Accusations fly in Kerner bankruptcy

Owners blame one another for once-proud f/x company's demise

From the time it was spun off from Industrial Light & Magic in 2006 until its recent demise, Kerner Optical stood as the movie industry’s most revered models-and-miniatures shop.

The San Rafael, Calif.-based company had once been ILM, in the days when special effects were created by engineers with high-speed cameras, not digital artists with software. More recently, as a standalone company, Kerner could claim to be the industry’s foremost master of destruction, specializing in scenes like the leveling of a town by an A-bomb in “Indiana Jones and the Kingdom of the Crystal Skull.”

Now Kerner Optical itself stands in ruins, its offices closed, its stages empty and its longtime artisans jobless as it goes through Chapter 7 bankruptcy. At first, many assumed the failure of Kerner was just another sad milestone as digital technology replaced classic moviemaking crafts, that it was another victim of progress and the f/x industry’s dubious management practices.

But the inside story is far more complicated, even bizarre.

The company’s CEO is alleging that Kerner was set up by a fraudster who used the company to bilk investors of millions — even as the company’s minority shareholder is similarly accusing that CEO.

While it’s not clear if anyone got bilked (and if so, who did the bilking), some things are clear: that a man who had been convicted of running a pyramid scheme became owner of a one-third stake in Kerner without putting up any money and with only the flimsiest relationships with his partners, from whom he hid his identity; that those partners entrusted him with courting investors even after they learned of his history; that the structure of Kerner came to resemble the structure of the pyramid scheme he once ran; and that investors lost millions in Kerner.

Yet to this day his former partners and some ex-Kerner staffers defend him, insisting he did nothing wrong and that he is among the injured parties. They blame the company’s current majority owner, who bought him out — and is asking for a criminal investigation to get to the bottom of the whole mess.

Eric Edmeades, Kerner’s majority owner and CEO, has written to the California attorney general seeking a criminal probe of Kerner’s original owners, claiming they hid the fact that one of them had been convicted of running a pyramid scheme, and that they followed the same pattern at Kerner.

Meanwhile, one of Kerner’s original partners, Kevin Duncan, has filed legal briefs with the bankruptcy court alleging extensive mismanagement and misappropriation of funds by Edmeades.

Not in dispute: One of Kerner’s trio of original owners was Joseph T. Sevitski, who pleaded guilty in 1996 to tax evasion and mail fraud for operating a pyramid scheme involving oil and gas investments. According to contemporary news accounts, Sevitski admitted to defrauding investors of about $10 million and was sentenced to three years in federal prison.

The name “Joseph Sevitski” was never attached to Kerner, however, and his partners didn’t know him by that name. He was using the name “Yuska Siuicki,” though he still went by Joe. Variety reached Sevitski on his cellphone and, in an emotional phone interview, he confirmed his 1996 tax evasion and mail fraud convictions. “I screwed up, a lot of people got hurt. It destroyed my family, it destroyed my life,” he said. “The only thing I can’t do is sell unregistered securities in California. That is the end of my restrictions.” When Variety asked if he had legally changed his name, Sevitski did not respond to the question and quickly ended the call.

Duncan, who put up the money for the acquisition of Kerner from Lucasfilm and became co-owner of the company in 2006 along with Sevitski and former Industrial Light & Magic model maker Mark Anderson, disagrees with Edmeades on almost everything about Kerner’s failure. But Duncan and Edmeades agree that one of Kerner’s problems was a proliferation of companies under the Kerner name, which made it difficult to track cash through the enterprise. Edmeades described “a complicated web of companies” and called the movement of funds among them “an involved shell-game that duped investors.” Both believe assets were diverted from Kerner Optical through those companies.

The charge is significant because the diverting of assets in that fashion was a hallmark of Sevit-ski’s oil and gas fraud in the 1990s. The bankruptcy court in that case, which found six separate companies run by Sevitski, said, “These enterprises were ostensibly separate corporations and partnerships; but Sevitski allowed his own financial affairs and those of his various enterprises to become thoroughly and inextricably intertwined.”

