Lawyers for Don Marsh continue to hammer home their claims that the former supermarket CEO's expenses for lavish travel were widely accepted as normal business costs.
Defense witnesses Mark Varner and Steve May, two top-level accounting executives who worked at Marsh Supermarkets Inc., both testified Thursday in federal court in Indianapolis that company directors and other executives knew about its executive vouchers program.
The so-called e-voucher system has been closely scrutinized by lawyers of Marsh Supermarkets, which is suing Don Marsh in an attempt to recover more than $3 million in company funds it says the former CEO spent on travel, gifts and meals.
May, who served as Marsh Supermarkets’ director of internal controls from January 2003 to December 2006—about the time Florida-based Sun Capital Partners bought the company—said he learned of the e-voucher system from then-CFO Doug Elbin.
Although May recounted that Elbin described it as a “secret accounts system,” Elbin also said it shouldn’t be a “huge concern” to May because the corporate controller knew about it.
Varner was Marsh Supermarkets’ corporate controller from 1991 until he retired in 2007 after a 36-year career at the company. Varner told jurors he actually reported to Elbin and Doug Dougherty, another CFO, during Varner’s tenure.
When one of Don Marsh’s lawyers, Jonathan Mayes, asked Varner whether he was aware of the e-voucher system, he replied: “absolutely, yes.”
Varner said he first became aware of the system in the late 1970s or early 1980s. Much of Don Marsh’s defense rests on his assertions that he submitted his business expenses for reimbursement within the system for many years while paying personal expenses out of his own pocket.
Lawyers for Marsh Supermarkets maintain he used it as an accounting maneuver to hide his lavish spending.
The invoices “demanded some confidentiality,” Varner said, because the expenses might contain business secrets not to be seen by general accounting clerks.
Instead, Karen Workman, Marsh’s director of accounting until 2008, handled most of the invoices, Varner said. She testified Wednesday that higher-ranking company executives approved the expenses.
Varner said that as many as 35 to 40 company directors and executives might have had their expenses paid through the e-voucher system to ensure that confidentiality.
Varner told jurors he provided e-voucher documentation to outside auditors, who, “not to my knowledge,” ever questioned the expenses.
Charles R. Clark, a Muncie attorney and former Marsh board member who approved some of Don Marsh’s expense reports, testified that he also relied on the company’s auditors to voice concerns about expenses.
“I didn’t hear anything, so I didn’t react,” he said, when asked on cross-examination whether he drew any conclusions from a lack of auditor concerns.
Scott Sorensen, a former senior manager at Ernst & Young LLP, Marsh Supermarkets’ auditor at the time, testified Wednesday during cross-examination that it’s not an auditor’s responsibility to detect fraud.
Varner further told jurors that he was involved in due diligence activities leading up to Marsh Supermarkets’ sale in September 2006 to Sun Capital. During the process, he provided the private-equity firm with “volumes” of reports detailing Don Marsh’s travel and entertainment expenses.
He testified that Sun Capital never raised concerns about Marsh’s treating his travel costs as business expenses.
May later told jurors that, as the sale of Sun Capital approached, he was tasked by Dougherty to summarize in a report the contents of e-voucher documents for the fiscal years 2005 and 2006.
May presented his findings to Marsh Supermarkets' audit committee, in which he said the firm's internal financial control system showed “significant deficiencies.”
He described the system to jurors as “average” to “below average.” He maintained that the company’s CFO is charged with establishing internal controls.
On cross-examination, however, he admitted that Don Marsh and his son David Marsh, the company’s former president and chief operating officer, also shared in the responsibility.
“Between the CEO and the CFO, you would expect the CEO to contribute more to the tone at the top of the company,” Ryan Hurley, a lawyer for Marsh Supermarkets, asked May during cross examination.
“Yes,” replied May.
The defense expects to rest its case Thursday afternoon, which would leave closing arguments and jury instructions for Friday morning. The jury could get the case as soon as mid-morning Friday.