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ULFS - News - May 4, 2010 FRAUD SUIT FILED FOR EX MANAGEMENT ON JRECK SUBS
Posted By: Charlotte Zur On: 04 May 2010 9:16 AM
DetailsULFS - News - May 4, 2010 FRAUD SUIT FILED FOR EX MANAGEMENT ON JRECK SUBS
WATERTOWN DAILY TIMES ?
FRAUD SUIT FILED ON JRECK SUBS
WORTHLESS' STOCK IN SOUTH AT ISSUE ??Date: Sunday, August 27, 2000 ?Section: Local ?Edition: Both ?Page: B1 ?By Ed Perkins ?Times Staff Writer
????Entrepreneur Christopher M. Swartz and his Jreck Subs Group Inc., both born in the Watertown area, are being accused of securities fraud in a $4.5 million federal lawsuit filed by minority shareholders of a company acquired in 1998. ??Jreck gobbled up the Li'l Dino Bagel Deli & Grille chain, a successful franchise with 39 stores in North Carolina and three other southeastern states. Apparently, no cash changed hands in the deal negotiated in 1997. Publicly, there was a stock swap and assumption of a $400,000 debt.But 25 minority stockholders in Li'l Dino say they are victims of a back-room corporate deal that left them with virtually worthless Jreck stock. In the meantime, Li'l Dino insiders were promised a $3.5 million golden parachute as an inducement to sell, the stockholders allege. ??"Whoever got that stock is just sucking air," said Randolph M. James, a North Carolina attorney who represents the Li'l Dino minority shareholders. ??Mr. Swartz, whose company recently changed names from Jreck Subs Group Inc. to Ultimate Franchise Systems Inc., denied the allegations in a recent telephone interview from his Longwood, Fla., office. He acknowledged Jreck stock prices are "terrible" but added that restaurants everywhere are suffering the same fate. Mr. Swartz predicted Jreck stockholders will see the value of the company's shares rise as restaurant stocks in general heat up. ??Mr. Swartz said the lawsuit is without merit and that actions by his firm in the Li'l Dino deal were prudent. ??"We're confident the court is going to find it that way," he said. ??He said he could not talk about specifics in the case. ??Mr. James, on the other hand, said he has "miles" of tape recordings made by Li'l Dino insider Mark D. Hassett to prove back-room deals ultimately hurt the minority stockholders he represents. Mr. Hassett, dubbed a whistle-blower by the lawsuit, was fired and is seeking compensation for that. He also holds 75,984 shares. ??Led by G. Michael Theodore, minority shareholders filed a lawsuit in U.S. District Court, Greensboro, N.C., against Mr. Swartz and Jreck. Their suit also names Li'l Dino officer Larry C. Barrett and a few other insiders of both corporations. ??The lawsuit charges securities fraud, misappropriation of corporate opportunities and breach of fiduciary duties. It says there were violations of securities law, North Carolina laws and the federal Racketeer Influenced and Corrupt Organizations Act, known as the RICO statute. ??It is also seeking punitive damages, which could treble any future award. ??The lawsuit also raises the name of Jreck franchise promoter H. Thomas Swartz, Christopher's father, who built the Jreck Subs Inc. franchise in Watertown. It names him as a possible behind-the-scenes controlling force in the national Jreck Subs Group Inc. firm. Mr. Swartz, a former attorney, was sent to federal prison and disbarred for his dealings with the failed Jefferson National Bank. ??No evidence of Thomas Swartz's involvement in Jreck Subs Group Inc. has surfaced so far, and Christopher Swartz denies it exists. ??"My father simply isn't involved," he said. ??The Li'l Dino minority shareholders are not the first to claim a Jreck deal left them with worthless stock. ??In an earlier stock offering, Jreck promoted shares for Western Fast Foods Inc. in Northern New York with the announced goal of having it publicly traded on Wall Street. The "paper" company was formed in 1984 to raise money to open Jreck Subs shops in New York's Monroe and Erie counties and operate stores elsewhere. ??About 1,300 people bought the penny stock. Because it never made it to Wall Street, shareholders could not sell it unless they found buyers themselves.??The value of Jreck stock, now listed under the symbol for Ultimate Franchise Systems Inc., UFSI.OB, on the NASDAQ bulletin board, was being traded at 20 cents a share Friday. The stock's highs in the last three years have been $8.25 in 1997, $3.13 in 1998 