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Insider deals at YTB raise questions, concerns
[August 31, 2008]

Insider deals at YTB raise questions, concerns


(St. Louis Post-Dispatch (KRT) Via Acquire Media NewsEdge) Aug. 31--When YTB International held its annual convention in St. Louis earlier this month, the fast-growing travel company wanted to make a big splash.

So it commissioned an Indiana design firm to build a nearly life-size foam replica of the Statue of Liberty, 130 feet tall and 50,000 pounds, to be erected in the Edward Jones Dome and unveiled to much fanfare at the opening ceremonies.

It's unclear how much YTB paid for the massive statue -- published estimates of its cost range from $1.8 million to $8 million -- but the company that YTB hired to make it, BerylMartin of Griffith, Ind., has received more than $7 million for printing and event work for YTB since 2004, according to regulatory filings.



And it's owned by YTB's trio of co-founders.

"The New Lady Liberty," as the foam colossus was called, is just the latest in a string of deals in recent years between Wood River-based YTB and companies owned or controlled by its top executives and board members. While it has been racking up big sales of online travel agencies to hundreds of thousands of people, it has been paying out millions of


dollars for office buildings, construction contracts and sales materials to companies controlled by a handful of insiders.

All of these deals were disclosed in the company's filings with the U.S. Securities and Exchange Commission and approved by the independent members of YTB's board of directors. They're legal.

But these kinds of deals raise the eyebrows of corporate governance experts, and, in YTB's case, give fuel to critics who say the whole thing is little more than a pyramid scheme designed to enrich those at the top.

"There certainly isn't anything illegal about related-party transactions," said Chicago-based securities lawyer Andrew Stoltmann, using the SEC's term for deals between a company and its top officials. "But at a minimum, they tend to raise red flags."

The biggest concern, said Charles Elson, who teaches corporate governance at the University of Delaware, is that the company isn't getting the best of a deal, that insiders are lining their pockets at company expense. And they can be a magnet for lawsuits.

"Any transactions by a company and its insiders are viewed by investors suspiciously," Elson said. "They're fodder for all kinds of disputes."

These types of deals aren't unheard of -- a 2004 study by New York research firm Rate Financials found that 40 percent of companies in the S&P 500 reported business deals with board members or executives. But since then they have become less common.

Following the string of corporate scandals such as Enron and WorldCom, many companies, Stoltmann says, now ban such deals entirely, to avoid "even the appearance of impropriety" and potential lawsuits from shareholders who may think their best interests are not being served.

LEGAL ACTION

At the moment, YTB faces lawsuits of a different kind.

Earlier this month, the California attorney general's office sued YTB, accusing it of operating a "gigantic pyramid scheme," in which the vast majority of its 130,000-plus "referring travel agents" earn little money selling travel while paying $450 up-front and $50 a month. The next week, two similar class-action lawsuits were filed in Illinois.

YTB has repeatedly defended its business model and said it will "vigorously" fight the suits. Its supporters point to other multilevel marketing companies like Avon, Mary Kay and Amway that survived scrutiny and have thrived for decades.

In response to questions about dealings with board members, YTB issued a statement noting that the deals were properly disclosed and said disclosure would "allow the informed reader to make decisions and draw conclusions regarding" them.

The board members involved either declined comment or did not return messages from the Post-Dispatch.

INSIDE DEALS

YTB has a long history of doing business with its own leadership.

Two of the company's most frequent business partners are Clay Winfield and Dr. Timothy Kaiser, members of its board since 2005.

Winfield is a developer in Edwardsville and Florida. And Kaiser, an Alton ear, nose and throat specialist, was the lead plaintiff in a major class-action suit filed by doctors nationwide against Cigna Health Insurance earlier this decade.

Together, they are the principal owners of Meridian Bank, in Alton, and Meridian Land Corp., which owned two office buildings in Edwardsville where YTB began leasing space in 2004.

Then, in 2006, YTB bought an old Kmart and 12 acres for its headquarters in Wood River, and it turned to Meridian Bank for a loan, borrowing $2.5 million for the deal.

According to SEC filings, the deal called for YTB to make interest-only payments, at a rate of prime minus 0.5 percent, for the first two years. In January, however, it paid off $500,000.

In July, it was supposed to pay off the full sum. Instead, YTB refinanced last month and will now make higher payments for a year with the full balance due next July.

When it came to building the new headquarters, YTB turned to Clay Winfield, hiring his Winfield Development for the job. Through June, it had paid Winfield more than $2.9 million for the work.

All through this time, YTB -- which has roughly 330 employees -- rented space from Meridian in two Edwardsville office buildings, and held options to buy them. Last summer, even as construction heated up on its new $15 million headquarters complex, it decided to exercise those options. For one building, it paid Meridian $480,500 in cash and took on $1.3 million in debt. That deal closed last August. Four months later, it reached a deal to buy the second for $2.35 million, paying a $500,000 deposit with the rest due when the deal closes, according to SEC filings, by year's end.

YTB also rents space in a third Meridian building near the other two, paying $8,400 a month and various other costs for 5,500 square feet of space.

And then there's the plane.

In February, YTB bought a Learjet that was half-owned by Meridian, to fly its executives to events around the country. The cost? $1.3 million. That sum is less than comparably aged Learjets are listed for on several plane-sale websites and, in an SEC filing about the deal, YTB said it got "commercially available" terms that "were as favorable to the company as would be from an unaffiliated party."

YTB made similar statements in announcing each of the deals. It may well be the case that YTB gets favorable terms from its directors, said Elson, but that raises questions about why the board member would give them such a good deal. Typically, he said, there's just no good reason to buy from insiders.

"The public perception about it has become quite negative," he said. "You can buy an office building from anybody. Why buy it from your directors?"

STATUE BUILDER

Another longtime business partner of YTB is BerylMartin. That's the company that built the giant Statue of Liberty, and which, according to filings with the Indiana secretary of state, is headed by J. Kim Sorensen, one of YTB's three co-founders and today the chief of its travel-sales division. Two other co-owners are YTB Chief Executive Scott Tomer and his father, Lloyd "Coach" Tomer, who bought BerylMartin for $100,000 in bankruptcy court in 2003.

According to BerylMartin's website, it designs brochures, websites and sales materials for YTB and one of its top salespeople, among other clients. It also has helped stage YTB's blow-out convention at America's Center each of the last three years.

From 2004 through June of this year, YTB paid BerylMartin nearly $7.2 million for these services, according to its SEC filings. Neither company would say how much BerylMartin received for its biggest job yet -- the Statue of Liberty for the August convention -- but one local newspaper quoted the total cost at $8 million, while another said $1.8 million.

YTB also has done business directly with Lloyd Tomer, paying a company he owns $128,000 for three cars last year, according to an SEC filing.

In a statement last year disclosing Sorensen's role as chief executive of BerylMartin, YTB said it negotiates terms with the company on an "arms-length basis." It also said it paid Tomer fair-market value for those cars.

Still, Elson said, these sorts of deals raise more questions than they're worth. Even when they are above board, related-party transactions raise the question that the company is not getting the better of the deal, and when, like YTB, the company is publicly traded, those questions carry a lot of risk.

"Prudence would tell you to avoid them," he said. "The easiest thing is just not to do it."

tlogan@post-dispatch.com -- 314-340-8291

To see more of the St. Louis Post-Dispatch, or to subscribe to the newspaper, go to http://www.stltoday.com.

Copyright (c) 2008, St. Louis Post-Dispatch
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