Joseph Smith, of Fishkill, New York, along with co-conspirator Dennis Mason, understated startup costs, overstated the number of franchises operating, and exaggerated the financial success of existing franchises to potential franchise owners, the Department of Justice (DOJ) said in a press release.
Smith and Mason advertised the sale of franchises for New York Bagel on Craigslist, at least in Washington state and Maryland. The duo charged potential franchise owners fees ranging between $7,500 and $44,500 to gain rights to open a store, according to the DOJ. Smith denied refunds of the fees when the potential owners learned of the misinformation.
Mason arranged the offer and sale of New York Bagel franchises, according to the Washington State Department of Financial Institutions. He previously offered and sold franchises for other companies through his New Jersey business Franchise Unlimited, Inc. When soliciting for New York Bagel, Mason used aliases, including Keith Samuels and Brian Schofield.
Smith deposited over $1.3 million in franchise fees into New York Bagel bank accounts he controlled from 2014 through 2016, the DOJ said. These funds went towards things unrelated to his business, including rent for his personal residence, car payments for personal vehicles, everyday living expenses and recreational travel.
Additionally, Smith failed to file corporate or individual incomes taxes on time from 2014 to 2016, according to the DOJ. He didn’t pay the taxes owed to the IRS either.
Mason and Smith also received a cease and desist order in 2015 from Maryland’s securities commissioner for the sale of their franchises. The order stated that the pair violated the anti-fraud, registration, and disclosure provisions of the Maryland Franchise Law.
IRS-Criminal Investigation is investigating Smith’s case.
Smith is set to be sentenced on May 24. He could be sentenced to up to five years in prison for both charges, along with supervised release, restitution, and monetary penalties.
Mason pleaded guilty to wire fraud and conspiracy to commit wire fraud on June 25, 2020.
Update 02/11/22 4:05 p.m. ET: This story was updated to include information and details about Joseph Smith’s case.
