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Sun Capital execs 'shocked' by Marsh financials

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Any feelings of satisfaction that executives of Sun Capital Partners had after completing its acquisition of Marsh Supermarkets Inc. quickly turned to “shock and surprise,” a managing director of the private-equity firm told jurors Tuesday.

Sun Capital bought the locally based supermarket chain in 2006 and began paying longtime CEO Don Marsh a $4.2 million severance after the two parties agreed he would no longer remain with the business.

But Marsh Supermarkets, under the direction of Sun Capital, stopped paying Marsh after it says it discovered millions of dollars of travel expenses, some related to visits to mistresses, that he billed to the company.

Marsh’s trips, many of them via the company jet, are at the crux of a civil lawsuit brought by the supermarket chain. It accuses him of using company funds to pay more than $3 million in personal expenses. Marsh, 75, spent 38 years leading the public company before Sun bought it.

“We said, ‘This can’t be true that this went on,’” recalled Scott King, a managing director of Sun Capital. ‘What do we do?’”

What Marsh Supermarkets did was terminate its agreement with Don Marsh about 18 months after the sale, paying him just half his severance. After Marsh Supermarkets sued Don Marsh in federal court in 2009, he countersued, asserting the company improperly halted his post-retirement payouts in 2008.

The decision to halt payment weighed on Marsh Supermarkets, which spent more than a year investigating the company’s finances while worrying about any backlash it might suffer from bad press.

At the time, the iconic chain, founded by Don Marsh’s father in 1931, had more than 100 stores in Indiana, Illinois and Ohio. Moreover, Marsh was one of Indiana’s highest-profile executives for decades and frequently appeared in the company’s TV advertising.

“His last name’s on the building,” King said. “It could harm the business from a PR standpoint to have this out in the papers.”

Marsh Supermarkets ultimately chose to attempt to recoup the expenses from Marsh in court, because “it was not his money to spend; it was the shareholders',” King said.

Sun Capital, which specializes in acquiring companies with $50 million to $500 million in annual revenue, previously had not acquired a company as large as Marsh.

During cross-examination of King, Andrew McNeil, Don Marsh’s lawyer, questioned whether the acquisition was too big for Sun Capital. It took several months for the deal to close, rather than the 30 days it typically takes the private-equity firm to conclude a purchase.

Without Sun Capital, Marsh Supermarkets likely would have ended up in bankruptcy, King said. A former Marsh CFO told jurors Friday that he sought out bankruptcy lawyers for advice.

Sun Capital replaced Don Marsh with Frank Lazaran, a veteran supermarket executive who arrived to a CEO's office devoid of documents or files. He testified via deposition Tuesday that he didn’t understand Marsh Supermarkets’ e-voucher system used to track Don Marsh’s expenses.

“I'd never seen anything like it,” Lazaran said in his deposition.

Attorneys for Don Marsh defend the expenses, saying they were within the boundaries of his employment contract. And they say his extensive travels were justified to promote the company and stay on top of trends in food retailing.

Also testifying Tuesday morning was Patrick Calhoun, a former IRS special agent hired by the supermarket chain to look into Don Marsh's expenses from 1999 to 2006 and determine whether they were "ordinary and necessary."

Among the discoveries he discussed on the stand:

— $927,210 in  "non-deductible outings" that were improperly expensed. Examples include taxidermy services and hunting licenses.

— $804,141 in costs for personal use of the company airplane, versus $906,997 for business use. After reviewing aircraft records, Calhoun determined that 47 percent of the flights were for personal business, far more than the 10 percent that Don Marsh reported.

Lawyers for Marsh Supermarkets are expected to wrap up their case against Don Marsh on Tuesday afternoon and could call David Marsh, Don Marsh’s son, as their last witness. David worked under his father as company president.

Marsh Supermarkets launched a legal fight against David in 2006 after he sued the company, alleging it shorted him $102,000 on his $2.1 million severance package. The company shot back that he had used the company “as his personal checkbook,” submitting expenses from family trips, and must repay more than $750,000. The parties reached a confidential settlement in 2007.

Don Marsh’s trial is expected to last two weeks and should conclude Friday.

