The star-crossed run of a Gwinnett County order-fulfillment company appears to be nearing a close.

Innotrac Corp., of Duluth, announced on Oct. 6 that GSI Commerce Inc. would acquire the company for $62 million in cash, stock and assumed debt. The merged company, which will retain the Innotrac name, combines Innotrac’s business of fulfilling customer orders for Target and AT&T with GSI Commerce’s business of operating web sites for American Eagle Outfitters, Toys “R” Us and other retailers.

Kilpatrick Stockton partners David Stockton and David Eaton in Atlanta advised Innotrac. Blank Rome partner Francis E. Dehel in Philadelphia advised GSI Commerce.

For Innotrac, the deal represents more than a strategic combination with a rival. It allows Innotrac to untangle itself from a criminal probe of a Ponzi scheme that was not of its own doing. A federal judge and a court-appointed receiver have both concluded that Innotrac was not involved with the operation of the Ponzi scheme and was not at fault.

The saga began in 2003, when the Euclid, Ohio-based investment fund IPOF Fund LP acquired about 35 percent of Innotrac’s publicly traded common stock, according to federal court documents and filings with the Securities and Exchange Commission. Innotrac’s management later learned from a regulatory filing that IPOF’s stake in the company had surpassed 10 percent.

A year later, Innotrac’s executives received a call from a receiver appointed by the U.S. District Court for the Northern District of Ohio informing the company that the SEC was investigating IPOF under suspicion that its general partner, David Dadante, was operating IPOF as a Ponzi scheme. Dadante had been acquiring Innotrac stock to defraud the investors who had contributed money to his fund. Dadante was later convicted and is now serving a 13-year sentence in federal prison in Ashland, Ky.

Dadante was “an admitted cocaine abuser and a regular at Atlantic City casinos,” according to a June 19 article in the Plain Dealer of Cleveland. Dadante bilked his investors out of $28 million and “blew it on personal extravagances” including a mansion, the Plain Dealer said.

Innotrac’s executives did not participate in any of the illegal activities perpetrated by Dadante, according to court filings.

“While members of the Receivership estate were the victims of substantial fraud, there does not appear to be any legally relevant relationship between that fraud and the actions of Innotrac or its principles,” U.S. District Court Judge Kathleen M. O’Malley wrote in an Oct. 7 order.

“Though certain members of the plaintiff class have alleged that Innotrac officers or directors engaged in fraudulent activity, the Receiver has not found a factual basis for this claim,” O’Malley wrote.

But even after Dadante was sentenced, about 35 percent of Innotrac’s stock was now being administered by a federal receiver. Further, IPOF’s investors had sued IPOF and Dadante in federal court in Ohio and were seeking financial recovery. The federal receiver began seeking a buyer for the 35 percent of Innotrac shares that IPOF had owned.

That turned out to be virtually impossible. Since the federal receiver controls 35 percent of Innotrac stock, and Innotrac chairman and chief executive Scott Dorfman owns another 46 percent of the company, Innotrac’s public float is only about 19 percent of its stock. That made it extremely difficult to find a buyer, according to court filings.

“These ownership positions have resulted in a lack of liquidity in our common stock,” Innotrac said in a regulatory filing. “Additionally, if any of Innotrac’s significant shareholders decided to liquidate its or their position, our common stock price would likely decline materially.”

The solution arose when Innotrac found a buyer—King of Prussia, Penn.-based GSI Commerce—for the entire company, not just the 35 percent stake held by the receiver. The boards of both Innotrac and GSI Commerce have approved the deal. Innotrac shareholders must also approve the deal. 

Additionally, as a condition of the merger agreement, GSI Commerce requires that the litigation filed by plaintiffs against IPOF must be settled before the deal closes. The investors who sued IPOF would receive about $17.4 million in cash and stock, according to the terms of the settlement agreement.

Judge O’Malley, of the U.S. District Court for the Northern District of Ohio, on Oct. 7 gave conditional approval to the settlement agreement. Final approval is pending and Judge O’Malley scheduled a fairness hearing for Nov. 5 at the federal courthouse in Cleveland.