A former Wisconsin State Senator has filed civil fraud and conspiracy claims against former e-waste recycling business partners and a Ladysmith financial institution, alleging their involvement in a massive illegal conspiracy to commit civil fraud.
Kevin Shibilski, former democratic Wisconsin State Senator from Wisconsin’s 24th Legislative District, filed civil fraud and conspiracy claims against James Moss, Thomas Drake, and other former business partners in the Western District of Wisconsin on Monday, July 20. The lawsuit also identifies Ladysmith Federal Savings and Loan as an active participant in the alleged fraud scam.
Shibilski alleges in a 27-page court filing that Drake and Moss, along with Vice President Bonnie Dennee, used false books and records to lure investors for their waste recycling company, 5R Processors Ltd. Once headquartered in Ladysmith and now out of business, 5R Processors was involved in recycling electronic equipment, appliances, and other assets. The corporation operated numerous facilities and warehouses in Ladysmith, Glen Flora, Catawba and West Bend and in Morristown, Tenn.
“Shibilski was a victim of a group of fraudsters who duped him into investing in 5R Processors by falsifying books and records which hid hundreds of thousands of dollars in unpaid tax liabilities and ongoing environmental schemes involving hazardous waste storage,” said Mark Belongia, an attorney from the Illinois and Indiana law firm Johnson & Bell, who is representing Shibilski.
Ladysmith Federal officials declined to comment.
Following charges filed earlier this year by the U.S. Attorney for the Western District of Wisconsin, Drake, Moss and Dennee have all pleaded guilty to conspiring to commit hazardous waste violations after a joint investigation by the Wisconsin Department of Natural Resources, the U.S. Environmental Protection Agency and the Internal Revenue Service. Moss also pleaded guilty to tax fraud charges.
Shibilski, who is seeking millions in damages, also makes claims his former partners started a competing company to steal all 5R Processors’ assets including cash, equipment, confidential company data and customer lists shortly after receiving his investment funds.
“These bad actors left Shibilski with nothing but the company’s debt,” Belongia said in a press release.
Shibilski, who now lives in Merrill, served as a Wisconsin State Senator from 1995 to 2002.
As part of its business, 5R collected and processed Cathode Ray Tube glass, the main component of CRT televisions and computer monitors. Due to their high lead content, CRT glass and used CRTs are considered hazardous waste by the U.S. Environmental Protection Agency. CRT glass is subject to the Resource Conservation and Recovery Act’s prohibition on speculative accumulation, which means a recycler must prove to the EPA that it has recycled, or has transferred to a different site for recycling, at least 75 percent by weight or volume of the amount of CRT glass that it accumulated during a calendar year.
Prior to the proliferation of flat panel displays and LCD and LED televisions that do not utilize CRT technology, CRT manufacturers paid electronics recyclers like 5R for recycled CRT glass, which could be re-used in the manufacturing process. CRT glass sales generated income for electronics recyclers like 5R. In 2004, the average price paid by manufacturers for recycled CRT glass was $205/ton. As new display technology gained widespread utilization, CRT manufacturing significantly decreased, and manufacturers no longer had use for recycled CRT glass.
The lack of demand for CRT glass led to a decrease in the resale price of recycled glass, and by 2012, electronics recyclers like 5R had to pay an average of $200/ton to recycle CRT glass. As a result of the increasing cost of recycling CRT glass, in at least the time period from 2010-2012, 5R accumulated large amounts of CRT glass for which it could not properly store or comply with the one-year RCRA disposal requirement.
According to Shibilski’s court filing, 5R’s CRT glass accumulation problem was known to Drake, Dennee and Moss.
“The EPA received a citizen complaint letter in October 2010 from a former 5R employee who claimed electronic waste, including broken CRT glass had been unlawfully dumped and stored in various locations, including ditches, purpose-dug holes and under the loading docks of 5R’s facility in Catawba. The EPA forwarded this complaint to the Wisconsin DNR for investigation,” Shibilski states.
The document also states, “Wisconsin DNR, accompanied by Drake, Moss, and Dennee, met to excavate the loading dock area at the 5R facility. The DNR investigation uncovered capacitors and CRT glass buried under the loading docks, as well as unacceptably high levels of arsenic, PCBs and the PAHs 2-methyl naphthalene and naphthalene in soil samples.”
