Papers shed light on Foss firm’s demise

In February 2005, Foss Manufacturing Co. changed the makeup of its board of directors to make it, in the words of former board member Patricia Foss, more “independent” and be run “more like a publicly held company.”

Her husband, Chief Executive Officer Stephen Foss, remained on the board of the Hampton-based family business. But in place of the company executives who had sat there now sat Foss’s relatives: Patricia; his daughter Jennifer Foss Smyth; and his son-in-law’s stepfather, Douglas Kinney.

The board would be responsible to stockholders, the largest being Steven Foss’s brother, Dennis Foss.

A month later, the company’s chief financial officer – Kevin Sexton – resigned and sent an e-mail to the new board telling members he was “asked to do unprofessional, unethical and even ‘other’ things to protect your family.”

Board members asked Stephen Foss to investigate Sexton’s statement. They accepted the CEO’s assurances that Sexton was making his charges because of his own personal problems.

According to sworn depositions taken in March as part of a lawsuit filed by creditors against the Foss family and company officials, they accepted his explanation until one August morning last year, when, in his Florida home, Stephen Foss told his wife and daughter that financial mismanagement had occurred on his watch.

“You could have knocked me over with a feather,” Patricia Foss said in her deposition.

Patricia Foss also said that her husband told her, “I may have had something to do with it,” and she urged him to call an attorney. “I honestly don’t want to know any more,” she said she told her husband.

“I was quite shocked and stunned,” Smyth said in her deposition. She had just two days before signed a five-year contract to work as the company’s marketing director.

Then, she said she told her father, shortly after being told of the possible financial mismanagement: “We need to ask for your resignation, please.”

A little more than a month after Stephen Foss stepped down as CEO, Foss Manufacturing filed for bankruptcy. While the company’s assets have been sold at a bankruptcy sale as a going concern, unsecured creditors – left some $15 million in the hole – filed suit on June 12, claiming that Stephen Foss “looted” the company, seeking repayment of millions of dollars in company assets that they claim Foss had illegally converted into family assets, even when he knew the firm was going broke.

The suit also charges eight other company officials and board members either with participating in the looting, benefiting from it or looking the other way when it happened.

On June 15, Bankruptcy Court Judge Michael Deasy signed a temporary restraining order freezing the assets of Stephen and Patricia Foss (aside from living expenses) until a full hearing on the matter – now scheduled for July 6 – takes place.

Creditor committee attorney Robert J. Feinstein said creditors are concerned about the assets, after learning that Patricia Foss in her deposition refused to divulge the location of $7 million in proceeds from the sale of the couple’s Florida home.

Feinstein also said the Fosses also sold a New Hampshire investment property and their Rye residence is currently on the market with an asking price of $3.35 million.

Detailed charges

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

(While a group of private investors bought Foss Manufacturing’s assets for $39 million, the bankrupt shell was renamed Felt Manufacturing Company and run by a trustee appointed by the bankruptcy court.)

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 transfers from board members – as well as from board members and top officials, including his brother, his wife, and his daughter, according to the suit. 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.

The board members “blindly relied on whatever Defendant Stephen Foss told them,” according to the suit.

The basic charges behind the complaint – and numerous accompanying documents – the 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.

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 residences of Stephen Foss and his wife and Smyth and her husband.

• Increasing Stephen Foss’ 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.

‘Bleeding money’

The March depositions paint more than a tale of alleged corporate corruption, for this was no public corporation. Instead it was a private family-controlled business, handed down to Stephen Foss by his father, who founded the company.

When $181,000 in company funds were used to make improvements on the Smyths’ home, Patricia Foss said, “I was under the assumption it was an offset to other funds that we had loaned the company.”

But Smyth said, “My understanding was that my father was paying for or helping with the house” from his personal funds.

The family members started becoming more involved because, by late 2004, the firm was “bleeding money” and that its management was “inept,” in Patricia Foss’s words.

Family considerations also came into play when it came to former CFO Sexton’s accusations.

In her deposition, Smyth said that Sexton was “ranting and imploding personally” and that she “accepted my father’s explanation that he was getting to the bottom of this.”

Her mother – when asked if she had believed her husband was reimbursing the company for personal expenses on the company credit card – said, “I absolutely did.”

Patricia Foss said she never asked her husband if he falsified data. “I can’t believe he would do something like that,” she said in her deposition.

And “to this day,” Smyth said in March, she still did “not know who did what at whose behest.”

Smyth said she could no longer seek an answer from the former CEO who once reported to her as a board member because “I don’t speak with my father.”

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