business

The Great Recession was a boon for Jacobs Trading Co., the liquidation company in Hopkins that bears the name of Irwin Jacobs, one of the state's best-known businessmen. The company deals in overstocks, scratch-and-dents and returned merchandise and saw operating income rocket to $14 million last year from $5 million in 2008.

But Jacobs remains under scrutiny for the one big blemish on the otherwise great year at his trading firm. Jacobs Trading took a $20 million loss on investments it made in another company Irwin Jacobs' headed at the time, the now-bankrupt Genmar boatmaker.

The $20 million loss, spelled out in two letters that Jacobs Trading sent to its small group of shareholders in December, left some investors raising questions about deals between some of the privately held companies in Irwin Jacob's business empire.

Separately, the committee of unsecured creditors in Genmar Holding's bankruptcy has been studying payments the boat maker made to affiliates and insiders prior to declaring bankruptcy, including to Jacobs Trading and Irwin Jacobs himself.

Genmar's bankruptcy filing listed payments of more than $16 million to insiders and affiliates in the year prior to its June bankruptcy filing. The unsecured creditors committee, which represents some 4,000 creditors who lost more than $100 million, estimates the payments exceed $20 million, court documents show.

Jacobs insists all the deals were done by the book and at arm's length. The transactions are no different than the way a GE or General Mills does business, he said, adding that the unsecured creditors committee has misunderstood the payments.

"They have no idea what they're talking about," said Jacobs. "I will not stop until this record is 100 percent clean and clear to everybody."

Phillip Bohl, an attorney for the unsecured creditors, stressed that such investigations in bankruptcy are common and that the probe has found nothing to suggest any criminal wrongdoing. The issue, he said, is whether Genmar gave preferential treatment to related parties, paying them as the recession swamped the boatmaker and stiffing creditors in bankruptcy. The unsecured creditors have filed court documents arguing they have rights to that money.

The case is unusual, Bohl said, because in most cases when companies are linked financially and there's trouble, they file bankruptcy together. In this case, only the Genmar Holdings companies capsized. That brings the inter-company payments into focus in a way that often doesn't happen, he said.

Debra Thompson, a principal at LarsonAllen and the financial adviser for the creditors committee, said the transactions that caught creditors' attention were payments from Genmar of more than $500,000 to Irwin Jacobs during the two years before Genmar's bankruptcy. The money wasn't his salary, she said. Genmar described the payments as not dividends, but "stock payments," Thompson said.

Thompson said the probe is somewhat up in the air because Genmar's bankruptcy may shift from Chapter 11 to Chapter 7 now that the asset sale is wrapping up.

"There's still some unanswered questions," she said.

Mark Sheffert, who was brought in by creditors as Genmar's chief restructuring officer, declined to comment on whether he found the inter-company transactions unusual.

Building an empire

Irwin Jacobs founded Jacobs Trading with his father some 50 years ago. It has grown over the years, using a formula of taking excess goods off the hands of retailers such as Wal-Mart, then using cheap prison labor to sort and repackage it for resale. Jacobs has bought and sold investments in companies as diverse as the Minnesota Vikings and Grain Belt.

Comparatively, Genmar is newer. In 1977, Jacobs took over bankrupt Larson Industries Inc. and began acquiring boatmakers, eventually forming Genmar in the mid-1980s. It grew to be one of the largest recreational boat manufacturers in the world, with more than a dozen brands and sales of $1 billion. But its fortunes sank with the recession.

All of Genmar's payments to Jacobs Trading were repayments of loans, Jacobs said. He said he had no knowledge of payments from Genmar to him personally. "I know nothing about them," he said.

Jacobs, 68, no longer heads Genmar. He left as chairman and CEO in November. He remains chairman of Jacobs Trading and owns about 50 percent of it, he said. He's formed a company that is buying parts of Genmar back from its new owner, California private equity fund Platinum Equity. Platinum paid $70 million for Genmar.

'The unfortunate situation'

For Jacobs Trading, 2009 was "truly a great year," company President Howard Grodnick said in the two letters dated Dec. 11 that Jacobs Trading sent to its investors. However, Grodnick said the company was taking a capital loss of about $20 million, or $2 per share, on its dealings with Genmar.

In an attached personal letter, Jacobs tells shareholders "how terribly embarrassed and sorry I am for the unfortunate situation in the way that JTC's investment in Genmar turned out."

"Surely, you must know that I would have never allowed JTC to make the investment it did in Genmar if I thought there was even a remote possibility that Genmar was going to file for bankruptcy."

The letter explains that the $20 million was mainly two deals. One involved $10.7 million in Genmar common stock that tanked because of Genmar's bankruptcy. Jacobs Trading had booked the stock -- a bonus for a loan Jacobs Trading made to help finance Genmar's 2001 purchase of Outboard Marine Corp. -- as income and an asset and had to write it off when its value plunged. The loan itself was repaid with 10 percent interest.

The second deal was essentially a loan to Genmar made in early 2009, about six months before Genmar filed for bankruptcy, in which Jacobs Trading bought about $9.6 million in preferred stock.

