A pattern of kickbacks from beer distributors and misrepresentation of the profits of Emeron's, a Rockville based chain of steak and beer restaurants, has been alleged in an investigation ordered by the Securities and Exchange Commission.
The outside investigation, made by Washington lawyer Francis T. Vincent Jr., involves former top officials of the chain in the alleged illegal payments from beer and wine companies, a practice still under scrutiny by the SEC and thought by some federal investigators to be industry-wide.
In the case of Emersons, the report stated, payments or rebates were made to promote the use of such national bands of beer as Schlitz, Ballantine and Old Milwaukee.
Emersons was formed here in the late 1960s by former chairman John P. Radnay and two associates. Before a recent cutback ordered by new management, the company was operating 40 restaurants in seven states and the District. Profits were generated by heavy advertising and continual expansion.
According to yesterday's report, however, "the misuse of funds by Radnay appears to have started very early in the company's history - at the latest in 1971 - and to have continued, in ever-increasing volume" until Radnay and chief financial officer Eli Levi were suspended from their jobs last April.
The report says that the company's financial statements for the years 1974 and 1975 were "false and misleading" as a result of accounting transactions designed to inflate reported profits. Public profits of $1.14 a share were reported in 1974, whereas a recent SEC-ordered audit showed profits of only 43 cents a share.
Based on extensive records and interviews, Vincent concluded that Radnay received close to $60,000 from various beer manufacturers or distributors, including $43,408 between September, 1971, and August, 1974, to use Old Milwaukee beer in the chain.
The report also said that Radnay used more than $50,000 in company funds to improve his home in suburban Potomac.
Vincent's report grew out of the SEC filing against the company last May 11 in which it alleged that Emersons had made false statements and allowed officers to misuse funds. In its consent agreement, Emersons agreed to hire an outside counsel to conduct an investigation.
As part of the consent decree Emerson's neither admitted nor denied the SEC allegations.
Emerson's new management now will study Vincent's report as well as recommendations for new internal controls designed to prevent recurrence of the alleged fraud by previous officers.
The Emersons case already has led to the indictment in New Jersey of that state's Senate president, Matthew Feldman, on charges of paying $6,400 in kickbacks to an Emersons officer in exchange for exclusive rights of liquor supply.
Last night, Emersons chief executiev Bill D. Jackson said "extensive changes in management" have been made since the SEC case was filed and "none of the former principal officers who have been implicated by special counsel's report is employed in any capacity by the company."
Jackson took over direction of the Rockville company last Oct. 2, said four unprofitable restaurants have been closed and that agreements in principle have ben reached for the sale of four other marginal locations.
The company is suffering from a financial squeeze at the moment, Jackson said, and negotiations are in progress to stretch out debts, "although the outcome of those efforts is not certain at this time." A recent special audit for the 20 months ended last June showed a new loss for the company of some $3.5 million.
Vincent's report, which included a separate study of auditing at Emersons by the national accounting firm of Touche Ross & Co., generally supported earlier allegations by the SEC. In addition, yesterday's report provided many more details on the beer companies' alleged payments to the Washington area firm.
Specially, Vincent reported:
Radnay allegedly participated in "fraudulent corporate financial statements," illegal payments from the beer and liquor industry and misuse of company money for improvements to his home and other personal expenses. Included in the money for home improvements was $8,900 for a swimming pool and driveway, $2,300 for mirrors, and $1,000 for interior decorator services related to a nursery and library, "not corporate expenses by any stretch of the imagination."
An Alexandria restaurant of the Emersons chain was billed for the swimming pool, itemized as payment due for "concrete 6,000 sq. ft. parking lot including excavation (sic) . . . as per bid," by a company that never worked fro Emersons.
Radnay allegedly directed an attempt to block federal investigations of the beer industry payments, denied falsely to the SEC that he had received such payments and has not accounted to the company for the use of beer and wine company money.
Members of the Emersons board of directors did not closely monitor activities of management in 1974 and 1975, according to the report, but they were held blameless because of Radnay's close control over the firm and the unlikelihood that more diligent oversight would have uncovered the allegedly illegal practices.
The accounting firm of Kenneth Leventhal & Co., previous outside auditors for Emersons, was sharply criticized by both Touche Ross and special counsel Vincent. Leventhal handled Emersons audits for 1972 through 1975 and its audits for 1974 and 1975 were revised thoroughly by Touche Ross, resulting in "immense negative adjustments."#TLeventhal also was criticized for not raising questions with the company about disclosure related to beer payoff investigations and for not being "alert" to ramifications of the federal studies.
Martin Jacobs, a partner in the law firm of Ginsburg, Feldman and Bress, was cited for allegedly not serving Emersons in the role of counsel as well as he could. Jacobs was in charge of the Emersons account for his law firm and his judgment on certain non-disclosures was questioned by the investigator.
Vincent took note in his report of the unusual criticism of one lawyer by another. "Special counsel has found it unpleasant to have been required to evaluate publicly the conduct and performance of another lawyer . . . while particular conduct of a lawyer may not result in a breach of his legal duty, that conduct may be subject to criticism for failure to protect fully the interests of his client," Vincent stated, noting that Jacobs was called on by Emersons to act "often in the absence of all the facts and frequently in the face of outright lies by the client."
But Jacobs "was not as alert to some risks as he might have been and appears to have been to willing to accept and act upon the basis of inconsistent explanations from Randay and Levi and others," Vincent concluded.
In response to that criticism yesterday, Ginsburg, Feldman and Bress senior partner Lee Marks said: "Our own feeling is that what the firm did and what Jacobs did was proper . . . if we had to do it over we would probably do it the same way. The report is very midly critical," it always is easy to say you should have passed on fourth down and three yards to go than run."
Marks said he has no criticism of fellow lawyer Vincent, who he said had done a "conscientious job, a very difficult job . . . we simply disagree."
Joseph King, a partner in the Kenneth Leventhal accounting firm, declined to return a reporter's out of town and not available for comment and Levi could not be contacted.
Behind the alleged fraud at Emersons, Vincent concluded, was the "agressive" and "fierce" competition for Emersons' draft beer business during 1971 and 1974 between Ballantine Brewing and its successor, Falstaff and Schlitz Brewing.
Viewed "most sympathetically," Vincent said, the firms and individuals involved were only following the free enterprise creed of Adam Smith.
"The problem with the way the parties acted is that, in connection with sales alcoholic beverages more so than in other areas, federal and state laws not only prohibit direct and indirect discriminatory pricing arrangements, but also preclude supplier-granted 'assistance' . . . in such forms as advertising allowances and loans for equipment purchases," as cited by former Emersons officers, Vincent said.
Vincent interviewed 43 people in his five-month investigation, which totals 252 pages plus exhibits and an appendix, as well as the separate Touche Ross study ofthe other accounting firm.