State Outlines Charges Against Former Republic CEO GillmanSeptember 15th, 2009 by Editor
The former president of Chicago-based Republic Windows and Doors, Richard Gillman, was arrested last Wednesday. The court alleges that he and several others, who have not yet been named in the court documents charging Gillman, “formulated and executed a scheme to defraud Republic’s debtors by abandoning Republic’s debt, hijacking its collateralized assets, and transporting them to Red Oak, Iowa, with the intent of using the stolen property to create a successor to Republic.” (CLICK HERE for related story.)
The state also alleges that those involved “enriched themselves, stole corporate funds, created companies and bank accounts for fraudulent purposes, laundered stolen money, criminally converted manufacturing equipment and concealed it in ten semi-trailers, transporting three of the semi-trailers to Red Oak, Iowa, and hiding the remaining semi-trailers in a southwest side trailer park; stole business equipment, destroyed business documents, created phony receivables, and engaged in computer ‘hacking.'”
The “proffer in support of setting bond” filed against Gillman cites several others as involved in the alleged scheme; they are known as Individual A (chief operating officer) and Individual B (director of manufacturing). At press time, their names had not been released.
The Beginning of the End?
Though Republic announced last December that it was closing, the state alleges that the company’s downfall became imminent as early as mid-2008, as the company “was seriously in arrears on payments to creditors and it was nearly certain that insolvency was imminent,” according to court documents. Prosecutors allege that Gillman and his alleged co-conspirators aimed to abandon the company’s debts and secretly relocate the company’s “collateralized manufacturing equipment” to an existing window factory in Red Oak, Iowa (also known as Echo Windows).
“The ultimate goal of the conspiracy was to use the stolen property to create a successor window manufacturing company to Republic that Gillman would operate, free of responsibility of the staggering debt that his mismanagement created,” writes John Mahoney, assistant state’s attorney deputy supervisor, in the proffer. Mahoney is with the state attorney office’s public corruption and financial crimes unit.
The state names a variety of victims of the alleged conspiracy, including Republic and its bankruptcy estate; several creditors, including JP Morgan Chase, Bank of America, and General Electric Capital Corp.; and the employees of Republic “who were deprived of their earned wages, accrued benefits and severance package.”
According to court documents, Gillman became involved Republic in October 2005 when he and an associate purchased it-through a company they owned, NFI LLC. According to court documents, Gillman owned 75 percent of NFI, and a financial associate, William H. Smith, owned 25percent.
In the following year, the company laid off several engineers “as it was unprofitably management-heavy,” according to court documents. Despite the changes, the court alleges that in 2006 the company experienced a net loss of $8,205,694 in 2006 and a net loss of $688,685 in 2007.
“Viable, Legal and Ethical Options”
In early 2008, the company decided to explore three options-merger, acquisition, or relocation, according to court documents. Prosecutors reference several PowerPoint presentations that were found in the Republic offices about how to come through the financial struggles.
Documents found show that the company hired a consultant, Larry Pointelin, “to conduct an operations review.” According to court documents, he made a presentation to the company’s board in April 2008 pointing out the following:
– Republic’s computer system needed to be replaced at a cost of $500,000 to $1 million;
– The company’s union contract would be up in May 2008; and
– He believed “Republic could not realize a profit while it was located in Chicago.”
On the last point, Pointelin allegedly advised the board that “the cost of worker wages and benefits were too high in Chicago and would be lower elsewhere.” He estimated re-location costs at $3,500,000, according to court documents.
The State Attorney’s Office also points out that the company signed a draft agreement with Jordan Knauff and Co. (JKC), an investment banking firm that specializes in the door and window industry, to obtain “‘buy side’ only acquisition advisory services.”
One PowerPoint presentation found on-site at Republic showed that JKC located 60 suitable candidates for merger and acquisition negotiations, Mahoney reports. “Of these, 50 companies were considered by Republic to be unattractive candidates for strategic partnership,” he adds.
“The first half of 2008 had seen Republic’s management considering viable, legal and ethical options to avoid insolvency,” writes Mahoney. “Had any of those options become a reality, there was a possibility that Republic could have continued as an ongoing concern. By mid-2008, however, the handwriting appeared to be on the wall and Republic’s insolvency seemed to be imminent.”
“How Do We Plug a $4 Million Hole?”
