How can banks get away with repeatedly and knowingly lending into crapola franchises?

September 20, 2008

It ain’t called a bank shot for nothing.

It’s as simple as Richard Solomon explains over at Blue MauMau.

First, Richard spells out the weasel play in an article named The Complicit Loan Broker In Franchise Fraud. [Whether there is a broker or not doesn’t matter.]

It is common practice in franchising for a franchisor, especially a fairly new franchisor, to steer its franchise investors to a particular loan broker, and sometimes even to a particular bank. It is also fairly customary for the loan broker or bank to pay the franchisor for the “traffic”.

The information in the business plan always comes from the franchise sales/marketing people of the franchisor. The franchisee has little or no input in the whole matter other than to sign what is put before him by the loan broker without reading it or with scant attention being paid to it. The information is almost always false in the sense that it is full of exaggerations, to put it nicely, and the pro forma financial information has little or no basis in fact.

Richard goes through the details and asks rhetorically with knowing what the answer is:

What is the likelihood that a franchise investor, on these facts and with this testimony, will get a favorable verdict? Anyone care to guess? Since it may be a somewhat novel case, what is the likelihood that a favorable verdict will be upheld on appeal? Anyone care to guess?

And when Michael Webster asks a pertinent question:

How can the franchisor provided information to the loan broker, an agent of the franchisee, which amounts to an earnings claim when the franchisor disclaims making earnings claims in their Item 19?

Richard goes on to explain:

In the mind of the jailhouse lawyer crooked franchisor, providing information to help a franchise investor obtain a loan and complete a business plan (which it all total crapola anyway), is not considered (by them) to be the making of an earnings claim. In the weasel word play of franchising there is the FDD, and then there is everything else. The position that we weren’t defrauding the franchisee; if anything we gave the bank false information by providing it for the franchise investor’s business plan, is not just some cynical homorous thaing I made up. That’s how it really goes down.

It is useful to read the whole thread and then keep an eye on the posting.

Here’s a clip from one comment (named appropriately Hindsight) that has shown up:

How I wish I had read an article like this 12 months ago. This type of article should be covered on a major publication small business section.

Betcha wish you had read this article before signing up, eh?

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Collusion allegation: AUS bank and franchisor

September 18, 2008

In a Smart Company article by James Thomson called MP renews calls for investigations into mistreatment of Bakers Delight franchisee, he quotes:

NSW parliamentarian Joanna Gash has renewed calls for the Australian Federal Police to launch an investigation into accusations Bakers Delight and ANZ bank colluded to put a franchisee out of business.

Quoting emails between the franchisor and the bank, Gash alleges:

On Monday, Gash revisited the case in Parliament, producing emails from Bakers Delight chief financial officer Richard Taylor and ANZ executives that she says shows “plans had been conspired to terminate Ms de Leeuw’s franchise well ahead of time”.

The bank and franchisor deny all the allegations.

This is the first public AUS public allegation of the key franchisor:franchise banker relationship that I identified and wrote about in a 2005 paper for Industry Canada called Franchising Opportunism [free download].

The Royal Canadian Mounted Police did a 10 month investigation of a related predatory franchise lending matter. [free download: Mounties investigate ‘predatory lending’, Ottawa Citizen, March 25, 2006]

And Mr. Oudovikine is accusing the bank of transferring the loans to Country Style without his authorization before he had a chance to obtain a business plan and other financial details from Country Style.

Mr. Oudovikine says his case shows how big banks, franchisors and franchise brokers team up to take advantage of franchisees, many of whom are recent immigrants like him.

“It’s predatory lending. (CIBC) didn’t do any of the due diligence they should have done,” says Mr. Oudovikine, who sent the Citizen e-mails confirming the RCMP investigation. An RCMP official said the police force doesn’t confirm or deny investigation.

And the Canadian bank’s reaction?

Mr. Oudovikine says he has repeatedly contacted senior CIBC officials and executives about the loan dispute, to little effect. He alleges that CIBC breached the Canada Small Business Financing Act regulations that require lenders to conduct due diligence on borrowers, including their ability to repay loans.


Les Stewart: Air Force brat

September 3, 2008

RCAFEmblenI was born in 1959 on a Royal Canadian Air Force radar station, CFB Sennetere, Quebec where my dad was stationed. He was a Chief Warrant Officer and made 22 Atlantic ocean crossings during WWII. They gave him an Atlantic Star medal and a gun as the ship’s purser.

Dad retired at CFB Borden in 1961 because it was close to his hometown of Paris, Ontario and my mom’s Ukaranian relatives in Toronto. The service was very good for men who came of age in the Great Depression. The house my mom and dad bought on Bayfield Steet was financed through the DVA.

I guess it is unusual for a non-commissioned air force officer to be given a navy medal. He prepared flight crews in Canada under the British Commonwealth Air Training Plan. My Dad trained commonwealth flight crews in Canada and brought them over to England.

The British Commonwealth Air Training Plan Agreement, between Canada, the United Kingdom, Australia and New Zealand was signed in Ottawa on December 17, 1939.

