Struggle for Control

Struggle for Control

By David R. Corder

Associate Editor

Over two decades, Paul Roy Smith Jr. carved a niche in the specialty insurance markets as the founder of Allied International Holdings Inc. Under his control, the private Treasure Island holding company and its subsidiaries amassed a market capitalization value of about $50 million by insuring carnivals, amusement parks and other entertainment venues. Then in 2002, the one-time carnival owner - known as "Duke" - died.

It appeared Smith, 69, planned well for his passing. Beginning in 1987, he supposedly crafted the first phase of what seemed to be a well-conceived business succession plan and he updated it over the next 15 years. He drafted a will a few years prior to his death that detailed the distribution of his estate, worth between $7 million and $13 million.

Nealry three years later, a feud rages over Smith's estate in Pinellas County probate court. Thousands of pages of court files refer to the fight, including one over Smith's cremated remains.

There are allegations about a conspiracy to steal estate assets. Records describe an armed takeover of Allied International's headquarters as part of a court-approved effort to protect the estate's assets. Even the lawyers are suing each other.

Meanwhile, three heirs have died during the estate's administration.

David H. Smith, 48, the founder's son and Allied International president and CEO, died in September from cancer. In February, his sister, Debby Melody Angelo, 46, also died of cancer. Two weeks later, her son Joel Melody, 25, was killed in a traffic accident on the Sunshine Skyway Bridge.

The family's circumstances makes Clearwater attorney Patrick O'Connor, the estate's successor personal representative, wonder aloud whether the family walks under a dark cloud. What's worse he sees no immediate resolution to the dispute or the claims against the estate.

Last month, Pinellas Circuit Judge George Greer gave O'Connor until April next year to submit a final accounting of the estate.

"It's very contentious," O'Connor says. "Unfortunately, there are some issues here we would like to litigate. We have discovered things that don't make sense."

O'Connor faces off against Clearwater attorney Joseph "Jay" Fleece III, who represents Allied International over who gets the 2,750 company shares, or about 79.9% of the shares outstanding, that Duke Smith owned at the time of his death.

Continue to prosper

Despite the turmoil, Fleece says the company and its principal subsidiary, THE Insurance Co., continue to prosper.

Those who knew Duke Smith say the feud would have angered and saddened him. It was not the legacy he wanted to leave following a career that took him from the Southern carnival midways to the corporate offices he built overlooking the Gulf of Mexico on Treasure Island.

Smith, the son of West Virginia carnival concessionaries, explained in a 1990 interview with Amusement Business magazine how he spent his youth in Connecticut boarding schools. His parents eventually allowed him to work in midway concessions.

The work initially appealed to Smith, says Tom Powell, a friend who gave the eulogy at Smith's memorial. But Smith grew tired of the hard work and constant travel.

Around 1970 or so, Powell says Smith's carnival - Blue Ribbon Shows - had produced little revenue over a week because of rainy weather. While closing down the show, an insurance agent drove up in a shiny new Cadillac or Lincoln to collect a liability insurance premium. The agent wore nice clothes and white patent leather shoes.

"(Smith) told Don Bay (the insurance agent), 'You can have all we've got,' " Powell recalls. " 'But we didn't make a thing.' "

That's when Smith started thinking about a career in the insurance industry, as Powell tells the story. Eventually, Smith went to work for an affiliate of Frank B. Hall & Co. and became the head of the firm's office in San Antonio, Texas.

Profitable venture

Early on, Smith's sons, David and Dean Smith, joined him in the venture. By the mid-1990s, David eventually succeeded his father as Allied International's president and CEO.

Just prior to Duke's death, Dean cashed in his Allied International stock - 872 shares - for a payout of between $3 million and $4 million.

Smith's daughters - Donna Mears Brent, Dale Cremeans and Debby Melody Angelo - sometimes worked for the company at trade shows. However, they didn't participate in the company's operation nor did they hold a stake in it.

It was a profitable venture, court records show. In the year before his death, Smith claimed in a personal financial statement he earned almost $1.3 million in annual income and bonuses through Allied International Holdings and its subsidiaries. He claimed personal assets of $14.3 million and $15,000 in liabilities.

