published Friday, May 27th, 2011

Ex-staff sue over gift card carcass

Former workers at Incentium LLC have filed a federal class-action lawsuit against Summit Partners, part of a group that owned and controlled the now-defunct Chattanooga-based gift card and incentives company.

The workers say that Summit did not give them 60 days notice of their termination, as required by the federal Worker Adjustment and Retraining Notification Act of 1988.

The suit is one of at least two legal actions against the investment group, which in two years transformed Incentium from a business with annual revenue of $115 million to a company in Chapter 7 liquidation.

J.J. Kardwell, principal at Summit Partners, said he and another man who controlled the company attempted to sell it to former owner Hamid Andalib, but couldn’t complete the deal.

“Incentium was losing $500,000 per month following the loss of the AT&T contract,” Kardwell testified in bankruptcy court Thursday.

Andalib, after contributing $300,000 of his own money to Incentium to keep it going long enough for him to perform due diligence, ultimately decided the company was beyond saving and declined to buy it, Kardwell testified.

That was on a Friday in February 2010. The company’s investor-run board met over the weekend and decided that Monday to shut the company down, he said. Incentium closed that Wednesday, idling 88 workers.

Kardwell said the collapse was costly to him. “The loss of equity value is a great personal disappointment and will affect my professional career as well,” he said.

Kardwell, along with his co-manager, Rob Chaplinsky of co-investor Bridgescale Partners, formed the entire “board of managers for the company” at the time of the company’s closure, he told lawyers.

Incentium was his first stint at running a company, he said, after he graduated from Harvard Business School in 2003 with an MBA.

But while Kardwell admitted that he served on the board in his capacity as a Summit employee, Summit’s lawyers sang a different tune in their response to the Warn Act lawsuit.

Lawyers denied in a response that Summit had control over the company, or made the decision to shut it down.

The company denied that it had control over hiring and firing, that key decisions were made by Summit’s board or that Summit made the decision to hire a CEO whom a judge later found had signed a noncompete agreement with a competitor, Maritz.

But under oath, Summit’s Kardwell seemed to contradict the company’s official position.

He admitted that the investor-run board hired Richard Phillips to replace outgoing CEO Richard Char on the advice of Summit’s law firm, Kirkland & Ellis, and admitted firing Richard Char.

“We felt it did not pose an immediate risk,” he said of the hiring of Phillips, a decision that cost the company $1.5 million in legal fees. “It was an extensive trial around the question of whether the [incentives-based companies] are competitors.”

Bankruptcy trustee Richard Jahn has a simpler view of Incentium’s collapse.

“It was horrendus,” he said. “The company was losing an amazing amount of cash.”

Phillips and his assistant were paid over $325,000 per year for about a day of work a week, Jahn said, when the two would “fly out [from California] on a Tuesday, and flew out on a Thursday.”

“It was a cash cow. If Nick over here wants $50,000, here’s $50,000,” he told Kardwell, who called that characterization “fundamentally untrue.”

“I think it is true,” Jahn replied.

Both cases could drag on for years, with the class-action suit not scheduled to move to trial until June 11, 2012, according to court documents.

Contact staff writer Ellis Smith at esmith@timesfree or 423-757-6315.

about Ellis Smith...

Ellis Smith joined the Chattanooga Times Free Press in January 2010 as a business reporter. His beat includes the flooring industry, Chattem, Unum, Krystal, the automobile market, real estate and technology. Ellis is from Marietta, Ga., and has a bachelor’s degree in mass communication at the University of West Georgia. He previously worked at UTV-13 News, Carrollton, Ga., as a producer; at the The West Georgian, Carrollton, Ga., as editor; and at the Times-Georgian, Carrollton, ...

Comments do not represent the opinions of the Chattanooga Times Free Press, nor does it review every comment. Profanities, slurs and libelous remarks are prohibited. For more information you can view our Terms & Conditions and/or Ethics policy.
bpqd said...

Another instance of businesses and businessmen failing to respect a key principle of ethical financial transactions and the laws in the US which guide them: personal interest.

When people stop being interested, stop caring, about how money is made, what happens to it, or what happens to people, not only do they stop being ethical in their transactions, but they also run the risk of engaging in illegal activities.

This same type of failure to respect the concept of personal interest caused massive fraud and failure on Wall Street. It's the unprofessional and unethical attitude which put us all into this mess.

The concept that these people used a business as a cash cow sounds believable. There are transactions records somewhere which will show what was what.

May 28, 2011 at 9:37 a.m.
hcirehttae said...

Phillips and his assistant were paid over $325,000 per year for about a day of work a week, Jahn said, when the two would “fly out [from California] on a Tuesday, and flew out on a Thursday.”

Their mistake was to work in a for-profit industry. If they'd "worked" for Blue Cross Blue Shield, this would be standard operating procedure for the higher-ups.

Moo, moo. Cash cow, indeed.

May 28, 2011 at 10:45 a.m.
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