Kar Auctions Services Inc., IPO: A Criminal History or a Money Tree for Three?

IPO should serve James Hallett, Michael Hockett and John Fuller well.
I

On November 30, 2009 KAR Auction Services Inc. (KAR) announced the commencement
of an Initial Public Offering of 23,000,000 shares of common stock estimated at
$15.00 to $17.00 per share.
$

Just last month, KAR Auctions changed its name from KAR Holdings, Inc., (before
that it was ALLETE in 2007). KAR's CEO James Hallett recently said, “This name
more accurately reflects the businesses…”
m

Or, this may be just a better way to hide previous dealings of past companies to
confuse investors. Below is an outline of James Hallett and KAR to better
illustrate the business model.
i

Hallett became CEO of ADESA U.S. after leaving ADESA Canada in 1996 to replace
ousted David Michael Hockett (a.k.a Mike Hockett or D. Michael Hockett).

Luckily he and two other executives were paid $44 million for leaving, which MP&L
later sued to recover when Hockett failed to live up to any of his promises not to
compete. Hockett agreed that he would not engage or be interested in (a) the
vehicle redistribution business; (b) the vehicle auction business; or (c) the
dealer floorplan financing business.
d

Hockett had his hands in all three before he left ADESA and still does business in
each one these. Hockett got MP&L's cake, ate it, and then used a portion of it to
start a separate business that cut into MP&L's bakery.

ADESA, AFC and D. Michael Hockett

In 1992 Mike Hockett and Gary Pedigo formed ADESA (Auto Dealers Exchange Services
of America) Corp., basing it in Indianapolis. Hockett was named president and CEO.
In April 1992 two million shares of stock were sold at $11.50 each. Hockett
retained a 56 percent interest.
r

In 1993, Hockett founded a new auction division: ADESA Canada. He helped merge the
salvage industry with the whole car industry by acquiring the Impact Salvage
Auction chain.

In January 1994 ADESA acquired Automotive Finance Corporation (AFC). Mike Hockett
was also part owner of CITA Inc. with John E. Fuller which was founded in 1987.
CITA provided floorplan financing to dealers and was renamed Automotive Finance
Corporation in December 1993, a month before being bought by ADESA.

In January 1995 Minnesota Power & Light (MP&L), an electric utility company,
bought 80 percent of ADESA's stock for $162 million. ADESA management, who held
most of the remainder, would remain in charge.

In August 1996, Minnesota Power and Light Co. instigated a management shakedown at
ADESA resulting in the resignation of ADESA founder and CEO Michael Hockett. ADESA
executive James Hallett was selected to replace Hockett.

Michael Hockett took a stock buyout, along with two other officials of ADESA $44
million. Under the 1996 Agreement, Hockett specifically agreed that for three
years he would not engage or be interested in (a) the vehicle redistribution
business; (b) the vehicle auction business; or (c) the dealer floorplan financing
business.
L
Litigation

On 10/15/1996 Minnesota Power & Light sued Michael Hockett, his wife Judy, and his
sons Brian Scott Hockett, Jason Hockett and Michael Hockett, Jr. in Indiana
Federal Court for breach of contract (IP96-C-1463-D/F).

Minnesota Power alleged that Hockett had engaged in the auto transport business
conducted by F & J Auto Transport, Inc., which was a subsidiary of Alphamega, an
Alabama corporation, with which Hockett was involved or had financed. F & J
allegedly competed with Great Rigs, Inc., an Alabama corporation that was a wholly
owned subsidiary of ADESA Corp. Second, Hockett had assisted others in forming
Alphamega.

In a separate case with the SEC, Judy Hockett, the wife of ADESA CEO Michael
Hockett in 1997 agreed to pay $60,600 to settle Securities and Exchange Commission
charges that she tipped off her brother before Minnesota Power & Light bought 80
percent of Adesa for $162 million. By trading on the information, the brother made
$25,500 in illegal profits, the SEC said. SECURITIES AND EXCHANGE COMMISSION V.
JUDY HOCKETT, GAYLE RAISOR, AND KEVIN
RAISOR, Civil Action No. IP97-870-C-D/F (S.D.In. May 29, 1997).
R

In 2001, Michael D. Hockett, son of ADESA founder D. Michael Hockett, was

sentenced for bribery in a federal court in Virginia. He served five months in
jail, 150 days of home detention and was ordered to pay a $20,000 fine. The
junior Michael Hockett was one of three men implicated in a bizarre plot to
blackmail a Suffolk City, Va., councilor into dropping his opposition to a zoning
issue. The scheme involved an attempt to get photos of the councilor with an
exotic dancer who showed up at his insurance office. The plot unraveled when the
councilor threw the woman out.
c

Earlier this year BRIAN SCOTT HOCKETT, of Indianapolis, was charged with bank
fraud, following an investigation by the FBI. The allegations were that from
January 2003 through May 2006, HOCKETT was the owner of Family Management Corp.,
which did business in the Indianapolis area as Fleetmax, a wholesaler of used
motor vehicles. In early 2002, HOCKETT established a line of credit for Fleetmax
with National City Bank and Fifth Third Bank to provide working capital for
F
Fleetmax.

