9 Jwrec Subs Pleads Guilty

The former owner and CEO of a chain of 40 New York-based Jreck Subs restaurant franchises, now faces 20 years in prison and a $250,000 fine for defrauding lenders and investors of up to $25 million. Christopher Swartz recently plead guilty to wire fraud and tax evasion in federal court, as well as to making false representations to lenders and investors. He is also charged with wire fraud and tax evasion in the amount of at least 3.5 million.

Franchise owners in and around Watertown, New York intend to continue operations without interruption as they insist that they are separate entities from the parent company. They are, however, concerned that the adverse publicity surrounding the company’s founder could have an adverse effect on brand loyalty and thus sales.

It is unclear at this time how the financial settlements against the company’s founder will effect franchisees. Changes in the corporate ownership could come with a change in the franchise agreement. More worrisome for the franchisees, is how far the Internal Revenue Service will pursue restitution against the company’s assets, which could include the franchises themselves. Swartz stated in his guilty plea that he had created a complex co-mingling of his company’s assets to keep them out of the reach of creditors, lenders, and franchise investors. Businesses were renamed multiple times, cash payments became a norm, and multiple bank accounts were used indiscriminately between all of the businesses. All of these tactics make it hard to trace the actual ownership of the company’s assets.

This case underscores the need to hire an experienced and knowledgeable franchise attorney to review the franchise agreement with you before you potentially learn an expensive lesson the hard way. If promises are made in the franchise agreement for higher than market rate returns, or guarantees of future sales and profits, you should be immediately skeptical. While franchising continues to offer excellent benefits for business ownership, there are unscrupulous franchise owners out there and you need to do your due diligence before investing.