2016 email surfaces alleged valuation misrepresentations in Inland Seafood’s sale to employees

An Inland Seafood truck.

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...

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