Sunday, July 20, 2003

Workers' pension fight drags on

Electro-Jet case 9 years and counting

By James McNair
The Cincinnati Enquirer

[IMAGE] Bill McDannold of Erlanger is a former machinist with the defunct Electro-Jet Tool & Manufacturing Co. of Evendale and lead plaintiff in a 9-year-old class action lawsuit against Electro-Jet.
(Jeff Swinger photo)
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Large metal-cutting machines sliced through steel with the clatter of automatic weapons. Every now and then, the fumes of spent motor coolant permeated the shop floor with a sewage-like stench. Black grease smeared tools and surfaces.

But employees cheerfully clocked in to Electro-Jet Tool & Manufacturing Co. in Evendale.

They did it for money but also out of devotion to the company's owner, an Austrian immigrant named John Endres. Endres chummed with his employees by name - up to 140 of them at one point - and never laid off one. Every December, he handed out bonus checks that made them forget the grime and the odor and the danger of their jobs. He took them to the old Carousel Inn restaurant in Reading, letting them order chateaubriand from the menu and get snockered on the company tab.

"I walked out of there one Christmas with a bonus check of about seven grand take-home," said William McDannold, who joined Electro-Jet as a tool-and-die maker in 1974. "Most years, it would be two or three thousand bucks."

That was before the event that would transform Electro-Jet from a worker's dream into a bad memory. Electro-Jet collapsed in 1997, and the once-amicable relationship between Endres and his workers degenerated into a legal brawl embroiling Endres, the workers, his executive lieutenants, lawyers, a bank and an investment banking firm. With a jury trial eight months away, the Electro-Jet debacle is unfolding as a test of federal pension law.

The road to the courthouse started in 1988 when Endres sold the company for $15.2 million - to the employees. At the time, Endres was 70 years old, he had already moved to Phoenix and Electro-Jet's fortunes were on the wane. He sold 17 percent of the company to seven of his executives, the rest to the entire work force, whose profit-sharing plan was converted into an employee stock ownership plan (ESOP).

Rank-and-file employees were dumbstruck by the news. Their profit-sharing plan contained about $5 million worth of government securities and stocks. Under the ESOP, their eggs would take the form of Electro-Jet's non-publicly traded shares. Equally unsettling, the ESOP had to borrow $10.2 million to complete the deal. The loan, from First National Bank of Cincinnati - now U.S. Bank - would be paid off over time with money from Electro-Jet.

The enterprise was doomed from day one. Unknown to the rank-and-file workers, orders from Electro-Jet's one big customer, GE Aircraft Engines, had plunged, and the company had begun to lose money. Within nine months of employee ownership, Electro-Jet reneged on its financial obligations to the plan. It brought in a crisis manager in 1993 - to no avail. Four years later, the company went out of business.

Today, Electro-Jet's former workers shake their heads at what happened. McDannold thinks about all the overtime he worked to amass the $70,000 in his profit-sharing account before 1988. He and 43 other Electro-Jet workers filed suit in 1994 to rescind the ESOP and restore their lost balances. McDannold, 58, now works for another metalworking shop.

"John Endres told us that is your money and that nobody can take your money," McDannold said at the dining table of his house in Erlanger. "But John Endres took that money."

Another former employee, Donna Bush, said she "overcompensates" for the loss of her $40,000 in profit shares. She has a full-time job and, on her own, sells ledgers and cabinetry to government offices.

"He (Endres) was very sincere and caring," said Bush, 56. "He always told us that our money would always be there for us. I honestly thought I was going to retire from there with a nice pension."

But Endres, now an 85-year-old Phoenix resident, isn't the only one they blame for their problems.

In a federal lawsuit filed on behalf of the rank-and-file employees in 1994, Covington lawyer Judith Boyers Gee named three other Electro-Jet officers, U.S. Bank, the lawyer for the profit-sharing plan and the company that appraised Electro-Jet on the eve of its sale. The charges include violations of federal pension law, breach of fiduciary duty, malpractice and fraud. Endres, in turn, sued his lawyer, Thomas Simons Jr., and Simons' Cincinnati law firm, Graydon, Head & Ritchey. And U.S. Bank contends that it was misled about Electro-Jet's financial condition.

