Two former executives of Lucent Polymers Inc. have been arrested and charged with fraud in relation to the sale of the company to Citadel Plastics Holding Inc. and later to A. Schulman Inc.
Former Lucent CEO Kevin Kuhnash and former Chief Operating Officer Jason Jimerson were arrested Feb. 12, according to the U.S. Attorney's office in Indianapolis. They were indicted by a federal grand jury and charged by the U.S. Securities and Exchange Commission.
An indictment alleges that they committed fraud when they orchestrated the sale of Evansville, Ind.-based Lucent but concealed critical defects in Lucent's business, including fraud that Lucent was committing on its customers.
West Chicago, Ill.-based Citadel bought Lucent in December 2013. Then, A. Schulman purchased Citadel in early 2015.
According to the SEC complaint, Kuhnash received $1.39 million through the two deals and Jimerson received $648,946.
“Like a modern-day Rumpelstiltskin, Lucent claimed that it could transform garbage to gold. Lucent promised customers that — unlike its competitors — it could process less expensive, recycled and scrap material and turn it into high-quality bulk plastics that met stringent standards on critical features like flame resistance and tensile strength,” SEC said in the complaint.
“Unfortunately, Lucent's business model was a fraud and defendants Kuhnash and Jimerson knew it,” the complaint said.
Lucent's compounds routinely flunked its own internal performance tests, but the company sent customers fake test results, according to the complaint.
Fairlawn, Ohio-based Schulman filed suit against Citadel in June 2016, charging that it had discovered evidence of the falsified
product information. Schulman now is part of global plastics giant LyondellBasell Industries.
“Corporate officials who put deviousness over good faith degrade the integrity of our markets and impugn the reputation of American industry,” U.S. Attorney Josh Minkler said in a news release announcing the arrests. “This office will continue to prioritize the investigation and prosecution of corrupt corporate executives who enrich themselves through fraud and deception.”
The indictment alleged that a key aspect of Lucent's business was its claim to be able to design and manufacture custom plastics products that met customers' exact specifications at very low prices. Lucent's customers included companies that made cars, automotive air bags, electrical boxes, ceiling fans, kitchen appliances and heating and air conditioning units. Their specifications often included flame resistance, color, strength and durability, and certification by Underwriters Laboratories.
Prosecutors allege that Lucent's internal testing showed that its low-cost products often did not meet its customers' specifications or UL standards. Nevertheless, Lucent employees allegedly created and submitted false records stating that the internal testing confirmed that the products were within spec, the attorney said. When customers complained, Lucent employees allegedly continued to conceal that they had altered the test results.
The indictment alleged that in 2013, Kuhnash and Jimerson were involved in trying to sell Lucent's business. According to the indictment, in September 2013 or earlier, Kuhnash and Jimerson were allegedly told that Lucent was routinely deceiving its customers regarding its products.
The indictment referenced an email that both Kuhnash and Jimerson received from Lucent's technical director, expressing concern about ethical issues including changes to UL formulas, data manipulation and customer complaints.
The indictment further alleged that, in discussing the email among themselves, Kuhnash and Jimerson said they would not let anyone see or have knowledge of the employee's email.
The indictment alleged that neither Kuhnash nor Jimerson took meaningful steps to stop Lucent's alleged fraud, nor did they disclose the existence of the fraud to Citadel.
Citadel acquired Lucent shortly after that, and Kuhnash and Jimerson allegedly received significant compensation for their Lucent stock, including stock in Citadel.
Although the indictment does not specifically name Schulman, it said when Schulman acquired Citadel in 2015, the two profited a second time. Both men allegedly owned significant stock in what was then Citadel, and as a result of the second acquisition, both allegedly received hundreds of thousands of dollars.
The indictment alleges that Lucent's fraud on its customers was discovered by Schulman a few months after acquiring Lucent's business. On the day that Schulman disclosed the existence of Lucent's fraud to investors, its stock price dropped 25 percent.
Finally, the indictment alleges that Jimerson obstructed justice and made false statements to the FBI by stating he was not aware of Lucent's fraud on its customers and did not receive the employee's email.
The defendants face possible sentences of five to 20 years for each count. The case is being jointly investigated by the Internal Revenue Service's criminal investigation division and the Federal Bureau of Investigation.
“These Lucent executives filled their pockets through fraud and numerous acts of deceit,” IRS Special Agent in Charge Gabriel Grchan said in the release. “As in this case and countless others, our agents will find corruption and bring it to justice.”
Kuhnash served as CEO and president of Lucent from 2008-2014, according to his LinkedIn profile. He held executive roles at plastics-related firms both before and after his time at Lucent.
In an email to Plastics News, attorney Kevin Tierney said that he and Kuhnash “recently received the indictment and are still reviewing it. … It would be premature to make a comment at this time.”
Jimerson was chief operating officer at Lucent from 2012-2013 and later a vice president at Citadel from 2013-2015, according to his LinkedIn profile. His attorney could not be reached for comment.
