Accounting chain mired in disputes

“We lost our house, our savings, everything we had,” says Greg, 32, of Dufferin Street in central St. Catharines. “We went through hell. And the thing I still can’t believe is how much we trusted them.”

The St. Catharines Standard
December 18, 1993

Accounting chain mired in disputes
‘McDonald’s of accounting world’ faces suits totaling millions of dollars
Carol Alaimo

When Greg and Catherine Johnson handed their life savings to an accounting chain based in St. Catharines, they never suspected the financial pain ahead.

Three years and a personal bankruptcy later, the couple are still picking up the pieces after investing in a company now facing millions of dollars in lawsuits and numerous allegations of misleading business practices.

“We lost our house, our savings, everything we had,” says Greg, 32, of Dufferin Street in central St. Catharines. “We went through hell. And the thing I still can’t believe is how much we trusted them.”

Johnson, now a youth worker for Niagara Region, is one of dozens of disillusioned people in Canada and the U.S. who say they’re sorry they ever heard of Leadley, Gunning and Culp International, a firm which sells accounting bookkeeping franchises and trades on the Toronto Stock Exchange.

It is a company where some bosses are said to drive around with Bibles on their front seats, and where a man convicted several years ago in one of the largest financial frauds in Canadian history now trains some recruits.

Since 1990 in Canada alone, nearly 100 people like the Johnsons have been through the doors of LGC and back out again after plunking down $20,000 to $60,000 each for business opportunities they thought would be their tickets to financial security.

Many are former federal auditors, accountants, bankers, bookkeepers or corporate controllers who signed on after losing jobs during the recession – and many say LGC took their money but didn’t deliver what it promised.

The company says the complaints aren’t true, and is fighting nearly $7 million in lawsuits which allege LGC or its agents made fraudulent, negligent, or misleading sales pitches to attract recruits to the chain.

Meanwhile, newcomers are still signing up at the company’s Hannover Drive headquarters, unaware that most people who came before them have already bailed out.

“They told me this was a booming company,” says Suzane Cox of St. Thomas, Ont., who says she left LGC a few weeks ago on the brink of bankruptcy after buying the Leadley System, a program which was supposed to help her build a thriving accounting practice by increasing office billings.

Cox and others who sink their life savings into LGC franchises aren’t entitled to be told up front about the firm’s track record because there are no laws in most of Canada to protect franchisees.

Unlike the U.S., which has federal rules and additional regulations in many states, Canadian franchisors are free to peddle their business opportunities without public disclosure of the skeletons in their closets.

In Canada, only Alberta has law which require disclosure, and LGC hasn’t been able to sell franchises there since its licence lapsed over a year ago. In Ontario, similar laws have been discussed on and off for 20 years, but so far nothing has been done.

Disputes Embroil Accounting Chain
LGC PRESIDENT Robert Leadley of Stevensville, a chartered accountant, licensed minister and a steward in the Brethren in Christ Church, acknowledges the company he founded in 1988 has had some problems. He says the company was likely too focused last year on its now-bankrupt U.S. branch to keep some Canadian members happy.

But no one was misled, and the future is bright now that the firm is back on track, he said.

“There’s a good story here about what’s going on with a company that’s turned itself around,” said Leadley, who sent The Standard a flurry of lawyer’s letters threatening to sue while this story was being researched.

“We’ve been through a long drought of finally getting the place where things are positive and all we need now is a whole lot of negative stuff to set us back 100 miles again,” he said.

Leadley says the company’s woes were caused by two ex-executives who took over in 1992 and “ran [LGC] into the ground.”

The people complaining about his company are just looking to blame someone else for their own failures, or are trying to escape their financial obligations to LGC, Leadley said. None of the lawsuits will be successful, he predicted.

‘All of these suits have to do with (ex-franchisees) not wanting to pay us what they owe us.’
Robert Leadley

At least 96 franchisees from Ontario, Alberta, Quebec, British Columbia, Saskatchewan and Manitoba have left LGC since 1990 the Standard has found. The company says it now has 72 franchisees.

Most of the current franchisees are happy, said Leadley, who promised – and later refused – to provide a current list to The Standard, saying he would only give it to a “third party.”

Leadley says people like the Johnsons are manufacturing their tales of woe about not getting refunds or the services they were promised.

The Johnsons, who paid $30,000 to join, were “given all their money back,” she said.

