Family Feud

Those high-flying days helping the small computer products distributor reach almost $1 billion in revenue and compete toe-to-toe with the likes of Ingram Micro and Tech Data have been eclipsed by his father&'s 2003 suicide and his own firing from the CEO position this past summer by the company&'s board of directors, whose chairman is his mother, Jeanie Diamond. Then, there&'s the lawsuit he filed in November, in which he claims he was wrongfully terminated for investigating alleged impropriety by his mother and others. Now, he is without a job, saddled with more than $100,000 in legal bills and cut off from several members of his family.

“It&'s been draining,” Diamond said. “I want to get it behind me.”

But getting it all behind him could cost his family&'s distribution company a pretty penny. Diamond is seeking an undetermined amount of compensatory and punitive damages. A significant judgement in his favor could further cripple the finances of a company already struggling to turn a profit. Aside from the lawsuit, he said he has turned over documents to the U.S. Securities and Exchange Commission and filed a complaint with Occupational Safety and Health Administration regarding his dismissal.

In his lawsuit, filed in Superior Court of DeKalb County, Ga., Diamond alleges he was wrongfully dismissed as CEO in July 2005 for actions he took to investigate a shareholder&'s complaints. Diamond said he found evidence substantiating the complaints but was met with resistance to investigate from his mother and other members of the board of directors.

Among the shareholder&'s complaints are that Jeanie Diamond received $4.4 million following the June 12, 2003, suicide of her husband, Jerry Diamond, who was CEO at the time. Jeanie Diamond received $1 million of a $10 million key-man insurance policy in addition to $3.4 million for the remainder of Jerry Diamond&'s seven-year employment contract. A company can take out so-called key-man insurance to protect itself against the death of a high-level executive. SED paid for the key-man policy, and the funds should have gone to SED operations that sorely needed working capital, said Mark Diamond.

The Tucker, Ga., distributor lost $2.6 million last year and its market capitalization was $2.5 million last week. SED has lost money in seven of its last eight fiscal years, a total of $69 million during that period.

In the lawsuit, Mark Diamond alleges his father killed himself because he was depressed over an investigation into the company&'s financial practices by the SEC. The investigation appears to have been halted after Jerry Diamond&'s death. To date, the SEC has not completed any inquiries into SED and will not comment on any pending matters, according to a spokesman at the commission.

Yet now, the actions of Mark Diamond may lead to another round of difficulties for the troubled family and company.

SED executives declined to comment on several topics for this article, including the lawsuit, the SEC investigation, company financial performance and Mark Diamond. Jeanie Diamond initially agreed to talk to CRN but substituted other executives to speak on behalf of the company, citing a last-minute business appointment.

A SHAREHOLDER&'S CONCERNS
The events leading up to Mark Diamond&'s ouster began last spring. In a March 2, 2005, letter to SED&'s board of directors, shareholder Alvin Katz of Fort Lauderdale, Fla., wrote he was “appalled at the manner in which the company appears to have been run as a private piggy bank for the Diamond family. …” Katz stated that the proceeds from a key-man life insurance policy paid for by the company on behalf of CEO Jerry Diamond was company property. SED&'s board gifted the money to Jeanie Diamond after she threatened to sue the company, according to former board members.

“A gift, however characterized, constitutes a breach of fiduciary obligations,” Katz wrote in his letter to the board. “All action necessary to recover the funds should be taken. Any professionals participating in the looting of the company&'s resources should be held accountable.”

In addition, another $7 million also was improperly paid to executives, Katz wrote. “Payments of well over 100 percent of the market capitalization of the company upon a change of control are so far beyond the range of customary corporate practice as to not only constitute waste but also shock the conscience,” he wrote.

Katz, who owns 130,000 SED shares according to the letter, did not respond to repeated phone calls and e-mails.

