Staffmark Alleges Fraud; Edgewater Says ?Too Late?

Staffmark Investment LLC claims that Edgewater Technology Inc. committed fraud by deceiving it regarding operating costs of the staffing division that Stephens Group Inc. of Little Rock purchased last year for $190 million. Staffmark filed suit Aug. 23 in Washington County Circuit Court in Fayetteville asking for $38 million to set things right. That suit, however, is sealed for the time being.

Only a week earlier, Edgewater filed its own lawsuit in the Chancery Court of Delaware asking a judge to declare the impending Staffmark suit without merit.

Knowing Staffmark was going to file suit, Edgewater asserted that Staffmark has missed the deadline for any “claim for indemnification” by six weeks.

“By letter of November 22, 2000, Staffmark first asserted that there had been improper allocation of corporate overhead to the commercial business by Edgewater and that the alleged improper allocation breached unidentified representations and warranties made in the purchase agreement,” the Edgewater suit states.

The deadline for any such claims was Oct. 5, 2000, Edgewater said in its lawsuit.

Edgewater also said Staffmark’s claim didn’t comply with the notice requirements of the purchase agreement and that the allocation of corporate overhead was agreed upon by both parties.

Calling it “good lawyering,” Jim Hudson, general council for Staffmark, said Edgewater filed the suit Aug. 15 as a “tactical maneuver” because they knew Staffmark would file suit soon.

“They sued themselves more or less,” Hudson said, noting that Edgewater is asking for no damages from Staffmark.

Plaintiffs in the Staffmark suit against Edgewater include Staffmark Investments LLC, Stephens Group Inc. and 10 other Staffmark divisions or entities.

In an Aug. 24 news release, Edgewater Chairman and CEO Clete Brewer said he’s awaiting a Delaware judge’s ruling on the Edgewater suit. He added that Staffmark’s lawsuit against his company is “without merit,” and that Edgewater plans to “vigorously defend against it.”

“We believe we were wronged, and fraud did indeed occur,” Hudson said.

Staffmark is the staffing company that was spun off by Edgewater last year when Edgewater was known as StaffMark Inc. Edgewater spent the first half of this year moving its operations from Fayetteville to Wakefield, Mass.

“The question is the cost of corporate overhead,” Hudson said. “The information which we received during due diligence led us to believe the cost of overhead would be X. But the cost of overhead has been much more than X.

“The order of magnitude that those numbers are off led us to believe that fraud had taken place. Edgewater either knew or should have known that certain information they provided was wrong … or omitted.”

Hudson declined to reveal specific numbers, noting that the lawsuit filed in Fayetteville is sealed because of a nondisclosure agreement made with Edgewater when the division was sold in June 2000.

If the buyer had known the expenses would be as high as they are, they would have tried to negotiate a lower price than $190 million for the business, Hudson said.

Staffmark decided to file suit because the company was unable to work out the problem with Edgewater without litigation, Hudson said.

The staffing division brought in $614 million in revenue in 1999. Hudson said Staffmark as a company netted about $600 million last year.

The problem, he said, is not with revenue, but with expenses.

“We feel good about [operating income],” Hudson said. “Obviously, we’re affected like everybody else by a slowing economy. I do think we’re weathering that better than our peer group.”

Hudson said the problems seem to be “isolated” to certain areas, but he declined to specify which areas.

Hudson and Staffmark’s Chief Financial Officer Greg Barnes said the company will support the unsealing of the lawsuit but that the move will require the approval of Edgewater.

Staffmark wants $13 million in compensatory damages and $25 million in punitive damages.

Hudson said the problems have nothing to do with the way Staffmark has handled the business since buying it. Staffmark currently has about 250 offices in 25 states.

“It is unfortunate that this situation has resulted in the need to file a lawsuit,” said David Bartholomew, Staffmark CEO. “However, we feel strongly that this action is necessary to protect the financial interests of our investors. We’re confident of our position and intend to pursue the matter with great vigor.”

Staffmark has hired Tom Mars in the Fayetteville office of Kutak Rock to handle the lawsuit. Mars is the former director of the Arkansas State Police.

Edgewater sold most of its staffing assets to focus on technology services and relocated its headquarters to Wakefield. Edgewater previously was one of the companies acquired by Staffmark when it became a publicly traded company.

Hudson served as assistant general counsel for StaffMark Inc. under Gordon Allison, who is now executive vice president and general counsel for Edgewater.