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Circos File Lawsuit Against DXP Enterprises; DXP Files Counterclaim

Dennis Circo and Chris Circo filed a lawsuit earlier this month against industrial distributor DXP Enterprises, Houston, TX, over alleged contract breaches related to the acquisition of their company, Precision Industries, Omaha, NE. The acquisition closed in September 2007. (See the Circos' complaint made here in pdf.)

DXP denied the claims and filed a counterclaim against Dennis Circo, Chris Circo and Circo Enterprises LLC/Circo Holdings LLC, alleging Circo made false representations regarding inventories when the acquisition of Precision was made, including that adequate reserves had been reflected in the balance sheet for obsolete, excess, damaged, slow-moving or otherwise unusable inventory. DXP alleges the value of Precision's inventories were "grossly overstated" and its reserve was "grossly understated." (See DXP's response here in pdf.)

In the Circos' complaint filed with the U.S. District Court for the District of Nebraska, they allege that DXP wants to adjust the value of the inventory and the sale price "in order to extract from Plaintiffs [the Circos] sums not due Defendant [DXP] and also to avoid paying to Plaintiff Dennis P. Circo certain earned buy-out fees called for by the Agreement."

What's more, the Circos say that no claim for a breach of contract was brought before the one-year anniversary date of the acquisition's closing, as outlined in the original agreement. The parties had included a one-year "survival period" post-acquisition, which allowed DXP opportunity to ensure books, records and inventories were accurate per pre-closing representations, according to the Circos' claim.

In its counterclaim, DXP said that it did not and could not have reasonably become aware of alleged inventory discrepancies until Precision's financial and accounting systems were integrated into DXP's systems in late 2009 and early 2010. DXP alleges that the Circos "actively concealed their fraud" while conducting "day-to-day operations" for Precision for several years after the acquisition. DXP alleges that the Circos knew or should have known of the alleged inventory misstatements.

But the Circos allege that DXP "intentionally conducted the business of Precision during the Earn Out period in a manner designed to reduce the value of Plaintiff Dennis P. Circo's Earn Out rights under the Agreement." The complaint also alleges DXP adjusted financial statements to reduce Precision's income; for example, it says that the company took "inappropriate" inventory write-offs.

The complaint alleges that DXP has "attempted to coerce employees of Precision into making changes in the inventory accounting methods that are unwarranted" to support its claims; it also alleges that DXP made misrepresentations to the Securities and Exchange Commission and others with respect to the inventories in an attempt to "wrongfully account for the inventories on the books."

DXP denies and addresses these claims in its counterclaim with examples of alleged inventory misrepresentations. DXP seeks rescission and return of the entire purchase price paid for the shares of stock of Precision; recovery of actual damages; attorneys' fees, costs and expenses; and pre-judgment and post-judgment interest.

The Circos seek a declaration that the time for DXP to assert claims with regard to inventories has passed; that all representations and warranties with respect to inventories were correct and that there has been a breach of agreement; and that any claims to the contrary are without merit.

For the full claims by both parties and what they are seeking, click below to download the respective pdfs:

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