Foss creditor suit charges looting

Stephen Foss, the former chairman and chief executive officer of Foss Manufacturing Company, looted the Hampton-based firm of million of dollars while it was going broke and concealed the company’s insolvency from its creditors, charges the Official Committee of Unsecured Creditors in a suit filed Monday in federal Bankruptcy Court in Manchester.

According to the suit, Foss, with the help of chief financial officer Kevin Sexton, illegally transferred over a period of four years millions of dollars of the company’s assets for personal use as well as by Foss’s family, right up to the company’s bankruptcy filing in August of 2005.

(In April, a group of private investors bought Foss Manufacturing’s assets for $39 million as a growing concern leaving behind a bankrupt shell, now renamed Felt Manufacturing Company and run by a trustee appointed by the bankruptcy court. Felt Manufacturing was able to pay off its secured creditors in full, but that still left unsecured creditors some $15 million in the hole.)

The suit charges that the company’s money was used to pay mortgage and taxes and improvements of private residences; for millions of dollars in personal travel; membership fees at more than a dozen private clubs; and even for the consulting services of a jewelry company of a key employee.

Foss and Sexton falsified the books and withheld these transfer from board members – as well as from board members and top officials, including his brother Dennis Foss, his wife, Patricia Foss and his daughter Jennifer Foss Smyth, according to the suit. But the board members and company officials looked the other way, failing to perform their fiduciary duty that could have prevented the company from accumulating even more debt that couldn’t be paid back, the suit charges.

This was especially true, according to the suit, after Sexton resigned in March 2005, charging in a e-mail to board members that he had been asked numerous times to do “unprofessional, unethical and even ‘other things’ to protect the Foss family.”

Stephen Foss dismissed Sexton’s charges, blaming them on exhaustion and personal problems, says the suit, adding that the directors “blindly relied on whatever Defendant Stephen Foss told them.”

Foss’s attorney could not be reached for comment by NHBR Daily. Sexton’s attorney declined comment, as did Joe Foster, the local attorney representing the unsecured creditors.

The basic charges behind the 114-page complaint – and numerous accompanying documents — filed Monday against nine company officials and six Foss family businesses are not new. They surfaced shortly after the bankruptcy was first filed and when the unsecured creditors committee asked the bankruptcy court’s permission to use proceeds of the estate to finance an investigation into the company.

But the level of detail in the filing and the extent of the alleged “willful fraud” by Foss is new. In particular, the suit details how Foss, Sexton and Marcella Darling, the former head of Foss’s information technology department, on a nearly daily basis “craftily-manipulated” computer data to hide how deep the company had fallen into debt by misstating the increasing age of accounts receivables and depleted inventory levels to creditors.

While deceiving creditors, Foss treated the company like a “veritable candy store,” says the suit. Money that was supposed to go into a lock box controlled by the company’s largest secured creditors was instead whisked into various bank accounts or directed to pay a variety of personal expenses, the suit says, including:

• Some $900,000 of illegal dividends to preferred shareholders, including Stephen Foss, his daughter, brother and the family trust. Paying out dividends when the company is insolvent violates state corporate law.
• More than $1.7 million of insider loan repayments, with more than $1 million paid in the year before the company filed for bankruptcy.
• Nearly $562,000 in credit card bills for alleged personal expenses, including taxes, fees for clubs in Bermuda, Florida and New Hampshire, greens fees, restaurant charges, bar tabs, massage therapy charges and yoga classes.
• More than $1.4 million to New Hampshire Helicopters (now known as Business Helicopters), owned by Foss and used regularly by his family for travel between their residences in New Hampshire and Florida.
• More than $300,000 to pay for the personal residence of Stephen Foss and his wife in Hampton and Jennifer Foss Smyth and her husband John Smyth in Massachusetts.
• Increasing Stephen’s Foss’s salary by more than $100,000 to $992,000 without informing the board of directors;
• More than $156,000 to fund various residential properties owned by Foss family-owned entities without any business purpose (including one property allegedly occupied by the Foss family housekeeper)

While this was going on, hundreds of employees were laid off, and the company under-funded its pension plan by $12 million and health benefits by $1.7 million, the suit adds.

In addition to demanding the money back, the creditors are seeking a restraining order against any financial transfers by the defendants. It particularly cites a deposition from Patricia Foss admitting that she and her husband sold a Florida property for $9 million and moved the money to an undisclosed location. It also notes that Stephen Foss repeatedly invoked his 5th Amendment right against self-incrimination in his testimony concerning that sale and the sale of other assets.

The complaint raises some 40 causes of action, but does not ask for a specific amount. A preliminary hearing on the matter has yet to be scheduled. – BOB SANDERS