HOCKETT concealed his diversion of the line of credit from the banks by falsifying
reports he filed with the banks, called “borrowing base certificates,” to show
that Fleetmax had more assets securing the line of credit than was actually
available. Reports to the banks showed that Fleetmax had approximately $12 million
in assets available as security, when in fact there was only $750,000. After the
banks discovered the fraud, and all of Fleetmax’s assets were sold, the banks lost
approximately $2.4 million as a result of HOCKETT’s fraud.
a

The elder Mike Hockett is currently founder and CEO of Auction Broadcasting
Company, which over the last couple of years has been selling its used car
auctions to ADESA’s present CEO James Hallett.
a

JAMES HALLETT HISTORY

J

In 1996, James Hallett, the head of Adesa Canada, was named president and CEO of
ADESA replacing ousted founder Mike Hockett
A

In October 2003 the firm's parent, now known as ALLETE, Inc., announced that it
would spin off ADESA as a separate entity. One share of ADESA stock would be
issued for each share owned in ALLETE. The move was taken to increase shareholder
value, as ADESA now accounted for almost two-thirds of ALLETE's revenues.
v

In December 2003, the SEC initiated an informal inquiry relating to ALLETE’s

internal audit function and the internal financial reporting of ALLETE (ADESA’s
former parent), ADESA, AFC, a wholly owned subsidiary of ADESA, and the loan loss
methodology at AFC.
m

In June 2004 the spinoff from ALLETE got underway with the sale of 6.25 million
shares of stock on the New York Stock Exchange. The remaining 93 percent of the
firm's shares were distributed to ALLETE shareholders in September. ADESA had by
now also issued $125 million in bonds, as well as securing $525 million in loan
commitments from a total of 29 banks.
c

Sean Hallett, the son of CEO James Hallett, had three separate lines of credit
with AFC and an outstanding loan through a related entity. As of December 31,
2004, the total amount owed to AFC was $1.7 million. As of December 31, 2004, Sean
Hallett and his related businesses were in default on those obligations. All three
credit lines were then closed.
c

ADESA pursued legal action to collect these amounts. AFC and Automotive Finance
Canada, Inc. (the "AFC Entities") filed their Statement of Claim in the Ontario
Superior Court of Justice on or about November 8, 2004 wherein it was alleged that
Sean Hallett and his related companies (the "Hallett Entities") had defaulted on
their outstanding obligations to AFC (Ontario Superior Court of Justice; Case File
No. 04-CV-278564CM2).
N

In December, 2004, Sean Hallett filed his Statement of Defense and Counterclaim
against AFC, AFCI, ADESA, Inc., ADESA Canada and ADESA Auctions Canada alleging
that there was no outstanding obligation and that the named counterclaim
defendants owed approximately $6 million to Hallett in compensatory and punitive
damages. On March 4, 2005 the parties met in Toronto, Canada and participated in a
mandatory mediation session in an effort to resolve the litigation.
m

In May 2005 James Hallett was fired by ADESA with new CEO Dave Gartzke taking on
Hallett's former duties as president of ADESA. Hallett became president of
Columbus Fair Auto Auction, in Columbus, Ohio the same year.
C

In the summer of 2005, ADESA and AFC sued Dealer Services Corporation ("DSC"),
founded by ADESA veterans Mike Hockett and John Fuller. DSC filed a counterclaim
against AFC Finance and ADESA Inc. (NYSE: KAR), claiming that AFC engaged in
anticompetitive behavior. The counterclaim alleged that AFC engaged in unfair
competition and interfered with DSC's business relationships by refusing to enter
into a blanket intercompany creditor agreement with DSC, and knowingly filing
frivolous, baseless claims against DSC in bad faith. DSC sought $25 million for
punitive and other damages. The lawsuits were filed Hamilton Superior Court,
I
Indiana.

HALLET RETURNS TO ADESA in 2007

James Hallett was announced February 1, 2007 as president and CEO of ADESA after
being terminated two years ago by new management at ADESA. The private equity firm
that is purchasing ADESA is taking the company private (KAR symbol NYSE). Hallett
apparently helped orchestrate a new ownership deal consisting of KELSO & Company,
GS Capitol Partner (affiliate of Goldman Sachs), ValuACt Capitol and Parthenon
C
Capitol.

James Hallett quickly began buying auctions from former ADESA CEO Mike Hockett.
Hallett said he always considered Mike Hockett, CEO of ABC Auctions, to be a
visionary, much like himself.
Now James Hallett is ready for KAR AUCTIONS to go public again. In an amended S-1,
KAR Holdings (the HoldCo for Adesa) disclosed the details of its upcoming IPO.
The company, with Goldman as lead underwriter (with upcoming Buy recommendations
to follow the IPO courtesy of 10 co-managers to secure an even better price for
Goldman to dump remaining shares), will sell 23 million shares between $15 and
$17/share.

MR. JOHN E. FULLER

Not a lot of intelligence on Mr. Fuller. Other than he was a Marine sergeant and
got hurt on the job as a fireman, his industry knowledge appears to be riding the
coattails of Mike Hockett.

He is the president of Dealer Services Corporation and claims he was the founder.
However, in October 2009 Mike Hockett claimed that HE is the founder. Mike Hockett
was originally listed in 2005 as a DSC Director on many state filings, yet his
name appears to have vanished in all current filings in 2009.