Steve Young’s private equity firm accused of covering up fraud

NFL great Steve Young is feeling the heat — and this time, it’s not from a 300-pound defensive lineman.

The private equity firm the Hall of Fame quarterback co-founded in 2007 — eight years after he retired — stands accused of covering up a massive fraud at one of its companies.

The PE firm, HGGC (which was formerly known as Huntsman Gay Capital Partners), where Young is a managing director, “falsified test results” at its Citadel Plastics company, according to a lawsuit filed by rival plastic manufacturer A. Schulman, which bought Citadel for $800 million in 2015.

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Citadel allegedly had been selling products with the claim that they met Underwriters Laboratories specs, when they did not, according to court testimony.

A civil trial over the alleged fraud started in April, and Judge Travis Laster is expected to rule on the liabilities portion of the suit as early as the end of this month.

Damages will be decided in the fall. Schulman is seeking up to $275 million in damages.

Federal investigators are also probing the alleged antics at Lucent Polymers — purchased by HGGC’s Citadel in 2013, court papers reveal. The FBI has issued more than five subpoenas in the matter. Young was not among those subpoenaed — nor is he one of the executives named in the suit, although his PE firm is.

Schulman’s 2016 lawsuit came back into focus last week after Young said in a TV interview that a major ingredient of his PE firm’s recipe for success is forming partnerships with its portfolio companies.

“We’re really attacking the market in an old-school way: We really look for partnership,” Young, known for his stand-out years as a San Francisco 49er, told CNBC.

The trial could prove to be embarrassing for Young and HGGC.

In court papers, HGGC, which first denied knowledge of any fraud but then backtracked to say “that they would have missed the blatant fraud because, as investors, their role was limited to providing financial oversight and help with M&A,” according to a Schulman court filing.

There was no mention in the court papers of Young’s idea for partnership.

“I think there is a certain level of arrogance at HGGC that surprises me,” said one source close to Schulman, who said Young’s TV appearance caught his attention.

In the court battle, Schulman claims HGGC at least knew about the potential for fraud at Lucent because the PE firm’s Citadel team flagged potential problems with the highly profitable Lucent product lines, according to court filings.

HGGC Executive Director Gary Crittenden, who was also chairman of Citadel, said during court testimony that he did not see any red flags at Lucent when the company was bought — or during the period it owned it.

Young is certainly hoping the trial won’t sully his reputation in his second career. He did not return calls seeking comment.

A lawyer for HGGC declined to comment on ongoing litigation but said he believes his client will be exonerated.

Schulman declined to comment.

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