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Feds: AIT's Evans 'unjustly enriched' himself in sale to employees

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Just three months before the parent company of AIT Laboratories was sold in 2009 to its employees for $90 million, it was appraised for less than one-fifth as much, according to a lawsuit filed Friday by the U.S. Department of Labor.

That sudden swing in value is why the federal government has sued AIT founder Michael Evans and the bank he hired to help sell AIT, alleging they breached their fiduciary duties. The suit, filed in federal court in Indianapolis, asks the court to force Evans and Louisville-based PBI Bank to give back any gains they made from the sale.

For Evans, 70, that could be a huge pile of money. He owned nearly 88 percent of AIT when it was sold to an employee stock ownership plan, or ESOP, according to the lawsuit. Evans did not cash out that entire stake immediately when the sale was made, but instead was to be paid over time as AIT employees made contributions to the ESOP, which functions as their company retirement plan.

The lawsuit claims that Evans has been paid $16.3 million so far. It's not clear from the suit how much more he might be in line to collect. The complaint notes that in 2013, a period when AIT was under severe financial pressure, a recapitalization resulted in Evans, who had helped finance the buyout, receiving a 90-percent stake in AIT. Meanwhile, the ESOP's stake shrank from 100 percent to 10 percent.

“Defendant Evans was unjustly enriched through the June 30, 2009 stock purchase because he knew, or should have known, that he and other selling shareholders were being vastly overpaid for their stock by the ESOP,” the lawsuit states.

An email sent to Evans on Tuesday morning was not immediately returned. A phone message left for a spokeswoman of PBI Bank also was not immediately returned.

In 2010, Evans committed $48 million of his expected proceeds from the AIT sale to Marian University, to help it finance the College of Osteopathic Medicine it launched last year. Evans already has had to slow his payments to Marian due to financial troubles at AIT.

The company started suffering in 2011 when the federal Medicare program cut reimbursement rates 47 percent for AIT’s bread-and-butter service: testing urine samples of patients receiving prescription painkillers to make sure they’re not abusing or diverting the drugs. Such tests made up about 90 percent of AIT’s revenue, which was $55 million in 2012, the most recent year available.

That change in fortunes means AIT had a value last fall of about $16 million, according to the lawsuit. The suit says that's about the same amount it was worth just before the sale to the ESOP in 2009.

Also benefiting from the sale of their AIT stock were four other AIT employees: Eric Orme, who is now CEO of Indianapolis-based Wellfount Corp., Ron Thieme, who is now chief information officer at Community Health Network; Todd Pedersen, who was AIT’s vice president of business development; and Andrea Terrell, who is laboratory director at AIT Labs, as well as Evans’ wife.

Each of those four were paid $2.7 million for their stock in AIT during the 2009 buyout, according to the lawsuit. None is named as defendants in the suit.

In March 2009, Indianapolis-based City Securities Corp. performed an appraisal of AIT Holding Co. Inc., the parent company of AIT Labs, so the five stockholders of the company—Evans, Orme, Thieme, Pedersen and Terrell—would have an accurate figure to report on their taxes.

City Securities calculated the value of the company at $17.1 million, although that value had been reduced by 20 percent to figure an accurate value for shares held in a minority, non-control status. Without that discount, City Securities’ analysis would have found AIT Holding to be worth $21.4 million.

However, the lawsuit alleges that the ESOP didn't gain true control over AIT because it was required to vote in board elections for the five directors named by Evans. Evans' clout proved useful after he stepped down as CEO at the end of 2011 and gave the reins to Thieme. Nine months later, he installed himself again as CEO, and Thieme left the company.

In May 2009, AIT and PBI Bank hired the Seattle-based accounting firm Moss Adams LLP to prepare a market valuation of AIT Holding. Two months later, Moss Adams determined that AIT was worth $106.2 million, which more than justified the $90 million purchase price paid by the ESOP for AIT.

But the Department of Labor said the Moss Adams analysis was deficient in numerous ways.

First, it valued AIT as if the ESOP would have control of the company, even though Evans would have authority to appoint a majority of the board of directors.

