WASHINGTON (Aug. 19, 10:30 a.m. EDT) — Garrett Dominy, president and chief executive officer of composite materials maker Advanced Technical Products Inc., made more than $11 million when his company merged in June with General Dynamics Corp.
That's a nice paycheck, especially for an executive who, just a few days before, was criticized sharply by the Securities and Exchange Commission for not clamping down on evidence of accounting fraud at the company's Alcore subsidiary in 1999. As a result of that investigation, a subordinate pleaded guilty to making false statements.
The SEC said Dominy and another executive ignored repeated warnings of accounting irregularities from the firm's controller and from a former Alcore employee.
Dominy is not the only plastics industry executive to engage in practices that have raised questions with regulators and corporate watchdogs in the past year.
William Channell Jr., president and chief operating officer of Channell Commercial Corp. in Temecula, Calif., got his board of directors to guarantee $600,000 of his “personal debt” in early 2001, according to company filings with the SEC.
Such financial backing is not unheard of for corporate executives, but the practice has attracted more attention lately, after disclosures that Tyco International Ltd.'s Dennis Koz-lowski and others seem to have used corporate coffers as their own personal banks.
Channell officials declined to comment, and the firm did not disclose to the SEC what the loan was for. One board member said the firm did not lose any money in the transaction. The company said in an SEC filing that the guarantee was canceled by the lender in March.
Channell paid the company a fee of 1 percent of the loan balance and provided 300,000 shares of company stock as collateral, according to SEC filings.
Less than two months after getting the loan guarantee, Channell also acknowledged to the SEC that he filed legally required disclosures on insider stock sales as much as 22 months late, covering $4.3 million in stock sales. The SEC had issued a cease and desist order related to the sales Feb. 28, 2001.
The loan guarantee for Channell came as business was taking a downturn for the molder of enclosures for the communications industry. In late 2000 the company had consolidated several facilities and laid off about 90 employees, or 10 percent of its work force. More layoffs came later in 2001.
Company officials did not return phone calls seeking comment, but one member of the company's compensation committee said the board took the right action once it became aware of Channell's “personal debt” situation.
“It came to the board's attention in the process of the normal reporting routines,” said Eugene Schutt, a member of Channell's compensation committee and president and CEO of information software firm FirstDoor.com Inc. in Atlanta. “It was a policy thing.”
Schutt declined to say what the loan was for, but said he does not “expect anything like that to occur in the future.” Schutt said the loan and debt are unrelated to the SEC action. The company said it was instituting new procedures to help its directors and officers comply with SEC reporting requirements.
Channell is the son of William Channell Sr., chairman and 36 percent owner of the firm.
The publicly traded companies on Plastics News' stock chart have not had any Enron-style meltdowns, in which hidden financial problems came to light and sent a company tumbling toward bankruptcy.
But Dominy and ATP, based in Roswell, Ga., are an example of a case in which a company executive came under criticism from securities regulators but still managed to profit handsomely, in an albeit-unrelated deal.
The SEC chastised Dominy and another executive — former Chairman, President and CEO James Carter — for ignoring evidence of fraud in 1999. The agency does not say why the executives did not act, but noted that a merger the company was pursuing around that time, with Veritas Capital Fund LP, ultimately fell apart when ATP's financial irregularities came to light.
The SEC's probe is unrelated to the decision to sell to General Dynamics, a separate deal that netted Dominy $11.2 million.
Dominy was not charged with any crime as a result of the SEC investigation, but the commission's June 5 order does not paint a flattering portrait of actions taken in 1999 by Dominy, who was ATP chief financial officer at the time, and Carter.
“The fraud at Alcore was so widespread that certain signs of it could not be concealed from management of ATP, Alcore's parent company,” the SEC wrote. The SEC said neither man took adequate corrective action.
“As a result, the company continued to file periodic reports with the commission, and provided documentation to a potential buyer of the company that included financial statements which ATP's management knew or should have known had a high probability of material misstatement,” the SEC wrote.
The commission said ATP's controller wrote a series of monthly memos in the second and third quarters of 1999 outlining problems.
The controller noted balance sheets were in “disarray,” and said there possibly were profit and loss misstatements, the SEC said.
Dominy and Carter also learned, in 1999, of four specific sales totaling $500,000 at Alcore that the company concluded should not have been recorded as revenue. But the two executives did not thoroughly investigate Alcore and “accepted Alcore management's assurances that there were no other improperly recorded sales at Alcore,” the SEC wrote.
“[Carter and Dominy] also determined to offset the improperly recorded sales against certain expenses they believed could have been capitalized during the quarter, and thus did not reverse the improperly recognized sales before filing the company's quarterly report on Form 10-Q several weeks later,” the agency wrote.
The company said in SEC filings that Dominy, Carter and the firm each made formal submissions to the SEC stating why they “should not be charged with violations of the federal securities laws.”
In the end, the SEC said that each man, and the company, violated the Securities Exchange Act, but it did not propose any fines. An SEC spokesman declined comment. Carter stepped down as an ATP executive in February 2000, but remained on ATP's board.
Dominy subsequently was named ATP's top executive, a position he held until the General Dynamics merger closed June 14.
In the end, his General Dynamics payout came from severance of $1.2 million, $2 million from stock options, and $8 million from cashing in the 239,000 shares of ATP stock he previously owned. General Dynamics did not retain Dominy, but a company spokesman confirmed it paid Dominy what he was entitled to under his contract.
A call to what is apparently Dominy's home in Roswell, Ga., where ATP is based, went unreturned. Calls to ATP's offices and to the company's chairman were not returned.