John Fox, the embattled owner of the bankrupt wine company Premier Cru, often liked to run his business close to the edge, according to interviews with former business colleagues.
To provide coveted wine to his international clientele, Fox was constantly on the prowl for wine bargains. This led him to strike deals with people selling wine on the “gray market,” outside the channels set up by many European wine houses.
And when Fox would order wines from legitimate distributors around the country, he would delay paying for his orders as long as possible, even though California law requires wine purchases to be settled within 30 days, according to one business associate. This delaying tactic angered so many people that many were gleeful when the Federal Bureau of Investigation announced in February it was investigating whether Fox ran a Ponzi scheme.
Read more about Premier Cru on Berkeleyside.
“There were a lot of smiles on faces when they heard that he was going down,” said Jim Elder, a vice-president of marketing and operations for The Sorting Table, a Napa-based wine importer and distributor. “There were a lot of smiles in the wine industry. He had screwed a lot of people, whether he didn’t pay them or always paid them late. … To me, it’s karma.”
Until it filed for bankruptcy in January, Premier Cru, owned by Fox and Hector Ortega, was located in a spacious wood-paneled store at 1011 University Ave., part of a three-building complex. The company brought in $19 million in sales in 2014, but when it abruptly shut its doors, it only had around $7 million in assets and $70 million in debts, according to court documents. Among the people Premier Cru owed money to were 9,200 customers. Fox filed for personal bankruptcy in February and reported he owed between $50 million and $100 million, with only $50,000 in assets.
One of the biggest unresolved questions? Where did that money go? While Fox lived a pampered lifestyle, with a $2.3 million, 6,000-square-foot house in Alamo; a leased $200,000 Ferrari; and a $90,000 two-door Corvette with a 650-horsepower engine, his splurges don’t add up to $63 million. Presumably, that is the question the FBI is trying to answer.
Mark Bostick, the attorney for Michael Kasolas, the bankruptcy trustee in charge of liquidating Premier Cru, said Wednesday before a court hearing that it appears Fox allegedly transferred money from Premier Cru into his own bank accounts. Bostick, who has had access to Premier Cru’s business records, said the bankruptcy trustee will probably be filing a lawsuit in September to try and recover some of the funds, he said.
Fox has declined to discuss Premier Cru’s bankruptcy with Berkeleyside. When he was required to appear at a hearing in front of his creditors, he refused to answer the bankruptcy trustee’s questions and invoked the Fifth Amendment more than 50 times.
A slew of lawsuits filed in 2015 by disgruntled customers, who said they had paid Premier Cru hundreds of thousands of dollars to buy wine that was not delivered two, three or four years later, may have precipitated the bankruptcy filing. When those customers called the store, employees said repeatedly that their wine was in transit and would be available in a few months, according to the lawsuits.
Some of the delays were to be expected. Premier Cru often sold “wine futures” where people would buy French Bordeaux while it was still aging in barrels. They would pay up front but would only expect to get the wine a few years later after was bottled. Wine lovers bought en primeur because it meant they were guaranteed bottles of coveted wine. It could also be less expensive than just buying the wine once it was in bottles, but not always.
In theory, Premier Cru would collect money from customers and immediately send that money to the distributors of the French wine.
But records uncovered by Kasolas while overseeing the Chapter 7 liquidation of Premier Cru show that Fox often “oversubscribed” various wines. That meant that he collected funds for bottles that he had already sold. Court documents show there are 22,875 bottles of wine in the warehouse that were oversubscribed, or sold more than once, according to court documents. Moreover, Premier Cru collected $45 million for bottles of wine it never purchased, according to court documents.
“I believe that’s fraud,” said Elder. “That’s selling something you know you can’t provide and taking the money and putting it into the bank.”
Fox could get away with this, according to former employees, because he would tell customers waiting for a specific bottle that it was still in transit. He could put them off as long as possible — their money already in Premier Cru’s accounts — and if they complained too loudly he could offer a substitute bottle or offer a refund.
“What probably happened to John was that he sold the wine over and over and over again until it finally caught up with him,” said Elder. “Somewhere in [between] that one and a half to two-year loop in that en primeur offer and the delivery of the wine is where he could have kept stacking up all this money.”