Despite the loss of two key executives, the company appears in good health. At least A.M. Best Co., the insurance company ratings service, says so in an analysis of THE Insurance Co.'s financials. The subsidiary accounts for the majority of Allied International's revenue.

"The company has produced strong operating results over the past five years with pretax returns on both revenue and surplus that exceed the average posted by the commercial casualty (industry) composite," the ratings service concludes in its most recent report on THE Insurance Co.

In fact, the specialty insurance carrier made gains during the recession years of 2001-02, when many U.S. casualty insurers lost ground because of post 9/11 losses.

In 2004, THE Insurance Co. reported net income of almost $2.5 million and total direct premiums written of more than $67 million. That compares with net of $2.9 million and premiums of $65.2 million for the same period the year before.

Such a performance has earned THE Insurance Co. an "A-" financial strength rating, the lowest level of excellence the ratings service offers. The highest rating available is A++ or superior.

Signs of discontent

Early signs of discontent among Smith's heirs emerged around October 2002, Pinellas County probate records show. It started with a request from two of Smith's three daughters, Brent and Cremeans.

The daughters wanted Tampa attorney Bill Gregory, Duke Smith's handpicked choice as his estate's personal representative and Allied International's long-time general counsel, to relinquish possession of the black-and-gold urn that contained their father's ashes. Gregory later acceded.

Any possibility of a quick and amicable resolution of the estate soon vanished. The daughters accused Gregory of refusing to communicate with their advocate, St. Petersburg attorney Wayne Shipp.

In March 2003, however, Gregory resigned as the estate's personal representative amid accusations of conflict of interest with his work as Allied International's general counsel and as a member of its board of directors.

Meanwhile, O'Connor then an administrator ad litem discovered Gregory - apparently without court oversight - had approved the transfer of Duke Smith's Allied International stock to the holding company.

Smith's daughters were infuriated. They viewed the transaction as an illegal effort by their now late brother, David, to gain access to their father's estate. If deemed property of the estate, Duke Smith's 2,750 shares in Allied International could be liquidated with proceeds distributed to the estate's beneficiaries.

This is a critical point since Duke Smith intentionally omitted David and Dean from the estate. He wanted them to run the family business, and specifically David to serve as it chief executive.

In the will, Duke Smith designated his three daughters and fiancee, Carolyn Patterson, as the estate's principal beneficiaries. So their stake could grow proportionally if the court ultimately rules that Duke Smith's shares belong to the estate.

When he learned about the stock transfer, O'Connor took an extraordinary action. He secured court approval to marshal the estate's assets.

On March 28, 2003, O'Connor arrived at Allied International's headquarters with a sheriff's deputy and an entourage of armed, private security guards. They took control, and asked David Smith and other corporate officers to leave. Locksmiths replaced the locks. Computer technicians changed the passwords.

The armed corporate takeover lasted only a few days, but O'Connor achieved his primary objective. Greer voided the stock transfer to Allied International and ordered the two sides to litigate the matter.

To protect the company's interest, Fleece filed a lawsuit against the estate to re-establish the existence of the lost 1987 stock redemption agreement that Duke Smith supposedly executed.

No one can find the original stock redemption agreement that Gregory purportedly drafted and Duke Smith signed in 1987 as part of his plan to ensure the smooth succession of the family business upon his death. Nor could anyone provide written proof that Duke Smith affixed the price of just $200 each on his 2,750 shares of Allied International stock-thousands of dollars less than each share's present day value.

"Everyone knew what Duke's intentions were," Fleece says. "Pursuant to a stock redemption agreement, Duke's stock was to be redeemed at a price determined by Duke back in 1987 based on the value of the company at the time for business succession purposes. This intention was documented in various ways, but unfortunately the actual agreement could not be located at the time of his death."

THE Insurance Co. Financials*

($ in 000s)

Category 2004 2003 2002 2001 2000

Direct premiums written $67,041 $65,237 $53,555 $33,293 $24,056

Pretax operating income $4,464 $3,495 $1,843 $1,604 $2,133

Total admitted assets $139,050 $121,933 $98,582 $76,239 $66,268

Policyholder surplus $38,155 $35,257 $32,245 $30,147 $28,234

Net income $2,477 $2,902 $747 $1,099 $1,595

*Subsidiary of Allied International Holdings Inc.

Source: A.M. Best Co.