Shelters After the Storm : Investors Rebuild Irvine Company Crippled by Scandal
Metro Display Advertising Inc. is a survivor if nothing else.
The bus shelter company faced almost certain oblivion nearly five years ago when a Ponzi scheme forced it to seek bankruptcy protection and threatened to wipe out more than $45 million from investors.
Today, the company’s modest quarters in Irvine are a far cry from the lavish surroundings it occupied during its high-flying heyday as a major provider of bus shelters in Southern California and Las Vegas. And its staff is a quarter of its former size.
But Metro Display is profitable and growing. It looks toward the day, perhaps as early as 1998, when it can start to pay back some of the money investors lost in the scheme by founder Jean Claude LeRoyer, who recently pleaded guilty to fraud charges and is awaiting sentencing.
“We’re solidly surviving and moving into the ‘thriving’ arena,” said Scott Kraft, an aerospace engineer who bought four shelters and ended up running the company as its president.
A company’s surviving a major pyramid scam, in which earlier investors are paid with money from newer investors, is highly unusual, said Michael I. Gottfried, Metro Display’s bankruptcy lawyer.
But Metro Display had two things going for it: a plucky band of investors who refused to give up and a good product in a small but growing industry.
The company, stripped of its funding in the Ponzi scheme, faced liquidation early in 1992. Federal securities regulators had urged a Bankruptcy Court judge to turn Metro Display over to a trustee.
The 1,185 investors, though, refused to fold. Hundreds descended on the court to plead their case. Granted two days to prove themselves, they ousted LeRoyer, installed a turnaround expert and agreed to repay debts.
The unusual show of unity, support and cooperation persuaded the judge to leave the company in their hands.
Investors went to work. They drew up their own reorganization plan and handled massive mailings, helping cut the company’s legal costs. All of the investors and almost all of the creditors approved the reorganization.
They helped with daily operations. A 72-year-old former military car-pool mechanic maintained the repair trucks and sales cars; another mechanic fixed the air conditioning at the offices. Others brought food for employees.
“We probably put in $250,000 worth of labor and services,” said investor Robert C. Lamb, who had bought 35 shelters. Lamb came out of retirement to become the company’s general manager.
Last year, Metro Display earned a modest $100,000 on revenue of $7 million from advertising panels on the shelters. Kraft said the business plan calls for a steady growth of 10% or more a year.
Indeed, cash-strapped cities and counties are looking more to businesses to provide public amenities that governments can no longer afford. Metro Display, for instance, can make, install and maintain shelters at no cost to a city, then sell advertising on shelter panels to recoup their costs and provide additional revenue that the company and the city can share.
Los Angeles is collecting about $800,000 this year on its 994 shelters from industry leader Outdoor Systems. Westminster is collecting $85,000 for its 140 shelters, mostly from Metro Display.
Altogether, the bus shelter industry garnered $190 million in revenue last year, a small part of the $3.5-billion out-of-home advertising market. But the shelter business has doubled in size in the last five years and is growing faster as it secures a spot among the newer breed of outdoor advertising concepts.
To be sure, Metro Display faces formidable odds. Companies need a lot of cash to compete because each shelter costs up to $10,000 to build and install--and much more to maintain. Though it’s the second-largest shelter company, Metro Display may not have the money to battle Outdoor Systems, which has double the number of Metro’s shelters, or major European companies.
Founder LeRoyer, who could not be reached for comment, had promised investors that they would be part of a growing, prosperous company.
Under his leadership, Metro Display, operating out of plush offices in Tustin, built and sold the shelters to investors and leased them back. It promised 20.4% returns and a repurchase of the shelters in five years for the original price.
It then sold advertising on the shelters and shared the proceeds with the investors and the cities that awarded licenses to the company. It had a staff of 130.
Trouble was, LeRoyer was selling the same shelter two or three times and using money from more recent investors to pay off earlier ones and to subsidize his own affluent Newport Beach lifestyle. He had put 2,600 shelters up but had sold nearly 4,700 to investors, according to court documents.
LeRoyer pleaded guilty earlier this month to federal fraud and tax-evasion charges. His wife, Karen, pleaded guilty to tax evasion.
After the company collapsed, the shelter owners faced a bleak future.