That court also said, “Sevitski commingled all funds he received in a single general operating account and spent money from that account as he pleased.” It said that of the $21 million invested, only $3 million had been invested in oil and gas producing properties or equipment.

Duncan, who said he is out $3 million now that Kerner is in Chapter 7, blames Edmeades for Kerner’s numerous shell companies, however, and says he is sure no money was ever siphoned out of Kerner by Sevitski. “(The money) went to salaries, rent and insurance,” he said. “I’ve seen the bills.” Duncan alleged Edmeades diverted assets from Kerner Optical, in which Duncan was a shareholder, to other Kerner companies entirely owned by Edmeades.

Sevitski acquired his one-third interest in Kerner without a long relationship with either Anderson or Duncan, and without putting up any cash. So brief was their acquaintance at the time Anderson and Duncan don’t even agree on how the trio came together. Anderson told Variety he was introduced to Sevitski by mutual friends when he was looking for partners to buy the model shop, and Sevitski then found Duncan. But Duncan said Anderson introduced him to Sevitski. However they came together, within weeks they were partners. Anderson and Duncan said they were unaware of Sevitski’s criminal history at the time.

Duncan said the ILM model shop “looked like an unbelievable opportunity,” and the chance to buy it directly from Lucasfilm “seemed like a sweet inside deal.” Duncan put up cash, and Anderson said, “Both Joe and myself were sweat-equity investors.” Anderson had 34% of newly formed Kerner Optical; Sevitski and Duncan got 33% each. Anderson became CEO of the new company and was the only buyer announced to the press at the time.

Duncan saw an opportunity with Kerner Optical because it was the original Industrial Light & Magic, the models and miniatures shop that created special effects for many hit pics before the rise of digital visual effects. In the middle of the previous decade, Lucasfilm could no longer afford the overhead of the model shop; rather than shutter it, Lucasfilm spun it off, freeing itself to work with visual f/x companies besides ILM.

By agreement with Lucasfilm, Kerner would not go into the digital effects business. However, its new owners hoped Kerner would follow in the footsteps of another Lucasfilm spinoff, Pixar, and parlay its engineering expertise into high-tech ventures beyond f/x.

Sevitski had represented himself as a 3D expert, and the company moved aggressively into the technology, building 3D camera rigs and working on a glasses-free 3D TV. But even Anderson is unclear on Sevitski’s actual 3D experience. He said, “I don’t necessarily know if the (3D) experience or the capabilities were from him as much as it was from the group of individuals that he pulled together as a team that did have a lot of experience or knowledge in the 3D world.” Former Kerner technologists agree Sevitski was not an engineer, though he kept himself informed and could make a good impression.

Duncan said he became aware of Sevitski’s criminal history about a year after the sale. Some Kerner staff had become suspicious when a Google search on “Yuska Siuicki” brought back no hits, something one former Kerner staffer called “impossible” for someone with long experience in entertainment tech. Sevitski eventually revealed in one-on-one meetings with some staff that he had served time for a white-collar crime.

Anderson, Duncan and some former staffers defend Sevitski and the work he did for Kerner. “He showed up to work, knew people in the industry and knew about cameras,” Duncan said.

Anderson said, “I think of him as a person that made some mistakes, paid his dues on it, and he was not that person while I was working with him.”

Though Sevitski owned a one-third stake in Kerner, he was never an officer of the company, Duncan said, and had no control of cash. He had no formal executive title, but according to former staffers, Sevitski kept stacks of business cards with various titles, including COO and CEO. When he was introduced to Variety, the card he used said “chief of disruptive technologies.”

Sevitski became one of Kerner’s conduits to investors. Former staffer Marty Brenneis, who was in charge of computer security for Kerner, said: “Joe was the professional smoke blower. He was the guy who went in and was charming.”

Rose Duignan, former Kerner director of marketing, told CineSource magazine in an interview posted Sunday: “Nobody was bilking people. But Joe attracted a sleazy underbelly of potential investor (sic). There were a lot of get rich-quick schemers circling. The brand of Kerner was greatly diminished.” Another former staffer said the f/x team watched the parade of potential investors skeptically, telling each other, “Just keep the model shop open.”

