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Exclusive: Empire Merchants, NY’s Largest Distributor, Files Federal Fraud Charges Against Part-Owner Charles Merinoff

September 20, 2016

Empire Merchants, New York’s biggest spirits and wine distributor, has fired CEO Lloyd Sobel and filed suit against co-owner Charlie Merinoff, claiming in federal court that the two men—and others, including Breakthru Beverage CEO Greg Baird—defrauded the company through their involvement in an interstate smuggling scheme.

The Brooklyn-based Empire is co-owned by the Merinoff/Drucker family and the Magliocco family. According to the complaint Empire filed in U.S. District Court in New York earlier today, Charlie Merinoff took part in an illegal scheme to smuggle spirits products from Maryland to New York, where they were sold by local retailers. With excise taxes on liquor nearly five times higher in New York than Maryland, the complaint contends that Reliable Churchill—the Maryland division of the Charmer-Sunbelt Group that the Merinoff family controlled—and retailers in both New York and Maryland deprived New York of millions of dollars of tax revenue through this illicit activity, which supposedly started in 2008 and continued until recently.

Earlier this year, Republic National Distributing Co. (RNDC)—the country’s second-largest spirits and wine distributor—was indicted in federal court in Maryland for what the U.S. attorney there alleged were similar activities, but was eventually exonerated. RNDC is frequently mentioned in Empire’s complaint, but not named as a defendant.

The complaint contends that Merinoff, who was CEO of Charmer Sunbelt during the period in question, “directed and participated in the Maryland bootlegging scheme for pecuniary gain,” but that he also had another motive: to weaken Empire by offering New York retailers cheaper spirits products from Maryland. By doing so, the suit maintains, Merinoff aimed to “coerce the other Empire principals to cede control over Empire as an independent operation by combining it completely with the larger “Charmer-Sunbelt Group,” which Merinoff controlled. By harming Empire, Merinoff intended to make Empire look weaker in the eyes of suppliers and, consequently, more reliant on the rest of the Charmer-Sunbelt Group to stay in suppliers’ good graces. Moreover, Merinoff intended to diminish the value of Empire so that when Empire’s other principals eventually contemplated selling their Empire interests to take a minority interest in the Charmer-Sunbelt Group, they would be paid less than their Empire interests should have been worth.”

Empire has been New York’s biggest distributor since its formation in 2007, and its revenue exceeded $1.9 billion in 2015, according to Shanken’s Impact Newsletter. Empire’s revenues are expected to be down in 2016, however, as the company was dealt a harsh blow when Bacardi moved its portfolio to Southern Glazer’s earlier this year. Empire’s key suppliers currently include Diageo, Moet Hennessy, E.&J. Gallo, Brown-Forman and Sazerac, among others.

The Merinoffs are also part-owners of Breakthru Beverage, the distributor that was formed when their Charmer-Sunbelt Group was merged with Wirtz Beverage Group earlier this year. Empire wasn’t part of that blockbuster deal. Baird, a longtime Charmer-Sunbelt executive who headed Reliable Churchill from 1999 through 2009, sat on Empire’s board of managers along with Merinoff, until late 2015—when the Breakthru deal was agreed upon.

The complaint states that Merinoff and Baird “breached their fiduciary duties to Empire in connection with the Maryland bootlegging scheme,” claiming that both men had knowledge that the smuggling was negatively impacting Empire but weren’t forthright with the company’s board. In fact, the lawsuit says, Merinoff directed others—including former Charmer-Sunbelt executive Arlyn Miller—to mislead the board regarding the bootlegging’s effects on Empire.

Sobel, who has been replaced by longtime Empire executive John Devin, had been Empire’s CEO since its inception. Yet, the complaint accuses him of “making decisions for Empire in the best interests of Merinoff,” who, it says, paid Sobel “under the table,” through a retirement vehicle that’s currently worth $4 to $5 million. The lawsuit contends that this caused Sobel “to forsake his fiduciary duties to Empire and instead to act in Merinoff’s and the Sunbelt Entities’ best interests.” For instance, “instead of acting in Empire’s interests, Sobel would defer to suppliers on Empire matters to enhance their relationships with the Sunbelt Entities because he was secretly financially motivated to do so.”

Along with Merinoff, Baird and Sobel, the complaint names retailers in Maryland and New York who it claims were involved in the smuggling scheme. Empire is seeking “redress for the many millions of dollars it lost as a direct result of Defendants’ illicit conduct.” The distributor says it “should be recompensed for every case of liquor whose sale it lost as a result of the bootlegging scheme, as well as for any contractual penalties it incurred or bonuses it lost as a result. Empire is entitled to treble damages under the RICO statute, as well as attorneys’ fees. Moreover, given the pervasiveness of defendants’ misconduct and its impact on the public, punitive damages should be imposed on all defendants in connection with Empire’s New York law claims. In addition, this court should enter equitable relief to prevent these defendants from engaging in future bootlegging that would harm Empire and other New York-licensed distributors.” —Peter Zwiebach

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