Transcript:

It all started with underwear.   

It was 2002.  Ames, the discount retail chain, was shutting down.  And people in places like Potsdam were fretting about where they'd buy everyday essentials like underwear, and other stuff.

Pet stuff, kitchen stuff...  Clothing, things for the home.  Presents for my grandkids and things...

The Scozzafava family saw a chance to kill three birds with one stone - fill that shopping void, empower the regional economy, and make some money in the bargain.

That's right.

Here's Assemblywoman Dede Scozzafava today.

We were very excited by the opportunity of showing that we can do it in the North Country.  We can raise the money to do it in the North Country.  We can create the jobs.  We can create a buzz, and maybe this is a platform that we could take and expand the company beyond that.

Seven years ago, Dede Scozzafava was a second term Assemblywoman and a former financial advisor.

Scozzafava's brother, Tom, was a young, brash venture capitalist coming home to Gouverneur from New York City.  He had worked for Lehman Brothers and Prudential.  He helped fund Mapquest. 

There was a vacuum of capital raising and capital for businesses here in the North Country, and we were going to provide it.

The brother-sister partnership brought on mostly local investors and started a new low-end retail chain.  They named it Wise Buys. 

They opened five stores in a year and created 200 jobs.  They say Wise Buys got off to a great start.  According to the Scozzafavas, they paid off much of their startup debt. 

I'm proud of those accomplishments, and y'know, it's very difficult what we're experiencing today.

The success of Wise Buys attracted Hacketts, a 170-year-old St. Lawrence County retail institution.  Hacketts planned to buy Wise Buys, creating a more powerful regional chain.

For months, Tom Scozzafava says, his team prepared to sell.

Meaning, we got out of lines that we were in, we stopped ordering goods we would have ordered, we didn't get ready for Christmas, because we were going to be acquired.

But for reasons that remain murky and are still part of a lawsuit, Hacketts backed out at the last minute. 

Wise Buys, at that point, really needed to do something.

This is where things get complicated.  And we need a financial guide to help sort it out.

OK, I'll do my best.  Hi, my name is Greg Gardner.  I'm an associate professor at SUNY Potsdam.

In 2007, Tom Scozzafava bought a company, GS Carbon, from a venture capital friend.  He got 1.5 million dollars in the deal, too. 

He changed the company's name to Seaway Valley Capital Corporation.  He bought out Wise Buys.  His sister, Assemblywoman Dede Scozzafava and the other Wise Buys folks got preferred stock in Seaway Valley and became passive investors.

But GS Carbon came saddled with seven million dollars in debt.  That debt rode along into the creation of Seaway Valley.

This company is clearly underwater and in a desperate financial situation.

Gardner's studied the North Country economy for 15 years, and he knows a lot about publicly traded companies.  Not just the ones on the New York Stock Exchange, but little companies trading in a murky part of the financial world called OTC, over the counter stocks.

Sometimes known as the pink sheets or penny stocks.  If they drew you a map, there'd be a little place on the map that says, here there be dragons.

It's a places for gambles.  High risk, occasionally high reward.  Tom Scozzafava's new company, Seaway Valley, is an OTC. 

It's a very risky place.  It's very hard for an outside to figure out the details of what's happening inside a pink sheet company.

Back to the Hacketts story.  It's July 2007.  In a surprising turnaround, Tom Scozzafava, the CEO and only board member of Seaway Valley, announced that his company, which owned Wise Buys, planned to buy Hacketts.

JONATHAN ON AB5: Wise Buys discount department stores announced this week it would buy fellow northern New York retailers, Hacketts, for six million dollars.  The two companies...

That's how NCPR reported it.  Wise Buys stores took on the Hacketts name. 

What Tom Scozzafava says he didn't fully know, was that Hacketts was four million dollars in the red.  That made Seaway Valley's balance sheet even worse.

According to Greg Gardner, that debt load was toxic.

If they can't come up with a brilliant operating plan to generate all kinds of money to get them out of this trouble quickly, they're going to go bankrupt.

But Tom Scozzafava says most of that scary debt wasn't really debt at all, just an accounting technicality that would disappear if and when business went well.

It has to do with fairly arcane Black Scholes financial derivative modeling.  It's not an actual debt that has to be paid.

Greg Gardner doesn't buy it.

That carries the assumption that everything goes exactly as he expects.  I would maintain my initial assessment that this is a company that is in significant financial trouble.

Another financial expert I showed the filing to agreed with Greg.  A third person who had considered investing in the company got cold feet when he saw those numbers.

It's worth pointing out that Seaway Valley's financial filings are covered with dire warnings.  They caution potential investors that the future of the company is in "substantial doubt".  Scozzafava himself acknowledges as much.

Seaway has always been, since buying the company, filling ditches rather than building mountains.  I mean, we're filling ditches, filling ditches, filling ditches.

But from afar, Seaway Valley looked like a promising investment.  It owned 9 brick and mortar stores.  Hacketts was a respected business.  And the CEO's sister was a state lawmaker.

Thousands of people bought the stock.

I made a bit research...about Tom Scozzafava...and his sister, also, I see she's a political and I thought this could be one of the penny stocks [laughs] which could be worth an investment.