Through a battery of lawyers, everyone denies doing anything wrong. Because the case involves complex pension-fund liabilities, attempts at piecemeal settlements have failed.

William Kirkham, a Cincinnati lawyer who represented the Electro-Jet ESOP and its participants, and his firm, Lindhorst & Dreidame, reached a $1 million settlement that was never finalized. The same fate befell a settlement that would have excused Gradison & Co. - the firm that appraised Electro-Jet - from the case for $750,000. Gradison now is called Gradison McDonald Investments, a corporate sister of Key Bank.

Just last month, the contestants were ready for a July 14 trial. But on June 23, U.S. District Judge Thomas Rose - the fifth judge on the case - had emergency heart bypass surgery. The trial is now slated for March 1.

Early days

As is often the case with defense subcontractors, Electro-Jet's fortunes were tied to GE Aircraft Engines. The company fabricated rotors, fan blades, air vanes and other metal engine parts for its customer half a mile away. During the defense budget buildup of the early 1980s, Electro-Jet was humming, and its workers were happy. Endres, in a sworn statement in 1994, said GEAE accounted for up to 90 percent of his sales.

But Endres wanted to sell his business. He had moved to Phoenix years before and was going to Cincinnati once a month to check on his company. Having survived cancer and a heart-bypass operation in 1982, Endres told Simons to find a buyer for Electro-Jet.

His chance came in November 1987. Devtek, a Canadian company unaware of Electro-Jet's financial turn for the worse, expressed an interest in buying Electro-Jet for $16 million. Endres pondered the offer, but knew much of the money would be wiped out by capital gains taxes. So when a tax-saving alternative was suggested - creating and selling to an employee stock ownership plan - Endres agreed, he states in court documents.

This is where the employee lawsuit says things went awry. It claims that:

• Endres didn't tell his employees that Electro-Jet's sales had fallen precipitously and that it was losing money after three straight years of profit.

• Electro-Jet officers Paul Weber, William Hare and Laura Gerding, who replaced Endres on the company board of directors and who agreed to serve as the ESOP's initial trustees, also failed to tell employees about the company's deteriorating financial condition. They also failed to disclose that Endres loaned them most of the money to participate in management's purchase of 17 percent of Electro-Jet - and that they would receive pay raises to cover the loan payments.

• Gradison's valuation of Electro-Jet at $16 million to $19 million was based on a "grossly inadequate" appraisal that did not factor in Electro-Jet's sharp drop in orders and product quality issues that kept the company on probationary status with GE.

• U.S. Bank, which took over trusteeship of the profit-sharing plan a month before the ESOP kicked in, failed to live up to its fiduciary duty to employees of conducting an independent review of the transaction and informing them of Electro-Jet's true financial condition.

• Kirkham, as legal counsel to the ESOP, and his firm failed to protect the interests of its employee shareholders. Moreover, the suit states, his role as counsel to Weber, Hare and Gerding in their separate purchase of Electro-Jet stock conflicted with his representation of the ESOP.

"This case is important," Gee said, "because, like the Enron case, it shows what can happen to the employees when corporate insiders, with their banks and their lawyers, act in their own self-interest to enrich themselves at the expense of the employees and without regard to their interest."

Gee will be joined at trial by Norman Berger, a class-action lawyer from Chicago.

Falling finances

Endres, who has an unlisted telephone number in Scottsdale, Ariz., and could not be reached for comment, chose an opportune time to sell Electro-Jet. During Endres' last full year of ownership, the fiscal year that ended Sept. 30, 1987, the company had sales of $18.8 million and a profit of $2.2 million. By the time he sold it to the ESOP Jan. 29, 1988, the cash cow had turned into a dog. Electro-Jet ended its 1988 fiscal year with sales of $8.8 million and a net loss of $1.9 million. More than a third of the loss preceded the sale.

In his 1994 deposition, Endres claimed no recollection of the company's precise financial condition.

"I knew tough times were there, but I was not aware of the particular amounts," he said. Elaborating, he said, "I was not specifically or I don't recall specifically paying attention to where these figures were at the time."

Endres' lawyer, John Hust, denied that Endres sold his employees a bill of goods.

"I think he's heartbroken that they would think that he would do such a thing," Hust said. "He's crushed.

