In a story about Emerson's Ltd., in Sunday's Business and Finance section of The Washington Post, it was reported that the company's stock is not being traded. That was incorrect. Emerson stock trades over the counter.
They lined up in the rain to get in," said a wistful Ralph Waldo Emerson, recalling the public's eager reception of the first Emersons, Ltd., restaurant when it opened in Northwest Washington in December 1969.
"It was the first free salad bar around here," he said. "That's what made us."
By 1976, there were 42 Emersons, Ltd., restaurants in 11 states, plus the District, each with a bottomless salad bowl.
Ralph Emerson dropped from management six years ago. But he remained a board member and stockholder. And last spring, when Emersons stock was trading over the counter at $12 a share, Emerson pledged his stock to get a $46,000 loan from a Nashville bank. Today, with Emersons shares not even trading, stock is being offered privately for under 50 cents.
The collapse came in May when the Securities and Exchange Commission, after investigating the company and its then top executives for allegedly keeping fraudulent books, among other things, was granted a permanent injuction by a federal judge here against Emersons and its two top executives. Those named in the suit were John P. Radnay, the former chairman, and Eli Levi, the former vice president.
Radnay and Levi were ousted by the Emersons board of directors. Other members of their management team also were purged. The troubled company's survival now rests with an experienced San Francisco restaurateur, Bill Jackson. He is being aided by Ralph Emerson, among others, who has returned to the Rockville headquarters of the company that bears his name.
The defendants, without admitting or denying the SEC allegations that ranged from false financial reporting to taking kickbacks from beer and liquor producers, signed a consent decree.
As part of the settlement of the civil suit, the court in July ordered a thorough investigation of the company, an it appointed as special counsel Francis T. Vincent Jr., a partner in the Washington law firm of Caplin and Drysdale. Vincent, in turn, tapped the national accounting firm of Touche Ross & Co. to help him in his investigation.
Recently, Vincent weighed in with a voluminous, detailed report that many at the SEC think rivals, on a smalle scale, the massive earlier report on illegalities by executives of Gulf Oil Corp. Wrote Vincent of Emersons: While presenting itself as a "well-managed, successful and rapidly growing company, in fact, the company's two top executives were corrupt, and the company's profits were grossly over-stated as a result of fraudulent activities and poor accounting and audit work."
The central figure of the Emersons affair is 36-years-old John Radnay. An intriguing description of Radnay's ambition is contained in the report.
In 1974, the report says, when the company was doing reasonably well, he felt compelled to have Emersons' books falsified to make the bottom line more impressive.
Radnay, who the report says "dominated" Emersons, "insisted the company had to show a constantly increasing profit level. The result was . . . a series of clearly fraudulent financial statement manipulations."
The 22-page report - plus 78 pages of accounting analysis by Touche Ross - along with a series of interviews by The Washington Post presents a vivid picture of what can happen to a company and its executives if the bottom line becomes an obsession.
The losers, of course, are the nearly 1,200 investors who bought most of Emersons' 1.2 million shares outstanding because they beheved Radnay when he told them: "Emersons is now well positioned for major growth and expansion."
Emersons was conceived in 1967 in an elevator at Harbor Square, in southwest Washington. It was there that the Radnays, loaded down with groceries, met the Emerons, also juggling packages. Emerson, then 35, and his new wife had not met many couples their own age in the apartment complex, so they invited Radnay and his wife to their apartment for drinks.
At the time, Emerson, a Tennesseean and a lawyer, was an administrative aide to Rep. Ray Blaton (D-Tenn), now his state's governor. Radnay, who had worked in the antitrust division of the Justice Department, was practicing law with the Washington firm of Arent Fox Kitner Plotkin & Kahn.
The two friends, plus another lawyer named Mark Rothman, decided to take a fling at the then popular restaurant franchising business. They set up a company called Diversified Franchises, Inc., with the idea of franchising a restaurant chain of behalf of a west Coast conglomerate.
That fell through, but in the meantime the three hired a New York restaurateur named Wolfgang Hanau, who had worked for a company that owned the Steak & Brew chain. Recalls Ralph Emerson: "Hanau told us, 'You ought to have a salad bar. Steak & Brew's making a fortune because they offer free salad'."
In November 1969, the three lawyers bought Hofberg's, a large delicatessan at Eastern and Georgia Avenues. The next problem was what to call their new enterprise.
They quickly went through three different advertising agencies searching for a catchy title to match the restaurant's planned Tudor decor. Finally, they settled on Ralph Emerson's last name, over his protestations. It was chosen, he says, "because Emersons had three syllables and sounded kind of British."
The overnight success of the first Emersons, which opened in December 1969 in the dining annex of Hofberg's, encouraged the three lawyers to expand their venture into a chain of restaurants. They had cooled on the franchising idea, deciding to keep control of the restaurants, which soon were popping up in Fairfax, Bethesda, and downtown Washington.
