The two behemoth hedge-fund investors that bailed out Denver’s beleaguered Quiznos in 2012 say they were duped in the deal by the sandwich chain’s owners and executives.
Multibillion-dollar hedge funds Avenue Capital and Fortress Holdings — the largest lenders to Quiznos during several years of financial flailing — argue that father-son owners Richard and Rick Schaden and six of the company’s executives conspired to overvalue the sandwich chain in a 2012 restructuring, according to civil lawsuit filed in U.S. District Court in Denver in late July.
That refinancing deal saw the Schadens give up control of the sandwich chain they took over in Boulder in 1991, delivering Avenue Capital 72 percent of the company in exchange for a $150 million cash infusion and forgiving roughly $300 million of Quiznos’ $875 million debt.
Avenue and Fortress say that deal was fraught with Schaden-forged fraud, costing the hedge funds “hundreds of millions of dollars,” according to the lawsuit. Citing apparently leaked internal e-mails and memos from 2011, the investors allege company executives obscured store closures, manipulated earnings, hid shortfalls and floated “excessively aggressive projections” to prod the investors into buying the company.
“As a direct and proximate cause of the executive defendants’ fraudulent scheme, the investor plaintiffs suffered substantial damages because of their purchase of Quiznos’ securities,” the lawsuit claims.
The Schadens are the investors behind the USA Pro Challenge, a professional, seven-stage bike race that begins its fourth, week-long traverse across Colorado on Aug. 18. The race costs $10 million to $11 million to stage every year, but annual losses have fallen from $9 million for the inaugural race in 2011 to $2 million in 2013. The race is pacing to be profitable in 2015, Rick Schaden told The Denver Post last spring, calling the race “a long-term play.”
Liz Brady DiTrapano, a spokeswoman for the Schaden’s Consumer Capital Partners, said in an e-mail that the lawsuit has “absolutely no connection to, or impact on the race whatsoever, which remains strong and continues to attract interest from world-class riders, sponsors and fans.”
The lawsuit alleges Quiznos executives and its board raised food prices on franchisees to offset declining profits, a move that spurred a wave of lawsuits by franchise owners in 2013.
Quiznos has a long history of legal actions filed by franchise owners alleging the struggling sandwich chain’s owners increased profits at the expense of independent store owners. In 2009, the Schadens paid $95 million to settle class-action lawsuits leveled by several thousand franchisees who argued the chain mistreated its store operators.
The Schadens and their business partners have grown their Smashburger chain into a nearly 300-store empire in seven years and this year launched the upscale pizzeria chain Live Basil.
In March, Quiznos announced a Chapter 11 restructuring as it struggled under a $570 million debt load.
At its peak in 2007, there were almost 5,200 Quiznos stores, and the company reported pre-tax earnings of $184 million. By 2011, the number of stores fell to 3,000 with earnings of $99 million.
There were a little more than 2,000 stores late last year.
In a statement e-mailed to The Denver Post, spokeswoman DiTrapano said it is “absurd to suggest that these self-described incredibly sophisticated investors” that specialize in buying debt-distressed companies could be misled.
The Schadens and other executives gave up equity in the company in January 2012 and “certainly can’t be faulted for the company’s performance since that time,” DiTrapano said.
“We believe this lawsuit is a transparent attempt to shift responsibility for a failed investment and provide cover for Avenue and Fortress with their investors,” DiTrapano said. “There was no fraud, no misleading projections and no possible motive for the Schadens or the board to mislead anyone.”
Jason Blevins: 303-954-1374, jblevins@denverpost.com or twitter.com/jasonblevins
