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Krones warns of profit plunge over possible fraud case payout

By Rory Harrington , 02-Feb-2012
Last updated on 02-Feb-2012 at 13:36 GMT

Krones has warned that damages it may be forced to pay over its alleged involvement in a US fraud and racketeering scam could cut its profits by tens of millions of dollars. The company denies any wrongdoing.

The German-based packaging machinery maker has announced it is in mediation talks with a number of parties seeking compensation over the firm’s alleged participation in large-scale fraud by one of its US customers amounting to more than three quarters of a billion dollars.

Krones said it couldn’t rule out the possibility that the multi-million dollar settlement it faces making may reduce company profits by tens of millions of dollars.

“Initial assessments from the mediation process indicate that the possibility cannot be ruled out that potential settlements developing from the mediation could have an adverse effect on the Krones Group’s profit situation, quantified as a low-to-medium double-figure million US-dollar amount,” it said.

Krones has been pursued for damages by a number of American financial service providers, a group of hedge funds and a liquidation trustee since 2008.

Alleged cover up

The claims centre on a slew of legal cases involving fraud by the management of US beverage manufacturing, bottling and distribution company Le-Nature.

The Pennsylvania-based firm is accused of perpetrating an elaborate Ponzi-type scheme between 2002 and 2006 that saw a raft of stakeholders defrauded out of more than US$850m (€646m). A Ponzi scheme is a financial fraud that that pays returns to investors from their own money or the money paid by subsequent investors or loans, rather than from any actual profit earned by the individual or organization running the operation.

Le-Nature, including its head Gregory Podlucky, has been been convicted of falsely claiming huge growth for the company between 1999 and 2004 as a basis for persuading investors to pump new finance into the venture to fund new plants. The extensive fraudulent activity is alleged to include incorrect balance sheets, forged vendor documents and false sales figures.

Krones is named in lawsuits in connection with allegedly colluding with Le-Nature in inflating the stated costs of filling lines it delivered to the firm.

One suit filed in Western Pennsylvanian District Court additionally names Volker Kronseder, Krones chairman of the board, and former CEO Heinz Sommer in the action.

The suit alleges Krones helped Le-Nature chief Gregory Podlucky to syphon off over $118m in financing that was earmarked to buy fraudulently priced equipment for three plants.

This money, claimed the legal papers, was supposedly refunded to Le-Nature for deposits it was said to have made on the equipment. Krones is alleged to have known that the deposits had not been made and did not exist.

Part of this alleged plan accuses Krones of submitting inflated bills to financiers for equipment for a plant in Phoenix and sending the ‘excess payments’ back to Le-Nature.

When a whistleblower alerted Krones’ executives, including Kronseder, to the problem, the suit claims: “Krones, acting through Kronseder and Sommer and Podlucky, worked together to conceal this part of the fraudulent scheme, concocting false and misleading schedules of equipment costs as well as baseless explanations for why financing dollars exceeded the actual cost of the equipment for the Phoenix plant”.

Allegations unfounded

A Krones spokeswoman confirmed to FoodProductionDaily.comthat it had made and commissioned a filling line worth about $100m for Le-Nature’s Arizona plant in 2005/06.

“Krones was nonetheless sued for damages as from October 2008, allegedly because individual employees had out of negligence or intent not prevented the fraudulent activities at Le-Nature’s,” she added. “Krones continues to regard the demands as unfounded.”

Krones said it had now taken a first step towards resolving the legal disputes which arose after Le-Nature went bankrupt in 2006, leaving almost no assets to sell.

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