In the first two years, there were several changes at the top of the new company: Radnay, who quit his law firm in the spring of 1969 to work full-time at Emersons, became company chairman and driving spirit. In May 1970, he hired an old college chum, Eli Levi, who was working with a New York accounting firm. Levi became controller, later to be elevated to executive vice president.
Ralph Emerson quit in 1970 to run unsuccessfully in Tennessee's Democratic guber-national primary. Both he and Rothman, who also quit about the same time because of differences with Radnay, left with 42,000 shares each of Emersons stock. Radnay's hold on the company was assured by his 120,000 shares, which amounted to about 40 per cent of the stock then outstanding.
"By the time Rothman left, the team which was to run Emersons until April 1976 was basically in place," Vincent said in his report.
In May 1971, the company made a new stock offering to finance still more restaurants. The 220,000 shares went on the market at $12.50 each, up from the original offering price of $3 just three years before.
By the end of fiscal 1973, the company was claiming sales of $16.6 million, more than triple what they were just two years earlier. Emersons had 28 restaurants, and further expansion was made possible by a $2 million line of credit from Bank of Virginia and First National City Bank.
Clearly, Radnay was considered a corporate whiz kid by Wall Streeters and bankers alike. Later it would be alleged in the SEC suit and in the Vincent report that even as Radnay was practicing corporate dynamics, he also was taking kickbacks from beer companies.
Beginning in 1970 when Emersons was barely in business, and continuing until 1974 when federal authorities began asking questions, Radnay allegedly collected about $60,000 in payments from companies supplying beer to Emersons restaurants, according to the SEC.
Radnay treated beer as a promotional item, and Emersons advertised "all the free beer you can drink" with a meal. Although a low-level official handles beer purchases at most companies, Radnay made it clear that only he would deal with beer distributors and brewers at Emersons.
Radnay played one beer company off against another, according to the Vincent report. In 1970, Radnay was buying beer from the Joseph Schlitz Brewing Co., but the report says "the details of the arrangement remain cloudy." In 1971, he switched to P. Ballantine & Sons (which later was taken over by Falstaff Brewing Corp.) because it beat Schlitz's price. But also because "Radnay received $3-per-keg discount in cash in monthly installments on at least three occasions," according to the report.
These payments were called "promotional allowances" or "cooperative advertising" and were paid by brewers through Emersons advertising firm. Such payments by beer, liquor and wine companies are prohibited, but the law was not enforced rigorously at that time.
In August 1971, Radnay dropped Ballantine because it refused to increase the "discount" to $4 a keg, the Vincent report says. Schlitz came through with the $4 to sell its non-premium beer, Old Milwaukee, to Emersons, according to the report.
According to Vincent, Radnay negotiated this contract directly with the top management of Schlitz in Milwaukee. An internal "confidential" memo to Levi from Radnay states that Schiltz would make a "contribution of $2 per barrel" to Emersons.
What did he not say in the memo was that distributors supplying Emersons were ordered to contribute and additional $2 in cash to Radnay. "He had no intention of accounting to Emersons for the cash," Vincent stated.
In 1973, there was a crackdown on payments by beer companies by the Bureau of Alcohol, Tobacco, and Firearms (BATF). Schlitz management instituted what it called a "Mr. Clean" program, which forced Old Milwaukee wholesalers supplying five Emersons units to quit making payments.
"Radnay's response was immediate and decisive," observes the Vincent report. Radnay quickly returned to Ballantine, now owned by Falstaff, which agreed to "pay a rebate of $3 per keg and that the discount would be paid directly to Radnay in cash," according to Vincent.
There were also payments by wine and liquor companies to Emersons and to corporate officials. "Although some of the wine and liquor payments were made in cash, it appears that all of them ultimately were received by the company," the report states.
Payments allegedly came from Charles Jacquin et Cie, Inc., in Philadelphia, Joseph E. Seagram & Sons, Inc., New York, and Federal Wine & Liquor Co., a New Jersey distributorship run by Matthew Feldman. Feldman, a Democrat who is president of the New Jersey state senate, was indicted by a federal grand jury in Newark for allegedly making $6,400 in kickbacks to an Emersons official.
The Emersons scandal threatens to be troublesome to others who became involved with the company. One is Martin Jacobs, Emersons' outside counsel, who is a partner in the Washington firm of Ginsburg. Feldman and Bress. Another is Emersons' former auditor, Kenneth Leventhal & Co., a middle-sized accounting firm based in Los Angeles with an office in Washington.
Jacobs is criticized in the report for certain actions in his role as corporate counsel. In January 1975, when the BATF began investigating questionable payments by Falstaff, Jacobs wrote a letter to the federal bureau giving the Emersons version of what happened, as explained by Radnay.
As explained in the letter, Radnay admitted to Jacobs that the company got allowances from Falstaff and that he himself got money, but he said he had turned his portion over to the company. The letter was vague, however, about how the cash from Radnay was spent; $3,300 of it was described simply as going to pay for "restaurant openings."
