Scotty's Brewhouse founder facing lawsuits from investors

MUNCIE, Ind. — Scott M. Wise, the founder of the Scotty's Brewhouse restaurant/breweries chain, is facing two securities-fraud lawsuits claiming he deceived investors.

A Yorktown native who started the chain in 1996 near Ball State University, Wise is being sued in a Marion County Superior Court and in U.S District Court in Fort Wayne.

In connection with a federal Chapter 11 bankruptcy case, Scotty's Brewhouse locations in Muncie, Carmel, downtown Indianapolis and Waco, Texas, have recently closed, though Wise sold the company to Arizona-based Due North Holdings in late 2016.

A lawsuit was filed Tuesday against Wise in Marion County on behalf of two shareholders who claim they were cheated out of $1 million. In November, Wise was sued in federal court on behalf of an investor who alleges he was defrauded out of $300,000.

Through his attorney, Jason Fulk, Wise told The Star Press that he did not mislead any investors and that he plans to defend himself against such "false accusations and show that at all times I acted in the best interests of the investors."

Between 1998 and 2016, "Wise embarked upon a relentless and obsessive campaign to position Scotty’s Holdings for a private equity sale, which Wise believed would require approximately 20 or more restaurants," according to the Marion County lawsuit filed by Fishers attorneys Christopher P. Jeter and Marietto V. Massillamany along with Indianpolis lawyer James A. Piatt.

They are representing investors Michael Murray of Indianapolis and Mark Bosler of Fort Myers, Fla.

"During the financial crisis of 2008, with Wise deep into his aggressive growth plan, institutional lenders began to restrict his access to capital," the lawsuit goes on. "Wise borrowed money from friends and acquaintances until those sources of revenue were exhausted, and/or the prospect of repayment became untenable. Wise then began to pursue individual 'investors.' "

By early 2016, Wise realized that his efforts to expand Scotty’s Holdings to position

it for a sale "had stretched the company thin financially and that he needed to find a buyer soon," the lawsuit says.

After becoming significantly in debt to Bosler, Wise convinced him to convert the debt to equity, promising Bosler that he would “double his money” in a year and that the equity sale of the Scotty's chain would total $20 million, minus $5 million in debt, the lawsuit claims.

Wise reportedly told Murray the same story, asking him during the second quarter of 2015 whether he wanted to “own a restaurant or make some real money.”

"Wise then told Murray that Scotty’s Holdings had received interest from some private equity firms and that a broker had been shopping the company to these firms with some

very promising numbers being discussed," the lawsuit alleges. "Wise told Murray that the selling price would be $20 million, which would include expiring the company’s $5 million debt, for a net sale price of $15 million."

But during a November, 2016 call, Wise "officially — and for the first time — informed

Murray that the terms of the deal had in fact changed, and that Scotty’s Holdings would be sold for $10,000,000 and that the company’s debt was $8,000,000."

► From 2016: Scotty's up for sale, reportedly for $20 million

In connection with the transactions with Bosler and Murray, Wise made "one or more untrue statements of material fact and/or omitted to state material facts necessary in order to make the statements not misleading,"the lawsuit complains.

The investors claim Wise unlawfully sold Murray and Bosler securities in Scotty’s Holdings that were not federally covered securities; the securities were not exempt from registration under Indiana law; and the securities were indeed not registered under the Indiana Securities Act.

In his statement to The Star Press, Wise responded: "Mr. Bosler invested in Scotty’s Brewhouse in 2009. Nine years later, in 2018, was the first time he ever suggested, through his lawyer, that I had somehow misled him in connection with his investment. The same can be said for Mr. Murray, who invested in 2015.

"Mr. Bosler and Mr. Murray each voluntarily invested in Scotty’s Brewhouse. When they invested, each of them acknowledged that he was offered access to all company information prior to investing and that the investment came with risk. When the investors sold their ownership interest in Scotty’s Holdings, LLC in 2016, I owned 71 percent of the company.

"Unfortunately, the Scotty’s Brewhouse chain experienced financial difficulties that adversely impacted the return to all investors, including me. With respect to my ownership interest, I have been treated no differently than the other investors."

Meanwhile, Steve Cibor, a Florida resident, is the plaintiff in the federal court case pending in Fort Wayne.

In or around early 2014, Wise convinced Cibor to invest $300,000 in the Carmel Scotty’s, which subsequently did not perform financially as projected by Wise, according to the lawsuit.

The litigation quotes text messages Wise reportedly sent to Cibor in 2015:

• “At some point we should talk about moving your equity from the Carmel location into the holding company that owns all the restaurants.”

• “Like I said I want to take care of you and my goal is to sell the entire company to private equity in the next couple years. Either way you will get taken care of but I think the payday will be bigger if you are in the holding company instead of a single

store level.”

The suit claims: "In soliciting plaintiff (Cibor) to invest in Brewhouse, Wise did not disclose his intention to utilize Plaintiff’s investment to fund start-up costs and initial losses so as to benefit Wise’s actual goal of expanding the number of restaurants owned and operated by (Scotty's) Holdings so that Holdings could grow the size of its operation at the expense of Plaintiff as an early investor in just one of the restaurant locations. In turn, this Holdings interest was converted to a worthless security."

The suit goes on to say, "Plaintiff’s investment was merely utilized to fund initial losses for the eventual establishment of multiple locations for the Holdings enterprise."

The statement Wise made in regards to the Marion County litigation also applies to the federal-court lawsuit. Wise denies misleading any investors and plans to vigorously defend the lawsuit.

Contact Seth Slabaugh at (765) 213-5834 or seths@muncie.gannett.com