Divine faces federal probe
Grand jury wants to determine fate of libraries' cash
By Barbara Rose
Tribune staff reporter
March 4, 2003
chicagotribune.com
A federal grand jury is investigating Divine Inc., Chicago's one-time technology darling, to determine what happened to $65 million in customer payments, documents obtained by the Tribune show.
The criminal investigation threatens to complicate the difficult legal and financial problems facing Divine and its chief executive, Andrew "Flip" Filipowski.
Divine filed for bankruptcy Feb. 25 and is trying to sell its major businesses.
The $65 million is money that Divine's RoweCom Inc. subsidiary says it collected last year from libraries across the country to forward to publishers for magazine subscriptions.
But librarians were alerted to a problem in December when they began missing issues and getting calls from publishers about lapsed subscriptions.
Divine placed RoweCom in bankruptcy in late January, and the subsidiary sued Divine for alleged fraud, charging that its parent had illegally diverted millions from its business.
Divine, which denied the charges, said it spent the libraries' money on RoweCom's operations and debt and couldn't arrange a loan to pay publishers.
In February, libraries began receiving federal subpoenas for their records in connection with a grand jury investigation, according to copies of the subpoenas obtained by the Tribune.
Assistant U.S. Atty. Kaarina Salovaara, who sought the library records, declined to comment, as did a spokesman for the U.S. attorney's office in Chicago.
Divine's general counsel, Jude Sullivan, did not return calls Monday seeking comment.
Although the missing payments prompted a civil fraud complaint against Divine in late December by New York's attorney general on behalf of a Buffalo library, the subpoenas are the first indication of a criminal investigation.
Several library managers said Monday that they were contacted in February by postmaster general officials in conjunction with the investigation. Legal experts say the postmaster general's involvement suggests the investigation is centering on possible wire fraud.
Libraries initially were asked in early February to deliver their RoweCom records to a federal economic-crimes unit in Boston, but the matter later was moved to Chicago.
Salovaara's subpoenas, dated Feb. 12, asked for records to be delivered to U.S. District Court in Chicago last week.
"We don't want our money back," said Morag Boyd, bibliographic services manager at the Milner Library at Illinois State University in Normal. "We want the periodicals we contracted for. And we want the publishers to be paid."
The library's experience is typical of RoweCom's creditors, which include government, corporate and university libraries locally and nationwide.
The biggest creditor is the National Institutes of Health Library in Bethesda, Md., which is owed $2.4 million, according to RoweCom's bankruptcy filing.
Milner Library paid about $1.15 million to RoweCom in October 2002 to order subscriptions for about 3,000 newspapers, magazines and scholarly journals, Boyd said.
"In early December we got calls from publishers about our not having renewed," she said.
The library has since determined that only $33,857 of its payments went to publishers.
Major publishers of scholarly journals have agreed to continue providing issues without payment at least through March while negotiations continue about who will pay the remainder of the year's subscriptions.
RoweCom, meanwhile, is being sold to a large competitor, EBSCO Industries Inc.
Divine purchased the financially troubled business in November 2001 when the company was on an acquisition spree. At the time, RoweCom was facing a $40 million shortfall in payments due to publishers in December, and Divine arranged a loan to cover the payments.
RoweCom's suit alleges that by the spring of 2002, Divine had decided it no longer would invest to keep RoweCom going as a viable business.
The suit alleges that RoweCom's employees were instructed to offer discounts to libraries that paid cash in advance--months before payments were due to publishers. RoweCom collected more than $65 million in payments last year through Nov. 30, the suit alleges, even though Divine "had no intention to pay those obligations."
At the same time, the suit alleges, Divine diverted nearly $74 million from RoweCom's operations during the period from April through December 2002.
Divine denied the suit's allegations and said it intends to defend itself. A reply to the complaint is due Thursday.
Sullivan, Divine's general counsel, was RoweCom's sole director. He told the Tribune in January that the money RoweCom alleges was diverted illegally went to pay off RoweCom's substantial obligations.
Sullivan said Divine inherited a shortfall of at least $54 million. "I'm not sure we fully understood the financial situation it was in," he said.
Divine realized it had a cash flow problem in September, Sullivan said, and the company tried unsuccessfully to arrange short-term financing, as it had the previous year. He said Divine stopped taking orders in December when it was clear the company would not be able to meet RoweCom's obligations.
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