SE Texas Record

Monday, August 19, 2019

Industrial Specialists alleges former employees committed fraud


By Carrie Bradon | Jul 8, 2019

GALVESTON — A Houston material distributor is suing two former employees and a company, alleging they committed fraud with the purpose of harming the plaintiff.

Industrial Specialists LLC (ISI) filed a complaint on July 3 in the Galveston County District Court against Richard Reuter, Kenneth Shepherd and AXM Systems LLC, alleging breach of duty of loyalty, breach of fiduciary duty and conspiracy.

According to the complaints, the defendants secretly formed AXM in 2015 to sell products related to Industrial Specialists' products. AXM allegedly consisted of five members and each of the them had trust that they could buy in for $20,000. Two of the trusts, the suit alleges, were created by and for the benefit of Reuters and Shepherd, who were senior level executives at ISI, in order to hide the identity of the trusts' beneficiaries. 

During the time when Reuter and Shepherd were employed by ISI, the lawsuit states, AXM sold $2.2 and $2.6 million in products, respectively. Reuter and Shepherd allegedly failed to disclose any information about their involvement with AXM. 

In 2016, the suit alleges, Reuter convinced ISI to end a buyback program because he wanted to set up a side business. According to court papers, in August 2016, Reuter and Shepherd began to work with Rick Morgan, another individual, with the purpose of harming ISI, as Morgan had sold $407,000 worth of materials to ISI that was obtained from ISI's customers between August 2016 and March 2018. 

ISI allegedly did not learn of the defendants' actions until March 2019 when it conducted its investigation, because Reuters and Shepherd had deliberately hidden their involvement with Morgan during the time when they were employed by ISI.

As a result of the defendants' wrongdoing, the suit alleges, the plaintiff has suffered monetary damages in an amount to be determined at trial.

Industrial Specialists seeks trial by jury, monetary relief of more than $1 million, compensatory and punitive damages, interest, attorney fees and all other just relief. It is represented by attorneys Jesse M. Coleman of Seyfarth Shaw LLP in Houston, and by Robert C. Stevens and Eric F. Barton of Seyfarth Shaw LP in Atlanta, Georgia.

Galveston County District Court case number 19-CV-1215

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