After hiring a lawyer, the Johnsons got an $8,000 settlement.

LGC was once dubbed “the McDonald’s of the accounting world” and hinted its success could rival that of the giant fast-food chain.

Today more than a dozen former franchisees in Canada have filed suits or countersuits against LGC, collectively seeking almost $7 million in damages from the publicly traded company which reported profits of about $165,000 in the first nine months of this year, and losses of more than $5 million last year.

The firm also faces about $1 million in lawsuits launched by creditors, former executives and others.

The franchisees claim LGC or its agents made fraudulent, negligent or misleading representation to lure people to join, then didn’t provide them with the technical services, extensive backup help or minimum billing they were promised.

LGC is defending the cases and has launched millions of dollars in countersuits claiming that any problems a people had were their own fault, not LGC’s.

Under their contracts, members who want to leave LGC have to buy their way out, by making an “exit payment” of 50 per cent of the value of their accounting business.

“All of these suits have to do with (ex-franchisees) not wanting to pay us what they owe us,” said Leadley.

Robert R. Jason of St. Catharines, a tax lawyer who represents LGC in other legal business, says the lawsuits “are all frivolous.”

Those suing are so wrong that they’re going to end up paying LGC, not the other way around, says Jason, who is also a chartered accountant, a current director of LGC and has at various times been its vice-chairman, president and chief financial officer.

Jason and Leadley cited several examples of cases they said were currently being settled out of court in LGC’s favor.

But lawyers for the plaintiffs they mentioned say that isn’t so.

“My clients aren’t going to pay (LGC) anything,” says Toronto lawyer Harold Cohen, who represents six people suing for $750,000 each in damages, each alleging that they were misled by LGC or its agents into buying deals that turned out to be “of minimal, if any value.”

“These are serious claims, we are making. They are not at all frivolous,” said Cohen, whose clients include two former Revenue Canada auditors.

The U.S. branch of LGC was plagued through much of its existence by the same complaints and creditors disputes now surfacing in Canada, many former American affiliates say.

In at least two states, Illinois and New York, LGC was fined for selling franchisees illegally, without being registered with the government, officials there say.

Kit Becker, 47, a lawyer and certified public accountant in Boca Raton, Fla., says he and many other recruits were people suddenly unemployed at mid-life due to corporate downsizing.

They were drawn to LGC by its claim of having a proven system for building up successful practices, said Becker, a former tax manager at a Coopers Lybrand office before joining LGC in May 1990.

Some early recruits were given guarantees of making $30,000 - $40,000 in their first year of practice. If they didn’t, LGC was to make up the difference.

“It sounded like a great idea, and it was a great idea,” said Becker, who paid $50,000 (U.S.) to join. After signing, he said, he learned it was just that, an idea, with little of the corporate framework to fulfill the promises made to purchasers.

Leadley disagrees. “What they were told was there, was there,” he said.

Unwilling to see their money go down the drain, ex-affiliates say they tried to pitch in and put the framework in place. LGC also put some services in place, but never enough to go around, they said.

But improvement efforts were stymied because LGC often didn’t pay the bills that resulted and wrote rubber cheques to advertising firms, telemarketers and other U.S. suppliers.

As complaints mounted, Leadley and other executives repeatedly promised things would get better, that the firm was having growing pains and needed to re-organize, said ex-affiliates.

Eventually, LGC had a hard time selling franchises, the main source of company revenue, because members gave “dismal” reports to potential recruits, Becker said.

In 1991, LGC had 72 U.S. franchisees, the firm’s annual report says. A year later it had 44, a drop of nearly 40 per cent in one year, according to the firm that took over U.S. assets when LGC’s American arm went bankrupt.

Several ex-affiliates in the U.S. and Canada said when they tried to collect on their earnings guarantees, LGC kicked them out and said it was their fault they hadn’t succeeded because they failed to follow the Leadley System. But Leadley says that never happened.

Chartered accountant Bob Wood of Belleville, Ont., LGC’s director of client services until late 1991, says when franchisees tried to complain, LGC’s attitude was: “Go ahead and sue us if you want to, because we have lawyers on staff and you don’t, and you’ll go broke before you get any money.”

That isn’t true, says LGC co-founder Brian Gunning of St. Catharines, a lay preacher and certified general accountant.

“We believe we should honor obligations and settle fairly with people in every case and are prepared to do that in every case,” Gunning said.

