Lawndale Capital takes issue with 'manipulation' of Sparton pension plan by CEO, board members

By Lisa Kerner

Charlotte, N.C., Jan. 16 - Sparton Corp. investors led by Lawndale Capital Management, LLC believe the company's current stock price "fails to reflect the value of Sparton's defense and niche EMS businesses, largely because of inadequate corporate governance practices that have effectively entrenched Sparton's underperforming management team."

Lawndale made its claims in a Jan. 11 letter to the company's board of directors included in a schedule 13D filing with the Securities and Exchange Commission.

According to the filing, Lawndale owns 960,460 shares, or 9.8% of the company, making it Sparton's largest independent shareholder.

Lawndale cited what it called the "manipulation" of Sparton's defined benefit pension plan assets through their over-allocation to Sparton stock rather than through proper diversification. The investor blamed chief executive officer and plan trustee David Hockenbrocht, as well as the board of directors, for their poor decision making in this regard.

As a result, plan beneficiaries "have seen the value of their plan swing from a sizeable surplus in 2000 to a potentially significant deficit today," the letter stated.

"We remain deeply disappointed that, despite the fact that we raised these exact issues in communications to the board on May 4, 2007 and again on Oct. 9, 2007, the board has taken no visible action," the letter said.

The investors believe there may be personal liability to the board for wrongful behavior, including:

• ERISA 404 violation - improper voting of Sparton stock against beneficiaries' best interests;

• ERISA 404 violation - maintaining an undiversified portfolio; and

• ERISA 407 violation - over-allocation to Sparton stock while insiders sold their own shares.

Lawndale said the Sparton board must take remedial action immediately and recommended replacing Hockenbrocht with an independent trustee to oversee the plan's voting and investment decisions.

The investor would also like to see a full independent investigation of violations of ERISA and fiduciary duties of management and board members followed by remedies and prevention of future violations.

In addition, Lawndale urged formation of a special committee of independent directors "to hire reputable advisors to analyze and recommend alternatives, including the sale of the company, to maximize share value for all shareholders, including the plan."

Sparton and its subsidiaries provide electronic manufacturing services for government and commercial customers. The company is based in Jackson, Mich.

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