A lawsuit filed against the owners of Inland Seafood alleges the company’s valuation was improperly inflated through false representations of its business prospects.
The suit, originally filed 18 November, 2022, accuses Inland’s executive team of “massively inflating” the value of the company when it created a leveraged employee stock ownership plan in 2016.
An amended complaint in the suit, filed 15 March, alleges a valuation of the Atlanta, Georgia, U.S.A.-based seafood distributor calculated by J.P. Morgan Chase in 2016, ahead of the company’s introduction of an employee stock ownership plan, was tainted by false and misleading sales projections proffered by Inland Executive Vice President Robert Novotny.
Allegedly, the email listed a USD 29.6 million (EUR 27.4 million) “retail and value-added sales increase” figure that including projected revenue for future business with a number of retailers, including USD 7 million (EUR 6.4 million) in business with Compass, USD 5 million (EUR 4.6 million) from Sam’s Club, USD 4 million (EUR 3.7 million) from Publix, USD 3 million (EUR 2.8 million) from Sprouts, USD 2 million (EUR 1.8 million) from Earth Fare, and USD 1 million (EUR 920,000) each from Kroger, Costco, and Aramark. The email also allegedly included a claim of future business worth up to USD 3 million (EUR 2.7 million) from Canadian customers and USD 1 million (EUR 921,000 ) from customers in the United Kingdom.
“Some of the listed customers – including Sam’s Club, Sprouts, Compass, Canada, and the United Kingdom – were nothing more than sales leads with whom the company had only very preliminary discussions; there was no basis for a good-faith belief that the company would likely achieve the cited revenue figures,” the amended complaint said. “Among other things, the selling shareholders and company personnel who communicated false and misleading sales projections on their behalf had no realistic expectation that Inland Fresh would achieve millions of dollars in sales to Sam’s Club following the transaction, that millions of dollars in new business from Sprouts and Compass would materialize, or that Inland Fresh would be able to successfully conduct business and obtain millions of dollars in revenue abroad, in Canada and the United Kingdom.”
Novotny’s claims were allegedly repeated orally by company representatives in a subsequent meeting with personnel from J.P. Morgan Chase “in order to advance the selling shareholders’ goal of causing J.P. Morgan Chase to render a valuation opinion that exceeded the company’s true fair-market value.”
“These misrepresentations misled J.P. Morgan Chase in determining the company’s expected future income, a critical factor in valuing the company,” according to the lawsuit.
Inland also allegedly claimed it had 200,000 to 300,000 pounds of fresh salmon worth USD 15.00 (EUR 13.80) per pound, when in reality it was frozen salmon worth USD 0.25 (EUR 0.23) per pound.
“[It was] a patently false statement which J.P. Morgan Chase relied upon in valuing the company,” the lawsuit alleges.
J.P. Morgan Chase ultimately issued a USD 92 million (EUR 85 million) loan to be repaid via contributions made by Inland’s approximately 580 employees to a trust fund. The loan is collateralized by unallocated shares in the employee stock ownership plan. However, the lawsuit alleges previous valuations of the company estimated its worth at USD 50 million (EUR 46 million) or less.
“Therefore, as a consequence of the fraud, the selling shareholders were able to inflate the company’s sales price by at least USD 40 million [EUR 36.8 million],” the suit states.
Schlichter, Bogard, and Denton LLP Attorney Andrew Schlichter, who is leading the case, declined to make further comment on the filing. Inland Founder and CEO Joel Knox declined to comment publicly on the lawsuit.
However, Wimberly, Lawson, Steckel, Schneider, and Stine Attorney Paul Oliver, representing Inland Seafood, said the lawsuit was brought “without any factual support or specificity.”
“Plaintiffs’ claims are based entirely on conclusory allegations that defendants ‘intentionally and actively deceiv[ed] multiple valuation advisors regarding the company’s assets and future business prospects.’ Yet, plaintiffs have completely failed to allege the ‘who, what, when, where, and how’ of the alleged fraudulent conduct,” Oliver wrote. “Instead, plaintiffs simply lump all the defendants together in the hopes that the court will allow an ’impermissible fishing expedition.’”
The lawsuit was filed just days before the end of the six-year statute of limitations and the plaintiffs in the suit did not exhaust all administrative avenues for resolution of the dispute before making their filing, in breach of legal requirements, Oliver wrote.
Several representations made by Schneider in the original complaint are materially false and were either accidentally or intentionally misleading, Oliver said. These include a claim the fair value of the company was USD 6.5 million (EUR 6 million) in 2017. But that was just the amount of the company its employees had acquired under the terms of the purchase plan at that date, and did not represent the full value of the company, Oliver wrote.
“Equity value is the enterprise value minus debt liability – it is the value left over for shareholders after paying creditors,” he said.
Inland’s request for dismissal of the case was denied after the complaint was amended but the company is likely to continue to refile a motion to dismiss the lawsuit.
“Although the complaint references alleged false representations regarding Inland Fresh’s business, plaintiffs allege no facts explaining how or why those representations were false. Instead, plaintiffs merely state in a conclusory fashion that the representations ‘had no basis’ and ‘were false,’” Oliver wrote. “Such vague and conclusory statements are insufficient to satisfy [legal requirements] because they provide no explanation for how the [representations] were false when made.”
The suit was filed on behalf of five former employees of Inland Seafood, at least three of whom now work for Inland competitor Farmers and Fishermen Purveyors, a distributor based in Norcross, Georgia, U.S.A. According to their LinkedIn profiles, Rani Bolton worked as a regional sales executive at Inland from 2006 to 2021, then became a sales specialist at Farmers and Fishermen in March 2021; Benjamin Lyman worked as a receiving manager and then general manager at Inland between 2012 and 2019 before joining Farmers and Fishermen in October 2019 as a salesperson; Alison Mercker was a salesperson at Inland from 2015 to 2020 before joining Farmers and Fisherman in July 2020 in sales and coastal procurement. Information regarding the employment status of plaintiff Melissa Suter could not be located. A fifth plaintiff, James Amstrong, worked at Inland as an operations manager and sales executive between 2015 and 2021 before moving on to PCO Foods in 2021 and then Gopuff later that year.
Photo courtesy of Inland Seafood
