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'Great disappointment' for Krones as fraud case settlement hammers bottom line

By Ben Bouckley , 09-Nov-2012
Last updated the 09-Nov-2012 at 16:19 GMT

Krones stand at Pack Expo 2012 in Chicago last week
Krones stand at Pack Expo 2012 in Chicago last week

Krones USA has paid $125m to settle a legal dispute ongoing in the US since late 2008, linked to damages claims from third parties who alleged that the company was party to fraudulent practices committed by now defunct beverage firm Le-Nature’s.

The German-headquartered beverage filling and packaging firm - which told BeverageDaily.com today that it was itself the victim of Le-Nature's large-scale fraud - said yesterday that the payment would hit its bottom line by around $100m, with $47m of this already charged against 2011 income.

To put the scale of this large-scale settlement into context, Krones annual pre-tax earnings totaled €74.6m ($94.9m) in 2011; when reporting its results in March the firm noted the possible future effects of any Le-Nature’s settlement.

'Our subsidiary played a role...'

Asked by BeverageDaily.com today if Krones still regarded all claims of wrongdoing against it as unfounded, its position in March, a spokeswoman said:

"We can admit that conduct of our subsidiary played a role in causing the losses.  Nevertheless we wish to state that in the case of Le-Nature’s we were the victim of a large-scale fraud, and were manipulated by the management of Le-Nature’s for criminal machinations."

Given that the settlement was so large, how disappointed was Krones at the effect it would have on its bottom line in 2012? "It's a great disappointment for us. But $47m had already been charged against income in the preceding year," she added.

"The result for the 2012 business year has accordingly been debited with an already-formed provision amounting to about $53m. The costs will thus have no further impact on the company’s result."

‘Special risks’ in US proceedings

The settlement is still subject to formal approval by the insolvency court, but Krones said that special risks arising from proceedings in the US “might otherwise have dragged on for years”.

Against this backdrop, Krones said it decided to end the matter by concluding settlements with the major plaintiffs, and striking a separate deal with the district attorney (DA) of Pennsylvania, which recently began an investigation related to proceedings.

Krones will now pay plaintiffs settlement payments totaling around $110m, while it will also pay the US Treasury $15m for the DA to discontinue their investigation.

“The settlements represent the closing chapter in long-running legal proceedings and we believe Krones is well positioned to capitalize on the opportunities before us,” the company said yesterday.

The plaintiffs – financial services providers, hedge funds and a liquidator – alleged that Krones was party to a massive fraud, a claim the company has always strongly denied.

A slew of US legal claims alleged fraud by the management of now defunct US beverage producer, bottler and distributor Le-Nature’s to the tune of $850m.

Not so lucky Podlucky...

Former Le-Nature CEO Gregory Podlucky was sentenced to 20 years in jail last autumn for extensive fraudulent activity.

He was found guilty of encouraging Le-Nature’s investors to inject new funds into his firm to fund new facilities, and committed fraud by forging vendor documents and submitting balance sheets falsely claiming massive growth from 1999 to 2004.

Lawsuits named Krones for alleged collusion with Le-Nature to inflate the stated costs of filling lines worth $100m that it delivered to the company in 2005/6.

One suit in Pennsylvania alleged that Krones helped Podlucky tap $118m in financing by allegedly refunding Le-Nature for deposits it falsely told investors it had made on equipment.

Krones was accused of submitting inflated bills for equipment earmarked for a plant in Phoenix to Le-Nature’s US financiers, then returning ‘excess payments’ to Le-Nature’s.

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