Asst. treasurer accused of stealing $3.3M at eatery chain

Alexander Coolidge | The Cincinnati Enquirer

CINCINNATI — The nation's largest Big Boy franchise is accusing a former high-level executive of embezzling at least $3.3 million in the past seven years.

In a regulatory filing Tuesday, Frisch's Restaurants (NYSE: FRS) said it has sued Michael Hudson, its former assistant treasurer and a company veteran of 32 years.

Criminal charges have not been filed against Hudson. Hudson did not respond to multiple calls at his home or on his cell phone and was not at his house Tuesday when a reporter visited. A woman at his home who identified herself as his mother said he wasn't home and declined comment.

The company said it discovered the alleged theft in late December after an internal audit revealed discrepancies. It also disclosed findings of an internal investigation to the U.S. Attorney's Office in Cincinnati last week for potential criminal charges.

Chief Executive Craig Maier says the alleged theft has rocked the close-knit company that operates 96 diners in Ohio, Kentucky and Indiana and employs 6,100 workers.

At the corporate offices, Hudson was unassuming but helpful and occasionally sent co-workers pictures of jackpots he won at the Horseshoe Casino downtown. Unbeknownst to colleagues, some years he allegedly embezzled so much he took home more than Maier.

"It's like a family member did this to you," Maier said. "You take it personally. You wake up in the middle of the night and say 'I can't believe he did this to us — to me.' "

The scandal comes as Frisch's looks to reignite growth and investors have showed renewed faith in the company. The news rattled investors: By Wednesday's close, Frisch's stock dropped 4.6% or $1.27 to $26.36 per share.

Maier is skeptical the company will recover any of the missing money but doesn't believe it will have to restate results. That's because Hudson already booked most of his alleged theft as expenses.

Frisch's expects some employee theft. It fires workers every week for stealing, usually a cashier with sticky fingers or wait staff that neglects to charge friends.

The embezzlement was so large that it lowered company profits by about 5% over seven years, Maier said. In the past seven years, Frisch's has booked annual profits from $2.1 million to $10.7 million.

A helpful coworker who didn't stand out

Hudson raised no red flags, Frisch's officials said. He started at the company before graduating from the University of Cincinnati and spent his whole career in the accounting department. He steadily rose to become assistant treasurer in 2004.

For more than a decade, he was one of the top nine corporate officers at the restaurant chain.

Hudson didn't drive a flashy car or live in a lavish home. He blended into Frisch's low-key atmosphere. He had his own office, but like most top officers, he mostly kept the door open.

"He's like every accountant you ever met: boring," Maier said.

But Hudson was also helpful: Somehow he ended up doing work for colleagues that might have exposed his alleged theft.

Frisch's officials are still trying to figure out how Hudson allegedly managed to program the company's payroll computer to pay himself hundreds of thousands extra annually. The company says he then hid the depleted cash by forging internal and vendor statements to show higher costs at stores.

The missing money wasn't noticed because they were recorded as expenses spread throughout the year and across almost 100 stores.

Frisch's accuses Hudson of stealing about $500,000 a year.

Discrepancies, then millions found missing

A routine review of records in mid-December uncovered discrepancies. A new worker conducting a internal audit got credit-card transaction records from the processing company that did not jibe with Hudson's records.

A Dec. 17 meeting was scheduled to figure out the discrepancies. Hudson abruptly resigned 5 minutes before the meeting, turned off his computer and left.

Frisch's scrambled to investigate. An initial review suggested hundreds of thousands of dollars were missing. Then it was millions.

In a January meeting, Frisch's officials say Hudson admitted to auditors and a private investigator that he took the money. He lost track of how much.

He said he worked alone. He also was broke.

Hudson claimed he gambled it all away, Maier said. But Frisch's officials think all the money might not have been lost gambling.

Auditors discovered thousands of dollars in withdrawals from Hudson's personal accounts at the Horseshoe Casino Cincinnati, Maier said. But they also found that Hudson purchased more than $400,000 worth of land — 19 different properties — vehicles and some jewelry.

Through its lawsuit, Frisch's plans to subpoena Horseshoe Casino video and other records to determine how much Hudson lost there. Company officials suspect Hudson might have used gambling as a cover to hide money he spent elsewhere.

"Gambling is either a serious problem or a cover," said Jay Kennedy, a criminal justice professor at Michigan State University who specializes in crimes against small businesses. Kennedy said embezzlers do all sorts of things with stolen money from saving it all in an account or investing it to blowing it all on the high life.

Besides a couple of traffic violations a decade ago, a background check of Hudson reveals no bankruptcies or other legal problems.

Hudson's three-bedroom, two-bathroom house is one of many modest split-level and ranch homes built in the 1970s on a narrow, quiet block in Union Township, Ohio.

A fence walls off his back yard. Three cars, a truck and van were parked in the driveway Tuesday.

Though not accused of wrongdoing, Hudson's wife, Pamela; an outside business partner, Wayne Pyles; and two outside businesses that Hudson was partner in are named in the lawsuit as having benefited from diverted money.

Getting back to selling hamburgers

Frisch's officials hope the damage is done. It's unclear how shareholders will react or if regulators might take some action.

So far this year, Frisch's stock had outperformed full-service restaurant chains rising 5.2% to $27.63 as of Friday's close. The chain has seen more investor interest since 2012 when it sold off its unsuccessful Golden Corral operations.

Frisch's already has made changes to its accounting procedures and will make additional improvements after auditors and investigators complete their work, Maier said.

If Hudson failed to report all his income to the Internal Revenue Service, the tax agency would be first in line to collect from recouped money.

Frisch's officials said the company will cooperate with the U.S. Securities and Exchange Commission should the agency decide to review or investigate the incident.

Dale A. Oesterle, a professor at the Ohio State University with expertise in securities law, said Frisch's was doing the right thing by being transparent about the case. Still, he noted the company will face extensive questions from at least four regulatory agencies: the U.S. Department of Justice, the SEC, the Ohio Attorney General and the Ohio Division of Securities.

"They've got to convince all the government agencies that they've cleaned house," Oesterle said. "This was more extensive than somebody dipping into petty cash."

Oesterle virtually guaranteed a civil action on behalf of shareholders against Frisch's.

"A plaintiff's attorney will look at this and sue for sure," Oesterle said, adding that Frisch's relatively small size may deter some lawyers who would want a bigger payday.

Looking ahead, Maier says Frisch's operations are running smoothly. Sales are up for the 12 months ending September 2014 and the company is virtually debt free.

"We want to get back to selling hamburgers now that I don't have a thief on the payroll," Maier said.