LOS ANGELES (CN) - The CEO used his insolvent staffing company as his "personal piggy bank, enriching himself and his family with questionable loans and sweetheart deals," nine investment entities claim in court.
Lead plaintiff Bowery Opportunity Fund sued D. Stephen Sorensen in Federal Court.
Sorenson, the CEO of Koosharem Corp., is the only defendant.
The plaintiffs claim he cut a "sweetheart" deal to restructure the company, rather than a bankruptcy sale that would have maximized value for debt holders.
After Sorensen "managed the company into the ground," he made a deal with junior creditors Anchorage Capital and Blue Mountain Capital that allows him to stay put at the company's helm and enjoy a generous salary package, the creditors claim.
"Under Sorensen's stewardship, the company was sued by the California State Compensation Insurance Fund (the 'state fund') for defrauding the state fund, and later as part of a RICO lawsuit for transferring approximately $80 million from the company to entities controlled by him. The insurance fraud action ultimately resulted in a $50 million jury award in favor of the state fund," the complaint states.
It claims that Koosharem "performed abysmally" under Sorensen's leadership, defaulting on its obligations to lenders. The company revealed this year that a compliance officer had embezzled almost $750,000 from it, the creditors say.
"The company is a textbook example of bad management ruining a good business," the lawsuit states.
Given the company's dire financial state, the "right path forward" is a Chapter 11 bankruptcy sale to the highest bidder, the creditors say. They claim Sorensen obstructed that to line his own pockets and shield himself from liability for his misdeeds.
"Sorensen has instead favored a restructuring proposal by Anchorage Capital ('Anchorage') and Blue Mountain Capital ('Blue Mountain'), which would pay plaintiffs and other first lien lenders just 80 percent of their claims in cash, as well as rights to purchase equity in reorganized Koosharem with a value that is uncertain (but in any event, the total recovery to plaintiffs on their claims will be far less than 100 percent)." (Parentheses in complaint.)
"Junior creditors, however, including second lien lenders (which debt is predominantly owned by Anchorage and Blue Mountain), are to receive substantial recoveries, and unsecured creditors are to be paid in full."
The complaint adds: "Sorensen, quite simply, is playing a game of chicken with plaintiffs. Sorensen's blatant disregard of his fiduciary duties has presented plaintiffs with a Hobson's Choice - i.e., sign on to a proposal that improperly diverts assets to junior creditors and does not pay plaintiffs in full, a proposal that whitewashes known and unknown insider-misconduct, or the company will stay out of Chapter 11 for as long as it can, with no sale process to go forward, all while assets are put at serious risk and will substantially decrease in value."
The plaintiffs says they sued "to obtain compensation for Sorensen's unlawful activity and to put the company back on a path toward financial stability that benefits all stakeholders, not just Sorensen and his insider cronies."
They seek damages for breach of fiduciary duty, and costs.
They are represented by Eric Goldberg with Stutman, Treister and Glatt.
Koosharem is based in Santa Barbara. On its Internet home page, it claims that one of its top competitors is Manpower.
On the "Financial Data" section of its home page, checked this morning, the company says: "Doing business as the Select Family of Staffing Companies, Koosharem provides comprehensive staffing and workforce management services through its operating subsidiaries. Offerings include recruiting and screening of professional job candidates, payroll and attendance management, and specialty staffing. The Select Family of Staffing Companies serves a national clientele of more than 6,500 companies from such industries as manufacturing, financial services, information technology, and professional services. It operates under the Select Staffing, Remedy Intelligent Staffing, Project Solvers, Westaff, and RemX brands. Chairman and CEO Stephen Sorensen owns the company."
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