The CRT glass at the Catawba facility was intentionally buried at the direction of Drake with knowledge of Dennee, according to Shibilski’s court filing.
5R engaged Ayres Associates to consult and execute remedial actions including removal of the illegally stored and buried CRT glass, removal of wastes and disposal of contaminated groundwater, which was completed from 2011-2012. Evidence of the remedial actions was submitted to the DNR, which closed its case against 5R on or about July 2013.
In the time period from at least 2010-2012, 5R shipped CRT glass between its facilities in Wisconsin and Tennessee at the direction of Drake and Moss with assistance from Dennee.
“5R shipped CRT glass between facilities in a deliberate attempt to circumvent the RCRA’s one-year hazardous waste storage requirements,” the court filing states, citing “a deliberate attempt to hide 5R’s continued violations by Moss, Drake and Dennee.”
The court filing also alleges these three individuals falsified shipping labels to change receipt dates of CRT glass; hid CRT glass from regulators and inspectors, created fake shipping invoices to downstream vendors showing non-existent shipments of CRT glass which would otherwise have been stored for more than one year, created fake entries in 5R’s internal inventory systems showing non-existent downstream shipping and lied to DNR regulators regarding the location of all stored CRT glass.
Around 2010, 5R began having significant financial troubles. At that time Drake, who was then Chief Executive Officer of 5R, began to seek outside investors to bring capital into the company through 5R’s attorney.
The attorney for 5R contacted Shibilski in an attempt to restructure 5R’s significant debt through Shibilski’s professional network and connections with the Wisconsin Economic Development Corporation and his employment with Dougherty Funding, LLC.
When financing from the WEDC, Dougherty Funding and later Mid-Wisconsin Bank fell through, 5R, via Drake, Moss and 5R’s attorney, proposed a direct investment by Shibilski. 5R offered Shibilski a salary, gradual stock ownership interest in 5R and title of Chief Executive Officer in exchange for Shibilski’s assumption of Drake’s personal guarantees to company debt. In solicitation of Shibilski’s investment in 5R, 5R created a business plan binder detailing company financials and provided profit and loss statements, balance sheets and “investment numbers” which showed financial obligations and short and long term debt.
The court filing alleges each of the documents presented to Shibilski contained material misrepresentations or purposefully omitted material facts. It claims profit and loss statements misrepresented past due rent expenses at 5R’s Ladysmith Fritz Avenue and Gates Avenue locations in amounts ranging from $1,658 to $117,000 per year and balance sheets misrepresented past due liabilities for rent at the Fritz and Gates buildings in the amount of at least $413,000. It also claims the materials omitted the existence of over 3 million pounds of stored CRT glass in its Morristown, Tenn., facility; the existence of Moss, Drake and Dennee’s scheme to move CRT glass between facilities to avoid the one-year storage requirement and the existence of illegally stored CRT glass in 5R’s “Sunshine Building” in Glen Flora. It also claims the materials misrepresented 5R was in compliance with all RCRA stockpiling requirements and represented outstanding payroll liabilities were about $315,000, when 5R’s tax returns for the same period showed the liabilities were over $587,000.
Relying on materials provided by 5R, Shibilski entered into a binding letter of intent with Drake and his wife, Jo Ann Drake, to acquire the Drakes’ stock in 5R. Per the letter of intent, Shibilski was to obtain gradually increasing ownership in 5R in exchange for his assumption of the Drakes’ personal guarantees on company debt.
Shibilski’s lawsuit alleges the letter of intent contained multiple misrepresentations by the Drakes and 5R stating, “the financial information provided to Plaintiff Shibilski was not consistent with the books and records of the company, was not true, complete, or accurate, and did not fairly present all material respects of the financial position of the company. The document alleges the tangible assets of the company were not free from material defects; 5R owed substantially more in payroll and other taxes than were disclosed to Shibilski; at the time of the disclosure and there were pending assessments, deficiencies, and claims for additional unpaid taxes aside from the payroll tax deficit. Also, Shibiliski alleges based on company and Drake’s prior experience with the Wisconsin DNR regarding the Catawba facility, Drake knew that 5R’s movement of CRT glass to avoid the one-year holding period was a valid basis for an action, suit, proceeding or investigation by the DNR, in direct contravention of the Drakes’ and 5R’s representation that “there is no basis” for any such action.