"He could have sold this company to any number of third parties for a higher price, but chose to sell to the people who had worked for him for a long time. What this case really boils down to is: Was the price fair that the company was sold for? And the mountain of evidence is that the company was worth what they paid for it."

A second appraiser, Valuation Research Corp. of Cincinnati, valued Electro-Jet's "hard" assets - its real and personal property - at between $17.7 million and $19.5 million. But to U.S. Bank, whose $10.2 million loan enabled employees to buy the company, Electro-Jet's financial problems would have voided the transaction - had the bank known about them. It said Hare, Electro-Jet's chief financial officer, misled the bank when he certified on the day of the company's sale that it had undergone "no material adverse change in the business or financial condition" since Sept. 30, 1987.

"Hare, Simons and Kirkham knew the true financial picture of Electro-Jet prior to the closing, but withheld that information from (U.S. Bank) and allowed the transaction to proceed," states a court document filed by bank lawyer Thomas Schuck.

Electro-Jet CEO Paul Weber said one other person knew: Endres. "He knew everything," Weber said in a sworn statement in 1995.

With Electro-Jet and its ESOP defunct, U.S. Bank took a bath on its loan. As of August 1995, the bank said it was out $6.2 million. The interest meter, meantime, has ticked away at a rate of $1,484 a day, putting the total debt at more than $10 million.

Sticking to the jobs

McDannold worked 20 years on the Electro-Jet plant floor. During one stretch, he worked 177 straight days, putting in up to 12 hours at a time, he said. The overtime and 15 percent night-shift premium was good money. The more he worked, the larger the company's contribution to his profit-sharing account.

McDannold said he had no idea that Endres was planning to sell Electro-Jet to the employees. He didn't know what an ESOP was. But management maintained that employees "are better served by an ESOP purchase than by sale to some other organization." So McDannold and others who were angered by the switch from a profit-sharing plan to an ESOP bit their tongues and stuck to their jobs.

No one in a position of authority, employees say, had their interests at heart.

What do the defendants say?

Gerding, an Electro-Jet officer and director, testified in 1994 that she assumed everything was "perfectly legal" because it was handled by two lawyers and an appraiser. Weber said he trusted Endres with his life and, as a big stakeholder in the profit-sharing plan, would have objected had he suspected a raw deal for plan participants. They declined to be interviewed.

"I just don't think it's appropriate to comment on the case before the trial," said their lawyer, Robert Pitcairn Jr. of Cincinnati.

Hare, who represents himself in the case, could not be reached for comment. But in a 422-page deposition given in 1994, the man who was Electro-Jet's top financial officer offers a fuzzy picture of who knew about the company's financial deterioration. He said he had shared that information with Star Bank, but didn't remember if he had told Gradison. He said he was "confident" that Gerding and Weber knew. As for Endres, Hare only said the former owner saved his interest for "very high, top-level" information, such as year-end reports.

Endres, in his own deposition, said he relied on his advisers.

"They knew what they were doing," he said. "I merely let them do what they had to do, being professionals. That's all I know.

"I'm not guilty," Endres added in his deposition.

Endres sued his lawyer, Simons, accusing him of failing to spell out his fiduciary liabilities, failing to obtain a second appraisal of Electro-Jet and failing to have independent trustees appointed to run the ESOP. Simons and his firm deny the allegations, which will be tried along with the main case.

Kirkham, represented by Charles Faruki of Dayton, also denies the allegations that he failed to protect the employee benefit plan. He asks that the suit be dismissed because it was filed too late. Gradison, represented by Cincinnati lawyer James Burke, also denies any impropriety. Like U.S. Bank, Gradison contends it was kept in the dark about Electro-Jet's financial troubles.

An aging lawsuit

By the time the case goes to trial next March, the Electro-Jet affair will be 16 years old, the lawsuit 10. McDannold would like to retire from his current machine shop job in six years, at 64. The $70,000 he had accumulated at Electro-Jet would come in handy.

Donna Bush would also like to count on the $40,000 she left behind at Electro-Jet after 16 years in its accounting department. She says she has no glamorous plans for retirement, which she figures is about eight years away. She just doesn't want to be working 14 hours a day, as she is now.

"I hope that eventually justice will be served," she said. "I have a dog, but I don't want to share his dog food when I retire."


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