Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010 - (Page E29)

May 3, 2010 CRAIN’S DETROIT BUSINESS Page E29 Scandals and Dubious Deeds From Previous Page BBC Equities: Lavish lifestyles The pitch sounded like many of the investment funds of 2008: Raise money from investors to buy distressed office buildings, operate them for a profit and sell them in better times for an even bigger profit. But what John Bravata and Richard Trabulsy didn’t tell BBC Equities investors is that, instead, they mostly were using the money to buy sports cars, mansions and expensive vacations. Just $21 million of Bravata $50 million raised was spent on real estate. And after the chips fell, the court-appointed receiver found $47 million in outstanding Trabulsy claims and just $100,000 in cash. And out of the real estate acquired, most was foreclosed, leaving 19 of the 70 properties able to be sold. Bravata’s and Trabulsy’s fates remain tied to the civil case filed by the Securities and Exchange Commission. “If they offer you Kool-Aid, don’t drink it,” said one investor. he started in 1972 bilked for more than $3.33 million. The financial chicanery was discovered after Connecticutbased Raytech Corp. bought the company in 1998. Hartwick pleaded no contest to one count of racketeering and 14 counts of embezzlement, was convicted of criminal enterprise and sentenced in April 2000 to up to 15 years in prison. Hartwick embezzled the money from 1992 to 1998 by issuing company checks listing himself or his account at Fidelity Investments and then rubber-stamping Stefanutti’s name on the signature line. Some of the money was recovered, but in November 2000, Hartwick was ordered to repay the $1.33 million plus interest. Commission said Conaway didn’t disclose that he overbought inventory in an attempt to increase margins and also didn’t pay suppliers. In March, a judge ordered Conaway Conaway to pay $10 million in fines following a jury verdict finding him guilty of charges he misled investors. lion to former lenders. He was scheduled to be released from prison May 1. Messinger was sentenced to 12 months and one day in federal prison. He also was ordered to pay $20 million in restitution. He was released March 28, 2008. Prison suit for clothing maker Ilene Moses was president and CEO of Detroit-based SMS Inc., a Grosse Pointe clothing manufacturer that filed for Chapter 11 in May 1990. SMS made coats and suits under several brands. Moses was charged with defrauding Michigan National Bank and Swiss Cantobank International out of about $26 million between 1983 and 1988 by using shell companies and phony paperwork to dupe auditors Moses and bankers. The U.S. attorney in Detroit indicted Moses in 1996 and again in 2002 in separate but similar cases. After years of legal maneuvers and claimed illness, Moses came to trial in January 2007 and was convicted on 52 counts. She is serving a 17.5-year sentence in a California prison, scheduled for release in 2022. DPS financial crisis The Detroit Public Schools expect to face a deficit of more than $300 million after more than a year of work to overhaul the district led by emergency financial manager Robert Bobb. For more than a decade, the DPS has been in fiscal meltdown. The $1.5 billion bond approved by voters in 1994 to improve and renovate 160 schools sat largely unused for almost a decade. It wouldn’t be until 2003 that the cash was spent or committed. In 1999, the Legislature voted to oust the current elected board with a reform board appointed by then-Mayor Dennis Archer. In 2000, Kenneth Burnley was named CEO of the district. Burnley attempted to implement reforms, but at the end of that year, the district still had a $90 million general fund deficit. Outcry over the appointed board reached a fever pitch in 2005 when Detroit voters defeated a proposal to replace the reform board with an elected board of nine members and a strong CEO, appointed by the mayor. Since then, the board has presided over a budget that has changed from a $95 million surplus at Burnley’s departure to a deficit of $139 million in 2009, when Bobb was appointed. Tax evasion on the menu In May 2006, the founder and owner of the Dearborn-based Middle Eastern restaurant franchise La Shish was indicted on accusations of a $20 million tax evasion the FBI said helped fund Hezbollah, considered a terrorist group by the U.S. Talal Chahine’s Dearborn-based chain of 14 restaurants, spread across Detroit’s suburbs since its 1989 founding, eventually closed. Some have reopened under new names and new owners. Chahine is believed to be living as a fugitive in Lebanon. In 2007, he and three others were indicted by a federal grand jury on charges of bribery, conspiracy and extortion in connection with immigration fraud. filed a civil lawsuit with wife Barbara in 2003 against his daughter, then-President Gail Duncan, to whom he had sold majority ownership in 1993, and her husband, then-General Manager Shashi TejPaul, or S.K. Paul. In 2005, Jerome-Duncan Ford filed Chapter 11 after defaulting on a Ford Motor Credit loan. Paul stepped down a few months later, and Troy-based Suburban Collection bought the assets from bankruptcy for $14.8 million in 2006. Gail Duncan sued Ford Motor Credit that same year, alleging it had worked to put her out of busiGail Duncan ness. That lawsuit was settled for $1 million in 2008. A Macomb County judge also in 2008 entered a $4 million judgment against Gail Duncan in Richard Duncan’s lawsuit, but the case was settled out of court. Gail Duncan now owns the Art Hotel in Laguna Beach, Calif. Tax scandal sinks SES The downfall of former Auburn Hills professional employment organization Simplified Employment Services Inc. led to a bankruptcy sale and tax evasion charges that sent four executives to federal prison. At its height, SES handled more than $700 million in payroll revenue for more than 2,000 client companies. But the company filed for bankruptcy in 2001, soon after the Internal Revenue Service raided its offices and several banks froze its accounts. Co-owners Dennis Lambka and Ron Bray were