(CN) – InkStop, an office supply chain, fleeced investors while it sank into bankruptcy, according to eight complaints in Cuyahoga County Court. InkStop fired store managers who asked why the shelves were bare, “transferred inventory to certain stores that were located near the residences of a number of outside directors so that the outside directors would not see the reality,” and even “arrang(ed) for sales staff from other stores to pose as customers” while “potential investors” and creditors visited, says one investor, who lost $750,000.
Plaintiff Michael Southard says InkStop took him for $750,000 in unregistered shares, and continued “to raise working capital from private investors … even beyond the point when it was clear that the business concept did not work.”
The defendants are CEO Dirk Kettlewell; his wife Dawn, a senior vice president; CFO Christopher Eastman; and corporate counsel Patricia Conti.
Southard claims the defendants raised capital through a series of preferred stock sales “available for purchase only by so-called ‘accredited’ or sophisticated investors,” and the first sale alone raised $15 million. Eventually, the company raised $35 million through stock sales, according to the complaint.
Southard says the InkStop shares were not registered with SEC or with any state.
He claims that Dirk Kettlewell “personally told investors that all but ‘a handful’ of stores were already profitable” when in fact, “few, if any, stores turned a profit,” and the company was heading toward bankruptcy.
Southard says the defendants falsely claimed that Canon had agreed to purchase a portion of the company and “faked the appearance of busy fully stocked stores that were accessed by actual shoppers.”
The complaint states that by “September of 2008, InkStop lacked sufficient funds to pay its key vendors. As a result, vendors demanded the return of product shipped and expressed increasing reluctance to advance product on favorable credit terms. As a result, InkStop had more than 100 stores but it lacked sufficient inventory to sell. The lack of merchandise on the shelves meant that the stores were not profitable and could not turn profitable.
“Defendants knew that the company was failing but sought to conceal it. When store managers raised questions about the limited inventory, they misrepresented to the managers and other employees the reason for it. In addition, defendants terminated certain store managers who raised too many questions about the lack of inventory. Directors also transferred inventory to certain stores that were located near the residences of a number of outside directors so that the outside directors would not see the reality. …
“InkStop had destroyed any relationships with key vendors by failing to timely pay and as a result the shelves of its stores were empty.
“By at least June 2009, defendants faked the appearance of busy fully stocked stores that were accessed by actual shoppers. They did so by transferring inventory from other stores to create the impression of dully stocked shelves and by arranging for sales staff from other stores to post as customers. Defendants did so in connection with visits from potential investors as well as current noteholders who were encouraged to forbear on calling for payment of the debts or to convert debt to equity.”
On Oct. 1, 2009, “InkStop notified its employees that all 152 retail stores would be closed and that workers would be laid off until further notice,” the complaint states.
It filed for bankruptcy in November.
Plaintiffs seek punitive damages for conspiracy, fraud, negligent misrepresentation Lead counsel is Edmund Searby with McDonald Hopkins in Cleveland.