The former chairman of Kapok Tree Inns Corp. initiated a "fraudulent scheme" to gain control of the restaurant chain, then "misappropriated" some of its assets, the Securities and Exchange Commission charged yesterday.
The SEC also accused two other Kapok Tree officials and the company itself of violating securities laws during a family fight for control of the company.
The SEC made the charges in a law-suit filed in Tampa, Fla., after a two-year investigation of a power struggle in the restaurant chain, which owns the Peter Pan Inn in Urbana, Md.
To settle the SEC complaint, two Kapok Tree executives consented to a permanent injunction prohibiting them from violating securities laws. They were June Baumgardner Gelbart, widow of the founder of the company and currently its chairman, and H. Gordon Brown, general counsel of the company for nine years. Brown "voluntarily" agreed not to practice law before the SEC for 21/2 years.
Former Kapok Tree Chairman Steven G. Weil, who faces the most seritus charges in the SEC complaint, spurned the consent settlement and denied the charges.
Weil also is a defendant in another SEC civil lawsuit accusing him of securities fraud, the Kapok Tree Inn complaint discloses.
Weil served as chairman and chief executive of the restaurant chain from November 1977 to May 1978, when he was fired by the board of directors.
Reconstructing the company's history for the past two years, the SEC says Weil became associated with Kapok Tree when the children of the company's late founder, Richard B. Baumgardner, sought Weil's help in financing the purchase of about 38 percent of the company's stock. The stock was owned by Baumgardner's estate and controlled by his widow.
Instead, the SEC charges, Weil made a secret agreement in March 1977 to share control of the company with Gelbart. Neither the board of directors nor the stockholders were informed of the agreement, in violation of SEC reporting requirements, the complaint says.
Weil claimed to be representing the interest of the Baumgardner children, but never purchased or gained control of their stock and was actually seeking control of the company for himself, the complaint charges.
Weil also allegedly lied to Gelbart in making a deal with her, claiming he had served on the boards of several companies and participated in successful proxy fights. He said a company named Geneva Holding Co. was affiliated with a major investment banking firm and would put up $500,000 to buy Kapok Tree stock.
Weil has served on the board of only one company, the SEC charged, and the proxy fight he was involved in prompted an SEC investigation. Geneva was owned by Weil and his wife and had neither a half million dollars nor any connection with investment bankers, the SEC said.
After learning of Weil's back-ground, the board of directors made an unsuccessful effort to oust him as president. After that failed, three out-side directors resigned.
The fight between the chain's founder's widow and children developed into a full fledged proxy contest in December 1978, but the children failed to get enough votes to oust Weil and their stepmother.
The SEC complaint charges Weil and other Kapok Tree executives distributed false statements to share-holders in the proxy fight, harassed the dissidents with lawsuits and mis-counted the ballots at the company's annual meeting.
Five months later, Weil was removed as chairman, chief executive and a director after an investigation by Kapok Tree's audit committee, and Gelbart later resumed the chairman's job.
The SEC charges that Weil "misappropriated and diverted" Kapok Tree's assets in a complex series of dealing involving painting that were displayed and sold in Kapok Tree restaurants.
Weil arranged for a company called Emrose Art Corp. to sell paintings in the restaurants without telling the board of directors that the company was owned by his next-door neighbor.
Through Emrose, Weil agreed to purchase 10 paintings by sports artist Leroy Neiman for about $78,000. The company's records, however, showed the purchase involved only a single painting. The SEC does not disclose what happened to the other nine.
One $8,000 Neiman painting that was supposed to be used as an advertisement in Kapok Tree restaurants wound up in Weil's personal possession, the SEC claimed.
Kapok Tree was supposed to receive 20 percent of the sale price of the painting as a commission, but Weil allegedly reduced the commission to 10 percent, and finally to zero. He also switched the art concession to a new firm, owned by the cousin of his private secretary, without giving the board details of that transaction, the SEC charged.