The financial crisis of 2008 hit Kerner hard. It had a deal with a Japanese company to build a 3D TV, but the Japanese company went out of business during the crunch. Edmeades, an Internet entrepreneur and motivational speaker with no show business background, acquired a majority share in Kerner in summer 2009, buying out Anderson and Sevitski. Duncan remained as a minority shareholder and secured creditor.

Edmeades’ letter to the attorney general says, “By the time I came to meet the three partners, investors had already lost over $5 million. I have since learned that at least some of my funds were used to pay off early investors to satisfy demands and threats of legal action.”

All sides in the dispute agree Edmeades was informed that Sevitski had a tax evasion conviction. Anderson and Duncan said Edmeades knew all about Sevitski’s history before buying in — though in conversations with Variety, both indicated they thought Sevitski’s only conviction was for tax evasion.

Edmeades said he was never told of Sevitski’s mail fraud or his admission that he defrauded investors. In a legal brief filed with the bankruptcy court, Duncan’s lawyers argue that Edmeades’ complaint that he was not informed of Sevitski’s mail fraud or pyramid scheme is “a distinction without a difference” and “there is no evidence anywhere that Mr. Siuicki was ever convicted of any crime other than tax evasion.”

However, a September 2009 email obtained by Variety shows Duncan writing to Anderson with the subject “History Repeats” over text of news accounts of Sevitski’s guilty pleas and his admission of defrauding investors. Duncan said he wrote the email out of frustration because “Joe had investors in, and it was close, close, close, and it would all fall apart.”

Both sides agree that numerous Kerner companies were set up and that assets were removed from Kerner Optical. Edmeades blames Sevitski and the previous management for that proliferation of Kerner companies, Duncan blames Edmeades, and Duignan said, “Both of them (Sevitski and Edmeades) were starting tons of them.”

Duncan and Edmeades are now in a bitter dispute over whether Edmeades was fully informed of Sevitski’s past, over who mismanaged the company and over the disposition of its technology, some of which remains valuable.

After Edmeades bought him out of Kerner, Sevitski continued his involvement with 3D through another company, PLLX3, which tried to buy out Kerner’s 3D businesses. Websites list Sevitski (under his alias Siuicki) as a principal of PLLX3 — but Anderson, who was briefly with the company, insisted Sevitski was never an employee there. Today PLLX3 is dormant, with only a front page on its website, but Anderson said it may yet be acquired.

Over the summer, Duncan sent Kerner into Chapter 7 when he refused to accept Edmeades’ bankruptcy reorganization plan. Duncan insisted Edmeades step down, but Edmeades refused, so Duncan refused to endorse the plan.

Now former Kerner technicians are looking for opportunities to acquire its technology and other assets. They hope to form smaller f/x companies that can scale up when needed, without carrying the cost of a permanent stage.

Sevitski, in his short conversation with Variety, blamed Edmeades for the mess and insisted: “I never had shit to do with the books. I never touched a dollar. I never made money off (Kerner). Like an idiot I handed Edmeades my 33% of the company for a dollar, and he never even paid me the dollar.

“All I did was, with my two friends, try to keep a place I loved alive and keep the people working.” A moment later, he ended the call.

Duncan said he’s sure Sevitski did nothing wrong. “He didn’t even get a salary his last year and a half there,” he said. “Joe is out, and he’s broke,” But he said if he had it to do over again, he wouldn’t put his money into Kerner, at least not without asking more questions. “Shame on me,” he said. “My lack of due diligence got me into this mess.”

Anderson called the whole situation “a big tragedy.”

“It’s real sad to see a company with such heritage and lineage go away,” Anderson added. “I wish the employees the best of luck. They’re not only people that I worked with for years but they’re also good friends. It’s a very unfortunate time, and it’s too bad that it fell apart.”

(Shelby Hill and Steven Gaydos contributed to this report.)