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Thursday, Mar 28, 2024

Capstone Exec Faces Lawsuit

A dispute over territory in an energy equipment distribution deal and nonpayment of commissions has resulted in a lawsuit in Orange County alleging fraudulent and malicious business practices against an executive with San Fernando Valley manufacturer Capstone Turbine Corp. James Crouse, executive vice president of sales and marketing at Van Nuys-based Capstone, is among the defendants in the legal action filed last month by Regatta Solutions Inc, in San Juan Capistrano. Regatta seeks $2 million in compensatory damages from Crouse; Kenda Brown, a former Regatta employee who became president of a competing distributor; Cal Microturbine, the distributor that replaced Regatta in California; and 15 unknown defendants. Regatta Chief Executive Steve Acevedo said his company’s territory and customers were whittled down when it didn’t payoff Crouse with what he called kickbacks and bribes. “It is a classic story of greed of a leading executive of a publicly held company wanting to pad his pockets with profits from the distribution channel,” Acevedo said. This is not the only lawsuit that Capstone faces. In federal court, the company was sued in the spring by FiveT Investment Management Ltd., in the Cayman Islands, and Deep Field Fund SPC Ltd., in the British Virgin Islands, for violating state and federal securities laws, common law fraud, breach of fiduciary duty and negligent misrepresentation. Attempts to reach Crouse or another representative at Capstone were not successful. Attempts to reach an attorney representing the company in the federal lawsuit were also not successful. Unlike the federal case in which Capstone is named as a defendant, the company is not a defendant in the Regatta case. Andrew Nelson, an attorney with Fortis Law in Costa Mesa, the firm representing Regatta, said that while Regatta is at odds with Capstone over the distribution deal, that dispute is being handled outside of the court system. “We do have an open-ended dispute but it’s not being resolved in a public forum,” he said. Capstone is a publicly traded manufacturing company that makes microturbines for the oil and gas, hospitality and retail sectors. For its fiscal second quarter ending Sept. 30, Capstone reported a net loss of $4.4 million, (-7 cents a share) on revenue of $22.2. million. But Robert Brown, an analyst who follows Capstone for Lake Street Capital Markets, said in a research note the company was making good progress with its growth efforts, streamlining cost structure and rejiggering its model to increase service contracts. “We expect service contract attachment rates to expand significantly and product sales are accelerating due to strengthening macro tailwinds with low natural gas prices, higher oil prices and tightening emissions regulations,” Brown’s research note said. Meetings about ‘consideration’ According to Regatta’s lawsuit, the company became a distributor for Capstone starting in April 2013. The original agreement was replaced by another two years later, after Capstone took away Hawaii as part of Regatta’s territory, resulting in the loss of up to $7 million in business for Regatta, the suit claims. Regatta entered into a separate agreement to service the microturbines it sold. The document outlined what Regatta would pay Capstone for parts. The legal action claims that some months after signing the second distribution agreement, Crouse began to interfere with Regatta’s operations, starting with hiring Brown away to be president of Capstone Energy Finance. In 2016, Brown started Cal Microturbine with a business partner with the strong encouragement of people at Capstone, Nelson said. He called Cal Microturbine “a tiny operation” that one could not put a lot of faith in. “To start diverting business to this competing distributor that has no track record is a peculiar business decision,” Nelson said. When Regatta lost business due to alleged actions by Crouse, the company had to turn over close to $20 million in contracts working their way through the pipeline, Acevedo said. “Since then, any business that the new distributor has done were all transactions we were working on,” Acevedo added. “And yet Capstone is claiming that it is new success for the distributor.” The lawsuit alleges that Acevedo would meet with Crouse a few times a year. At these meetings, Crouse complained about how other Capstone distributors made more money than him. Crouse would also regularly request that Regatta “give him extra consideration” to remain as a distributor, including once asking for a Cadillac, the lawsuit said. “Acevedo, and thus Regatta, rejected these requests,” the suit continued. “The relationship soured after the perks were never given,” Acevedo added. “That is what this lawsuit is all about.” On customer service surveys, Regatta regularly achieved high scores, Acevedo said. “We had done all the right things, so you wonder how it could come to something like this,” he added. The next step in the case is for the court to set a routine management conference. That has not been put on the court’s calendar yet, Nelson said, adding, “(It) will not happen until the end of December most likely.” Federal case In the case pending in U.S. District Court, FiveT and Deep Field are trying to recover losses sustained from buying more than $30 million in Capstone stock. Their lawsuit alleges that Chief Executive Darren Jamison made “material misrepresentations and/or omissions” to the two funds about Capstone’s revenue, sales and operations. “These statements induced plaintiffs to purchase Capstone stock,” the legal action said. FiveT bought 9 million shares for $13 million and Deep Field bought 18.8 million shares for $30 million in May 2014, based on phone calls representatives had with Jamison. During the calls, Jamison discussed past and future sales and revenue for the company that the lawsuit alleges were misleading. Specifically, Jamison failed to disclose that Capstone’s revenue or backlog was artificially inflated because revenue expected from BPC Engineering, a distributor in Russia, was uncollectable, the suit alleges. “Jamison did not disclose that BPC was, at this point in time, already subject to a credit hold and that, as a result, defendants had improperly recognized revenue on its sales to BPC or that Capstone’s revenue and accounts receivable were overstated,” the lawsuit reads. The lawsuit also alleges that the company’s 2014 annual report and three quarterly earnings reports contained misleading statements. The case is scheduled for a conference on Nov. 30.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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