and 63 cents in 1999. ??Jreck plans to fight the Li'l Dino lawsuit, asking that the case be dismissed outright and seeking sanctions. According to Mr. James, Jreck's motion to dismiss is on procedural grounds as attorneys seek information from the opposing sides. ??In an answer filed in North Carolina, Jreck says that a "General Release Agreement" was signed on behalf of the minority stockholders on July 30, 1999, so they cannot sue. It was just two days before the lawsuit was filed. Jreck's answer does not say who signed it. ??The company also says it was cleared of wrongdoing in the Li'l Dino buyout in a hearing conducted by the North Carolina Department of State, at Jreck's request, to determine the fairness of the stock swap. Mr. Theodore and Mr. Hassett alleged a diversion of assets to a dummy corporation named "ABC Inc." ??A deputy securities administrator in the North Carolina Department of State, David S. Massey, ruled there was no credible evidence that such a plan existed. Nor was there evidence that Li'l Dino assets were worth any more than was offered, he said. ??"They said it was a fair transaction," Mr. Swartz said. ??The lawsuit, however, alleges that Jreck insiders lied or, at least, withheld information at the hearing. ??Represented by attorney Benjamin N. Thompson, North Carolina, Jreck denied "any conspiracy or untruthful testimony at the fairness hearing." ??Jreck said the minority stockholders could have appealed the decision but did not. ??The company also maintains that plans for the ABC deal were dropped before the North Carolina hearing, and the corporation was never formed. It says it acted in good faith, and minority shareholders lost nothing in the deal. ??The minority shareholders disagree and give an exotic recipe of ingredients in the ABC deal. ??First, Li'l Dino assets or "opportunities" were split, and valuable ones were secretly put in the dummy ABC corporation, the shareholders allege. They were reserved for Li'l Dino insiders: Mr. Barrett and his hand-picked beneficiaries. ??The hidden assets included Intercollegiate Foods Group, which has developed food service operations in several universities, including Duke. It also included rebates totaling $46,000 per quarter. ??At one point, Jreck "terminated" the ABC deal. ??Mr. James claims the ABC deal was scrapped, at least on the surface, so the Li'l Dino buyout could go unscathed through the fair hearing. The attorney claims there was a cover-up and the deal stayed essentially the same but was based on a "handshake" agreement. ??In the meantime, $2 million in Jreck stock went to Li'l Dino shareholders for their stock. Jreck also assumed $400,000 of Li'l Dino debt. ??What Li'l Dino minority shareholders apparently did not know at the time of the buyout was that Jreck issued preferred stock that subsequently flooded the market, driving down regular shares that went to Li'l Dino shareholders by 90 percent. In essence, the $2 million deal was suddenly worth about $200,000. ??The new stock was not revealed in SEC filings until Feb. 17, 1999, more than a year after the Li'l Dino buyout. ??Mr. Swartz objected to the idea that his firm manipulated stock prices. ??"No company ever issues shares with the idea of driving the price down," he said. "That's asinine." ??Mr. James acknowledged Jreck's actions could have been good, competitive business, a way of leveraging a buyout, while offering top Li'l Dino management a golden parachute. ??It became illegal, Mr. James contends, because the shadow ABC deal and other actions were kept a secret from Li'l Dino shareholders. ??Many of the allegations in the federal lawsuit came from tape recordings made by Mr. Hassett, a 16- year employee of the Li'l Dino corporate family. He was Li'l Dino vice president of operation and administration, and assistant secretary. One of his duties was to record board meetings. ??He also taped conversations and made copies of relevant documents, according to the lawsuit. He recounted what was said during family gatherings and even while driving Mr. Swartz, former Jreck Chief Operating Officer Bradley L. Gordon and Jreck President Richard Silberman to and from the airport. ??Negotiations for the Li'l Dino buyout spanned several meetings. ??At an Oct. 15, 1997, meeting, Mr. Barrett told Jreck representatives, including Mr. Swartz, that he wanted $8 million to $9 million for Li'l Dino. Mr. Swartz said he would