At least one Jacobs Trading investor said the deals surprised him. The investor, who asked not to be named and who provided copies of the letters, questioned why a liquidator would put money into a manufacturer of speedboats and yachts. He also questioned whether Jacobs and the board properly handled Jacobs' conflict of interest as chairman, a director and major owner of both companies.

"I didn't know I was investing in a lending institution," the investor said.

Two local corporate lawyers said Jacobs Trading investments probably didn't cross any legal lines as long as the facts about the investments -- and Jacobs' deep involvement in both companies -- was fully disclosed to board members, and they voted on the matter and deemed the investments prudent. Unless a company's bylaws or articles set limits, a private company is free to use its money for any kind of lawful investment, said Clark Opdahl, managing partner at Henson & Efron in Minneapolis. However, board members still have a fiduciary duty to see that the investments are prudent and in the company's best interest.

Directors also have a duty to act as though it's their own money at stake, and a duty not to be on both sides of a transaction, said Bruce Machmeier, partner and head of the securities practice at Oppenheimer, Wolff & Donnelly in Minneapolis.

Company directors typically avoid making investments in other companies they're involved with because such deals are "sort of fraught with all these difficulties of complete fairness," Opdahl said.

There are no rules about the makeup of boards of private companies. Jacobs Trading's board includes Jacobs as chairman; Dave Engel, Jacobs Trading's chief financial officer; Howard Grodnick, Irwin Jacobs' son-in-law and the president and CEO of Jacobs Trading; and Daniel Lindsay and Dave Mahler, both executives at Jacobs Management Corp. Lindsay was also a director at Genmar.

Jacobs said all the transactions between affiliated companies were 100 percent by the book, approved by the boards and recorded in their minutes. Jacobs Trading's bylaws, he said, "are so wide in scope" that it can make investments of any type. Jacobs estimates the company has more than a dozen or so investors, and said they've been kept informed of the deals at shareholder meetings and other communications.

"We're a trading company," Jacobs said. "We buy and sell things every day." He said he personally lost $25 million in loans and $100 million in Genmar stock. "Am I dealing at arm's length? Am I doing this right? I believe I am."

He noted the first Jacobs Trading loan to Genmar was repaid with interest, (although the bonus stock ended up being worthless). The second loan came with a 10 percent interest rate and involved convertible preferred stock that Jacobs Trading could choose to convert to equity at an established price over three years, he said.

Hair-care mogul John Paul DeJoria put $25 million into Genmar at the same time, Jacobs said, in a nearly identical convertible preferred stock transaction.

DeJoria, like Jacobs, has a rags-to-riches story and wide-ranging business interests. He's best known for launching Beverly Hills-based Paul Mitchell Systems. In an interview, DeJoria said he met Jacobs through a common friend, Bill Nicholson, who is a director at Genmar. DeJoria said he put the $25 million into Genmar to help it pay down its bank debt and was "blown away" when it filed for bankruptcy. Jacobs has blamed Genmar's lender, Wells Fargo, for forcing it into bankruptcy.

History of investments

Jacobs Trading has invested in Irwin Jacobs' other companies before. When Jacobs bought stakes in Conseco Inc., a struggling financial services company, and AremisSoft Corp., a New Jersey software company that crashed in 2001 after its executives were accused of fraud, Jacobs Trading also took positions. Jacobs said he personally put about $150 million into Conseco and AremisSoft. Jacobs Trading's investments were "much smaller," he said.

Both investments were turkeys. In an interview with the Star Tribune in 2001, Jacobs called AremisSoft "one of the great disasters of my business life."

More recently, the company's consolidated financial statement for 2007 and 2008 show Jacobs Trading spent $5.3 million to buy four Marquis brand yachts from Genmar Yacht Group. On June 19, 2008, it loaned Operation Bass Inc., a Jacobs company that markets fishing tournaments, $1 million at the prime rate plus 2 percent. On Dec. 30, 2008, it made a short-term loan for $1.8 million to Genmar at the prime rate plus 2 percent. Both loans were quickly repaid.

Lately, Jacobs Trading is back in the boat business. It is buying chunks of Genmar out of bankruptcy, as part of a 50-50 joint venture with DeJoria. The joint venture, called J&D Acquisitions, bought Genmar's Carver and Marquis yacht business for $6.05 million. Irwin Jacobs will be the chair of the yacht business.

In a separate deal, J&D Acquisitions also bought Genmar's plant in Little Falls, Minn., its Seaswirl plant in Culver, Ore.; its Windsor Craft brand; as well as VEC Technology, which wasn't in bankruptcy. VEC, based in Pennsylvania, owns a patented high-tech process for molding fiberglass and composites that could be used to make blades for wind turbines. Jacobs wouldn't disclose the prices of these acquisitions or how much Jacobs Trading contributed.

He sent an e-mail to Jacobs Trading's shareholders in late January announcing the yacht acquisitions.

"I believe the purchases and investment that J&D is making in the Genmar bankruptcy assets will go down as one of my best acquisitions ever," he said.

Jennifer Bjorhus • 612-673-4683