Construction Cuts, Pizza Hats, and the CEO Who Got Caught Red-Handed

People know me as the guy who's exposed some of the worst stocks in America... I take tremendous pleasure in exposing a popular name that's involved in some kind of wrongdoing. For example, in 1995, I published an exposé in the San Francisco Chronicle called "The Tangled World of Supercuts." Supercuts is a nationwide chain […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Construction Cuts, Pizza Hats, and the CEO Who Got Caught Red-Handed By Herb Greenberg --------------------------------------------------------------- [Stocks fall – and Steve Jobs' prediction coming true]( Steve Jobs' ability to predict the future was remarkable – now his "Final Prophecy" is coming to life, with huge implications for you and your money. And that's exactly why investing legend Joel Litman has just prepared the most fascinating and useful analysis I've seen in many years... [Click here to view](. --------------------------------------------------------------- People know me as the guy who has exposed some of the worst stocks in America... I take tremendous pleasure in exposing a popular name that's involved in some kind of wrongdoing. For example, in 1995, I published an exposé in the San Francisco Chronicle called "The Tangled World of Supercuts." Supercuts is a nationwide chain of discount barber shops with more than 2,000 locations scattered across the U.S. In all honesty, it was a fairly boring stock that most investors wouldn't even notice. But the more I looked into Supercuts, the more red flags I started to see... First, I found it odd that chairman and CEO David Lipson lived in Chicago, not California, where the company was founded. Plus, he wasn't even an employee! Lipson, the largest shareholder at the time, was paid as a consultant through a separate company. Lipson's background was in accounting, having worked for accounting giant Arthur Andersen. Yet here was the company, on its fifth CFO in six years... and three of the former CFOs were suing Supercuts... alleging the company was manipulating earnings and violating tax laws. One of those former CFOs, William Stirlen, claimed he was fired after he went behind Lipson's back and wrote to Supercuts' auditors questioning unusual accounting methods, including half of the company's earnings between 1992 and 1993. For example, Supercuts routinely counted stores that weren't officially open for business as being open just to make its growth look better than it actually was. Get this: If a store was still under construction, the hairdressers would give the construction workers a haircut. They called it a "construction cut." The entire store could literally still be in drywall, and Supercuts would have a guy sitting there with his construction hat on his lap getting a haircut just so the company could inflate its earnings. Supercuts categorized these as "soft" openings. And by giving a haircut, management could count a location as open, which would let Supercuts book $22,000 worth of franchise-related fees. While $22,000 isn't enough to move the needle, Supercuts was doing a ton of them. In the fourth quarter of 1993, Stirlen estimated the company had done more than $300,000 in revenue in soft openings alone. Lipson later denied that any soft openings had taken place whatsoever. Lipson, seemingly discouraged by the pace at which his franchisees were expanding, decided to take matters into his own hands. He started buying back franchises and aggressively opening company-owned locations. That way, instead of having to pay a royalty or franchise fee, Supercuts could keep the revenue for itself. Except, things didn't go quite according to Lipson's plan... Eventually, the company had overexpanded. It's the bane of retail's existence – particularly publicly traded retailers. Lipson was doing whatever it took to maintain an unsustainable pace. And eventually, it fell apart. --------------------------------------------------------------- Recommended Link: [TOMORROW: 'The Gold Story No One's Telling']( Many experts are saying, "Buy gold." But we recommend you do something much different – for the chance to double your money on some surprising stocks. The details come from Herb Greenberg, a financial investigator. So far, you could have doubled your money 14 different times with a clever strategy for 2022 from Herb's team. [You can access the full details (and a free recommendation)](. --------------------------------------------------------------- As I wrote in the Chronicle, Lipson's unusual practices may not have been illegal, but they certainly didn't reflect well on his part... Not only did I interview Lipson – which, in hindsight, I'm shocked he agreed to in the first place – but I also spoke with several former employees and executives. And the harder I looked, the more red flags I found... One shareholder rights activist I spoke to said, "They raise all kinds of red flags." As I wrote in my piece... It's even difficult to determine where 56-year-old Lipson's business life ends and his personal one begins. He's engaged to one of the company's top officers. His former wife is a former Supercuts president, whom he married several years after hiring her to run the company. They divorced in 1992 after disagreeing on whether to take Supercuts public. Such controversial behavior would be suspect in the best of businesses, but becomes especially troubling when a company's financial performance is shaggy. Analysts have had to trim Supercuts annual earnings estimates for two straight years, and since late 1993 its stock has dropped by nearly half. Even the company's most prominent and enthusiastic investor, the legendary Peter Lynch, recently conceded in Barron's that he "can't quite understand why" Supercuts hasn't done better. Shortly after Lipson's divorce, he got engaged to a different executive! As you can probably guess, Lipson drew a lot of attention to himself... He was a quirky guy, no doubt. My favorite story was hearing that he once showed up to the company's annual Christmas party with a cooked pizza on top of his cowboy hat. Of course, nobody ever went to jail for wearing a pizza on his head, but the story still makes me laugh all these years later. It didn't take long for other oddities to bubble to the surface... I found out that Lipson drove a car that Supercuts leased, despite not having a California driver's license. He had asked then-CFO Jeff Gall to put his name on the car as the driver, which Gall's lawsuit later claimed was an attempt to avoid paying California's state income taxes. He also served as the chairman of the company's compensation committee, which decided how much he and other executives should be paid. To no surprise, the committee voted to bump his pay by 50% and tossed in a $3 million severance package for good measure. Lipson's efforts ultimately fell short. By the third quarter of 1994, Supercuts' earnings came in below Wall Street estimates and analysts cut forward guidance. I didn't set out to take Lipson down... But if you're going to fire somebody, you better make sure he doesn't have anything on you. And when I tracked down multiple former CFOs who all wanted to talk to me, I knew something fishy was going on. These guys knew the books were cooked and that the accounting was overly aggressive. As Lipson was building out the company, people assumed that because he was an investment banker with an accounting background, he must have been good. Sometimes that's the case... Other times, it means he knows how to play with the numbers. Accounting can cut both ways, good or bad. And it was clear to me that the company was in real trouble. After my piece in the Chronicle was published, things quickly started to change at Supercuts. Lipson stepped down, Supercuts sold itself to American hair salon chain Regis (RGS), and a few years later, a federal jury convicted Lipson of illegal insider trading. His appeal was rejected. My newest exposé will air tomorrow at 8 p.m. Eastern time... Unlike my investigation of Supercuts, this one will focus on the entire market. In particular, we're looking at how the huge shakeups this year have opened a once-in-20-years "backdoor" that could transfer money from Wall Street's wealthiest investors into your account. There's the potential to build serious wealth if you understand how this works. [Click here for the full details](. Regards, Herb Greenberg March 23, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](