My mom was in the RCAF Women’s Division a corporal and a teletype operator in London, England during the war. She enlisted because it seemed much more exciting than farming the 1,000 acres of her father’s wheat farm in Ste. Agathe, Manitoba. My Uncle Jerry was lucky: he was old enough to work in Poland during the war. Just the forearm tattoos. I never got a chance to know Dad’s brother Neil.

My oldest brother was in the Canadian military for over twenty years. He retired as a major after graduating from the Royal Military College of Canada, RMC and Purdue University. Keith wore an iron ring. Gary, next in line, spent a short time at Royal Roads.

Business, especially big business, is now organized like an army. It is, as some would say, a sort of mild militarism without bloodshed; as I say, a militarism without the military virtues. G.K. Chesterton

RCAF: per ardua ad astra, “Through Struggle to the Stars”

RMC Yearbook 1968

RMC Yearbook 1968

Clan Stewartvirescit vulnere virtus, “Courage grows strong at a wound”

Keith siblingsThanks to Brent for the story and Keith’s photograph.

Keith Cold Lake PIpeband

Keith Comendation


Sue Big Franchising: franchisor, lawyers, lenders, sales agents, developers

September 2, 2008

Neil Hickman, with wife Michelle and their children Lewis (6) Lauren (11) and Holly (10), moved here from the UK for a better life but have lost their life savings after investment company failures. Photo / Martin Sykes

Good job: Naturally, raise enough doubt to have the contracts set aside as unenforceable because they were based in fraud.

More body parts are washing up on New Zealand’s shoreline in the continuing Blue Chip scandal.

See my post on the family on the left, Kiwi scams touch all classes of immigrants and the New Zealand Herald’s original article, Immigrant banker put $1.7m in Blue Chip).

The Herald says this week:

The investors claim the agreements are unenforceable.

They say Greenstone and the Blue Chip group had an agency relationship, including a profit-share arrangement. They are also taking action against three Blue Chip-recommended lawyers over the advice they gave – Jonathan Mathias, Zeljan Unkovich, and Hamilton firm Foster, Milroy & Turketo.

Okay but Jenni McManus and BusinessDay.co.nz really gets into the details in Blue Chip investors sue their lawyers:

Eight out-of-pocket investors in bankrupt property company Blue Chip are suing their Blue Chip-recommended lawyers for breach of duty for their handling of millions of dollars worth of apartment purchases due to settle within weeks.

They say lawyers Jonathan Mathias, Zeljan Unkovich and the law firm Foster Milroy & Turketo who habitually did Blue Chip work, were recommended to investors for legal advice when buying apartments in the Barclay development in downtown Auckland about two years ago.

The investors claim they were dissuaded from using their own lawyers by Blue Chip, who they say told them its property schemes were complex and their own lawyers might not understand how they worked.

But Mathias, Unkovich and Foster Milroy & Turketo regularly did Blue Chip-related work and knew how the schemes operated, the investors say they were told. Some say Blue Chip threatened not to pay their legal fees unless they used lawyers Blue Chip recommended. Specifically, the plaintiffs allege the lawyers failed to advise them of the implications of the transactions they were signing or to give them any advice about the documentation.

So its the lawyers and franchisor only? No: Here are the lenders, sales agents…

The claim is part of the first significant lawsuit against Blue Chip. Other defendants have been named as Greenstone Barclay Trustees, GE Custodians (a lender), Tasman Mortgages and Executive Mortgages (mortgage brokers) and Blue Chip associate Bribanc (now know as Vault Realty).

Fraud claims have been brought against Tasman and Executive, where it’s alleged one or both fraudulently altered the loan documentation for one investor whose income was misstated, and mortgages were obtained from GE Custodians on the basis of fraudulent conduct.

…but last if not least, the property appraisers.

Described by Dale [Paul Dale, the Hickman’s lawyer] as naive and unsophisticated investors, the Hickmans also relied on a valuation from Blue Chip associate Bribanc Real Estate that they did not even see. Dale is arguing that, as with several plaintiffs’ properties, their apartment was over-valued.

They are seeking an injunction and although I am not a lawyer they appear to have to satisfy a pretty low legal standard:

…all the plaintiffs need prove is that they can mount a credible argument against the developers and Blue Chip.

Whatever happens, there were no aligned interests or a conspiracy to commit fraud. Only a nut-job would ever think such a thing.


Green Acres fraud triggers Kiwi franchise review?

August 19, 2008

This is an interesting article by Nevil Gibson in The National Business Review: Franchisers face prospect of regulation.

Nevil Gibson starts of with:

The Green Acres franchising scam, in which dozens of new migrants from China and India were bilked of millions of dollars, has sparked a government clampdown on the sector.

Commerce Minister Dalziel [picture] is quoted as saying:

“I was actively involved in meeting with franchisees at the beginning of the year who had been caught up in what is an alleged fraud and still subject to investigation by the relevant authorities including the Franchise Association of New Zealand (FANZ).

As a bit of a reminder to viewers:

In May, the NBR reported the Green Acres Group – the country’s largest franchiser – had recovered from the $4 million fraud, which involved an individual selling a home ironing franchise to several hundred investors for more than $20,000 each.

