Carl Karcher Enterprises

REPORTS OF CONNECTIONS between the Ku Klux Klan and the fast food holding company, best known for hamburger chain Carl's Jr., are almost certainly urban legends. The misdeeds of Carl Karcher Enterprises (CKE) are not racial but financial, including an insider trading scandal, misvaluation of Arizona acquisitions, and squabbles with co-branding partners.

CKE is named for founder Carl Karcher, who parlayed a hotdog cart into a 2,000-restaurant business with almost $3 billion in fiscal 2003 sales. In 1984, the first year that CKE offered franchises, the company also expanded from California into Texas, a venture that lost money from the start. An internal company report was available to Carl Karcher and his brother Don, then president of CKE, who gave 14 relatives advance warning of the bad news. A number of family members, though not the Karcher brothers, sold stock in the company before the news became public, avoiding $310,000 in losses as share value plummeted. All of the Texas restaurants were sold in 1986, when losses reached $7.1 million.

A Securities and Exchange Commission (SEC) investigation in 1988, at the height of Wall Street's insider trading scandal, led to Karcher and six relatives agreeing to pay $664,000 in fines and reparations while admitting no wrongdoing. Half of the amount was to be paid by Carl Karcher to the government, the remainder by the family to damaged shareholders.

The agreement also protected the Karcher family from criminal charges. Civil charges against other family members, including Carl Karcher's wife, were dropped. CKE accounting director Alvin DeShano settled similar civil charges for about $25,000. DeShano, the only CKE defendant also[Page 141] tried on criminal charges, was acquitted of securities fraud, thanks to a defense that portrayed him as too disorganized to commit fraud effectively.

A second failed expansion, this time into Arizona, led to a dispute with hamburger rival Wendy's over unfair business practices. While existing Carl's Jr. stores in Arizona were losing $5 million a year, CKE bought 10 Wendy's locations from Wendy's franchisee Ronald Brown. Wendy's sued CKE for $79 million and Brown for $40 million, arguing that the sale had been made without their permission. The suit was settled for an undisclosed amount in 1990.

Three years later, Carl Karcher's younger brother Frank sued CKE for $10 million, claiming the company had deceived him about the value of the 12 Carl's Jr. stores that he bought as franchisee in Arizona in 1990, at the time that CKE was converting all 31 of its money-losing Arizona stores to franchise operations. Frank Karcher claimed that the valuation had been based on a formula not disclosed to him, one that inflated sales and profits by relying on deep discounts to drive purchases up.