Most were elderly Southern Californians, and many had put their life savings into the shelters. Many retirees went back to work, some in low-paying jobs waiting tables and washing cars. They relied on Social Security payments and food stamps to survive.
The Securities and Exchange Commission, which had sued LeRoyer for selling unregistered securities, wanted the company liquidated. A competitor offered $250,000 to buy the assets.
And Metro Display began losing contracts. Irvine pulled out, as did Laguna Niguel, where some residents complained that the ads were eyesores.
Agreeing to donate their shelters for stock, investors laid out a plan to pay off vendors, cities and other creditors. Some took half in cash upfront. Others took the option of getting repaid 100% over four years.
Investors got a big boost when investor Allan Ross, a San Diego anesthesiologist, provided a $1.5-million line of credit for general operations.
Kraft redesigned the shelters and came up with a reliable solar system to provide lighting for up to eight days without sun. He computerized the entire operation, which helped reduce staffing. And he began working nonstop, sleeping in the living rooms of fellow investors during the week because there was no time to commute to his home in Agoura Hills.
“It was a 120-hour-a-week job,” Kraft said.
Investor Lamb and former Tustin neighbor Richard Engbaum, also an investor, pulled shelter owners together. One call for help, Lamb said, and dozens of investors would show up.
Retired high school teacher Don Beatty and four dozen fellow bus shelter owners drove to every shelter in California and Las Vegas--cataloging the shelters’ conditions and the advertising on them.
Their effort has impressed others in the industry.
“I’ve never seen people more dedicated to success,” said Bill Crabtree of Van Wagner Outdoor Inc. in Los Angeles.
Investors, Kraft said, now have only two questions: when they’re going to get their money and when LeRoyer is going to jail.
After the company completes its payments next year to vendors and other creditors, Kraft said, investors will decide whether to recoup their money by taking dividends or going public.
LeRoyer, 52, faces a maximum sentence of 24 years in prison and a $1.5-million fine. Karen LeRoyer, 45, faces nine years in prison and a $750,000 fine. Their sentencing is scheduled for Feb. 14.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
A Pyramid Scheme Gone Good
1992
* Jan. 23: Tustin-based Metro Display Advertising files for bankruptcy reorganization and suspends payments to scores of investors with lease-back arrangements. Federal investigators have been probing the company for at least a year, suspecting it may be running a pyramid scheme. The firm’s president, Jean Claude LeRoyer, is suspected of siphoning company funds to make improvements in his home and of using investor funds to pay other investors’ returns.
* Jan. 25: About 200 investors meet to discuss ways to salvage their funds. Options include converting their individual ownership of the firm’s bus stop shelters into stock in a reorganized company.
* Jan. 28: A federal judge orders Metro Display to stop selling investments in what the SEC alleges was a $48-million pyramid scheme that duped more than 4,500 investors.
* Jan. 29: Instead of appointing an independent trustee, a federal bankruptcy judge appoints Robert F. Bicher interim president of Metro Display. Bicher is selected by the company with the approval of creditors and investors since he will most likely support their plan to convert shelter ownership agreements into stock. As part of the agreement, LeRoyer must relinquish control.
* Feb. 3: The SEC agrees to settle its case against Metro and LeRoyer in exchange for an agreement under which no wrongdoing is admitted and under which the company agrees not to violate federal securities laws in the future. But the investigation into LeRoyer continues, and he could still be liable for repayment of any money he is found to have wrongfully taken from the company.
* Feb.4: FBI agents search Metro’s offices and LeRoyer’s home.
* Mar. 24: Metro seeks easier payment terms from creditors as part of its bankruptcy protection plan.
* May 4: Investor reorganization plan is approved. Hundreds of investors who bought bus shelters will become shareholders. Investor Scott Kraft is appointed president.
1993
* March 18: Metro shows signs of improvement under its new leadership. Ad revenue is up, and the company has signed a joint-venture deal with a major billboard company.
1996
* Oct. 10: LeRoyer pleads guilty to six charges of mail fraud and filing false tax reports. His wife, Karen, the firm’s former bookkeeper, pleads guilty to three counts of filing false tax reports.
Source: Times reports
Metro Display Advertising
* Founded: 1976
* Headquarters: Irvine
* President: Scott Kraft
* Employees: 40
* Product: Provides bus shelters and advertising displays
* 1995 revenue: $7 million
Source: Metro Display Advertising