One document allegedly recovered from the chief operating officer’s office was a document called “How do we plug a $4 million hole?” according to court documents.
In the document, “Individual A” suggested the company “suspend interest and principal payments on debt owed to Veka, suspend or limit capital expenditures, block relief from LaSalle and temporarily defer payments to GE Capital,” for a savings “of only $1,539,000.”
Several consultants also reviewed the company’s financial situation in mid-2008, including Fort Dearborn Partners Inc. and Silverman Consulting, which suggested that, “At this point, the Company was nearing the zone of insolvency and management’s … fiduciary obligations should have started to shift to what was in the best interest of the company’s creditors,” reads the proffer.
At this point, the State Attorney’s office claims that instead of following the advice of the consultants and “fulfilling their legal obligations to their employees and creditors, Gillman, Individual A and Individual B formulated a scheme to defraud them.”
“[They] conspired to steal the company’s money, defraud its creditors, cheat its employees, convert its manufacturing equipment and transport it to Iowa where they planned to acquire an existing window manufacturing plant and start up a new company,” charges the State Attorney’s office.
The Alleged Echo Plan
According to court documents, Republic had been in discussions with TRACO as early as March 28, 2008, about its offer to sell its existing vinyl replacement window manufacturing division in Red Oak, Iowa, which later would be renamed Echo Windows by Gillman.
“The acquisition of TRACO’s plant and the relocation of its manufacturing operations to Red Oak would have possibly been legal had certain conditions been met,” writes Mahoney. “Among those conditions were full and total disclosure obtaining the prior permission of the owners of the company and its assets-Chase, Bank of America and GECC. These conditions were ignored and instead the conspirators concealed the true nature of their scheme to defraud.”
The State Attorney’s Office say they found an easel board in Gillman’s former office in Chicago with plans about when items and machinery would be moved, what would be moved, by who, etc. Though it allegedly noted that Republic’s Sienna P-2, Contour and Allure lines definitely would be moved, “the option was left open to steal other manufacturing lines,” reads documents filed in the case.
Prosecutors also say they found a document dated October 31, 2008, which appears to be a fourth revision of the plan, outlining that in Phase I they would “renegade Contour immediately,” and in Phase II, “they would remove ‘Allure, Patio Door, Minor Casement, Glass and Complete Contour.'”
“This is evidence of the plan to steal additional manufacturing equipment from other lines,” writes Mahoney. The court says the document also references a “Phase II and III forced blitz move.”
Echo was incorporated in November in both Illinois and Iowa, according to court documents, and Sharon Gillman, Richard Gillman’s wife, and Lawrence Gritton were listed as its principal agents.
The court alleges that Gillman sought the assistance of Smith (his partner in NFI, which had helped purchase Republic) to finance the purchase of Echo. Prosecutors allege that the two set up a new company, Smithfield Windows “to use as the vehicle with which to [purchase the TRACO facility].” Smithfield Windows was set up on September 9, 2008, and Gillman, Smith and “Individual B” traveled to Red Oak to visit the facility on September 11, according to court documents.
Then, in October, “Smithfield Windows … wrote letters of intent to the Board of Directors of Republic offering to execute a purchase agreement covering the sale of all its furniture, equipment, computer systems, intellectual property and pending purchase orders for the sum of $100,000,” reads the proffer. At that time, the company is alleged to have also started negotiations with Veka to utilize its vinyl extrusions. Republic also had used Veka, but the company had cancelled its credit to Republic due to a large outstanding debt, according to court documents.
On November 18, Smithfield changed its name to Red Oak Real Estate LLC, with Gritton named as its principal agent, according to court documents. It was announced in early December that Red Oak Real Estate had purchased the TRACO facility (CLICK HERE for related story.)
Inside Republic’s Last Year
As this was occurring, prosecutors allege that Gillman and his associates also were setting up other companies to complete “the theft of $202,000 from Republic.”
“This stolen money was laundered through a bank account of a corporation formed solely to facilitate the scheme to defraud,” reads the proffer. “The laundered money was then used to purchase equipment and transport stolen assets.”
Prosecutors allege two shell corporations, International Fenestration Partners (IFP) and TKDO Inc., were set up for this purpose. The State Attorney’s office alleges that money was funneled from Republic to these two companies in order to pay to relocate Republic’s assets to Red Oak.
