Lawsuit: AIT founder sold company to employees at inflated price

The U.S. Department of Labor has sued one of Central Indiana's charitable big-givers, Michael Evans, accusing him of improperly coming into a major source of his wealth.

The labor department lawsuit accuses the founder and former owner of AIT Laboratories of selling the Indianapolis company to employees in 2009 at a price that he knew was vastly inflated.

Evans should return millions of dollars in "unjust" gains from the sale because it violated federal laws governing employee stock ownership plans, according to the lawsuit.

A former Indiana University School of Medicine professor, Evans is the major donor to Marian University's new Indianapolis medical school, with a pledge of $52 million. He's also donated $10 million to his alma mater, St. Joseph's College in Rensselaer.

Evans, 70, intends to fight the government's charges, filed Friday in federal court in Indianapolis, said his lawyer, Andrew McNeil.

"We think (the charges) are faulty," McNeil said.

Evans built AIT from a start-up toxicology lab in 1990 to a full-service testing site for blood, urine and tissue specimens, used by employers, hospitals, police agencies and other customers across the country. The company's offices are on Executive Drive near Indianapolis International Airport.

The government alleges that Evans breached his fiduciary duties under federal laws when he sold his 88 percent stake in the company to its 300 employees in 2009. Evans used what the labor department contends was an "unreliable" valuation of $90 million for AIT, made by Louisville-based PBI Bank and the national accounting firm Moss Adams LLP.

Only a year earlier, the government's lawsuit says, the Indianapolis investment firm City Securities had put a much lower value on AIT: just $17 million. And AIT itself, in its financial statements, calculated its worth at the time at an even lower $5.2 million, the lawsuit says.

PBI Bank, serving as the trustee for the employee stock plan, is a codefendant in the lawsuit. The bank didn't respond to a request to comment.

McNeil said the $90 million that Evans and four minority partners got for selling AIT was a fair price.

"Procedures in place at the time of the employee stock transaction were appropriate," he said. "Valuations...were consistent with all industry standards. The valuations were sound."

But the 18-page lawsuit calls the $90 million price far from realistic. The lawsuit says the value put on the company relied on "unreasonably high" income forecasts for AIT and didn't reflect increased competition AIT faced in the specimen testing industry and the coming of lower government and insurance company reimbursements for specimen testing.

AIT's troubles since the sale suggest that the sale price was inflated, the labor department lawsuit says.

In 2011, "profit margins decreased substantially" at AIT after reimbursement rates for pain management testing fell by about 40 percent, the lawsuit says. By December of that year, it says, AIT was in violation of its loan agreement with M&I Bank, which had loaned $15 million to help the employee stock ownership plan finance the purchase.

M&I (now BMO Harris Bank) brought in a turn-around specialist to run AIT and last year the company was recapitalized, with Evans returning as majority shareholder. The employees' former controlling share in the company was reduced to 10 percent.

After the recapitalization AIT's value dropped to $16 million, while debt associated with the employee stock plan and Evans was forgiven, according to the lawsuit.

Evans himself provided $79 million to finance most of the employee stock plan's purchase of AIT. The loan from Evans was supposed to be paid back over 10 years, in part by using proceeds from the company.

The lawsuit wants Evans to give up "all profits and financial benefits" he received from the sale. The lawsuit says Evans in 2010 received "accelerated payments" on his loan of $16.1 million. Evans remains on AIT's board but is no longer an executive at the company.

Four minority shareholders each received $2.7 million for selling their 3 percent stakes in AIT, but none is named as a defendant in the lawsuit. The other shareholders include Evans' wife, Andrea Terrell, and three AIT vice presidents, Todd Pedersen, Eric Orme and Ronald Thieme.

McNeil wouldn't comment on the status of Evans' charitable donations.

Daniel J. Elsener, president of Marian University, said in a statement that Evans has paid off 20 percent of his $52 million pledge to the College of Osteopathic Medicine, which opened last year.

"He has kept us informed of his ability and commitment to fulfill" the remainder of the pledge, Elsener said. "Our board of trustees and I have full confidence that he will indeed fulfill his commitment."

Call Star reporter Jeff Swiatek at (317)444-6483. Follow him on Twitter: @JeffSwiatek.