EVANSVILLE, Ind.—Two former executives of materials firm Lucent Polymers Inc. have been arrested and charged with fraud in relation to the sale of their company to Citadel Plastics and later to A. Schulman Inc.
Former Lucent CEO Kevin Kuhnash and former Chief Operating Officer Jason Jimerson were arrested Feb. 12, according to the U.S. Attorney's office in Indianapolis. They were indicted by a federal grand jury on the fraud charges and also charged with fraud by the U.S. Securities & Exchange Commission.
An indictment alleges that they committed fraud when they orchestrated the sale of Evansville-based Lucent to another company but concealed critical defects in Lucent's business, including fraud that Lucent was committing on its customers. West Chicago, Ill.-based Citadel is not named in the release, but it announced its deal for Lucent in December 2013. Citadel itself was then acquired by A. Schulman in early 2015.
"Corporate officials who put deviousness over good faith degrade the integrity of our markets and impugn the reputation of American industry," U.S. Attorney Josh Minkler said in a news release announcing the arrests. "This office will continue to prioritize the investigation and prosecution of corrupt corporate executives who enrich themselves through fraud and deception."
The indictment alleged that a key aspect of Lucent's business was its claim to be able to design and manufacture custom plastics products that met customers' exact specifications at very low prices. Lucent's customers included companies that made cars, automotive air bags, electrical boxes, ceiling fans, kitchen appliances and heating and air conditioning units. Their specifications often included the plastic's flame resistance, color, strength and durability, and certification by Underwriter's Laboratories.
According to the indictment, prosecutors allege that Lucent's internal testing showed that its low-cost products often did not meet its customers' specifications or UL standards. Nevertheless, Lucent employees allegedly created and submitted to customers false records stating that the internal testing confirmed that the products were within spec, the attorney said. Even when customers complained, Lucent employees allegedly continued to conceal that they had altered the test results.
The indictment alleged that in 2013, Kuhnash and Jimerson were involved in trying to sell Lucent's business. Kuhnash and Jimerson allegedly both owned stock in Lucent and received hundreds of thousands of dollars' worth of compensation when the sale was completed.
According to the indictment, in September 2013 or earlier, Kuhnash and Jimerson were allegedly told that Lucent was routinely deceiving its customers regarding its products. The indictment referenced an email from a Lucent employee that both Kuhnash and Jimerson received that discussed data manipulation, changing UL-certified product formulations and customer complaints.
The indictment further alleged that, in discussing the email among themselves, Kuhnash and Jimerson said they would not let anyone see or have knowledge of the employee's email.
The indictment alleged that neither Kuhnash nor Jimerson took meaningful steps to stop Lucent's alleged fraud, nor did they disclose the existence of the fraud to Citadel who was acquiring Lucent's business.
Lucent was acquired shortly after that, and Kuhnash and Jimerson allegedly received significant compensation for their Lucent stock. That compensation allegedly included stock in Citadel.
Additionally, the indictment alleged that, even after the acquisition was completed, Kuhnash and Jimerson did not take meaningful steps to stop Lucent's fraud on its customers and did not disclose the existence of the fraud, including to the acquiring company's outside auditors.
Although the indictment doesn't specifically name Schulman or Citadel, it said when Schulman acquired Citadel in 2015, the two profited a second time. Both men allegedly owned significant stock in what was then Citadel, and as a result of the second acquisition, both allegedly received hundreds of thousands of dollars.
In total, the indictment alleges that Kuhnash and Jimerson personally received approximately $2 million from the two acquisitions of their stock. The indictment further alleges that Lucent's fraud on its customers was discovered by Schulman a few months after acquiring Lucent's business.
On the day that Schulman disclosed the existence of Lucent's fraud to investors, its stock price dropped 25 percent.
Finally, the indictment alleges that Jimerson obstructed justice and made false statements to the FBI by stating he was not aware of Lucent's fraud on its customers and did not receive the employee email.
The defendants face possible sentences of five to 20 years for each count. The case is being jointly investigated by the Internal Revenue Service's criminal investigation division and the Federal Bureau of Investigation.
"These Lucent executives filled their pockets through fraud and numerous acts of deceit," IRS Special Agent in Charge Gabriel Grchan said in the release. "As in this case and countless others, our agents will find corruption and bring it to justice."
Kuhnash served as CEO and president of Lucent from 2008 to 2014, according to his LinkedIn profile. Prior to joining Lucent, Kuhnash was an executive at automotive injection molder Arkay Industries Inc. for almost 30 years.
In an email, attorney Kevin Tierney said that he and Kuhnash "recently received the indictment and are still reviewing it. ... It would be premature to make a comment at this time."
Jimerson was chief operating officer at Lucent from 2012 to 2013 and later a vice president at Citadel from 2013 to 2015, according to his LinkedIn profile. His attorney could not be reached for comment.
Judge dismisses Schulman suit
In related news, a lawsuit filed by Schulman in June 2016 was dismissed in early December in Delaware Chancery Court. Schulman had filed the case against Citadel and several of its former owners and executives and was seeking damages of almost $300 million.
The trial began in April in Wilmington, Del. and had continued even after Schulman was acquired by LBI in August. Jimerson had been named as a defendant in that suit.
The New York Post reported in early December that one former Citadel owner—private equity firm HGGC of Palo Alto, Calif.—paid a settlement that the paper estimated at $100 million.
In an email, an LBI spokeswoman said that the firm "can confirm that the parties resolved the litigation, which resulted in the filing of dismissal papers." She added that she could not provide further details because of "the confidential nature of the agreement."
HGGC officials could not be reached for comment. Former NFL star Steve Young is a founder of HGGC and remains an investor.
A court official said that Matrixx Group, an Evansville-based unit of Citadel that became part of Schulman and now is part of LBI, filed a suit in 2016 against River Associates of Chattanooga, Tenn., which had invested in Lucent in 2005. That case remains open, but has not seen much recent activity and has no new hearings scheduled.