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  • @ Pete
    You hit the nail on the head, Pete.
  • @mlf
    You are correct. Don stole money from the stockholders, not Sun. Sun knew all about Don milking the company dry. They didn't care when it was the stockholders getting robbed; they got mad when they realized they got played too and they got even madder when Don sued them. It's really a shame for all the stockholders and the majority of the Marshes who are nothing like Don.
  • Down with Sun
    Ask Sun how many employees they let go that we're close to retirement when they took over. My uncle worked for Marsh his entire adult life. Even during his teenage years. He was close to retiring when Sun took over and then let him go. They hired a 20 something kid to take his management position. They paid the kid half of what my uncle was being paid and didn't have to pay his retirement. As far as I'm concerned, I hope people stop shopping marsh and it goes under. The prices stink as it is right now anyway. Go Kroger!
  • What Goes Around
    What about the owner of Sun Capital, Mark Leder's nude parties on the company dime. After all, it was at Marc Leder's home fundraiser for Mitt Romney where Mitt made his famous 47% remarks. These CEOs are nothing more than greedy weasels who think the world is supposed to bow to their false genius. http://www.nypost.com/p/pagesix/nude_frolic_in_tycoon_pool_S8t8KXKG1IeGFSDtN6Xm9M
  • greedy piggy
    The Marsh family started the supermarket, but it was a series of bad decisions made by Donnie and his family that ended up with the remaining Marsh assets up for sale. Don also had some creative accounting where he was hiding his expenses; the total amount of these expenses was being hidden from both the stock holders and then from Sun Capital This is not a matter of Sun capital treating the Marshes like they do not matter, the court case is more the result of a greedy pig not realizing that the trough is empty. Keep in mind that this case was initiated by Don Marsh who felt that he was being treated unfairly by Sun. After Sun got sued by Don, they counter sued. When Sun bought Marsh, Marsh supermarkets was going bankrupt, the vendors and suppliers were getting ready to stop supplying Marsh, Marsh was up for sale, and sun capital bought the remaining assets. After Sun got a closer look at the books, they had to cut off Donnie. Any competent investor would have done the same.
  • union
    I can not believe someone has not put the blame on the union yet. Bankrupt companys always blame the unions while they line their own pockets.
  • Wise up everyone
    Fraud is not something that is 'uncovered' so easily in due diligence. To say it was not caught early enough does't fly in the midst of the SEC, IRS and any other Dept involved to protect SHAREHOLDERS. Contrary to everyone's supposed hard feelings towards Sun.....they actually made a killing on this deal, selling the parts left them with lots of cash....and the grocery division, which will eventually be sold, if nothing more than for the instant "footprint" it gives. Don Marsh was a crook, time doesn't absolve him of his misdeeds.
  • Unethical behavior
    For all of you who think the private equity firm did not do its homework and is treating Marsh unfairly consider this: It is not likely that due diligence would have turned up these expenses as personal because the company approved them as business and it would have been difficult to obtain the detail necessary to review to make this determination until they purchased the company; also consider that it appears that Don Marsh may have lied to the buyer as well as the public shareholders. Remember he signed off on the public disclosure and ignorance of the law is no excuse. I expect that the CFO informed him of what he was signing and it had been discussed in newspapers and magazines for months. Also, in my opinion a CEO has a responsibility to the employees and vendors as well as shareholders to be diligent in running their company to ensure its longevity. He wasted funds while they were on track toward bankruptcy. I believe that Sun Capital is acting prudently and i admire them for doing what is right rather than shirking under the glare of potential bad publicity like too many companies do.
  • @Natcha
    While the name is Marsh, it is a public company. The CEO, nor anyone else can use money of the public company for personal use without reporting it as income, and being part of the person's pay. It isn't an issue of Marsh is an issue or not. He, in essence stole money from the stockholders.
  • Makes you wonder
    If Don Marsh hadn't sued Sun for 2 million in back-pay after he was fired for "no reason", would this case be going on like this? He would have been way ahead if he'd let it go. The greedy will never learn - all luck runs out and eventually and there's a high price to pay.
  • Due Diligence
    Pete I agree. Why didn't the do more due diligence prior to the purchase.Was the information hidden from them. This is business not personal. Marsh was almost Bankrupt from what I heard from employees at the time. Don Marsh had no choice but to find investors to purchase the chain or lose everything his family had built. I rarely shop there as they are very expensive compared to the other stores.
  • Shock and Surprise?
    On surface, it sounds like Sun Capital Partners figuratively bought a 'pig in a poke'. Investigating the company’s finances should have occurred before the purchase.
  • Sour Sun
    Sun had done their due diligence and should have uncovered the unreasonable expenses. The truth is Marsh should have gone through bankruptcy and sold off in pieces. Sun was smart enough to realize that there was value in a lot of the less public elements like Crystal Catering, the real estate, and the like. Sun finds itself holding the bag with a less than appealing grocery operation that they have been unable to unload. Their solution is simple...First they sue anyone and anything that they can to try and recover anything...Second they turn the screws on their customers and decrease product size and increase prices. Sun has literally turned Marsh into convenience stores. Priced themselves out of weekly grocery gathering and are simply utilizing their locations to rob the neighborhoods at the checkout stand.
  • Due Diligence
    Don Marsh was in the process of driving the grocery chain into the ground and was bailed out by a private equity group that did not do its homework. I am sure Don was using the company as his own personal checkbook for many years prioir to the sale. While this may not be a criminal act in itself, tax evasion is. If personal trips were categorized as business expenses this would now be earned income for Don Marsh. I think Sun is only looking back to the date it acquired the business but the IRS may want to look back even further. Of course, there is probabaly no money left to pay anyone. Sun bailed out a company that was on the verge of bankruptcy and now they are trying to save some face and money by cutting thier losses. No one cares about Don Marsh. Ultimately, Don Marsh was a philanderer and a poor business man that took down the company his father built, nothing more.
    • Does Anyone Really Care About the Marsh Investors?
      The Marsh family started and built the Marsh Supermarkets name. Then some investors purchased the business, hoping to make a killing, and they treat the Marshes like they don't matter, and freely sue them when they don't get what they want. It will be interesting to see whether the jury cares about investors more than the family who gave us Marsh Supermarkets in the first place.
      • No Bad Press
        It's not bad press. I only began shopping at Marsh again once they outed Marsh. Now I shop there quite often and will continue to.

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