Former Antioch Company employees sue leaders
- Published: January 7, 2010
A large group of former Antioch Company employees has filed a lawsuit against company leaders, charging that in recent years those leaders placed their own financial interests before the welfare of the company as a whole, leading to actions that forced the company into bankruptcy and the loss of more than $20 million in employees’ retirement funds.
The suit was filed Dec. 23 in the U.S. Bankruptcy Court in the Southern District of Ohio, Western Division. Representing the employee group, which is called The Antioch Company Litigation Trust, is W. Timothy Miller of the Cincinnati firm of Taft, Stettinius & Hollister.
Specifically, the Dec. 23 suit describes the 2003 Antioch Company restructuring as a financial windfall for company leaders that left the company overleveraged and cash-poor, leading to its November 2008 bankruptcy, which wiped out the value of current and former employees’ shares in the company.
The suit also alleges, among other assertions, that most company leaders had conflicts of interest based on their benefiting financially from their decision to restructure; that they neglected to engage an independent analysis of the 2003 restructuring to determine its effect on the company as a whole; that employees were misled by leaders as to the risks involved in the 2003 restructuring and the subsequent mounting financial problems; and that leaders used an insurance company that they knew, or should have known, had already declared bankruptcy to insure employees’ retirement funds. That insurance company has to this date paid nothing on the claims.
The suit names as defendants 30 former and current company leaders, including former CEO Lee Morgan, current company president Asha Morgan Moran, and several former company directors, including former villagers Malte von Matthiessen and Ben Carlson.
In an interview this week, Lee Morgan said that he could not comment on specifics of the case due to its being in litigation. However, overall, “The allegations are false,” Morgan said. “We expect to defend them vigorously and to prevail.”
The suit is being “led by an opportunistic lawyer hoping to get a settlement from the insurance company,” said Morgan, who retired as CEO a year ago and is no longer involved with the company operations.
Current Antioch Company President Asha Morgan Moran, who is the daughter of Lee Morgan, did not return calls seeking comment.
It’s not clear at this time how many former employees have opted to join the lawsuit, according to Heidi Everett of St. Cloud, Minn., the former communications manager for Creative Memories, the subsidiary of The Antioch Company, who is a spokesperson for the trust. Everett, who lost $116,000, estimated the number of potential members of the lawsuit at several hundred. Last year’s bankruptcy settlement included $500,000 so that former employees could pursue claims against the company, Everett said, and employees with promissory notes for their ESOP, or Employee Stock Option Plan, shares were asked whether they wanted to join the suit. However, the trust has not yet received the final numbers of those who chose to do so. While the company now employs about 500, it employed about 1,200 several years ago, and several hundred laid-off workers are eligible, Everett said.
Those Antioch Company employees who chose to leave the company in 2003 were able to cash in their ESOP shares.
In Yellow Springs, Lynda Hardman is one of the former Antioch Company employees who lost most of her retirement savings, $118,000, with the bankruptcy. Hardman, who was laid off from her position as a production planner last year, is one of a second group of former employees suing the company. Those in that group, those who were laid off in recent years, are called “unsecured creditors,” because they did not have promissory notes on their ESOP shares, as did the employees in the first group. The unsecured creditor group, which numbers about 100, filed a suit last spring in Chicago against The Antioch Company.
About 12 Yellow Springs community members have lost significant portions of their retirement from the company, according to Hardman.
“People need to know the impact of this,” Hardman said, referring to the loss of employee retirement funds. “It’s huge.”
A unique company
The Antioch Company was co-founded in Yellow Springs in 1926 by Ernest Morgan, father of Lee and son of former Antioch College President Arthur Morgan, who sought a way to use the scrap paper from his printing business. To do so, he began the company, which produced personalized bookplates. Morgan, a lifelong Quaker, envisioned his business as a “community of work,” in which the Quaker values of mutual respect and egalitarianism would flourish, according to the company Web site. As early as 1929, he began profit-sharing with his employees.
Lee Morgan joined the business as treasurer in 1968, then became president and CEO before his 2008 retirement. Asha Morgan Moran joined the business in 1999 and served as chief operating officer.
In 1979, the ESOP was established to provide retirement benefits for employees. When an employee left the company, his or her stock interest was redeemable by Antioch in cash or installments. In the 1980s the company acquired Webway in Minnesota, and went on, with its Creative Memories subsidiary, to become one of the world’s largest direct-sales scrapbook and accessory suppliers, operating from facilities in St. Cloud and in Yellow Springs.
The business model envisioned by Ernest Morgan continued for decades, according to several former Creative Memories employees, who all expressed a longing for the unique work environment they experienced at The Antioch Company, which they said they have not found anywhere else.
