SUNDAY EDITION | Scrap metal executive running two companies at - WDRB 41 Louisville News

SUNDAY EDITION | Scrap metal executive running two companies at once

Posted: Updated: May 25, 2014 11:19 AM
Image by Mike Petrig / WDRB Image by Mike Petrig / WDRB
LOUISVILLE, Ky. (WDRB) -- After losing money three years in a row, Louisville-based Industrial Services of America desperately needed a new leader.

So, in December, the scrap metal company on Grade Lane turned to a familiar face: Sean Garber, a Louisville-area businessman who was ISA’s president in the late 1990s.

There’s just one complication: Garber is also the CEO and largest shareholder of a privately owned business that appears to be both a supplier and a competitor to ISA, the publicly traded company he’s been running for six months now.

According to ISA’s public filings, Garber is CEO and owns about a third of Algar Inc., the private company that operates Grade A Allstate Auto Parts.

Grade A is almost directly across the street from ISA on Grade Lane, and each company is involved in the other’s “core” business. Like ISA, Grade A deals in scrap metal. And like Grade A, ISA operates an auto parts scrap yard.

“What you have there is a veritable knot of conflict of interest issues,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Elson is one of three corporate governance and finance experts who say the situation raises questions about Garber’s ability to effectively manage, and act in the best interests, of both businesses.

In the “post-Enron” world, it’s not enough for publicly traded companies to disclose potential conflicts among executives – they have to make their best efforts to root them out, said Jay White, dean of business school at Indiana University Southeast in New Albany.

“What we have here is, at a minimum, a perception of a conflict of interest,” White said.

While not technically an employee of ISA, Garber holds the title of “president” and controls the company’s day-to-day operations through a “management services agreement” between ISA and Garber’s private company, Algar.

ISA has gone to great lengths to tip-toe around potential problems created by Garber’s simultaneous involvement in both ISA and Grade A, according to a review of ISA’s filings with the U.S. Securities and Exchange Commission.

For instance, ISA has prohibited Garber and others with Algar from seeing ISA’s inventory, pricing and other key information about the lines of business in which the two companies compete.

The agreement does not specify what those lines of business are, leading the experts to question how the so-called “information barriers” will be enforced. They also wondered how ISA expects Garber to turn the company around even as he is prohibited from knowing everything the company is doing.

Meanwhile, while Garber is in control of both companies, the agreement explicitly allows ISA to buy scrap material from Algar.

There are controls meant to keep Algar from over-charging ISA, but the prospect of Garber enriching his private business raises questions about whether the purchases are always in ISA’s best interest, the experts said.

Tim Keane, director of the Emerson Ethics Center at St. Louis University’s John Cook School of Business, said ISA investors should know how much money Garber is steering to his private company through ISA – something ISA has not disclosed in its public filings.

Garber and Orson Oliver, chairman of ISA’s board of directors, declined to be interviewed by WDRB. They also declined to respond to nine questions submitted in writing – such as, "How much money has Grade A realized from sales to ISA?"

In an emailed statement, Garber said ISA’s board is “confident” that the “safeguards” the company set up in the management agreement – like the provision prohibiting Algar from overcharging ISA for scrap – “are being executed in order to protect the best interest of ISA and its shareholders.”

In an earlier email to WDRB, Garber said the two companies’ interests are “generally aligned and not in conflict.” Their “core businesses” are “distinctly different,” he said. Algar’s core business of recycling auto parts “produces the supply material needed for ISA’s core business” – which is processing scrap metals for customers like steel mills, Garber said.

Yet, ISA appeared to consider Garber’s Grade A a legitimate competitor not more than a year ago. Last June, ISA prohibited its then-chief operating officer, Brian Donaghy, from immediately going to work for any of six competitor companies as part of a negotiated early exit from Donaghy’s employment contract.

One of the prohibited employers listed in Donaghy’s exit deal was: “Grade A.”

A small, struggling company

With operations in Louisville and southern Indiana, ISA has about 118 employees, down from 159 a year ago, according to its latest quarterly report.

The total value of its outstanding shares is around $33 million, making it a very small company to have publicly traded stock. By comparison, Louisville-based Humana is more than 500 times bigger, while Yum! Brands is more than 900 times larger.

ISA briefly risked being kicked off the NASDAQ stock exchange last year when it failed to file a quarterly earnings report.

The company’s performance has been on a downward slide for four years. ISA generated $343 million in 2010, the last year it turned a profit. In 2013, its revenue tumbled to $137 million. The company lost twice as much money last year -- $14 million – than the year before.

Amid the dismal results, ISA’s founder and largest shareholder, Harry Kletter, retired as CEO in May 2013.

His successor was supposed to be Jonathan Blue, the well-known Louisville businessman and University of Louisville trustee. Blue’s company, Blue Equity, struck a deal to manage ISA last April, with Blue briefly appointed as ISA’s CEO.

But the deal fell apart a few months later when Kletter changed his mind about Blue taking over and voted his big bloc of ISA shares against the stock options ISA had agreed to sell to Blue Equity, Jonathan Blue said in an interview.

Kletter died in January at age 86. A few months earlier, he gave joint control over his ISA shares – about a quarter of the company’s stock – to Garber and Oliver, ISA’s board chairman.

Oliver, a consultant whose expertise is in banking, also holds the title of “CEO” for ISA. But he does not maintain an office at the company headquarters on Grade Lane, according to a person who answered the phone there.

Algar, Garber’s company, struck a deal on Dec. 2 to become ISA’s day-to-day manager, with Garber appointed as ISA president. ISA pays Algar up to $250,000 a year toward Garber’s salary.

The agreement does not set a minimum number of weekly hours Garber is expected to devote to ISA as opposed to Grade A, Algar’s auto parts and scrap metal company located across the street.

It’s hard to understate Garber’s newfound influence at ISA: In addition to the joint voting power over the company’s biggest bloc of shares, he is expected to be named vice chairman of ISA’s board of directors.

ISA has said in filings that it wants to combine with Garber’s company as soon as possible, whether by merger, joint venture or ISA acquiring Algar entirely – a transaction that would personally benefit Garber.

ISA says the “business combination” with Garber’s company is to happen “as soon as is reasonably practicable” – presumably, when ISA is on a surer financial footing.

That raises another potential conflict for Garber, according to the business experts, because ISA would have to negotiate a fair price with Algar’s shareholders, such as Garber.

White, the business dean at IUS, added that it’s much more difficult to determine the fair market value of a privately held company like Algar.

In its filings, ISA says any merger between the two businesses would have to be “a mutually beneficial arms length deal” – a term that is not defined.

Despite the potential conflicts, investors have bid up the price of ISA’s stock by 65 percent since the Garber agreement was announced on Dec. 3. The stock closed at $4.79 a share on Wednesday.

In its first quarterly report under Garber’s management, ISA said its revenue continued to fall and its losses widened in the January-March period, compared to a year earlier.

But in February the company negotiated some breathing room with its largest creditor, Fifth-Third Bank, freeing up cash for “growing operations.”

In a press release, Garber called it “a new beginning for ISA.”

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