The media reason given is Green Acres but the Discussion Paper cites a total of 3 reasons:

  1. information imbalance [assuming more of the same pre-sale disclosure information will help],
  2. cost of any remedy [keep litigation but make mediation mandatory], and
  3. reputation damage that interferes with the franchise industry’s ability to sell, sell, sell.

Curious how the wrong that seems to get the most attention is the negative publicity drag on the head office as opposed to the $4-million cash lost to the recent immigrants.

Time will tell if this proposed regulation turns out to another McLaw: the illusion of franchise investor protection. A cynical interpretation makes this spin designed to get past the next election.

  • One great suggestion is a requirement for every franchise system to join the FANZ and be held accountable to its Franchising Code of Practice [download pdf].
  • Mandatory legal advice would be a real step forward, too. [A Certificate of Independent Legal Advice from both spouses to make a franchise agreement enforceable.]

These standards would apply to all members of the FANZ community [lawyers, accountants, consultants, salespeople] and not just to the franchisors. Right?

It would be a shame to have salespeople or consultants not being responsible for their advice let alone the professionals [franchise lawyers and accountants] who have an existing statutory duty of care to provide prudent advice.

It would seem a shame to maintain the fraud incubator where a Blue Chip v2.0 can flourish [ie. defrocked professional uses franchising as a mask and liability shield that causes thousands of the most vulnerable to lose their homes].

The standard when evaluating public official actions is, if I recall correctly:

  • knew or
  • could have been reasonably been expected to know.

Blue Chip in government hot water since 2005

July 23, 2008

Another in a series of terrific articles by The New Zealand Herald on the Blue Chip mess.

This time, it seems the government was fiddling while Blue Chip investors’ money was burning.

Maria Slade reports today that two brief cases of original documents were handed over to property consultant Olly Newland [left] who has been helping the victims and the Serious Fraud Office.

It appears the Inland Revenue Department was pressuring the Blue Chip group of companies for income tax payable in 2005.

The documents – 40 or 50 files in their original folders – reveal that the Blue Chip property investment group was being pressured by Inland Revenue over hundreds of thousands of dollars in unpaid tax as far back as 2005.

The group did not fall over until early this year, when 22 of its companies were placed in liquidation owing around $84 million.

So a government agency was having a tough time with Blue Chip company 2 to 3 years before the whistle was blown? I wonder how many people got burned after the government knew or should have known there was a public risk?

Every public servant [civil servants, Oath of Allegiance, Parliamentary Oath & Executive Councillor] swears an Oath of Office to serve Her Majesty Queen Elizabeth the Second.

  • Presumably, QEII would frown on enabling a theft of $84 million from 2,000 of her loyal subjects [many of whom were old enough to remember her coronation].

Somebody knew something. They reported their suspicions properly. Somebody else did nothing because it would have been embarrassing politically to pull the plug, even though that was their duty to do so.

Some of the two thousand Kiwi were sold down the river to avoid a political scandal. The Blue Chip fiasco was not an accident: This was perfectly predictable and made worse by government inaction. The scammers had some very good friends in high places, I think.

For example, Simnel Ltd – a company associated with Blue Chip founder Mark Bryers – was under pressure to pay a tax bill of $226,806.

As Newland said:

“It was all happening long before the whistle was blown.”

Note: It is my experience that federal public servants are meticulous in documenting that they had informed their political masters about a likely tax loss. They know their duty and they knew there was a vulnerability [public hazard] in failing to regulate non-bank lenders.

There exists a paper trail from the Blue Chip tax problem into the political elite. Unless I miss my guess, all roads lead to the office of the Prime Minister of New Zealand.


Sue the enablers: lawyers, appraisers

July 9, 2008

Good news for the thousands of Kiwi real estate investors who have lost +$80 million from a tanked franchise system.

I like it. I like it a lot.

Sue the practicing attorneys with the greatest legal duty and insurance rather than the smarter, former one who is in Oz now.

  • Want to pretend fulfilling your fiduciary duty to a client?

Okay.

  • Let’s e-publish a list of the defending solictors and their law firms.

Auckland law firm Ellis Law is trying to take legal action against the lawyers and appraisers who helped convince senior citizens to sign up for some very high risk, fuzzy logic investments.

Ellis Law principal Brian Ellis said there were a number of concerns surrounding the solicitors’ actions, including:

  • The size of the deposits investors were required to make.
  • The immediate release of investors’ deposits.
  • The lack of explanation in the documentation about who actually owned the property and who was developing it.

But some things stay the Same: And what is the government doing when asked by Ellis and Paul Dale to help centralize and co-ordinate claims?

Other than acknowledging the lawyers’ request the Government has not yet responded.

There is still lots of work to do.

Ellis said many affected Blue Chip investors could not afford the $2000 retainer the lawyers were charging. “We think there’s a large number who have done nothing.”

He knew of people in their 70s and 80s who had no idea what to do, and who were struggling to even write a straightforward narrative of their situation.

Anyone that waits for any western government to help out when the inevitable and predictable fraud sausage blows up, is a damn fool.


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