WASHINGTON—The alleged fraud that led to the Feb. 12 arrests of two former Lucent executives is detailed in a colorful filing made that same day by the U.S. Securities and Exchange Commission.
Kevin Kuhnash, 56, and Jason Jimerson, 44, have been charged with fraud for their activities at Evansville, Ind.-based Lucent. Citadel Plastics bought Lucent in 2013, and it was acquired by A. Schulman Inc. in 2015.
Schulman now is part of LyondellBasell Industries.
Schulman first disclosed the alleged fraud shortly after the acquisition and filed a lawsuit against Citadel and others in 2016. That suit recently was settled and dismissed.
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."
On the first page of the 27-page SEC filing, officials say, "Like a modern-day Rumpelstiltskin, Lucent claimed that it could transform 'garbage to gold.'"
Other highlights of the filing include:
Lucent promised customers that—unlike its competitors—it could process less expensive, recycled and scrap material and turn it into high-quality bulk plastics that met stringent standards on critical features like flame resistance and tensile strength.
Lucent's near-magic "garbage to gold" process was "a huge commercial success." Between 2007-2013, Lucent's annual sales almost doubled, going from less that $43 million to more than $80 million.
"Unfortunately, Lucent's business model was a fraud and defendants Kuhnash and Jimerson knew it," SEC officials said in the filing. In reality, they said, Lucent's plastics routinely flunked its own internal performance tests. Plastics that were supposed to be impact-resistant were too brittle. Alleged flame-resistant products caught fire for too long or melted too easily.?
In a September 2013 presentation to prospective investors, Lucent boasted that its ability to turn low-cost materials into high-performing compounds "is the essence of our secret sauce that allows us to slay the market leaders, practically at will." SEC officials said that, "In reality, Lucent's actual 'secret sauce' was fraud."
Officials contend that when a product failed one or more tests, Lucent employees sent the customer a certificate of analysis (COA) falsely stating that the product met all specifications. Between December 2010 and December 2013, "the vast majority" of COAs Lucent sent to customers contained falsified test results, SEC officials said.
In one example, Lucent claimed that it could make a clear, flame-retardant compound. That product was attractive to customers because it could be used in see-through plastic covers for electrical boxes and other applications. But Lucent discovered that the flame-retardant additive caused the product to appear opaque, not clear.
SEC officials said that Lucent "solved" this problem by removing flame retardant from the product and falsifying flame test results on COAs sent to customers. As a result, Lucent's customers bought an alleged flame-retardant plastic that, in reality, had no flame-retardant properties.
For products containing recycled material, Lucent falsely registered the product with testing firm Underwriters Laboratories as containing prime materials. UL would have put products made with recycled materials through more stringent testing. By registering its products as prime materials, Lucent saved money and avoided additional questions and procedures that could have uncovered its deception, SEC officials said.
Lucent also used old product samples to evade the UL certification process. SEC officials said that this practice "was so common that Lucent employees had a name for it; they referred to this practice as grabbing a sample from the 'box on the shelf.'"
In September 2013, when Lucent was soliciting buyers for the company, Lucent's technical director sent an email warning Kuhnash about "ethical/conscience issues," including changes to UL formulas, data manipulation and customer complaints.
In a subsequent email, Jimerson told Kuhnash that he had "similar fears and reservations," adding that potential acquirers could discover the problems in the due diligence process. Kuhnash replied: "I feel the same in your assessment regarding his latent fears of the diligence process," according to the complaint.