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Krones pays for role in Le-Nature's fraud

By: Michael Lauzon

November 9, 2012

FRANKLIN, WIS. (Nov. 9, 2 p.m. ET) — German blow molding and bottling equipment supplier Krones AG and its U.S. subsidiary Krones Inc. will take a pretax hit of about $100 million to settle legal actions stemming from a fraudulent scheme run by former customer Le-Nature’s Inc., a Latrobe, Pa.-based bottler of flavored water, juices and teas that went bankrupt in 2006.

Krones agreed to pay the U.S. government a $15 million penalty for a non-prosecution agreement. The firm also agreed to pay about $110 million to plaintiffs in the case. After insurance reimbursements, Krones’ net payment will be about $100 million. It already took a $47 million charge against income for the case in 2011 and will take another $53 million charge in 2012, Krones announced in a preliminary news release Nov. 8.

Still unresolved is a settlement with the liquidator of the equipment. The settlement needs to be approved by the insolvency court. Krones said it has already taken into account any risk associated with the pending suit.

Krones was alleged to have cooperated with Le-Nature’s scheme to overinflate the price of equipment it bought from Krones so that Le-Nature’s could defraud lenders. Lenders were told the equipment cost twice the actual amount, according to U.S. Attorney David Hickton.

Krones denied the allegation.

“Krones denies having knowingly participated in Le-Nature’s fraudulent activities in any way, and admits no fault or misconduct in its dealings with Le-Nature’s,” Krones said. “In the course of doing business, Krones was manipulated by Le-Nature’s and subjected to fraudulent and unethical activities.”

Hickton stated in a news release that during 2004-06, Krones cooperated with Le-Nature’s in deceiving lenders about the cost of equipment. Krones then received the excessive payments, kept funds to cover the cost of making the equipment, and forwarded the additional $118 million to Le-Nature’s.

Le-Nature’s fraud also extended to overinflating financial data to mislead lenders and investors. Le-Nature CEO Gregory Podlucky received a 20-year jail term for fraud; several other Le-Nature executives also got jail terms.

Hickton said the $15 million penalty for Krones was the largest ever for the Western District of Pennsylvania.

“Fifteen million dollars is the largest financial penalty ever imposed in this district,” Hickton said in a news release. “We entered into this agreement with Krones because we are satisfied the penalty is of a magnitude adequate to deter Krones from becoming an instrument of a criminal scheme in the future, as well as to deter others from transacting business by deceitful means. Also entering into the balance in making this agreement was Krones’ cooperation with our investigation, and its own internal management changes which we believe help make unlikely any similar conduct by the company in the future.

“The financial marketplace operates on a bedrock principle of good faith,” Hickton said. “Those who do not meet that standard should understand the United States will hold them to account.”

Krones’ headquarters is in Neutraubliing, Germany. Its U.S. subsidiary is based in Franklin, Wis.

Krones has been embroiled in legal proceedings since October 2008.

“Krones has entered into the settlements to eliminate the continued uncertainty and risk associated with the U.S. legal proceedings and to allow the company to limit the time, distractions, and expense created by those proceedings,” the company said.

“Since 2006, Krones Inc. has strengthened its management team, improved company oversight and instituted enhanced internal controls,” Krones stated.

Krones AG reported sales for nine months ended Sept. 30 of 1.9 billion euros ($2.4 billion), up 4.6 percent from the previous year. Net income, at 36.2 million euros ($46.4 million), was 39 percent lower. Worldwide it employs 11,900. Besides blow molding and bottling equipment, it offers integrated brew house and processing systems, integrated technology solutions and warehouse logistics.

Le-Nature’s defrauded investors, lenders and vendors out of $684 million, a judge calculated early this year. Lawsuits were filed by financial service providers including AIG Commercial Equipment Finance Inc. and CIT Group/Equipment Financing Inc. and hedge funds. Krones was one of several defendants listed in the lawsuits as being complicit in the equipment price fraud.

According to lawsuits filed in Pittsburgh, Podlucky placed orders with Krones at highly inflated amounts and then forged documents to convert back, for his personal use, funds placed on deposit with Krones. Le-Nature’s bought equipment from Krones to expand in Latrobe and Phoenix and was looking at setting up a third plant in Florida.

Overall fraud charges included overstating financial data. Bankruptcy trustee Marc Kirschner alleged Le-Nature’s reported 2005 sales of $287 million but revenue was actually as low as $64 million.