Diamond said he took Katz&'s complaints seriously. And, after receiving Katz&'s letter, SED&'s four-member board put together a committee to investigate the complaints. However, Mark Diamond said he quickly met with resistance while compiling information for the committee to investigate. For example, when he asked for Jeanie Diamond&'s employment contract, her assistant told him, “Jeanie said this is none of your business and that you will not be receiving this,” according to a letter Mark sent to the board on June 10, 2005. At the time, Diamond told the board in writing, “This behavior is unacceptable.” He later received a copy of the contract, he said.

That same month, SED&'s board of directors held a special board meeting and agreed to hire Larry Ayers, a former CFO at the company, as a consultant to help close out the 2005 fiscal year books. Minutes of the meeting show that Mark Diamond “strongly disagreed and pointed out several financial mishaps that had occurred previously under Mr. Ayers&' watch.”

Allegations regarding Ayers&' previous tenure at SED were outlined in an Oct. 30, 2002, letter to the board from Michael Levine, Ayers&' replacement as CFO, which states that, under Ayers, SED&'s accounting and finance department was “out of control and morale was terrible.”

Levine&'s letter states that SED also was illegally doing business in California at that time because its status as an active corporation in California had been revoked. In addition, the letter states there were “significant misclassified balance sheet amounts including liabilities to state and federal tax authorities, and no control over Form 8300 process with more than $1 million outstanding, causing constant fear that the IRS would demand penalties and interest and potentially put someone in jail.” Ayers could not be reached for comment.

At the special board meeting, board member Melvyn Cohen asked Mark Diamond if he would “risk being terminated as CEO by not signing off on the year-end financials if Mr. Ayers were hired,” according to minutes from the meeting.

On June 13, 2005, Ayers was hired as a special financial consultant, and Cohen asked that a special board meeting be scheduled to remove Mark Diamond as CEO, according to the minutes. Cohen said the board was “tired of the ‘aggravation&' of having to deal with the constant animosity and dissension between him and the chairman [Jeanie Diamond],” according to the minutes of the meeting.

STRAINED RELATIONSHIPS
The Diamond family has long been synonymous with SED. Jerry and Jeanie Diamond co-founded the company in 1980. Mark joined in 1987. He gave up his last semester of college to help his father break into the computer products distribution business and rose through the ranks. “Work was a place that used to bring a lot of personal and professional enjoyment. It&'s not every person that can go to work and see their dad every day.” Diamond told CRN last week.

Mark said he and his mother had a tenuous relationship for several years, but it deteriorated more quickly after Jerry Diamond shot himself with a .357 Magnum in the basement of his large home on the Chattahoochee River.

How exactly did it get this way? What created such spite between a mother and her only son? Former board members and employees offered some possible answers.

“She is the personification of a controlling individual,” Cary Rosenthal, a former SED board member for more than a decade and longtime friend of Jerry Diamond, said of Jeanie Diamond. “Mark has more education, more sophistication than she does. He knows the computer and electronics industries inside and out. From a business perspective, a problem between them could have evolved from her viewing his growth and sophistication as faster than some others in the organization.”

Rosenthal said Jeanie asked him to resign from the board after he would not support her request to receive $10 million from the key-man policy.

Former employees paint a picture of Jeanie Diamond as a domineering matriarch who could be your best friend or your worst enemy. For example, several solution providers and former SED employees only agreed to speak to CRN off the record for fear of reprisal from SED or Jeanie Diamond, including those now employed outside of the close-knit high-tech community of metro Atlanta.

“She doesn&'t wear just her pants, she wears everybody&'s pants,” said one former employee. “She was very, very, very dominating. If she didn&'t like you, you were out, regardless of whether Jerry loved you. It was her way or no way. There were people she would stop talking to for years over absolutely nothing. If she passed you in the hallway, she would not even look your way or acknowledge you were alive.”

Meanwhile, Jerry Diamond was the exact opposite, said former employees. “Jerry didn&'t know a stranger,” said a former employee. “He had his arms open to everyone. He always gave people a hug, always had a smile on his face and was full of energy.”

