C. Gregory Earls is a world-class networker. He built his career culling money from a wide circle of Washington area friends and acquaintances, getting them into investments and deals, from B-grade movies to corporate takeovers.
Earls operates in the milieu of high-class charity events and Georgetown parties, cultivating an exclusive club of contacts of those in high repute. He has led a business life played out largely below the radar of securities regulators and the media.
That is, until Earls made a play for a company called U.S. Technologies Inc. and persuaded William H. Webster to join its board of directors. U.S. Technologies' troubles could be the undoing of Earls's business fortune. It tarnished the reputation of one of Washington's most well-regarded public servants and led to the resignation of Securities and Exchange Commission Chairman Harvey L. Pitt.
The 57-year-old Washington businessman and his struggling company have been the focus of intense media scrutiny because of the controversy surrounding former FBI director Webster's tenure on the Internet incubator's audit committee. Webster resigned as chairman of a new national accounting oversight board after Pitt failed to disclose to SEC commissioners that Webster had been entangled in U.S. Technologies' auditing and accounting problems, an omission that would help spur Pitt's departure from the agency.
Earls has been left as chief executive and chairman of a money-losing company, operated out of sparse Connecticut Avenue offices adorned with plaques commending his service with the Boys & Girls Club of Greater Washington and St. John's Community Services. He may no longer be able to do the one thing that has always kept his business afloat: raise money from well-heeled individuals. He also faces investigations spawned by the Webster flap and a string of unpaid court judgments and pending lawsuits from angry investors in a wide variety of other deals.
A review of Earls's business practices shows that his current predicament is not new. His past is filled with instances of delayed payments to partners, occasional bounced checks, and harsh rulings by judges and arbitrators who said the self-styled merchant banker used his investors' money to pay off his own debts.
Earls denies any wrongdoing but declined to address directly many of the specific charges raised in court by his critics.
"My conscience is absolutely clear," he said in one of several recent interviews at his office. Earls is a slight man with graying, light-brown hair and dresses in smart business attire and monogrammed shirts. His manner is suffused with Southern courtesy, his speech tinged with a West Virginia lilt.
"I have certainly made plenty of mistakes, but I have never put my interest before my partners," he said.
According to court records and interviews, Earls's modus operandi was to solicit friends, politicians he raised money for, his children's teachers, wealthy individuals he met at local charity events -- even parishioners -- to join his business ventures. Many said they were impressed by his charm and philanthropic activities, and assured by the business connections he touted.
"I liked him. He seemed to be a very successful business guy," said former congressman John Bryant, who eventually sued Earls for fraud.
Earls is, after all, a well-known figure in Washington social circles, frequenting galas for the Washington Ballet and the Choral Arts Society and once living in a $3.5 million home in northwest Washington. He gained some notoriety when he lived at the Four Seasons Hotel for a year, after separating from his wife, and hosted Christmas parties there for the Boys & Girls Club. In 2000 he was co-chairman of a reelection fundraising event for District Mayor Anthony A. Williams.
He was a deacon at Christ Church in Georgetown when he persuaded newcomer David Forward, a local businessman, to invest in a venture more than 10 years ago. Forward said Earls told him he already had enough money from investors, but, as a personal favor, he was offering the new guy at church a piece of the deal. After Earls stopped returning his calls, Forward said he had to threaten to expose Earls to the church's congregation before he agreed to repay his $100,000, which took five years.
Another $100,000 investor, Donald S. Beyer, the former lieutenant governor of Virginia, said he would run into Earls "all the time at different functions and parties; everybody seemed to know him."
"I had good feelings about him," he said. But when Beyer tried to collect on what he thought was a $75,000 profit, Earls stopped returning calls. After hiring a lawyer, Beyer eventually collected $112,000.
"There was a dead silence for a year," Beyer recalled. "He never explained it. I was left with no other conclusion but that I never want to do business with him again, and would never recommend him, and would actively warn people away."
Enter the Internet
After two decades running investment partnerships and some movie deals, many of them financially successful, Earls turned his attention in the late 1990s to the Internet. He gained control of U.S. Technologies in 1999, and in 2000 the company merged with E2Enet Inc., an Internet incubator founded and controlled by Jonathan J. Ledecky, a well-known Washington entrepreneur. Until then, U.S. Technologies had been solely in the business of hiring prisoners to make furniture and computer circuit boards.
