Civil Suit Claims Foss Board Negligent

By Patrick Cronin

Hampton Union, Friday, June 16, 2006

[The following article is courtesy of the Hampton Union and Seacoast Online.]

HAMPTON -- Creditors of the bankrupt Foss Manufacturing Co. filed a civil suit against former chief executive officer Steven Foss and former executives.

Plaintiffs seek monetary damages alleging Foss executives fraudulently "looted" company funds.

The suit, filed in federal court this week, claims among other things, the former board of directors failed to live up to its duties and that company money was wasted in excessive salaries, bonuses, illegal preferred stock dividends and for personal uses unrelated to business operation.

Others named in the suit include former chief financial officer Kevin Sexton, and the former board of directors, which includes Foss's wife Patricia, daughter Jenifer Smyth, brother Dennis Foss and David Rowell. The Foss Family LLC, Foss Reality Inc., Business Helicopter Inc., and Custom Travel of New Hampshire are also named as defendants.

Foss Manufacturing filed for bankruptcy this past September after its chief lender, CapitalSource Finance, cut off credit, alleging the company fraudulently borrowed millions of dollars to benefit itself and company insiders. The company was sold this spring through bankruptcy proceedings and is under new management.

According to the 114-page complaint, Foss Manufacturing was on the brink of bankruptcy for several years, but remained afloat by misrepresenting its condition and falsifying financial information to its debtors to continue receiving a line of credit.

The complaint alleges Foss enlisted Sexton, the former chief financial officer and Marcella Darling, former head of the technology department, by creating false financial documents and inventory reports.

Creditors said while the company was on brink of financial ruin, "extraordinary" payments were made to Foss and Sexton.

Creditors allege from 2001 until the company filed for bankruptcy Foss received $902,762 over and beyond his salary, and unjustly increased his yearly salary by $104,000 per year bringing his annual salary to $992,000 by June 2005.

Sexton received a $30,000 loan from the company he allegedly never repaid and a $24,000 bonus in 2004 when no other employee received one that year. Also in 2004, Sexton received a $53,601 raise for "significant additional duties" even though no new duties were added to his job description.

The suit alleges $223,095 in company funds were used to make improvements to Smyth's home in Hamilton, Mass., while $12,875 was used to upgrade Stephen Foss's home in Rye.

Foss is also accused of using the company's American Express cards, racking up $561,923 in personal charges and being reimbursed $483,196 for non-business expenses including club memberships and house account bills at more than a dozen private clubs in Bermuda, New York, Florida and New Hampshire.

Company funds were also allegedly paid to Business Helicopters Inc., owned by Stephen Foss, for Foss and his family to travel back and forth to their home in Naples, Fla.

The suit claims the company purchased a personal residence for the Foss family housekeeper at 8 Towle Farm Road in Hampton and two homes on Drakeside Road in Hampton. According to court documents, the homes were transferred to Foss Family LLC II, a limited liability corporation owned by the Foss Family LLC, and then leased back to the company, which paid the mortgage on the properties.

Creditors further claim illegal dividends were paid to the company's preferred stockholders, all of whom were Foss family members or their affiliates.

The suit states the board of directors failed its duties, especially after Sexton's resignation. Sexton allegedly sent the directors an e-mail in March 2005, stating he was asked on numerous occasions to do "unprofessional, unethical, and other things to protect the Foss family." The suit claims the directors failed to investigate and instead paid Sexton $50,000 after he left the company and later gave him a $25,000 check as a reward for his years of service.

Stephen Foss was asked to resign by the board of directors in August 2005 after fraud allegations came to light and CapitalSource threatened to cut of the company's credit line.

The suit comes on the heels of a creditor's investigation of the company and its former officers. Lawyer Paul Daley, who represents Stephen Foss, said the investigation was nothing more than a "fishing expedition" to get dirt to file a civil suit against his client.

Creditors said the suit's purpose was to recuperate funds not repaid as part of bankruptcy proceedings. In all, more than $50 million of claims have been made against the company, but the company was sold for less than $35 million.