A federal grand jury here is examining claims of improprieties in the operation of Auto-Train, the auto and passenger rail line between Lorton and Sanford, Fla., that filed for bankruptcy in September 1980, according to sources familiar with the investigation.
Federal officials, including the FBI and the Securities and Exchange Commission, have been investigating the collapse of Auto-Train, which made its final run last May after nearly 10 years of operation.
Once the darling of stock speculators who scurried to buy up the initial 1.6 million shares offered on the American Stock Exchange, Auto-Train fell on hard times in the late '70s after profits peaked at $1.7 million in 1976.
According to sources close to the case, investigators are trying to determine whether Eugene Garfield, Auto-Train's former president, board chairman and majority stockholder, intended to use worthless bank drafts to keep Auto-Train creditors from shutting down the railroad he founded.
Some former company officials blame Auto-Train's failure on poor strategy, the addition of unprofitable lines such as an extension from Lorton to Louisville, Ky. Others say it was the costly insurance claims and National Transportation Safety Board charges blaming Auto-Train for two derailments in 1976.
Today, Auto-Train exists only on paper. Murray Drabkin, a Washington attorney appointed by the bankruptcy court to settle the creditors' claims, continues to weed through a maze of records in an effort to close outstanding accounts.
The grand jury, the source said, is reviewing contracts, correspondence and the business dealings between Auto-Train and European American Group Ltd., a financial consulting company based in Miami.
European American Group, headed by Michael Strauss of Coconut Grove, Fla., provided bank drafts and other financial assistance to Auto-Train before the company's collapse.
Strauss served three years in Lexington Federal Penitentiary for mail fraud and is now facing sentencing on other counts in the U.S. District Court for Eastern Pennsylvania.
In a series of interviews with the Camden (N.J.) Courier Post, Strauss contended that Auto-Train's financial statements were "doctored" to mislead investors and that Garfield paid Strauss' firm $15,000 in cash "under the table" to arrange the worthless bank drafts.
Attempts to reach Garfield for comment were unsuccessful.
For documentation, Strauss offered to the Courier Post correspondence, copies of contracts, reproductions of bank drafts and other articles from the files of European American Group and several off-shore banks operated by Strauss' company.
European American's relationship with Auto-Train began in April 1980, according to Strauss. European American was asked to help finance a complicated deal involving rail cars that was intended to generate revenue to help the financially troubled Auto-Train, Strauss said.
The deal ultimately fell through, but not before Strauss agreed to help Auto-Train out of its financial plight. Strauss said Auto-Train offered to put up the rail company's assets to secure credit from the off-shore banks. The credit was to cover locomotive lease payments, Strauss said.
"They wanted $1.5 million, agreeing to put up sufficient unencumbered accounts receivable money owned to Auto-Train by other companies to secure the credit line, and they wanted sight drafts made out to the creditors," Strauss said.
The drafts, which Strauss said he designed, looked like regular bank checks but were marked "bank draft and made payable pursuant to credit."
"They never were intended to be used as checks for payments of bills. They were legitimate, but valueless at the time," Strauss said.