Earls said it was Ledecky's idea to merge E2Enet into U.S. Technologies. Ledecky's spokesman said support for the idea was mutual, and it was considered a good deal for shareholders of both companies. Ledecky was neither a board member nor a director of U.S. Technologies after the merger.
Earls also began to focus on building an all-star board of directors that would elevate U.S. Technologies' profile and assure potential investors about its viability. He wooed prominent executives and former politicians, again tapping his vast well of social connections.
Earls recalls offering Alexander M. Haig Jr., the former secretary of state and White House chief of staff, 400,000 stock options to join the board. Earls even listed Haig as a director of the company in an SEC filing -- a filing he would have to revise. Haig eventually declined to serve when Earls cut the option offer back to 250,000 shares, Earls said. A spokesman for Haig simply said that he declined to serve on the company's board, without specifying a reason.
A prominent local technology executive, who requested anonymity, said Earls tried unsuccessfully to woo him by offering him stock options worth $2 million. Earlier, Earls had impressed the same executive, when the executive was trying to join a local country club, by holding a dinner at the club for him. Earls said he did not recall offering anyone $2 million in stock options. The executive didn't join the U.S. Technologies board.
Webster and two other well-known Washingtonians, Beth Dozoretz, former finance chair for the Democratic National Committee, and former senator George Mitchell, who was already a member of E2Enet's board, did join the new board. Their positions came with 250,000 stock options, which jumped in value after U.S. Technologies announced it would merge with E2Enet.
U.S. Technologies stock, after languishing at less than 30 cents for months, climbed to an all-time high of $5.75. On paper, Earls and his all-star board of directors had made millions.
But there were early signs of trouble. As part of the deal, the new company was to assume a $2 million financing agreement Ledecky had made with Blue Rock Avenue, one of E2Enet's start-ups. When U.S. Technologies defaulted on it, Blue Rock Avenue sued Ledecky, who had personally guaranteed the money, according to Ledecky's attorney.
"Ledecky was forced to take legal action to compel U.S. Technologies to satisfy its obligation under the merger agreement," said attorney Matthew Schwartz.
The merged company got walloped again, however, in the bursting of the technology bubble. Of its 34 associated companies, only nine had generated any revenue as of the end of 2000, according to SEC filings. And its weak financial controls were criticized by its outside auditor, BDO Seidman LLP.
Documents provided by BDO say the firm was fired after it warned U.S. Technologies' audit committee, chaired by Webster, of internal accounting weaknesses. Earls said BDO's firing in mid-2001 was unrelated to its warning. He said U.S. Technologies just couldn't afford the $660,000 audit bill. And he did establish more internal controls, he said.
While his Internet dreams were evaporating, Earls was having other problems. During the same period, Earls was receiving what would become nearly $4.5 million from Peter Ackerman -- a Washington investor who was a protege of junk bond king Michael R. Milken -- to buy U.S. Technologies stock, according to a lawsuit Ackerman filed.
Earls declined to discuss the issue, citing pending litigation, except to say, "There is no misuse of money."
'I Feel Like a Failure'
Though he would not comment on his current business troubles, Earls did elaborate on his career and his rise as a dealmaker. In interviews, he was candid about his personal and business trials, even discussing his failed marriage as he recounted his history.
"I am not happy with the turn of events right now, and I feel like a failure," he said. "But I think I developed a good track record." Earls said that of the 22 deals he solicited investors for, at least 14 were profitable and only five lost money. Considering that it was mostly venture funding, one of the riskiest forms of investing, that's a good track record, he said.
Earls grew up in Bluefield, W. Va., in the Appalachian mountains, and graduated from the University of Virginia in 1967. "I was always interested the capital markets and business in general," Earls said. "I ordered a subscription to the Wall Street Journal in the 7th grade."
He said he tried to join the Air Force but didn't pass the physical. So he began his business career in New York with the Wall Street stock brokerage Hornblower, Weeks, Hemphill & Noyes, staying for six years before deciding to go out on his own.
His first ventures in the 1970s were producing lowbrow movies, many of them belonging to the "blaxploitation" genre popularized by "Shaft." The films, including his first, "Black Gestapo," made "hundreds of thousands" of dollars for investors who used the deals as tax shelters, Earls said. Higher-profile films came later, including "The Pilot," a money loser that gained some acclaim, and "Flight of the Eagle," which was nominated for an Academy Award.