The couple formed a good-cop, bad-cop team that former employees say helped foster a fiercely loyal but competitive work environment. But then revenue started to falter (see chart). And, some former employees said, this was aggravated by family and friends being promoted over more competent employees not in the family&'s inner circle.

SED would have been better off bringing in outside management to help grow the company, said Mark Flaxer, former vice president of marketing at SED, who left the company in 1998. Flaxer worked there for eight years before leaving to start his own audio/video/security company, AdTech Custom Solutions, Alpharetta, Ga. “It&'s difficult for billion-dollar companies to grow using the same model they took to get to that level in the first place,” Flaxer said. “Look at what Steve Raymund did with Tech Data. That was a family-run business, but he went out and hired professional managers from other distributors or manufacturers and grew that business dramatically.

“SED was a great place to work. It was a lot of fun building that company,” said Flaxer. “But if there was anything they could have done differently, it was bring in professional businesspeople to manage the company. But when it&'s your baby, it&'s hard to give that up.” WHAT&'S NEXT?
SED has always measured itself on its success serving SMB solution providers with a more personal touch than they can get from larger distributors—like having dedicated account reps for even the smallest of solution providers. But five SED customers said they would continue to rely on the distributor until they saw that the lawsuit was impacting SED&'s ability to serve them.

“We will continue to use them unless it got to a point where the company was on shaky ground. We need to make sure there are reliable shipments,” said Ryan Bowman, service manager at Esh Computer Center, Lancaster, Pa. “We don&'t get the same pricing from them as with others, but there are some items where they do better. There are enough distributors on their level to pick that up, that will bend over backward to get our loyalty.”

Meanwhile, SED continues to chug along with the resources it has. The company is developing consumer-electronics and cellular businesses to complement computer products, which still account for about 70 percent of revenue, said Jonathan Elster, executive vice president at SED.

Last September, SED announced a three-year, $50 million asset-based credit facility with Wachovia, an action that Mark Diamond said he helped secure before he was fired.

SED is using about $35 million from Wachovia to help finance operations and grow new business, Elster said. “It helps us pay vendors faster, and we&'ve made investments in other areas. We are now using Salesforce.com and we recently enhanced and redesigned our Web site. Overall, we continue to look for new opportunities to bring more and more solutions to our customers,” Elster said.

The distributor recently signed distribution deals with Mitsubishi Digital Electronics for LCD and DLP TVs, Canon for digital cameras, camcorders and printers, and Tom Tom for GPS products.

Despite being a publicly traded company, SED has not publicly released its financials since fiscal year 2004. SED filed for nonreporting status, which allows companies with fewer than 300 named shareholders to keep their finances to themselves. SED has about 1,300 shareholders, Diamond said, but only about 200 were named in 2004. Since then, Diamond has gifted some of his shares to more than 100 people in order to bring SED above the 300-person limit and get the company to release its financials to the public again, he said.

Diamond said he prides himself on trying to do what is right for SED shareholders and solution providers, whom he believes also have been abandoned by those now in charge at the company. SED counts 3,500 to 5,000 active IT solution providers in its partner base.

“How would you feel if you&'re a shareholder and not getting information from the company? Why should you invest in the company?” Diamond said. “How about a customer community that wants to know if it [makes sense] to do business with you?”

Former board member Rosenthal said it just may be that the days of the small distributor are over. “I don&'t see a need any longer for the small distributor,” he said. “I saw what has happened to distributors in other industries. They&'re gone. In the computer industry, it&'s survival of the fittest, which is Tech Data and Ingram Micro.”

Ideally, Mark would like to see SED succeed, perhaps with himself back at the helm. But he knows that is unlikely and he has little faith in the current board to implement a successful long-term strategy.

These days, Mark Diamond&'s wife, Shay, stares into her husband&'s face and a pair of tired eyes stare back, weighed down by the strain of a situation that threatens to tear a company and a family apart.

“He truly loved SED,” she said. “He put his all into it and the very people he trusted the most are the ones that hurt him the most. I&'m just sorry because he saw SED as his father&'s legacy and he wanted to take the business back to where it was before.”