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Case 1. Buca

By Elizabeth Bennett  |  Posted 2006-06-07 Print this article Print

Using "shadow companies" with puppet CEOs and inflated or bogus invoices, a number of I.T. managers stand accused of ripping off their employers—in some instances, for tens of millions of dollars or more. The scam? It's called procurement

Case #1: Buca

The Target: Buca, Inc., is a fast-growing Minneapolis-based chain that operates family-style southern Italian restaurants under the names Buca di Beppo and Vinnie T's of Boston. Founded in 1993 and publicly traded, the company, which had revenue of $239 million in 2005, has 104 restaurants in 28 states and the District of Columbia.

The Subjects: John J. Motschenbacher, former Buca CIO; Greg Gadel, former Buca CFO.

In 2001, when High Wire Networks was seeking a customer to extol the merits of a voice-over-Internet Protocol (VOIP) system it was selling, the Minneapolis computer services company enlisted John J. Motschenbacher, who at the time was Buca's vice president of information technology and finance.

Buca, a national chain of full-service, dinner-only restaurants also based in Minneapolis, had been receiving complaints from customers unable to make reservations when they called during the daytime, when the restaurants were closed. After High Wire installed an intelligently routed call center to handle calls re-routed from individual restaurants before 3 p.m., when the restaurants opened, operators in the company's central office were able to ascertain where the call was from and make a reservation or log take-out orders.

As a result, Buca was taking as many as 15 additional reservations in each of its then 62 locations each day and saw a big jump in its take-out orders as well, Motschenbacher told a reporter from Communications Convergence Magazine (now incorporated into Call Center Magazine).

What neither the reporter nor Motschenbacher's employer knew at the time was that the technology manager had a vested interest in High Wire's success, Buca has alleged. In fact, according to a civil complaint filed by Buca in July 2005 in the Fourth Judicial District Court, State of Minnesota, Motschenbacher and Buca's then-CFO, Greg Gadel, had helped form High Wire and were company shareholders and directors. Motschenbacher was, in fact, High Wire's CFO, receiving $3,125 a month in consulting fees, according to Buca's complaint. And to help High Wire navigate its critical startup phase, Motschenbacher and Gadel headquartered the company in the same building as Buca, and had Buca pay $98,000 to build out this office space, Buca claims in court documents.

And, through an intermediary company in which Buca charges they had an undisclosed financial interest, EDP Computer Systems, Motschenbacher and Gadel allegedly billed Buca for the salaries of approximately 10 High Wire employees who were doing little or no work for the restaurant company, Buca claims in court documents.

"They used a separate entrance but otherwise were based in Buca's building," says Rich Erstad, Buca's general counsel. And this was only part of what Buca alleges was a comprehensive scheme involving kickbacks and inflated and bogus invoices that continued for almost five years without being detected.

No criminal charges have been filed against Motschenbacher and Gadel. Buca's civil suit charges both men with breach of fiduciary duty and unjust enrichment.

Motschenbacher's attorney, Brooks F. Poley, and Gadel's lawyer, Todd A. Noteboom, did not respond to calls and

e-mails regarding this story. Motschenbacher has an unlisted telephone number and could not be reached. Gadel did not respond, though Baseline left messages for him at his office at Parasole Restaurant Holdings in Minneapolis.

To his superiors, Motschenbacher seemed an exemplary information-technology manager. He started his career with the company as the corporate controller in 1998 and was clearly on a fast track. In 1999, he was promoted to vice president of finance and purchasing.

By August 2003, Buca had almost tripled its number of restaurants, to 102 from 40 in 2000. That month, company CEO, chairman and president Joseph P. Micatrotto appointed Motschenbacher senior vice president of information technology, stressing his contribution to Buca's growth. "A distinguished leader, I'm proud to announce John's promotion …" Micatrotto said in a Buca press release at the time. "John's role is critical to our success in managing over 100 restaurants nationwide … Since arriving at Buca, Inc., he has developed a strong team that supplies the entire company with information needed to operate our business."

According to Buca's allegations, however, Motschenbacher and Gadel, who joined the company in 1997 as its CFO, were fleecing Buca from the get-go. In 1998, Buca contracted with EDP Computer Systems, a now-defunct St. Paul-based reseller, to supply the company with computer hardware and services. Both Motschenbacher and Gadel, Buca alleges, had a material interest in EDP, which was providing them several times a year with "under-the-table" cash payments that ranged from $5,000 to $25,000. Motschenbacher and Gadel would share these proceeds, Buca claims. The CIO also allegedly received gifts from EDP, including two four-wheel-drive all-terrain vehicles. After one of Motschenbacher's vehicles was damaged in an accident, he demanded and received a replacement vehicle from EDP, Buca alleges.

