Something's rotten at Fortune Industries

Markets are built on trust, when trust disappears markets begin to fall apart.  The default behavior of markets is to trust unless evidence says otherwise.  At times even when there is an overwhelming amount of evidence to the contrary investors still trust, such as with Enron, or Worldcom.  Shareholders at Fortune Industries trusted management to do the right thing for them, unfortunately their trust was misplaced.

I'm going to cut straight to the chase and fill in the details later:  Fortune Industries management negotiated the going dark/private deal in bad faith, took advantage of shareholders, and took actions that were highly unethical if not blatantly illegal.

I have written about Fortune previously (and here), I'd recommend reading the past posts, but I want to provide a quick summary.  Fortune, an HR outsourcing company, when faced with the sickness of their founder created a financial transaction that would eliminate small shareholders (under 500 shares), while restructuring the balance sheet.  The company would be redeem the founder's perpetual preferred shares and replacing them with debt.  Unaffiliated shareholders would own 8.9% of the company after the transaction down from 39% before the transaction.  In the transaction ownership interest transferred from Carter Fortune and minority shareholders to CEO Tena Mayberry and CFO Randy Butler.  Two members of management who held an insignificant interest in the company suddenly came to own 91% of the company through financial engineering.

I initially posted about Fortune over a year ago, but the deal only closed recently.  Shortly after the deal closed I received some fascinating comments on the original post.  I've since been in touch with that commenter and the story I heard about Fortune appalled me.  As a side note, if you leave an anonymous comment I cannot see your email, if you want to get in touch with me you need to reach out as this person did.

I will refer to my source as Person A in this post, I've decided to keep their name anonymous out of respect for their privacy.  If you are interested in talking to them email me and I'll get you in touch.  They are very willing to talk and share the information they have, which is a lot.

To understand where Person A is coming from a little background is in order.  They approached Fortune after the deal was initially announced with a letter of intent to purchase the company outright.  They offered $1.5m more than what the company's management was offering.  Additionally the money from their offer was guaranteed.

Person A initiated contact with the attorney for the Board of Directors, the attorney refused to pass the offer onto the Board, and Person A ended up contacting the Board members individually with the proposal.

After contacting the Board Person A setup a meeting with the company to discuss the proposal.  Management and members of the Board were to be present at the meeting, when the meeting happened no one from the Board was present, just Jeff Bailey, and the inside attorney Carrie Hill.  This is a very important point, the board of directors are to represent shareholders, they run the company and employ management for day to day operations.  A Board can fire all management, management cannot fire the board unless they become shareholders.  shareholders can fire board members.  So at this meeting, when a superior deal was presented the shareholder representatives were absent, the very people who are supposed to evaluate the deal and decide whether to present it to shareholders.

During the meeting Person A asked for a 30 day quiet period where due diligence could be conducted. This is a typical request, Fortune denied it saying there wasn't enough time and they had to get the deal done now.  The irony of this statement is that it took Fortune over a year to complete the deal, an extra 30 days shouldn't be an issue, especially if the deal is superior.  Clearly management didn't even want to entertain the offer and threw out a limited time excuse.

One aspect of the deal that never sat well with me was that it appeared to be a sweetheart deal for management, and it as negotiated with Carter Fortune on his deathbed.  In talking to Person A I came to find out that Carter Fortune had a reputation around Indianapolis for being an honest businessman who cut favors for no one.  He believed in engaging in arms-length transactions even with family members.  It strikes me as odd that suddenly a man would go against his life's character and sign a blatantly favoritist deal in his last days.  Further bolstering this view is the fact that a very prominent family member, who was very familiar with Carter Fortune did not like the deal.

Why would management refuse to look at a materially higher offer?  They stood to gain 92% of the company if their deal went through, whereas if the company were sold they would gain almost nothing outside of a side pocket fee buried deep in the proxy.  The company's lawyer stood to gain $500k from the deal, and their CPA $300k from the deal as well.  The company's management and its advisors stood to gain so much financially it's no surprise they were incentivized to do everything possible to shoot down other offers.

This inherent conflict of interest is why companies have boards of directors.  The board is supposed to be independent and objectively evaluate deals for shareholders.  Except in the case of Fortune the Board of Directors was kept out of the loop, and possibly mislead about the nature and terms of the deal.

What's in this post is the tip of the iceberg with regards to the malfeasance related to the transaction.  The information above directly relates to how shareholders were taken advantage of, but some of the other things I heard could potentially be securities fraud or criminal in nature.

Now that the transaction is done it seems like all hope is lost, but that's not the case.  Shareholders have a VERY strong case against management, and the company's advisors.

Action items:

1.  If you are a current Fortune shareholder, or were one and are interested in joining a class action lawsuit against the company please contact me at the link below.  There's a possibility this transaction could be reversed and shareholders receive a far more fair compensation for the deal.  You would not be paying legal fees out of pocket.

2.  If someone has a contact at the SEC, a real contact, someone who can actually move something forward please contact me as well.  The SEC's mission is to supposedly protect shareholders, but unless a story gets in the news, or the company is large shareholders are neglected.  Some of the stories I heard strongly lead me to believe that the SEC needs to open an investigation into Fortune's management.  I filed an initial SEC complaint months ago, it disappeared into the void, I want my next complaint to land somewhere important.

3. Spread this story!

Lastly you might wonder why I even care about this.  I didn't hold a significant position in Fortune, but it bothers me to see management take advantage of shareholders.  The shareholders are the owners of the company, and the fact that they were denied the ability to vote on a superior deal is frustrating, as well as other aspects related to this deal.  I feel that often management at smaller public companies thinks that they can get away with more because the SEC doesn't care about small companies.  If the government won't do their job then individuals need to step in and fill the gap.  If small companies knew their shareholders cared and were watching them, then some might be less inclined to behave unethically.

Talk to Nate


  1. Nate, have you had a chance to talk to any members of the BoD or get any kind of independent verification of the revised offer? It's not that I doubt Person A's account, it's just always smart to hear both sides of the story.

    I found it odd that FFI used a valuation firm based in Nashville (same city as Tena & Randy) and not a firm based in Indianapolis (corporate headquarters). I haven't read Kraft's report (I'm sure it's fine), but I always wondered if Tena and/or Randy had some kind of prior connection to that firm.

    1. I agree with you, I haven't reached out to the Board yet, but given details not included in the post I'm fairly confident I have the Board's side of the story as well. The other side would be management, and I've tried to reach out to them repeatedly, it's been met with silence or terse answers explaining why they can't answer simple shareholder questions.

      I think you're on the right path in thinking about the firm in Tennessee. My guess is all of the firms used as part of this deal are because Tena and Randy have personal connections and the firm might give a favorable opinion verses an objective one.

  2. Nate...I have not been following this but have reviewed the previous post.

    Shareholders did have the right of appraisal under Indiana law...correct?

    I know this is an onerous/risky/probably stupid route to take for the small investor....but it may be the only thing the law affords us in these situations.

    Really highlights the point that when evaluating a closely held company, you have to evaluate managements current actions and extrapolate the chances management will take advantage of minority shareholders.

    If a person had a significant stake in the company (and deep pockets) (and a stomach to work with lawyers), demanding an appraisal may be a viable options. A risk/reward thing.

    Anyway, thanks for the info.

  3. FDVF getting taken out at 58.6 cents a share. A weird one for me...I tried to make a little in the reverse split, which didn't work out, then followed the co obsessively as they were relisting. Following relisting, co traded at around 11 5x in about 2 years.