Directors of a Northern Virginia firm that lured millions of dollars from unwary, local investors for purchases of nonexistent Portuguese wines, improperly forced the firm to pay for Rolls-Royces, a $320,000 yacht, interest-free loans and various personal expenses, a federal judge has ruled.
Judge James C. Cacheris, in an order filed in Alexandria District Court, found the Vienna-based Vortex Corp. and six of its directors liable for damages over what the judge labeled "gross mismanagement . . . and corporate waste arising from their improper transactions and self-dealing." He ordered the firm placed in receivership, saying its directors had "displayed continuous conduct which at its best amounts to recklessness and a conscious disregard for the rights of others."
Cacheris said the irregularities included purchase of three Rolls-Royces, a Mercedes-Benz and a Lincoln Town Sedan bought by Vortex at a cost of $176,908, although they served no legitimate business use. The firm also paid rent for and expenses of a yacht, the Waterbed, owned by a director and docked in the Washington area. The judge said the yacht was used only once to entertain Vortex customers.
Vortex and one of its directors, John D. Schrott Jr. of McLean, were alleged in a 1974 Securities and Exchange Commission complaint to have helped funnel hundreds of investors into a $26 million pyramid scheme involving contracts on nonexistent "industrial" wines from Portugual. Schrott, once touted as a financial wizard while still in his 20s, later signed a consent decree promising not to sell any unregistered securities.
Another McLean businessman, former Vortex vice president Robert Dale Johnson, pleaded guilty to stock and mail fraud in the case and served a six-year prison term in connection with the scandal.
"We don't feel in all respects that the findings are correct," Schrott said yesterday. As for the automobiles, he said: "We find the ruling very much not accurate. They were for business purposes." Schrott said the firm will file motions seeking to amend the judgment and may appeal "some portions" of it.
Named with Schrott as defendants were his parents, Mr. and Mrs. John D. Schrott Sr.; his sister and brother-in-law, Carol S. and David B. Crouse, and Robert Terry Simmons. All live in McLean. Cacheris dropped one director originally named as a defendant, J. Dent Farr, during a five-day trial of the case in April.
The suits were brought by two individual shareholders from New Jersey and Connecticut; World University, a Puerto Rican nonprofit organization that owns shares in the company, and Risdon Corp. Cacheris earlier dismissed Risdon from the case because it has been sued by Vortex in federal court in Bridgeport, Conn., in a securities dispute.
Since the wine scandal, the judge said, the company's fortunes have dwindled. Its sole active subsidiary is Metalcrafters Inc. of Richmond, a manufacturer of conveyor systems and other metal products. Cacheris ordered that a special master set damages in the case.
Included by the judge in a litany of alleged wrongdoing by the directors:
* That between 1974 and 1981, Schrott shuffled furniture and artwork -- some of it valued at up to $105,000 -- among his parents, his sister and Metalcrafters in order to "shield the property and income from creditors."
* That Vortex officers were overpaid. Schrott Sr.'s salary in 1979 was $71,906 and in 1980 was $69,787. "When asked about the corporation affairs . . . Schrott Sr. admitted he did not know anything about the inner workings of the corporation," the judge said.
* That the directors authorized political contributions to unidentified candidates in Virginia's 1973 governor's race and the 1977 House of Delegates campaign without any business justification.
* That the Schrotts enjoyed the benefits of interest-free loans and had security systems installed in their McLean homes at company expense. Vortex also footed the bill for personal travel by the Schrotts and Simmons and reimbursed the Schrotts for personal telephone expenses.
* That in 1974 Vortex forgave debts totaling about $100,000 to John Schrott Jr. for "no legitimate business purpose."