Former LGC director John Thompson, head of a Toronto merchant bank which lost about $2 million by investing in LGC, says he felt part of the firm’s problem was Leadley spending so much time on church business.

Leadley has the head office of his church, Orchard Creek Fellowship Brethren in Christ, inside LGC headquarters.

Leadley says he makes up for the time spent on church affairs by working long hours at LGC.

Some LGC affiliates say they are happy with the company.

One of them is Robert James Saunders, 48, an expelled chartered accountant.

“I got more than what I paid for,” said Saunders, who has an LGC practice in Bracebridge and is hired to train the company’s recruits from Northern Ontario.

Asked why there would be so many complaints about LGC, Saunders said: “People who can’t make it have to blame someone else other than themselves.”

Memos obtained by The Standard show Saunders was once one of the leading complainers and tried to organize LGC affiliates to pressure for changes.

“I have discovered that many partners like me are having problems with LGC apparently living up to their contractual and moral obligations.” Saunders wrote to fellow members in October 1991. “Existing management appears to be sadly out of touch with many (members).”

These are serious claims we are making. They are not at all frivolous.’
Harold Cohen

Saunders refused to comment on the memos.

In 1984, Saunders pleaded guilty to 12 counts of fraud in the collapse of Argosy Financial Group of Canada Ltd., a scheme where investor funds went into bogus mortgages and into the pockets of Saunders and other Argosy officials.

He was sentenced to three years in prison for his part in the $24 million financial fraud which fleeced more than 1,600 victims.

Saunders refused to comment on his background and wouldn’t say if the recruits he is training are aware of his criminal past.

Jason said Saunders has paid his debt to society and his past is of no concern to LGC.

Chartered accountant, Dianne Chandler of Havelock, Ont., says she’s satisfied with what she has received from LGC.

“I don’t feel they’re being deceptive about anything they’re doing,” said Chandler, who joined in 1991.

Several current members said they were unhappy in the past, but said LGC seems to be making an effort in recent months to straighten things out.

“I’m not ecstatically happy, but I believe they are trying to correct their mistakes,” says Robert Sass of Port Elgin, Ont., a certified management accountant.

But some current members aren’t satisfied.

Leonard Tam, a certified general accountant in Ottawa, said he was insulted when LGC recently sent members a memo offering $500 for each recruit they could bring in.

“If they gave me $20,000, I wouldn’t get anyone else involved in this thing,” he said.

In Ontario, chartered accountants are policed through the Ontario Institute of Chartered Accountants, a self-governing body which disciplines wayward members of the profession.

In June, the institute fined ex-LGC affiliate Earl Somerville of Oakville $1,500 for professional misconduct for his use of LGC’s telemarketing plan.

Under the profession’s code of conduct, members are not allowed to solicit clients away from another chartered accountant.

To comply, they must start their telephone call by asking if the person already has an accountant, and end the call if the answer is yes.

Somerville and several other chartered accountants interviewed say LGC encourages its members to aggressively solicit without regard for OICA rules.

Leadley said LGC believes the rule on telemarketing is unconstitutional, and hopes one of its members will become a test case to challenge the issues.

Late last year, a Brampton chartered accountant contacted the OICA to complain LGC had misappropriated the money be paid for practice insurance.

Garry Higgins said LGC offered the insurance, sent a bill and cashed his $518 cheque. But a few months later he got a notice from the insurer that the policy had lapsed due to non-payment.

When LGC refused to refund his insurance money, Higgins sued in small claims court and won. “It is clear from the evidence that the money sent in for insurance was not applied to same,” the judge’s ruling says.

Leadley said Higgins owed the company royalties, so LGC took the money for insurance and applied it to the royalties he owed, which meant the cash ended up in company coffers.

Asked if that was legal, Leadley said: “I don’t know but it probably wasn’t a good idea.”

Peter Carroll, OICA will take another look at Higgins’s case as a result of the judge’s ruling.

Under Ontario law, the institute has no jurisdictions over a company and can only discipline individual chartered accountants, Carroll said. That law is expected to be changed, although it isn’t known when.

When Somerville’s discipline case is written up in the OICA newsletter, it will specifically mention he was “formerly involved with an international accounting franchise organization.”

Douglas Low, general director of standards enforcement and self-regulation at OICA, acknowledged the wording ordered by the discipline committee is a reference to LGC.

The committee likely took the step as “a bit of a warning to other members to be careful who they get attached to,” Low said.

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