Shibilski entered into the agreement on March 1, 2013 and became CEO of 5R and acquired 15 percent of 5R’s corporate stock. He alleges in the lawsuit he did not become aware of the stored and transported CRT glass until December 2014, when he personally visited 5R’s facility in Morristown, Tenn., and saw the class for himself.
“As a result of Plaintiff Shibilski’s reliance on the misrepresentations and subsequent agreement to the Letter of Intent, plaintiff became personally liable for the debts of 5R,” the court filing states.
Shibilski is asking the court void the letter of intent, alleging the agreement was based on material misrepresentations by Drake and Moss.
Shibilski alleges in his civil complaint that despite him being 5R CEO, Moss retained control over all finances, operations and checking accounts until Moss left 5R in 2016. During this time, Moss allegedly failed to adequately pay the company’s payroll tax liabilities to the IRS, and in June 2014 5R owed $175,347 in payroll taxes.
Despite efforts to restructure 5R’s business and increase income, 5R continued to struggle throughout 2013 and 2014, resulting in an inability to maintain a payment plan it had entered into regarding its past due tax liabilities. In October he hired an outside tax liability consultant to assist 5R with its IRS dealings.
The lawsuit also alleges Ladysmith Federal Savings and Loan was involved in concealing from Shibilski financial mismanagement related to 5R’s bank account. It also accuses former 5R officials and the bank of racketeering related to the creation of a separate company to compete with 5R.
5R negotiated with Ladysmith Federal for a loan to refinance 5R’s debt. As part of this loan, Ladysmith Federal required Shibilski to sign an unlimited personal guarantee as the CEO of 5R.
Shibilski claims he was notified of company overdrafts totaling $349,000 about five weeks after Shibilski had personally guaranteed 5R’s debt. To cover the overdrafts of the 5R accounts, Shibilski arranged financing through another company he owned, Wisconsin Logistics Solutions, which would purchase 5R’s trucking platform for a price of $300,000 with Ladysmith Federal loaning the remaining $49,000 to 5R.
Shibilski alleges after the transaction was completed, Ladysmith Federal accepted the $300,000 payment but did not apply it to the overdraft amount and never completed the $49,000 loan to 5R. This impacted 5R’s ability to satisfy its debts and therefore increased the amount of debt that Shibilski had personally guaranteed.
Shibilski alleges the overdrafts were concealed to induce Shibilski to enter into the loan agreement and guarantee, resulting in Shibilski suffering direct monetary damages. Shibilski asks the court void the Feb. 2, 2015, guarantee and compensate Shibilski for his losses.
In 2014, 5R’s attorney advised Shibilski to form the “sister-company,” called Pure Extractions, to focus on glass recycling with Shibilski as CEO and Moss as chief financial officer in full control over all bank accounts. In the lawsuit, Shibilski alleges Moss overdrafted accounts, skimmed money by way of fraudulent ATM withdrawals,kited checks, fraudulently deposited business checks into his personal account and misappropriated money from Pure Extractions’ accounts through fraudulent counter withdrawals.
Shibilski alleges, while Moss was misappropriating Pure Extractions’ financial accounts, Moss was also conspiring with Dennee, Ladysmith Federal, and a bank representative to set up another new company, PXL, Inc. This company was designed to compete with 5R and Pure Extractions as early as March of 2016. Shibilski also alleges the defendants conspired to steal inventory, cash, and equipment from Pure Extractions and 5R, as well as to avoid confidentiality agreements and appropriate 5R’s customer database.
In June 2016, Moss left 5R and Pure Extractions to work for PXL, taking assets including equipment, office furniture, documents and customer databases for use by the new company.
“Additionally, defendants stole over $300,000 of Pure Extractions, Inc. corporate profits to fund operations at PXL,” the lawsuit alleges. “Defendants’ actions left plaintiff Shibilski personally responsible for 5R’s corporate debt with no assets to run the company.”
Due in part to the defendants’ theft of 5R assets and customers, 5R became unable to meet its obligations and defaulted on its debt owed to Ladysmith Federal. Ladysmith Federal then brought suit against Shibilski as the personal guarantor of 5R’s corporate debt. Shibilski states in the lawsuit the case with Ladysmith Federal has been settled.