Bernd Buchenberger is an IT network specialist in southern Germany.  He invested almost 12,000 dollars in Seaway Valley.

Today, for reasons we'll get to in a minute, Buchenberger says his shares are worth nothing.

Phil Hersch, a retired middle school science teacher from Valencia, California invested about 3,000 dollars in Seaway Valley.  His shares are worthless now, too. 

They ran the store into the ground with dealings that were not above board, in my mind.

Wait, wait, wait a minute.

Didn't we just hear our financial guide, Greg Gardner, say...

If they drew you a map, there'd be a little place on the map that says, here there be dragons.

Don't these investors know OTC stocks are a gamble?  Phil Hersch says, sure, but Tom Scozzafava and Seaway Valley are different.

If I go to Vegas, I know what the odds are.  It's very obvious that this is not a straight and narrow business that this guy is now running.  It's basically just stealing from me.

Here's why the investors are so outraged, and here's how their stocks lost their value. 

Tom Scozzafava was paying off debts by taking on more debt.  A strange kind of debt called a convertible debenture.  Help us, Greg Gardner.

OK, a debenture is just another word for an unsecured bond, which is a loan.

And a convertible debenture?

A convertible debenture means that the buyer, the lender, has a choice of being paid back in cash on the schedule agreed to or converting the value of that into stock in the company.

But each time a lender chooses to convert the loan into stock, more shares are created even though the actual value of the company hasn't changed.  So existing investors' shares are worth less.  They're diluted.

It works just like inflation with money.  When the government issues too many dollars, we get inflation and the value of any one dollar gets smaller.  The more shares of stock you issue, the less valuable is any one share.

Tom Scozzafava was issuing millions in convertible debentures.  He had to, he says.

The weather outside...  We were standing outside in the weather, but it was the weather outside that was really working against us.

By 2008, the mortgage and financial crisis was already starting to infect banks nationwide.  Still, in March of that year, Wells-Fargo gave Seaway Valley a 5 million dollar line of credit.  Scozzafava began paying off debts.

But then in September - one year ago - Lehman Brothers failed.  The markets crashed.  Credit locked up.  Fearing another Great Depression, consumers stopped spending.  Hacketts and Seaway Valley, Scozzafava says, were caught in a perfect storm.

So you've got a credit market contraction, you've got a structural shift in consumer spending, and you have a conpany that could have used another 3, 4, 5 million dollars in equity, but it was impossible to raise because the markets were off 50%.

And then the hammer fell.  Wells-Fargo, a recipient of 25 billion dollars in taxpayer bailout money, called in Seaway Valley's line of credit.

And basically, they just said we want it all.  5.5 million in six months.

To pay back Wells-Fargo, Scozzafava issued millions more in convertible debentures.  He closed three Hacketts stores.

Seaway Valley's common stock was once trading at 175 dollars a share.  Today, it's worth hundredths of a penny. 

In May and June of this year, Scozzafava made debt restructuring and refinancing deals with two companies, Auctus Equity Fund of Boston and Fuselier Holdings of Texas.  Bad signs, says Greg Gardner.  They're basically vultures.

Auctus and Fuselier are companies that specialize.  Their job is to work with extremely distressed companies.  They take equity.  They then find someone else to buy those shares at what they expect to be a profit.

Ken Hebb works in the North Country financial industry and knows a lot about OTC stocks, too.  He says Seaway Valley's business model is not sustainable.

The party doesn't go on forever.  It's going to stop somewhere.  The question is when and where and can it recover the cash flows in the meantime.

None of the financial experts I've spoken with believe Scozzafava has done anything illegal.  On the scale of business ethics, though, the Seaway Valley story falls in a gray zone.  Here's how Greg Gardner puts it.

At least at the extreme edge, it's starting to get very sleazy.  I personally would not want to be involved in this business transaction, on either side of it.

[bring sound up of Alteri's bakery]

Tom Scozzafava sips a coffee at Alteri's bakery in Watertown.  This is another business Seaway Valley owns.  So is Sackets Harbor brewing company.

He bristles at some investors' accusations that he's running a shell game, or that he's sucking their money into his own pockets, or that Seaway Valley's cooked.

Number one, I haven't profited anything on this.  Nothing.  In fact, I've probably imperiled any net worth I have, significantly imperiled it. 

Scozzafava gestures around him, to the conollis and cakes behind Alteri's display cases.

Number two, there are real businesses here.  Real businesses can hit the wall.

You get the sense Tom Scozzafava is a man who's used to success, who believes in himself.  Now he's eye-to-eye with failure.  His name, and his family's name, is on the line.  It's hard to tell if he still believes.

It is what it is.  My mail goal is to keep the company alive.  We're still here fighting.  We paid off Wells-Fargo.  And hopefully we can continue to find a way to work our way out of this.  We're not out of the woods yet.

Scozzafava recently hired a new vice-president for Hacketts.  He's trying to stock the empty shelves and inject new life into the retailer's six stores.

There's still time for Scozzafava to say he's the man who saved Hackett's, a cherished North Country institution.  But it's clear that time is running short.

For North Country Public Radio, I'm David Sommerstein.