A former top executive of Marsh Supermarkets Inc. became so concerned about the company’s deteriorating finances less than a decade ago that he took the desperate step of meeting with bankruptcy lawyers.
Doug Dougherty, a key witness in the civil trial of former CEO Don Marsh and Marsh's former chief financial officer, testified Friday morning that his warnings of possible financial collapse largely went ignored by his boss at the time.
“I was getting more calls from vendors that had some concern about our ability to pay,” Dougherty said.
Dougherty began receiving calls from vendors in late 2004 and early 2005, about a year-and-a-half before Florida-based Sun Capital Partners acquired the locally based supermarket chain. Marsh Supermarkets says Don Marsh continued to treat the company as his personal checkbook even after the CFO warned of financial problems.
Marsh Supermarkets accuses the former CEO of using company funds to pay more than $3 million in personal expenses. Marsh, 75, spent 38 years leading the public company before it was purchased by Sun Capital.
Dougherty told jurors he expressed his concerns about the company’s finances to Marsh, who reassured him “not to worry about it” because Marsh Supermarkets is in “better financial shape than he knows.”
Don Marsh testified Wednesday that he didn’t agree with company directors that the company was in financial distress.
“Some people felt that way,” Marsh said. “I didn’t.”
But Dougherty said Friday that he became increasingly worried because the company planned to refinance a line of credit and he didn’t believe it would qualify for satisfactory financing terms if it was performing poorly.
Dougherty had served as the company’s CFO since 1994 and was a veteran accountant who previously held similar positions at several other companies, including Topeka, Kan.-based Payless Shoesource Inc.
His relationship was often rocky with Don Marsh, who thought Dougherty’s business style was “too conservative,” he told jurors.
“There was a lot of conflict,” Dougherty testified. “You wouldn’t know if you were dealing with a rational businessman. He threatened to fire me many times.”
Don Marsh did just that in May 2005, when he told Dougherty he needed to be gone by the time Marsh returned from a five-day trip. Dougherty said Marsh never gave him a reason.
Earlier in the trial, Don Marsh told jurors: “I felt like he wasn’t performing the way I thought he should.”
After his replacement quit, however, Dougherty returned to Marsh Supermarkets in December 2005. At the time, Marsh was a $1.7 billion-in-revenue company with more than 115 grocery stores and 160 Village Pantry gas stations.
David Herzog, Marsh Supermarkets' lawyer, asked Dougherty why he would want to return seven months after being fired.
“I knew losing two CFOs in that time would be very difficult for a company to get terms from vendors, and there were 10,000 jobs on the line of people I liked,” Dougherty responded.
Before his firing, directors of Marsh Supermarkets in June 2004 signed off on a company code of conduct following federal passage of the Sarbanes-Oxley Act, a high-profile law which mandates that top management of public companies certify the accuracy of financial information.
But jurors learned earlier in the trial that Marsh continued to use the company jet for personal reasons, including numerous extramarital affairs, even after his company adopted the code of conduct to discourage financial fraud within the company.
Marsh testified Thursday that he’s “always been open and honest with the company.”
Dougherty, however, said Friday that the code of conduct was never publicized within the company because “my understanding was that Mr. Marsh didn’t want to widely distribute” it.
Lawyers for Don Marsh began cross-examining Dougherty early Friday afternoon. During that questioning, Dougherty told jurors he was not aware of the company's outside auditor, Ernst & Young, ever raising concerns about Don Marsh's expenses during the CPA firm's annual reviews of the company's books and records.
On Thursday, Don Marsh’s lawyer revealed he owes more than $500,000 in federal taxes from an IRS audit that found "disallowed deductions" for personal expenses he racked up from April 2004 to September 2006.
The trial, which began Monday, is expected to last another week.