The Securities and Exchange Commission has issued subpoenas for the financial records of Washington socialite R. J. Reynolds Tobacco heir Smith Bagley and Several of his former associates at the Washington Group, a North Carolina conglomerate Bagley founded in 1972.
Bagley guided the Washington Group in Winston-Salem until December, 1975, when he sold his share in the firm and moved here. According to Bagley, the comapany was making about $5 million a year on sales of about $100 million when he left. The firm owned clothing manufactures and chains of ice cream and convenience stores.
But the firm's fortunes fell and in June, 1977, Washington Group filed for reorganization under Chapter 10 of the federal bankruptcy act. While not an actual bankruptcy, the Chapter 10 filing is designed to protect the company from creditors and help it reorganize.
That is when the SEC became involved. SEC probers are reportedly attempting to put together the pieces that led to the near-failure of the company.
According to Richard A. Gilbert, a 61-year-old consultant appointed by federal Judge Rufus W. Reynolds to run the Washington Group, in its reorganization, one of the first problems he noted was unusually high consulting fees paid to outsiders.
Gilbert cancelled the fees at least temporarily, after Judge Reynolds said in court that he was "floored" by them.
The two fees of significant size that drew attention were to Bagley and to David R. Johnson, the major stock-holder of the company purchased by the Washington Group in 1973.
Bagley was drawing $60,000 a year in what he described in a telephone interview yesterday as a "non-compete" agreement. In other words, Bagley was being paid not to enter into competition with Washington Group. Such agreements are common when chief executives leave firms.
But the Johnston situation has the most significant question mark.
Johnston was the principal stock-holder of Johnston Mills, a Charlotte, N.C., yarn manufacturing firm that was purchased by Washington Group for nearly $5 million in May 1973.
Four months after the sale, Johnston was given another "non-compete" contract that promised him a total of $5.75 million to be paid over 18 years until he turned age 65. In addition, the Washington Group also paid $500,000 as an option to buy Johnston's 760-acre horse farm, according to Gilbert.
Both Bagley and Johnston were receiving their fees when the Washington Group filed for reorganizarion. After the SEC were notified of the huge fees, an investigation was begun to determine whether there were any corporate improperties, such as misuse of funds, excessive spending, etc.
SEC investigators have subpoenaed and received records from four North Carolina banks, as well as the United Virginia Bank in Richmond and a Pennsylvania Bank.
According to John Jameson, spokesman for one of the banks, North Carolina National Bank, the subpoenas asked for the financial records of the Washington Group, Bagley, Johnston, James R. Gilley, who succeeded Bagley and presently holds abour 60 per cent of the Washington Group's stock, and two officers of the Johnston Mills, Neal Thompson and Malcolm Mitchell.
Bank officials from three other North Carolina Banks, the Wachavio Bank and Trust Co., the Northwestern Bank and First Union National Bank comfirmed that they have complied with similar subpoena requests. An official of the United Virginia Bank also confirmed that his bank has been served.
A source who was party to the Johnston deal provided details of that teanaction to the Washington Post. It is believed that the Johnston transaction is the focal point of the SEC Enforcement Division probe.
"Johnston Mills has a net worth of $15 million when it is sold," the source said. "The Washington Group negotiated a deal with Johnston that would give the company abnout $5 million in cash and give Johnston himself about $300,000 a year plus until he turned 65. since Johnston was the principal stock-holder, he was able to structure that kind of deal."
The source said the deal was still attractive to the Washington Group because it was getting the mills for 30 per cent under net worth.
"But part of the deal," the source said, "was that Johnston agreed to indemnify Washington Group against any action by other Johnston Mills' stockholders who might have been concerned that he was getting so much of the money."
The source said the entire deal was reported to the SEC at the time, including the long-term arrangement with Johnston.
The deal did go through, and all terms of the arrangement were continued until the action of the reorganization trustee in June cutting off the payments to Johnston.
A source at the SEC said the investigations that subpoena records of companies under reorganization are commonplace and do not necessarily mean there has been any wrongdoing.
Bagley and his wife, Vicki, are prominent socialites with links to many people in the Carter administration. He is presently president and publisher of "Today is Sunday," a newspaper Sunday supplement.
Bagley said he understood that the investigations in connection with the Washington Group were "normal types of proceedings," and indicated that he would cooperate in any way possible. He said he had not been served a subpoena.
Gilley was quoted as saying that he, too, had not received any subpoenas.
Trustee Gilbert said that when the firm filed under Chapter 10 it had about $31 million in assets and "about $25 million in liabilities but had to file because of a "liquidity problem."
Gilbert also said, however, that he thinks he can turn a profit for the company in the 1977-78 fiscal year ending in June.