accused of defrauding the government of more than $51 million in income taxes withheld from employee paychecks between 1997 and 2001. They testified that they used the money Lambka to prop up SES. They pleaded guilty in U.S. District Court in late 2002 and agreed to serve five years in federal prison, several months after the firm’s remaining contracts were sold out of bankruptcy to Troy-based Troy Design Inc. SES Vice President Brian Lambka was sentenced in August 2008 to 18 months in prison in a plea deal, and former general counsel Edward Fisher was sentenced last October to 41 months in prison after a trial for helping to conceal the fraud in part by blaming faulty software. Energy trades zap McCormick William McCormick Jr.’s 17 years at the helm of CMS Energy Corp. included improving finances in the wake of Consumers Energy Co.’s canceled Midland nuclear plant, and ambitious international expansions. His reign ended abruptly in May 2002, when has announced he was resigning amid an investigation involving $5.2 billion in 2000 and 2001 energy trades. McCormick The “roundtrip” energy trades by a Houstonbased CMS subsidiary involved simultaneous power purchases and sales that netted no profit or loss but were done to raise the its profile as an energy marketer. That led to class-action shareholder lawsuits, financial penalties, and U.S. Securities and Exchange Commission actions against some former CMS officers but not McCormick. A Commodity Futures Trading Commission investigation over the reporting of natural gas trades to energy industry publications resulted in a $16 million settlement fine. CMS also settled shareholder class-action lawsuits for $200 million. Airport contract questions Wayne County Executive Ed McNamara was known for creating a political machine that rebuilt the county’s finances and produced a who’s who of names: Jennifer Granholm, Mike Duggan, Saul Green, Freman Hendrix and Kwame Kilpatrick. But McNaMcNamara mara, who was executive from 1987-2002 and died of heart failure in March 2006 at age 79, also had his share of negative headlines. Dogging his final years in charge were investigations into the county’s management of Detroit Metropolitan Airport and questionable construction contracts — allegedly handed to McNamara’s friends, family and political backers — for what came to be the $1.2 billion McNamara Terminal. Former McNamara aide Wilbourne Kelley III was convicted on embezzlement, bribery and conspiracy charges related to an airport contract and sentenced to 44 months in prison. He was released in October 2008. Hawkins: Taxes, wire fraud Former Detroit restaurant franchisee and business owner La-Van Hawkins pleaded guilty in May 2009 to a charge of failing to pay federal withholding and Social Security taxes for employee paychecks and was ordered in July by a federal judge to pay $5.7 million in restitution. Hawkins also got 10 Hawkins months in prison concurrent with his 33month federal sentence from a 2007 wire fraud conviction. He was released March 19, 2010. Hawkins is the former owner and president of Wolverine Pizza L.L.C. The company operated more than 80 Pizza Hut franchise locations in metro Detroit and other areas at the time. Cooking books at Lason Inc. To investors, 1999 looked like a good year for Troy-based Lason Inc. Or so they thought. That was before the U.S. Securities and Exchange Commission announced that the printing and mail-order processing company’s top executives admitted to inflating third-quarter revenue by $13 million to meet earnings expectations. They also told investors Lason was in good financial shape when it was not. Chairman and CEO Gary Monroe pleaded guilty to filing a false report with the SEC. CFO William Monroe Rauwerdink and President and COO John Messinger also pleaded guilty for their roles in covering up the company’s financial condition. Monroe was sentenced to 15 months in prison and ordered to pay $20 million in restitution. He was released Oct. 10, 2008. Rauwerdink got 45 months in prison, two years of supervised release after prison and was ordered to pay $115 million to former shareholders and $170 mil- Scandal reaches even Mom Ex-NHL player Dean Turner was a senior vice president for the former Dean Witter Reynolds Inc. charged with defrauding investors out of $11.4 million from 1992 to 1995. Those who claimed they were cheated included his mother, Detroit TV personality Marilyn Turner, and Oakland County Executive L. Brooks Patterson. Charged on 19 counts, he was convicted in 1999 of two counts of mail fraud and one count of making false statements to a federal agency and spent 18 months in prison. Conaway not special to Kmart Chuck Conaway was hired in May 2000 to be the savior of Kmart Corp. With a strong track record at CVS Corp., Conaway vowed to bring the company back to peak performance, took charge of its outdated computer systems and closed underperforming stores. But what Conaway didn’t tell investors became an issue after the company filed Chapter 11 bankruptcy in 2002. The Securities and Exchange Feud at Jerome-Duncan What looked at first like a family quarrel over leadership at Jerome-Duncan Inc. blossomed into bankruptcy and hefty payouts on lawsuits for the Sterling Heights Ford dealership. Richard Duncan, who co-founded Jerome Duncan Ford in 1956, Misplaced trust Oscar Stefanutti, owner of struggling Sterling Heights automotive supplier Advanced Friction Materials Co., trusted Richard Hartwick as the company controller — only to see the company

Table of Contents for the Digital Edition of Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010

Crain's Detroit Business 25th Anniversary
Looking Forward
25 Companies to Watch
25 Mainstays
25 People Then and Now
25 Scandals and Dubious Deeds.
25 Philanthropic Gifts
25 Newsmakers of the Year
25 Big Stories
25 Innovations
25 Gone But Not Forgotten
Health Care
Defense
Suppliers
The Internet and Communication
Energy
Finance
Signs of the Times

Crain's Detroit Business - 25th Anniversary Issue, May 3, 2010

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