During the same period, Earls founded Nova Corp., an attempt to profit from the oil embargo set by the Organization of the Petroleum Exporting Countries. Drivers faced an hour wait at the pump, and alternative energy sources were gaining popularity, so, Earls said, he bought coal mines. At the same time, high fuel prices made summer trips to Florida unpopular, and Earls took advantage of plummeting real estate prices to buy property there. He says he made millions from his Nova ventures.
His business took another turn in the 1990s. In 1992, he said, he put up $50,000 for a contract to buy a company that distributed hospital and medical training material via satellite. Dallas-based Westcott Communications Inc., which also wanted the firm, paid Earls $1 million in stock for the contract.
Through Westcott, Earls met Texas congressman John Bryant, who was seeking investors for an independent minor-league baseball league he was forming. Earls said he lost $4 million on the league.
His connection to Westcott landed Earls on the board of directors of Jayhawk Acceptance Corp., a company Westcott founded in 1994 to buy auto loans made to poor people or to those with no credit history. After early financial success as a public company, Jayhawk faltered. In 1997, its auditor discovered that Jayhawk was using a faulty lending formula, and a third of its customers couldn't be expected to repay loans, Earls recalled. Jayhawk filed for bankruptcy.
Earls sold more than $2 million in Jayhawk shares in the months leading up to the bankruptcy, according to Thomson First Call, but he says he lost millions more when the share price fell. He would later point to Jayhawk's failure as the beginning of his personal financial troubles.
Around the same time, Earls started soliciting investors for cash to buy shares in publicly traded companies. Among the deals was one in which he solicited investors for his idea to buy a 9.9 percent stake in Greyhound Lines Inc. of Dallas, putting them in position to launch a "friendly takeover," according to court records. Greyhound had acres of undervalued real estate and with better management could be turned around, potential investors were told.
Bryant, who by then had left Congress, became a $100,000 investor. In early 1998, a Canadian company bought Greyhound for $6.25 a share; Earls had paid about $2.65 a share.
"We made a lot of money, I thought," Bryant said. But soon Bryant and other investors had reason to worry: The payout from the deal was slow in coming, and for some investors, it never came. Harold Warren, a Dallas police officer, said he invested $135,000 in the venture. Earls sent him a check for $35,000 as a partial payment, according to a lawsuit filed by Warren, Bryant and several others. The check bounced.
In another lawsuit over the Greyhound deal, Richard Carella, a Pennsylvania doctor, complained that after being told that his $194,000 investment was worth $331,199, Earls repeatedly promised but failed to wire the money to his pension fund.
Those cases were settled out of court.
At the same time, investors in another deal were having doubts about Earls. Earls had established an investment vehicle called Pinheal Acquisition Co. to accumulate shares of Franklin Bancorporation Inc., which operated Franklin National Bank branches in the District. In July 1998, BB&T Corp. acquired Franklin for $170 million in stock, or $24.08 a share. Again, Earls's investors, who were told shares had been purchased at between $2 and $8, were expecting a large payout, a lawsuit alleged.
Coming Up Short
But again Earls failed to deliver, according to court and arbitration rulings. One investor was Edward Eagles, a history and macroeconomics teacher who had taught three of Earls's children at St. Albans School, a prestigious prep academy, and had invested $550,000 in the bank deal and four other of Earls's ventures.
An arbitration panel found that Earls had violated his fiduciary responsibility to Eagles by commingling the bank stock in a larger pool of financial ventures Earls controlled. It found, too, that Earls used money from Pinheal stock sales to pay some of his own debts.
After examining Earls's business history, a Delaware state judge wrote in August, "There is a pattern that may rise to the level of criminal conduct, in a series of cases that involved [Earls] inducing investors to invest their moneys and then proceeding to divert those moneys to himself."
Earls would not discuss his current personal financial situation. . At the time of his divorce in mid-1999, he reported assets of $6.7 million, more than half of which were in his home on Indian Lane. But he also reported $8.7 million in liabilities, leaving him with a negative net worth of more than $2 million.
These days, Earls said he spends his time trying to raise money for U.S. Technologies. The company is in limbo. Of its remaining 80 employees, 60 are prisoners. It hasn't made a quarterly filing required by the SEC in months. Its latest one, for the quarter ended March 30, said the company had only $52,000 on hand.
"We've got a going concern, but we are still cash-poor," Earls said. "It's been very difficult to raise money even before all the bad publicity. Now it's impossible."
Staff researcher Richard Drezen contributed to this report.