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Firm that employs inmates sues its spinoff company

PRIDE's lawsuit filed by a reconstituted board complains of conflicts of interest by joint officers and resulting losses.

By JONI JAMES
Published September 24, 2005

The state-created St. Petersburg company that employs prisoners has sued the controversial spinoff firm that cost the company millions of dollars and drew the scrutiny of the governor.

PRIDE filed suit Sept. 8 in Pinellas Circuit Court against Industries Training Corp., two of its subsidiaries and a former PRIDE executive. It seeks to recoup a fraction of the millions of dollars it lost supporting ITC, which handled payroll and other administrative services for PRIDE.

The lawsuit accuses R. Michael Smith, ITC's chief financial officer, of breaching his fiduciary duty to PRIDE by helping ITC spend PRIDE's money when he was serving as chief financial officer of both companies.

The lawsuit was prompted by the recent sale of ITC's employment placement service, Labor Line, to a North Carolina company that recently incorporated in Florida.

PRIDE asserts it deserves proceeds from the sale because it created the business, gave it to ITC in 1999 and invested hundreds of thousands of dollars more in its operation. The suit doesn't specify the amount PRIDE is seeking.

PRIDE president Jack Edgemon, along with PRIDE's attorneys, Greenberg Traurig's Ronald LaFace of Tallahassee and I. William Spivey II of Orlando, couldn't be reached for comment Friday.

Smith, reached Friday, referred all questions to ITC's attorney, Roy Harrell Jr. of Holland & Knight's St. Petersburg office. Harrell couldn't be reached.

The suit marks a new chapter in the PRIDE-ITC saga and reflects the fact that Gov. Jeb Bush has replaced the majority of the board since last summer, when scrutiny of PRIDE and ITC's relationship began.

As recently as last month, PRIDE's board declined to sue the former spinoff because attorneys said there weren't enough assets to make it worth the litigation cost.

But with this suit, PRIDE acknowledges for the first time that its long relationship with ITC represented a conflict of interest for PRIDE and its former leaders. The shared corporate structure of the two firms allowed executives who worked at both to use PRIDE revenues to keep ITC afloat.

"Smith placed himself in direct conflict of interest that prevented him from promoting the best business and financial interests of PRIDE," the lawsuit reads. The former board, which included many members who had helped establish ITC and appointed Smith to his dual roles, never conceded that point.

Last month, an internal report ordered by the new board estimated PRIDE had spent more than $67.7-million over six years propping up ITC, which continuously ran a deficit but paid hefty salaries to Smith and former PRIDE chief executive officer Pamela Jo Davis.

At the same time, PRIDE, formally known as Prison Rehabilitation Industries and Diversified Enterprises, was failing to employ additional inmates. The nonprofit company was created by the Legislature in 1981 to run the state's prison industries, using inmate labor in agriculture and manufacturing businesses. In exchange for their labor, PRIDE is supposed to teach inmates skills they can use upon release to make a living.

ITC was a drain on PRIDE from the beginning. The board agreed to funnel 10 percent of PRIDE's monthly revenue to ITC for handling administrative work. ITC also took over PRIDE's employment placement service for ex-prisoners and compensation for Davis, Smith and other top PRIDE managers.

The relationship began to unravel in June 2004 when Bush's inspector general launched an audit. Davis and Smith were put on leave and eventually left PRIDE. PRIDE broke from ITC in January.

Joni James can be reached at 850-224-7263 or jjames@sptimes.com

[Last modified September 24, 2005, 00:59:07]