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March 12, 2012 02:00 AM

Krones may take hit in fraud case

Bill Bregar
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    Krones Inc. and its German parent, Krones AG, both makers of blow molding machines and bottling lines, said they could end up paying millions of dollars in settlements over the fraud case of Le-Nature's Inc., a defunct Latrobe, Pa.-based maker of flavored water, juices and teas.

    Krones, based in Neutraubling, Germany, posted a news release on its website. “Potential settlements developing from the mediation could have an adverse effect on the Krones Group's profit situation, quantified as a low-to-medium double-figure million U.S.-dollar amount,” the company said.

    Krones said “the opposing parties' demands are unfounded,” but also said the machinery maker's U.S. lawyers “have advised to continue mediation, also with regard to the special risks entailed by the American legal system.”

    Lawsuits filed against Le-Nature's by bankruptcy trustee Marc Kirschner, financial service providers and a group of hedge funds allege that Krones officials played an active role in the fraud — a charge that Krones denies. Krones officials said the company did not know about Le-Nature's fraud schemes.

    “We did not knowingly participate in any fraud,” Christoph Klenk, Krones' CFO, said by telephone March 8. He said Krones is a well-known company with a long history.

    Le-Nature's collapsed into bankruptcy and shut down in 2006, after what was described as the largest financial fraud in western Pennsylvania history. Last fall, former CEO Gregory Podlucky was sentenced to 20 years in prison. Several other executives also received jail terms.

    Podlucky defrauded investors, lenders and vendors out of $684 million, according to U.S. District Judge Alan Bloch.

    Krones is one of several defendants listed in the lawsuits.

    Kirschner sharply criticized Wachovia Bank NA for continuing to loan money for Le-Nature's “reckless expansion” and ignoring red flags to continue a stream of unnecessary borrowing. The fraud required “continued capital expenditures” through expansions in Latrobe and “an albatross of a facility in Phoenix.”

    Le-Nature officials were planning a third plant, in Florida, and even talked about factories in Scotland and Germany, court documents said.

    A big part of the fraud involved greatly overstating financial data. According to Kirschner's suit, the company reported 2005 sales of $287 million, but the actual revenue was as low as $64 million. Le-Nature's officials used phony financial documents to mislead auditors, then used them to secure money from lenders and investors.

    Another part of Le-Nature's scheme involved deliberately inflating the cost of machinery — using loaned money — and then getting Krones to wire the excess payments back to Le-Nature's.

    According to the lawsuits, filed in U.S. District Court in Pittsburgh, Podlucky placed orders with Krones for turnkey systems at highly inflated amounts, far more than the normal price for the equipment. Podlucky used forged documents to convert funds placed on deposit with Krones back for his personal use.

    AIG Commercial Equipment Finance Inc. deposited about $26 million in late 2005 and early 2006 for equipment lease financing of Krones machinery, according to the suit filed by Kirschner, the trustee.

    “When AIG sent a representative to the Krones AG plant in Germany to inspect the equipment, it learned that manufacturing had barely begun and that Krones had transferred nearly $20 million of AIG's deposit to Le-Nature's supposedly based on written instructions from AIG.” The letter, forged by Le-Nature's, was on AIG letterhead.

    Another lawsuit, filed by CIT Group/Equipment Financing Inc., said CIT paid about $145 million for Le-Nature's to buy three Krones production bottling lines for the large Phoenix factory — when the true price was about $90 million.

    Krones, in its website news release, said it supplied about $100 million worth of equipment for the Le-Nature's plant in Phoenix.

    CIT charges that Krones and its executives kept the “conspiracy” a secret to prevent lenders from uncovering the fraud, and failed to disclose the true cost of the equipment. When Krones ignored warnings about Le-Nature's from a tipster from within Krones, the tipster contacted CIT to warn the company, CIT claims in its lawsuit.

    Klenk said Krones had no comment about the tipster matter.

    CIT used strong language to allege that Krones was aware of the fraud scheme, but kept the machinery deals going to boost its own business.

    “Beginning in 2004 and continuing through at least August 2005, Krones was funneling back to Le-Nature's millions of dollars in funds that had been paid to Krones by various financial institutions, including CIT, in connection with equipment purchases for Le-Nature's,” CIT wrote in its suit.

    In court documents, Krones said it “did not know and could not have known through the exercise of reasonable care” about the scheme.

    “We strongly deny the allegations of CIT, of course,” Klenk told Plastics News. He said there was no conspiracy.

    “With the values we have [at Krones], the company would not knowingly participate in such a scheme,” Klenk said.

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