In return, Motschenbacher and Gadel approved Buca's very unfavorable contracts and transactions with EDP, allowing the vendor to charge far higher margins than it could have obtained from other customers, Buca claims. "Markup costs ranged up to several hundred percent," Buca's lawyers charged in their complaint.

Motschenbacher also allegedly failed to obtain competitive bids for the computer equipment and would accept whatever price EDP asked. Motschenbacher approved transactions with EDP, while Gadel had responsibility for approving all of the EDP invoices, according to Buca's court documents.

Meanwhile, the VOIP system EDP and Motschenbacher had developed for Buca was so effective that Gadel and Motschenbacher believed other companies, including those in the restaurant industry—potentially Buca's competitors—would want to adapt it, Buca charges. To peddle the system, they formed High Wire in conjunction with EDP as a corporation on Oct. 18, 2000, according to court documents. Although Buca knew nothing about the involvement of its CFO and CIO in the new company, Gadel and Motschenbacher held High Wire's first organizational meeting in the executive conference room at Buca's headquarters, Buca charges in court documents.

Once High Wire was ready to launch, Motschenbacher and Gadel moved it into the same building where Buca had its headquarters. Buca says that EDP billed Buca for the High Wire office space and employees, labeling the invoices, at Motschenbacher's direction, as "HW Services" or "Guest Services/Network Support." These invoices were often hand-delivered to Motschenbacher who, in turn, would hand-deliver the Buca payment to EDP, according to Buca's allegations.

High Wire was folded into EDP in October 2001, at which point Motschenbacher, still High Wire's acting CFO, wrote himself a $25,000 check from the High Wire account, Buca alleges. He continued to receive kickbacks from EDP, Buca alleges.

Separately, in 2004, an investigation by Buca's audit committee, the company said in an SEC 10-K filing, revealed that Buca CEO Micatrotto had purchased a villa in Italy, using almost $1 million of Buca's money, as a training facility for Buca employees. In violation of SEC regulations, Micatrotto had put the place in his and his wife's names, according to Buca.

The company asked Micatrotto to resign in May 2004, Buca's SEC filings indicate. Micatrotto subsequently agreed, among other things, to make certain cash payments to Buca, its 10-K filing indicates, and to waive all rights to receive any payments under Buca's Key Employee Share Option Plan, including both vested and unvested benefits. These agreements resulted in a total recoupment to Buca of approximately $900,000, says Buca in a 10-K filing with the SEC. Baseline could not reach Micatrotto for comment.

Soon after, a financial audit by Buca began uncovering some of the financial irregularities attributed to Motschenbacher and Gadel, Buca said in SEC filings.

Gadel resigned from the company in February 2005, joining Parasole Restaurant Holdings, which owns and operates Italian restaurants and which originally founded and spun off Buca. The following month Buca, its SEC filings indicate, terminated the employment of Motschenbacher. Buca later claimed in its civil suit that Motschenbacher refused to speak to company investigators and took steps to impede Buca's investigation. In one of his last acts as CIO, he damaged four Buca computers in his possession so no information could be retrieved from them, Buca asserts.

Resolution: Unlike many companies that are subject to procurement fraud, Buca refused to sweep the matter under the rug. "We have an entirely new management team in place, and we want to be good corporate citizens about this," general counsel Erstad says.

In the civil suit, Buca is asking for damages in excess of $50,000, all compensation Motschenbacher and Gadel received during the period they were allegedly defrauding the company, and all costs plus interest incurred by the Buca investigation plus attorneys' fees.

The case is scheduled to go to trial in August.

Buca Base Case

Headquarters: 1300 Nicollet Mall, Suite 5003, Minneapolis, MN 55403

Phone: (612) 225-3400

Business: Owns and operates Italian restaurants under the names Buca di Beppo and Vinnie T's of Boston.

Chief Executive Officer: Wallace B. Doolin

Financials: Publicly traded; annual revenue $239 million.

Incident: Buca's former CIO and CFO allegedly defrauded the company through ownership in outside vendors.

Senior Writer
Elizabeth has been writing and reporting at Baselinesince its inaugural issue. Most recently, Liz helped Fortune 500 companies with their online strategies as a customer experience analyst at Creative Good. Prior to that, she worked in the organization practice at McKinsey & Co. She holds a B.A. from Vassar College.
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