“It was an amazing collaborative team and environment,” said Everett, who worked at Creative Memories from 1996 to 2005, when she was laid off. “You wanted to go to work every day.”
While the ESOP program offered employees an opportunity to share in the company’s financial success, the ESOP philosophy extended beyond the stock options, according to Lisa Drew, a 15-year employee who formerly worked in marketing and product development, and who lost $650,000 from her ESOP shares.
“Employees were empowered to take risks, to stretch and move beyond where they were to make the company better,” she said. “You had a pride and a belief that you were making a difference. I loved working there. I still grieve the loss of that job.”
The events cited in the lawsuit reflect a significant change in the culture of The Antioch Company that seemed obvious to some employees beginning in about 2003, according to Everett and Drew, who identified a shift in leadership and escalating financial problems as factors that may have contributed to the perceived change. More and more, according to Drew, the company seemed focused on the bottom line and less on the values that had made the company different.
“I think there was a complete loss of heart,” Everett said in an interview this week. “Before, the company had a tremendous balance between heart and business. But we lost the heart part.”
The most difficult part of the events leading up to the lawsuit, according to the former employees, is losing trust in the company that had embodied for them such humane values.
“People feel they were betrayed, or were a bad judge of character,” Everett said, regarding herself and her fellow -employees.
Restructuring the company
The lawsuit focuses on actions that were set in motion by a 2003 recommendation by company leaders that the company be restructured. The change, from a subchapter S corporation to a wholly owned ESOP, would save the company about $290 million in taxes over 10 years since wholly-owned ESOP companies do not pay taxes.
To become a wholly owned ESOP, the company needed to purchase the shares of non-ESOP shareholders, of whom the Morgans were the most significant. Other directors and officers were also non-ESOP shareholders, and collectively, according to the lawsuit, the board owned about 86 percent of the non-ESOP shares.
The cost for those shares was about $200 million, according to the lawsuit. To finance the purchase, the company became far more leveraged than previously, with its debt load increased from $10 million to about $200 million.
Antioch Company directors met with employees to discuss the restructuring before employees were asked to vote on the action, which employees approved. According to the suit, leaders assured employees that the company could handle the debt load.
“I trusted the Morgans,” Lisa Drew said. “If they said something was good for us, I trusted that.”
Lee and Asha Morgan, along with the directors, stood to gain financially from the sale, according to the suit. The shares, which had a year earlier been valued at $680 per share, were for the restructuring sale valued by the company at $850 per share. Consequently, Lee Morgan stood to gain about $58 million from the transaction, Asha Morgan Moran stood to gain about $80 million, and other members of the Morgan family stood to gain $51 million, according to the suit, which also asserts that other directors had a financial interest in the change. Director Ben Carlson stood to gain about $1.5 million and von Matthiessen about $1 million, the suit states.
Those who stood to gain financially had a clear conflict of interest in the decision and should not have been involved in the decision making, the suit states. The suit also states that the directors chose not to engage an independent analysis of the effects of the restructuring on the whole company, although they were advised to do so.
According to Lee Morgan this week, the purpose of the restructuring was not financial gain but restoring the company to economic health.
“Sales were plummeting,” he said of the situation in 2003, and something had to be done.
Morgan said he could not comment on whether the figures cited in the suit regarding his profit on the sale of his non-ESOP shares were accurate.
Over the next several years, with declining sales and significantly increased debt, the company’s financial distress intensified, according to the suit. In November 2008 the company entered into the prepackaged bankruptcy program.
The bankruptcy rendered ESOP stock worthless. While the company was required to obtain adequate security for the ESOP notes, it had failed to do so, according to the suit. The company had guaranteed the notes through an insurance company in the Bahamas that had itself gone into bankruptcy in summer 2007. Regardless, the company rehired the company, Condor, as surety on the notes with an issuance in October 2007, several months after Condor declared bankruptcy. To date, Condor has not paid on the claims, according to the suit.
Antioch Company employees who lost their ESOP shares in the bankruptcy have the option of re-investing with the current company, Lee Morgan said this week. According to Everett, the former employees she knows have chosen not to do so.
“If Creative Memories/Antioch actually turned around and had valuable stock, why would we trust that we’d get a payout in the future? Wouldn’t the same problem arise?” she wrote in an e-mail message.
In an interview this week, Antioch Company Chief Operating Officer Chris Veit said, “The company itself is not impacted by the lawsuit. We are continuing to work hard to turn this around.”
Veit was brought to the company by the bank group of senior lenders who now have majority control of the company’s board of directors, he said.
Currently, the company has about 500 workers overall producing Creative Memories products, with about 50 workers left in the Yellow Springs facility, he said.