The 11-year-old private equity firm that was co-founded by NFL great Steve Young has had better weeks.
The firm, HGGC, where Young is a managing director, tried at a hearing this week to get out from under a $270 million civil fraud case — but Delaware Chancery Court Judge Travis Laster was not making it easy, according to The New York Post.
The judge pressed HGGC lawyers on whether the Palo Alto, Calif., PE firm knew that there was an alleged fraud at Citadel Plastics — a company the firm sold in 2015.
While HGGC lawyers claimed that they were not responsible for any fraud at Citadel because they discovered no wrongdoing at the plastics company they bought in 2012.
But Laster argued that HGGC certainly flagged a pricing issue when its Citadel in 2013 bought Lucent Polymers — and might have investigated the Lucent pricing matter after the acquisition.
There, Laster said, HGGC could have known of a possible fraud.
Rival plastics company, A. Schulman, bought Citadel for $800 million in 2015 — and almost immediately discovered something was funky with some of Lucent’s prices.
In a lawsuit, Schulman has alleged that HGGC “falsified test results” at Citadel.
Young is not one of the HGGC executives named in the suit, although his PE firm is. Young recently boasted of the fine partnerships HGGC forms with its portfolio companies — something that sets HGGC apart from other PE firms.
His firm, Young said on the recent TV interview, gets fully engaged with its companies.
In the Citadel case, HGGC claims it didn’t know of the Citadel alleged fraud and therefore isn’t liable for any damages. The fault, it claims, lies with Citadel.
HGGC’s lawyers said there is no evidence it or Citadel knew when Citadel bought Lucent Polymers in 2013 that Lucent was selling fraudulent products.
Schulman discovered that Citadel when buying Lucent was aware profit margins in Lucent were unusual — and raised questions.
“I do not think that anyone is spilling out a story that your guys identified a problem in due diligence, saw this problem in due diligence, and closed over it,” Laster told HGGC’s lawyers.
Citadel allegedly had been selling products with the claim they met Underwriters Laboratories specs, when they did not, according to court testimony.
“Okay. Then we’re in agreement that it doesn’t make sense that they would have found out during due diligence,” said HGGC lawyer Stan Wash.
“I know it’s fun to get yourself all fired up about things that nobody’s arguing; right? But that’s just — it’s not something that’s in the case,” Laster said, explaining that the issue is whether HGGC should have known after buying Lucent.
A court battle is a rare occurrence in PE circles — where allegations of fraud, while rare, are usually settled early in the legal battle.
Few make it to trial.
HGGC, which was formerly known as Huntsman Gay, decided to roll the dice on a pitched legal battle.
Laster is expected to rule on fraud liability in the next several weeks. HGGC declined to comment by press time.
By: Karen Hillman