended Palomar College in San Marcos, Calif., but never graduated. While there, he spent many hours creating logos and artwork on the school’s computers and transferring the designs to T-shirts. That led to his first enterprise, a clothing company. Later, while working at a local sports shop, he met Way, who had come in to get a surfboard waxed.

Like Block, Way also attended Palomar but never graduated. Born at a hippie commune in Northern California, he suffered a serious injury in high school that kept him from becoming a professional skateboarder.

Then there is Blehm, an Oklahoma native, described in the book as “a workaholic who tirelessly strove for success.” In his long career, he had worked at everything from a child-care business to a family Christmas tree venture. “Creative by nature,” according to the book, “he modified and produced such inventions as wind-up extension cords and eyeshades (without lenses).”

But Blehm had never contemplated an enterprise connected to skateboarding until he met Block and Way. “They weren’t smart-aleck; they were both nice,” Blehm recalls in the book. “They had nice demeanors and seemed relatively clean-cut, except for Damon’s long hair.”

Still, he was reluctant to sign on with them. “The last thing I wanted,” he says, was to join a company “owned by a couple of young kids.”