“Concealment of their scheme required Republic’s money could not directly, or at least easily traceably, be used for that purpose,” writes Mahoney. The state says that over five months-starting in June 2008-checks were written from Republic’s bank account to IFP’s account, which was set up in Barberton, Ohio, for a total of $202,103.
The court says that when a bankruptcy consultant was reviewing Republic’s books and purchase order list, it showed that the invoice items associated with the money Republic paid IFP were never received.
The State Attorney’s office notes that IFP’s bank records also were reviewed as part of the investigation, and that it had made several checks to TKDO LLC-with an address of 3630 S. Canal St., Chicago, “the address of Individual B’s home,” for a total of $57,122.30.
IFP also had made payments to several industry suppliers, including Sturtz Machinery and Product Design and Development (PDD), according to court documents.
“PDD shipped an order for machine tools, dies and presses ordered by Employee A and Individual B, which were necessary to retool soon-to-be stolen manufacturing equipment that would be required to support Echo’s operations in Red Oak, Iowa,” reads the proffer.
IFP also is alleged to have made several payments to Transgaj Inc., which was to have transported the equipment from Republic to the Red Oak facility.
According to court documents, in September 2008 Republic officials realized that to move one particular line of machinery, it would need to be re-tooled and new dies would need to be fabricated for it to be used in a new facility.
“Individual B told Employee A to use the company name ‘TKDO’ when he placed the order for the purchase of equipment [from PDD],” writes Mahoney. “Individual B explained to Employee A that he could not use Republic’s name when he placed orders because nobody would ship to Republic anymore because of its very poor payment history and lack of credit.”
The employee provided his own home address for the order, according to court documents, and was told by “Individual B” that TKDO were the first initials of all his family members.
The move of the equipment allegedly began during the second week of November 2008, and “Individual B” is said to have told employees it was being “liquidated to pay employees’ wages,” according to court documents. “Employee A” told investigators that those who moved the lines into trailers were paid with cash, according to court documents-which came from Republic’s account for alleged “electric work to be performed” at the request of “Individual B,” who said that the work could only be paid for with cash, according to documents filed in the case.
During the bankruptcy case, prosecutors say Gillman provided a testimony saying he authorized the removal of the equipment, but was not present for the move. The trucking company provided invoices to investigators showing that three of the trucks of equipment went to the Red Oak facility in early December, and seven were removed to a Republic storage yard in Chicago, according to court documents. The trucking company advised it was paid by IFP, according to prosecutors, and the checks were signed by Jason Petrie, the only name referenced in the court documents as associated with IFP.
The Final Days
Some employees were told on December 2 by “Individual A” that the company was closing the following Friday and all the manufacturing employees learned the same on that Thursday, December 4, according to court documents, “and that everyone would be expected to leave the plant by 10:30 a.m.”
“Individual A claimed that the employees’ health insurance would be valid through the end of December. It had in fact already lapsed,” adds Mahoney.
Company officials claimed it was closing “because its credit was pulled,” according to court documents.
When Friday morning came, the employees, of course, did not leave the plant-and made national news by doing so, drawing the attention of government officials across the country. Prosecutors note that this allowed bankruptcy consultants the ability to recover much of the information needed in the case.
“The employee occupation of the factory, while apparently peaceful and orderly in nature, effectively prevented Gillman, Individual A, Individual B, Employee B and others from re-entering Republic’s offices or the manufacturing floor,” writes Mahoney. “As a result, Bankruptcy Consultant and other agents of the bankruptcy trustee were able to recover many of the documents referred to herein.”
Echo did receive three trailers of equipment, but soon also closed on February 23, 2009 (CLICK HERE for related story).
Prosecutors claim that in Gillman’s testimony regarding Republic’s bankruptcy, “he acknowledged that [creditor] Chase had ‘super, super powers, super control’ over Republic.” Based on this, the State Attorney’s office alleges that Gillman and his associates “were conscious of the illegal nature of their activities.”
The Story Continues
Though Gillman still is in custody at the Cook County Correctional Facility in Chicago, with a bail of $10 million, DWM has not been able to locate records for any other Republic officials. State Attorney’s Office deputy communications director Tandra Simonton advised DWM magazine the investigation is ongoing.
“At this time no other information is being released,” says Simonton. “This is a continuing investigation.”
Stay tuned to www.dwmmag.com for more information on this case as it unfolds.
Written by Penny Stacey, assistant editor for DWM magazine.