MANHATTAN (CN) – The executives and board members of a father-son staffing company conspired to strip the business of its assets in a $100 million fraud meant to enrich other family-controlled companies, a New York hedge fund claims in Federal Court.
Pinnacle Investment Partnership says it has owned at least 1 million shares of stock in the staffing firm Stratus Services Group Inc. since 2002. In a secondary offering in 2004, Pinnacle allegedly bought about 1.2 million of the 5 million shares sold.
Pinnacle claims Stratus promised to use the money to reduce trade payables, pay delinquent payroll taxes and a cash overdraft, repay debts and increase working capital, among other corporate purposes.
Instead, Stratus wired about $500,000 to “offshore accounts” controlled by Stratus’ CEO Joseph J. Raymond, Sr. and his sons Joseph J. Raymond and Joseph J. Raymond Jr., Pinnacle claims.
“The money surreptitiously transferred … was for their personal benefit and enjoyment,” the lawsuit states.
According to the complaint, the Raymonds and Stratus CFO Michael Maltzman then “conveyed” some of this money, directly or indirectly, to Norman Goldstein, a Stratus board member who is also the president of NGA, a company that imports, distributes and sells glassware products.
NGA continued to “launder and fraudulently convey” the money, Pinnacle claims.
In December 2005, Stratus agreed to pay Pinnacle about $2.3 million in exchange for the return of approximately 21,000 shares of its preferred stock, the complaint states.
In completing this transaction, Stratus promised to provide Pinnacle with an independent accounting firm’s fairness opinion and approve the transfers by a majority vote by their shareholders, but Stratus “never had any intention of honoring their representations,” Pinnacle says.
“In point of fact, defendants knew that they had already engaged in transactions which made fulfillment of the promissory note’s terms impossible and had no intention of continuing [Stratus] as a viable business entity in the future,” the hedge fund claims.
Stratus outsourced management of wages, payroll taxes and workers compensation to another staffing firm, ALS, in which Raymond Jr. served as a principal, according to the complaint.
Pinnacle says Stratus approved ALS’s “grossly inflated” fees of about $31 million in 2004 and $102 million in 2005.
As a result, an unidentified attorney chose to resign in 2005 “rather than be a party to the fraud being perpetrated by (Stratus),” and board member Michael Rutkin followed suit later that year, the lawsuit claims.
The Raymonds allegedly rewarded Stratus executives and board members for looking the other way as they stripped the company of its assets by giving them a share of the spoils.
Goldstein and NGA received money from the Raymonds’ offshore accounts; Maltzman was hired at another Raymond-controlled business; and the Raymond made sure to repay Rutkin’s promissory notes before stripping the company of all its assets, the lawsuit claims.
The strain from ALS’s “absurd charges” eventually caused Stratus’s primary source of funding — a loan from Capital Temp Funds — to dry up, Pinnacle claims.
Capital agreed to extend the loan if Stratus sold its assets to ALS, which the company did, at “fire-sale prices,” according to Pinnacle.
Stratus allegedly sold $40 million in assets from its six northern California offices for the “woefully inadequate” sum of $4.5 million.
It then unloaded assets from seven other offices and its Dallas Morning News account for $1.5 million, though Pinnacle claims the assets were worth about $30 million. About a year later, Raymond Jr. and ALS co-owner Michael O’Donnell resold those same assets for a “substantial personal gain,” Pinnacle claims.
Accountabilities Inc. received about $20 million in assets, the lawsuit claims, while Tri-State got assets worth about $10 million — both “for little or no consideration.”
“After the fraudulent transfers in 2005, (Stratus) was a husk of a corporation,” Pinnacle says. “It had only enough funds to pay the remaining amount due under the loan agreement, but not any of its other creditors.”
Pinnacle demands $100 million from the Raymonds, Rutkin, O’Donnell, Maltzman and the staffing firms for breach of contract, fraudulent inducement, accounting, misappropriation, breach of fiduciary duty, and violations of debtor and creditor law.
It is represented by Timothy Kebbe in White Plains, N.Y.