8-16-2001, Documents filed recently in U.S. District Court in Peoria in the Foster & Gallagher Inc. lawsuit show a company besieged with consumer complaints and legal investigations as it allegedly pursued a "churn and burn" marketing philosophy.

Under mounting legal scrutiny and pending loss of sweepstakes - the company's primary marketing tool and revenue maker - a $70 million loan from the employee stock ownership plan made multimillion dollar payments to major shareholders while employees, referred to as ESOP "worker bees," were precluded from accessing their accounts.

Court documents question whether the $70 million ESOP loan breached fiduciary obligations. Despite pending consumer fraud investigations, the company contended Foster & Gallagher and its subsidiaries operated "in compliance with all applicable laws." Court records show direct-mail marketing materials for Foster & Gallagher subsidiary Michigan Bulb Co. were routinely sent to legal counsel for approval.

Customer complaints averaged 1.2 million a year, and third-party complaints from attorneys generals, Better Business Bureaus and help action lines averaged over 20 a day.

Attorneys generals from 21 states were investigating Michigan Bulb Co., and a Canadian investigation labeled "quasi-criminal in nature" carried penalties of up to $1 million and five years in prison.

An internal company memo dated July 25, 1992, states only 25 percent of Michigan Bulb Co. orders were from repeat customers. The "churn and burn" philosophy referred to new orders from customers lured by promised sweepstakes winnings and then burned.

These recent filings attempt to show that as investigations into company practices heated up, management initiated the $70 million stock purchase from key shareholders, financed by a loan from the employee stock ownership plan.

During this time when legal investigations into company practices were mounting, Foster & Gallagher directors received a packet summarizing legal actions with a cover sheet reprinting a cartoon showing an attorney asking a judge "Are you telling me that just because something is against the law, that makes it illegal?"

Once the company agreed to discontinue sweepstakes marketing, which was considered consumer fraud by many states, revenues dropped precipitously. After Jan. 1, 1998, when Michigan Bulb ceased sweepstakes, earnings dropped from $31.7 million in 1997 to $800,000 in 1998 to losses of $18.2 million in 1999 and $11.4 million in 2000. That drop in revenues plus the $70 million ESOP loan apparently were impossible to overcome.

Foster & Gallagher filed for bankruptcy July 2 in federal court in Delaware, days after terminating its work force with no advance notice and no severance packages, leaving 4,000 former employees without jobs, health insurance or retirement benefits.

In response to interrogatories in the lawsuit on behalf of the ESOP and former employees against Melvyn Regal and other company principals, Regal repeatedly stated it would be "unduly burdensome" to provide the requested information. He also cited attorney-client privilege in his refusals. The court is being asked to force Regal to disclose requested information.

Bankruptcy records show an interim president is earning $21,000 a week and a New York public relations firm received a $50,000 retainer and $10,000 a month.

Both U.S. Sen. Peter Fitzgerald, R-Ill., and U.S. Sen. Richard Durbin, D-Ill., filed formal requests with U.S. Secretary of Labor Elaine Chao seeking a review of the Foster & Gallagher employee stock ownership plan. Spokesmen for the senators said Monday no response has been received.

Durbin noted in his request the "possibility of mismanagement of the (ESOP) program by the company."

Assets in the ESOP - the only retirement benefit Foster & Gallagher employees had - dropped 91 percent from $82 million to under $7 million.

Fitzgerald's office spent weeks reviewing documents on the Foster & Gallagher ESOP.

"I am from a banking background," he said. "This merits an investigation."

U.S. Rep. Ray LaHood, R-Peoria, requested a Labor Department investigation.

Spokesman Tim Butler said there has been no response. LaHood wants an investigation of both the ESOP and employee health benefits, Butler said.