When Gatekeepers Fail.
The investigative television show W5 has a terrific undercover story about Reza Solhi and his merry band of franchise bandits, CTV.ca | Taking Your Dough. (Disclaimer: I am the lawyer shown in the video representing some of Mr. Solhi's victims.)
Mr. Solhi is depicted as a one man wrecking show, bilking new Canadian out of hundreds of thousands of dollars. A partial list of those judgments can be found at www.anthonysfranchiseinformation.com.
One may wonder if Mr. Solhi's fraud had anything do with franchising, or was franchising simply a vehicle for his fraud?
The disturbing part is what was not shown: who facilitated Anthony's Kitchen's entry into the United States franchising system? Did he sneak across the border, looking for a couple of quick financial hits? Did he have a Uniform Franchise Circular Offering? How could he expand without one? Did he have some two bit law firm put together a UFOC from a template?
No, I have reviewed Anthony's Kitchen's UFOC. It was put together by one of the top flight U.S. franchise law firms, and it is professionally done. Of course there is one slight problem: there is no mention of the numerous criminal fraud charges, nor is there any indication that Solhi has ruined a number of Canadians. Yes, some but not all of the lawsuits are mentioned, and given a suitable pro-franchisor gloss.
But if you are one of the top flight U.S. franchise law firms, why on earth would you risk your reputation assisting Solhi's entry into franchising? For a fee? The UFOC fee cannot be more than $30k to $40k. Is your international reputation worth so little that you will risk it to assist Solhi?
One of the real dangers inherent in a due diligence law scheme, where information is provided to investors for their own investigation, is when the gatekeepers -the professionals who assist in compliance- are either lazy, conflicted, or just don't give a damn anymore.
The most spectacular examples of this were the accounting scandals, which recently ended with a number of directors and officers going to jail for fraud. The accounting frauds at essence were simple lies about how much money had been earned - complex because of how the lie was put together to pass mustard for the regulator.
But those accounting firms were asleep at the wheel - for various reasons, notably fees for service, the accounting professionals became passive gatekeepers. "Oh, heck, I think that this is all bogus, but if we disclose it, say in a couple of footnotes, then that is all we need to do."
The most telling moment in Jeff Skilling's trial happened at the beginning: Skilling said he was just sick when he learned how Fastow was hopelessly conflicted, and the amount of money Fastow was stealing from Enron because of how the partnerships -which helped Enron disguise its losses- were set up. Apparently, he reached this judgment after minutes of reviewing the partnership documents.
I don't know whether the Solhi UFOC was an aberration or not, but Jim Coen at the highly regarded franchise portal, Blue Mau Mau, argues that
"There is a perception that franchising is a relatively low-risk entry to entrepreneurship because the franchiser provides benefits such as name recognition, bulk buying rates and advertising. But, the reality is that no two franchises are alike and while some provide tremendous value to a franchisee others don't. The franchises that do provide the value are worthy investments, the ones that don't stay away from and hide!
The proposed Franchise Rule changes don't do enough. The FTC should raise the bar and require certain minimum standards for a franchise to be able to start offering franchises for sale."
Those involved in facilitating the entry of franchisors into the economic system ought to worry that this low level of minimum standards is going to attract legal liability because of their deeper pockets.