not pay the price. ??Although Mr. Swartz left the meeting, negotiations continued. Robert Burg, who sold Sobik's Sandwich Shop, a Florida franchise, acted as Jreck's broker and outlined the ABC deal. He told Mr. Barrett that is how Jreck purchased his firm. ??Former North Carolina attorney John Evans, who was disbarred for unrelated reasons, explained how to make it all legal. Mr. Evans, described as a close friend of Mr. Barrett, was a Li'l Dino shareholder and ran a franchise. ??The deal for the Li'l Dino sell- out, including the ABC deal, was agreed to at an Oct. 24, 1997, meeting. Mr. Barrett, who would eventually be slated to get 60 percent of the ABC deal, told Mr. Hassett to keep "his mouth shut about it," ??Jreck admits the idea of an ABC corporation was floated but says it was subsequently abandoned. ??Mr. Swartz characterized the ABC diversion as a way "to reward the people who actually built Li'l Dino," according to the lawsuit. ??On Dec. 17, 1997, J. Michael Ferretti, former chief financial officer of Li'l Dino Management Corp., announced at a meeting that the ABC deal has been "torn up" and instructed attorneys to put a paper trail in place to show that, the lawsuit says. ??It also alleges that keeping the ABC deal in place would run the risk of blocking the acquisition at the hearing by the North Carolina Department of State. ??At the meeting, Mr. Ferretti was quoted to have said, "Larry has elected to rely on Chris's good faith ... to do what is right post closing with respect to management compensation and appropriate incentive that we took it off the table. ??"Now, I whole heartily expect that... somewhere between one and 30 days after closing, Chris will come back to Larry and put in place a deal substantially identical to what we then called ABC as an incentive plan..." ??A "draft" letter by Mr. Swartz dated Dec. 2, 1997, two weeks before the pronouncement that the ABC deal was to be terminated, offers Mr. Barrett a position for him and people he selects to develop "opportunities." ??According to the draft letter, Mr. Swartz offered to set aside $1 million in Jreck stock for Mr. Barrett and pay him 50 percent of the profits from developing Jreck and Li'l Dino opportunities for five years. ??The lawsuit goes deeper into Jreck's past by naming Thomas Swartz, who started the Jreck franchise operation in Watertown. The elder Mr. Swartz was found guilty in 1996 of bank fraud, conspiracy and bribery in the demise of Jefferson National Bank. ??A jury found Thomas Swartz sucked $1.6 million in loans out of Jefferson National Bank for his business interests, including Jreck Subs. He served a 41-month sentence in the federal prison system, first in a so-called "prison camp" and then at a halfway house in Orlando, Fla., near Lakewood, where Jreck Subs is based. ??The lawsuit suggests that the elder Mr. Swartz may be involved in the day-to-day affairs of Jreck Subs Group, now Ultimate Franchise. ??Mr. James acknowledges he has no proof of it. ??"I think it makes common sense, it's logical, but it is my speculation," the attorney said. ??Christopher Swartz denies his father's participation in the company in any way. ??Thomas Swartz and former Jefferson National Bank Chairman Harry S. Pack, who was sentenced to 30 months in the federal prison system, were indicted Jan. 4, 1996, by a federal grand jury in Syracuse. ??In May 1996, five months after the indictment, Jreck was bought by Circa Media Inc., a Colorado corporation, and the name was changed to Jreck Subs Group. ??The Li'l Dino stockholders claim, "Tom Swartz or others acting on his behalf, through a sleight of hand, created the new Jreck through the acquisition of a Colorado corporation to protect the assets of the Swartz family in Jreck's stock." ??Jreck also wrote off a $104,141 loan it gave his father, the lawsuit says. ??The lawsuit compares Tom Swartz to owners of "target" franchises sought out by Jreck Subs Group. ??It alleges they are the type of people who "personally desire significant wealth in their lifetimes" but ignore federal and state law and live a lifestyle beyond their means. ??The shareholders allege Tom Swartz, while in prison camp, may have had a hand in picking the target franchises. ??Their lawsuit says, "...Tom Swartz has the time to devote to this analysis of potential targets because of his incarceration." ?
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