Second, Moss Adams conducted but then ignored a competitive market analysis that found reimbursement rates for lab tests were likely to be cut and competition was likely to increase.

One reason Moss Adams did not use the competitive market analysis in its calculations was because AIT had been spending a large amount of its revenue—12 percent—to acquire “leading edge technology." According to the lawsuit, Moss Adams claimed this spending gave AIT a "competitive advantage."

But Moss Adams’ analysis also projected that AIT in future years would spend only 0.9 percent of its revenue, rather than 12 percent, on acquiring new technology. That decision effectively "overstated the future earnings" of the company, according to the lawsuit, and thereby the value of AIT.

Third, Moss Adams relied primarily on AIT’s 2009 assumptions for sales growth, revenue and profit in future years, and it did not get complete data on comparable companies used in its valuation.

Messages left for Moss Adams' spokeswomen were not immediately returned Tuesday morning.

AIT Laboratories, which is now led by CEO Matt Neff, is not a defendant in the lawsuit. Nevertheless, the company issued a statement Friday about the lawsuit.

“AIT Laboratories regrets to learn of the lawsuit filed by the Department of Labor involving the ESOP creation in 2009. … It is also important to note that any money that the DOL could recover in the lawsuit would be payable to AIT's ESOP for the benefit of its employees,” AIT said in its statement. “AIT plans to continue working to grow the company, adding more well-paying Indiana jobs, despite the challenging business conditions that have been driven by sharp cuts to Medicare and other healthcare payment sources.”

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  • The vast majority of ESOPs work out well
    I have had the privilege of helping to create ESOPs in Central Indiana and across the country since 1990. Both in my personal situation and in general, most ESOP creations work out well for employees. I believe there should always be an outside trustee and that trustee should have complete power in hiring the valuation firm. The Department of Labor has been hiring more talented investigators to audit ESOP transactions. The northern part if our MSA is covered by the Chicago office. The rest by the Cincy office. My experience is that the DOL is very fair ready to praise good ESOP transactions, while condemning ones they believe to be exploitative. Please do not judge ESOPS to be bad in general, they are fabulous at most companies. Just ask employees of Wood-Mizer, Herff Jones and other great Indy employee owned companies.
  • Terrible
    The employees never asked for an ESOP. Dr. Evans and his cronies pushed it from day one. It was to be a tremendous benefit for employees. Now we know why. Greasy haired Eric Orme made off with $2.7 million. Ron Thieme, who couldn't manage his way out of a wet paper bag, made off with $2.7 million. Todd Pedersen, whose role I'm still not sure of to this day, made off with $2.7 million. Andrea Terrell, current acting part time lab director-consultant and Dr. Evans ' wife, made off with $2.7 million. Sickening. In the subsequent years, employees have been cast off without reason other than financials. Glad that Dr. Evans and the cronies were so concerned for the company's well-being. I don't see any jail time from this, but they deserve some stiff penalties for screwing over the employees of AIT Labs.
  • Unjust
    This company took advantage of its employees and the ESOP at every turn. Dr. Evans and his inner circle had control of every aspect of the company, including the ESOP, every step of the way. He never relinquished power.
  • Insider Information
    This is an obvious case of insider trading. Evans and his cronies knew that AIT profits would plummet when the prices AIT charged were reduced by 1/2. So, what to do? Sell to an informed third party who would deeply discount the price? Or, sell to an ESOP at a price 5 X greater knowing that Ron Thieme who supposedly represented the employees was getting a $3 million payoff to agree to this inflated price. Where is Ron Thieme now?
  • Wrong nuts
    This is not an arms-length transaction. The DOL must look at these closely. Management all had a conflict of interest. The ESOP should have a 3rd party trustee involved who is not mentioned here. JK: was there a trustee involved?
  • This is Nuts
    The value of any company is what a buyer will pay for it. As such, values are subjective. If you had 10 consultants they would give you 10 different values. It has to be impossible to prove unless government has specific e-mails indicating they purposely inflated the value. Surely, the government will extort the $10 to $15 M it is going to cost to defend then go away. What a crock!

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