AIT Laboratories and its former executives have already incurred nearly $5 million defending themselves against charges by the U.S. Department of Labor that AIT founder Michael Evans sold the company to its employees at an inflated price.
Those expenses have so far been paid by a $5 million executive risk insurance policy AIT had purchased before the Labor Department filed suit against Evans in August 2014.
But with legal expenses still racking up, AIT and Evans have filed their own lawsuit against a second insurance company from which they bought another $5 million of so-called “excess liability” insurance. They want a court to compel that company to pay future expenses in the ongoing litigation with the government.
AIT and Evans sued Philadelphia-based ACE American Insurance Co. on Monday in federal court in Indianapolis, saying the insurer wrongly denied AIT’s claim for coverage of its legal expenses under a liability insurance policy AIT purchased in August 2013.
Three months after buying that insurance policy, AIT received a letter from the Department of Labor saying that the bank Evans hired to sell his stake in AIT may have breached its fiduciary duties to AIT’s employee stock ownership plan, or ESOP.
The Department of Labor eventually sued both Evans and the bank, Louisville-based PBI Bank Inc., which acts as the trustee of AIT’s ESOP.
The Labor Department’s lawsuit claimed that a valuation of AIT conducted for PBI one week before the sale was six times higher than a valuation made just three months earlier by Indianapolis-based City Securities Corp.
That second evaluation, conducted by Seattle-based accounting firm Moss Adams LLP, allowed Evans and his co-executives to sell their stakes in AIT for $90 million, instead of the roughly $20 million they were really worth, according to the Labor Department’s lawsuit. The AIT ESOP took out loans to purchase the company, promising to use employee retirement contirbutions to pay back the loans over time.
The Department of Labor settled with AIT and the other executives in August 2014, according to the new lawsuit, but decided to pursue charges against Evans and PBI.
Those settlements, as well as all the legal costs for the current and former AIT executives in the Labor Department’s investigation and lawsuit, have been paid by Federal Insurance Co., a subsidiary of New Jersey-based Chubb Corp.
The executives that settled with the Labor Department are Eric Orme, who is now CEO of Indianapolis-based Wellfount Corp.; Ron Thieme, who is now chief knowledge and information officer at the Indianapolis-based Community Health Network hospital system; Andrea Terrell, who is Evans’ wife and who still works at AIT as its laboratory director; and Todd Pedersen, who is now vice president of corporate affairs at Indianapolis-based software firm Interactive Intelligence Inc., according to his LinkedIn profile.
In a brief interview, Evans said he disagrees with the Labor Department’s depiction of the 2009 sale of AIT but declined to discuss it in detail.
“Obviously, I do, because I’m contesting it,” Evans said. But, he added, “I prefer to wait until I get in front of a judge. I just don’t believe in trying cases in the media.”
In November 2014, Evans filed answers to the Labor Department’s lawsuit, in which he denied the valuation figures attributed to City Securities, denied playing a role in PBI’s decision to hire an outside firm to value AIT and also denied being responsible for hiring PBI as trustee of the ESOP. PBI’s hiring, Evans’ answers stated, was Orme’s decision.
“The losses complained of [by] the [Labor Department] were not caused by any fault, act or omission by Dr. Evans, but were caused by circumstances, entities or person, including without limitation, downward economic trends and market changes for which Dr. Evans is not responsible and cannot be held liable,” wrote Evans’ lawyer, Andrew McNeil, of the Indianapolis law firm Bose McKinney & Evans.
McNeil declined to comment further this week. The case has been scheduled for trial in November 2016.
In the lawsuit against ACE American Insurance, AIT and Evans note that their first liability insurance policy has been honored by Federal Insurance because the Department of Labor’s investigation did not produce written allegations of wrongful acts—the standard for making a claim against the insurance policy—any earlier than September 2013.
That falls within the period of AIT’s insurance policies, which ran from July 1, 2013, until July 1, 2014.
But ACE American claims that the Labor Department’s investigation actually began in January 2011, when the Department of Labor, or DOL, began an audit of AIT’s ESOP.
“This was 2½ years before the inception of the ACE Policy Period,” wrote Angelo Savino, an attorney for ACE American, in a June 2014 letter to AIT. “Moreover, defense counsel for AIT met with and produced documents to the DOL in connection with its investigation of the [ESOP] Transaction in June 2013, prior to the July 1, 2013, inception of the ACE Excess Policy.”
A message left for Savino seeking comment on the lawsuit by AIT and Evans was not returned.
Evans, 71, who is on the board of AIT but no longer works for the company, referred questions about the lawsuit against ACE American to AIT CEO Matt Neff and to AIT’s attorneys at the Faegre Baker Daniels law firm.
Chris Scanlon, who is representing AIT against ACE American, declined to comment on the case.