Neither the board of directors not the company's accountants, Leventhal & Co., were told about the BATF questions, the Falstaff payments, or the BATF letter.
In September 1975, Emersons and Leventhal & Co. were subpoenaed by the SEC in connection with an investigation of alleged kickbacks paid by Schlitz. According to the special counsel's report, Jacobs allayed the accountant's concern by noting that the investigation was aimed at Schlitz, not Emersons. He still did not tell Leventhal & Co. about the earlier BATF probe into Emersons and Falstaff.
Just as in 1974, the stockholders found no mention of the probes in their annual report. This was because Jacobs did not consider the information "material," according to special counsel Vincent.
But accountants at Leventhal & Co. told the special counsel that had they known about the Falstaff-BATF situation when they learned of the SEC subpoena on the Schlitz investigation. "They would have considered expanding their auditing procedures."
In January 1976, Emersons again was subpoenaed by the SEC, this time concerning cash payments, rebates or kickbacks allegedly paid to Emersons by Falstaff. Again, neither Radnay nor Jacobs told the board or the accountants, according to the Vincent report.
And Jacobs did not turn over to the SEC a copy of the letter he wrote a year earlier to the BATF, which also concerned alleged payments by Falstaff.
Jacobs later explained that he did this because he felt that if the SEC knew about the BATF investigation, it might delay approval of a registration statement that Emersons had submitted to the commission in order to sell more stock. The special counsel found the "legal basis for Jacobs' decision unimpressive."
There remained for Radnay the nagging problem of the $3,300 which Falstaff had paid in January 1975 he had turned over to the company for "restaurant openings." According to Vincent, Radnay never provided - and Jacobs never demanded - proof that he turned over the money to the company.
On March 11, 1976, three employees provided Jacobs with affidavits that they received the $3,300. But on March 19, with the affidavits already distributed to the Internal Revenue Service, the Wall Street underwriters of the new stock, and others, Jacobs learned that the affidavits were "fabricated."
The lawyer managed to get back all the affidavits, the report says, except for one. And that one subsequently was forwarded to the SEC.
As to the auditors, Leventhal & Co., the report states that the accountants failed to discover that Radnay and Levi, the company's financial expert, were exaggerating financial returns through various devices. Radnay "insisted the company show a constantly increasing profit level," the report observed.
Radnay realized that to keep Wall Street interested he had to keep Emersons' apparent earnings inflated. In April 1975, for example, he predicted in a speech before the influential New York Society of Securities Analysts that Emersons earnings would be 40 per cent greater in 1975 than they were in 1974.
In fact, right up to the time that the SEC filed its complaint, the big Wall Street brokerage of Shearson Hayden Stone, Inc. - apparently relying on Emersons' figures - was preparing to sell the public a new issue of Emersons stock.
The court-ordered audit of Emersons by Touche Ross, the accountants, revealed a truer picture of the company's finances. Net earnings for 1975 were reduced in the new audit from the original $1.4 million to $495,613, and in 1974 from $922,099 to $524,338.
The reason for the discrepencies, apparently, was that Leventhal failed to uncover some accounting legerdemain by Emersons. For example, the company put off paying advertising costs, which normally are deducted when incurred, for future years. And steaks were carried on inventories as being a higher grade - thus of higher asset value - than they really were. Indeed, Touche Ross discovered that in one year overpricing of inventory added 7 per cent to earnings before taxes.
Marvin Goldman, a partner at Leventhal national headquarters in Los Angeles, called the Touche Ross report "hindsight." He said: "We continue to believe that we followed generally accepted accounting procedures."
Beginning in 1973, Radnay charged the company for personal expenses such as plumbing work, carpeting and wallpaper at his Potomac home, according to the report. A swimming pool deck and a driveway costing $8,900 were charged to the Alexandria Emersons.
Radnay and Levi were running up personal bills right to the end, the report charged. On March 19, 1976, when Jacobs, the attorney, learned that Radnay had gotten payments from Schlitz and had lied in depositions, he advised Radnay, as well as Levi, to hire outside counsel.
But it was not until the April 11 meeting when the board learned for the first time that company funds were being used to pay the two executives' lawyers. The Vincent report criticized Jacobs for not telling the board, which under the company's by-laws had to approve such payments.
Levi hastened the collapse of Emersons, Ltd., when, on April 7, he went to the SEC and volunteered to tell everything he knew. Now that the government's civil litigation has been settled, criminal investigations are under way. The Internal Revenue Service has begun a probe as has the Montgomery County Attorney's Office.
Meanwhile, Bill Jackson, the new president of Emersons, is hoping to get enough financing to keep the company in business. Of the 42 restaurants left by the old regime, 4 have been closed and 4 are for sale. All 27 "Dimples" discotheques, opened by Radnay in a vain attempt to boost restaurant business, have been closed.
Indeed, Jackson indicates the name Emersons, Ltd., soon may be a thing of the past. The one-time K Street Emersons has been changed to "K Street Saloon and Steakery," which Jackson said "could be a prototype of things to come."