Former Lucent Polymers executives Kevin Kuhnash and Jason Jimerson have been sentenced to federal prison for their roles in fraud connected to the sale of that compounding firm to Citadel Plastics.
Kuhnash, former CEO of Evansville, Ind.-based Lucent, was sentenced March 2 to 36 months in prison. The 59-year-old had pleaded guilty in July to two counts of securities fraud and one count of money laundering.
Jimerson, former Lucent chief operating officer, was sentenced to 24 months. The 46-year-old pleaded guilty in June to two counts of securities fraud, one count of money laundering and one count of making false statements to federal agents.
Kuhnash also will serve one year of supervised release following his imprisonment and pay a $10,000 fine. Jimerson will serve two years of supervised release following his imprisonment and pay a $10,000 fine.
Both were sentenced to federal prison by U.S. District Judge Richard Young in Evansville. In a news release, acting U.S. Attorney John Childress said that "those who choose fraud over fair dealing must be held accountable."
"That is particularly true for corporate leaders like Kuhnash and Jimerson, whom society relies on to ensure the fairness and integrity of business and the marketplace," he added.
According to the release, both men admitted that they concealed critical defects in Lucent's business when they orchestrated the sale of the company to a private equity firm in late 2013 for more than $64 million.
That acquisition was made by Citadel Plastics, a firm that had been created by private equity firm Wind Point Partners of Chicago. Citadel was the combination of several plastics acquisitions made by Wind Point beginning in 2007. Wind Point sold Citadel in 2012 to private equity firm HGGC of Palo Alto, Calif.
Global materials company A. Schulman Inc. then acquired Citadel in mid-2016. The disclosure of the fraud led to major financial issues for Fairlawn, Ohio-based Schulman, which later was acquired by LyondellBasell Industries.
Schulman filed a suit against Citadel in June 2016 in relation to falsified product information. Citadel, Wind Point, HGGC and Schulman were not mentioned by name in the release.
Officials said in the release that Kuhnash and Jimerson claimed that Lucent could produce specialized plastics products that consistently met or exceeded customer specs at very low prices by using low-cost, recycled materials.
Lucent's internal testing showed that many of its most profitable products often failed to meet specifications, officials said. This information was hidden from customers and Lucent shipped the products with a fabricated set of test results that falsely claimed the product was within specifications.
According to the Securities and Exchange Commission, fire retardant measures were among the specifications that were falsified by Lucent.
Kuhnash and Jimerson became aware of all of this in the months leading up to the sale of the company, according to the release. Both men admitted to being aware of an email from a whistleblower employee who disclosed what he described as "ethical/conscience issues" and "a level of dishonesty" at Lucent.
The email described the fraud that Lucent was perpetrating on its customers, including the manipulated test results and lying to customers, according to the release. Jimerson agreed with Kuhnash to not forward the email or let anyone know they received it, officials said.
Kuhnash and Jimerson never disclosed the fraud during their company sales pitches or the due diligence process leading up to Lucent's sale, they said. After the company was sold, both Kuhnash and Jimerson lied to the private equity firm's outside auditor about whether they were aware of any fraud.
Both men had owned stock in Lucent. From selling the company, Kuhnash personally received almost $1.4 million and Jimerson received more than $600,000.
The release also points out that on the day that Lucent's fraud was publicly disclosed to investors, Schulman's stock price dropped more than 20 percent, or more than $175 million in shareholder value.
Assistant U.S. Attorneys Nick Linder and Kyle Sawa prosecuted the case for the government. The investigation was a collaborative effort between the Federal Bureau of Investigation and Internal Revenue Service Criminal Investigation.
"These two men knew of the fraudulent practices at the company they led, but chose to let it continue out of sheer greed, going even further by remaining silent as the company was sold for the sole purpose of enriching themselves," said Paul Keenan, FBI Indianapolis special agent in charge.
"This case demonstrates the strong partnerships the FBI has and the diligent work of all involved to combat significant fraud schemes such as this," he added.
"Internal Revenue Service Criminal Investigation is relentless in unraveling the fraudulent actions of those, such as Kevin Kuhnash and Jason Jimerson, who schemed to defraud customers and potential future owners of their business," said Tamera Cantu, acting special agent in charge of IRS-CI's Chicago field office.
"[The] sentencing is a reminder that there are detrimental consequences for this type of criminal behavior, and our special agents are determined in their efforts to uphold the justice system," she added.
Separate SEC litigation was stayed pending resolution of the criminal action. Officials said that litigation continues.
The SEC's complaint charges Kuhnash and Jimerson with violating anti-fraud provisions of federal securities laws. It seeks permanent injunctions, disgorgement plus prejudgment interest, civil monetary penalties and officer-and-director bars.