Despite the long length of time it took for customers to get their wines — an issue that was widely discussed for years on various wine boards — people kept returning to Premier Cru. That’s because Fox had an inventory of fine wines at great prices and people couldn’t resist snapping them up.
“A lot of people got a lot of good wine for a very good price, so over the years he did deliver a lot of wine to a lot of people,” said Elder.
One way Premier Cru could offer such good prices was that it purchased some of its en primeur wine, as well as great French and Italian wine already in bottles, on the gray market, according to people familiar with the company’s business. In regions like Bordeaux and Champagne in France, there often is only one distributor with a license to import alcohol into the United States. Theoretically, if a retail wine store like Premier Cru wants to sell that wine, it must purchase it from that distributor. The system provides accountability and guarantees the provenance of a wine.
But a market exists outside these strict channels, and while European wine makers frown upon it, some distributors try to circumvent the system. For example, there may be a European distributor or retailer or restaurant that has the right to buy these wines, but only sell them in Belgium and Germany. But that distributor may decide to break the contract he or she made with the wine houses and sell the wine in the United States, where it can command higher prices. This is the gray market.
Even some insiders have used the gray market. One famous case involved the most coveted wine in the world, from Domaine de la Romanée Contee (DRC) in Burgundy. In 1992, Lalou Bize-Leroy, a co-director of that domaine, used her separate wine exporting company, Maison Leroy, to ship some bottles of DRC to the United States and Japan through a Swiss affiliate, even though it only had permission to sell those wines in Central Europe. The wine, which cost around $850 a bottle at that time, sold for $1,300 a bottle in Japan, according to the New York Times. Aubert de Villaine, who owned 50% of the domaine to Bize-Leroy’s 25%, ousted her as a result.
Buying wine through the gray market is not illegal, although some consider it unethical. But it was a way for Fox to get some stellar, normally unavailable wine at cheaper prices for his clients.
When Fox and Ortega opened their first store on Piedmont Avenue in Oakland in 1980, they had a combination wine store and wine bar where they served cheese and other things to eat, according to Michael Verlander, whose store, Walnut Creek Wine and Cheese, which evolved into the restaurant and wine store, Prima, had a similar format.
The store never really took off until it started offering wine futures in the 1990s, said Verlander. Within a short period of time, Premier Cru went from a normal wine shop into an outlet to which serious wine buyers flocked. Soon, Verlander noticed he was losing some of his customers to Premier Cru.
“When Premier Cru entered it, they did it in a big way,” Verlander said in an email. “They offered a broad spectrum of Bordeaux at unbelievably low prices. We wondered how they could do it. It didn’t take long to find out they were using mostly gray market wines. Who knew how they got them, how they were handled and their provenance? There was no way we could match their pricing with our legitimate importers.” Verlander sold Prima in 2006.
Fox allegedly cut corners in other ways by offering wine to customers that he didn’t own and couldn’t readily get. With coveted and rare wines, a wine broker might only get a few cases and then send out sale notices to multiple potential buyers.
Jason Brandt Lewis, who used to deal with Premier Cru when he worked for the Daly City importer Adventures in Wine (AIW) in the 1990’s, said it appeared as if Fox would sometimes collect money for wine from his customers and then would not be able to secure that wine.
Back in the 1990’s, brokers used faxes to communicate. A broker would send out a fax with information about a few cases of a good wine he had sourced.
“Unless you jumped on it right away you might not get it because it’s a fax and not an email,” said Lewis. “A retailer in New York higher on the fax list might get the fax first.”
Since it was a slow and somewhat clumsy way to communicate, the faxes would state that the offer was not valid until the buyer received confirmation.
But few retailers wanted to front thousands of dollars for a case of wine. So after they got the fax they would reach out to their customers to see of they wanted to buy into the deal. On occasion, Fox would reach out to his customers to see if they wanted the offered wine, and then would get back to AIW to buy the cases, only to find they had already sold, said Lewis. “On a number of occasions, Fox got angry when he discovered that the wine had already been sold and sometimes would push AIW to look for duplicate bottles.”
“John wouldn’t wait to make sure AIW had wine before selling wine to his customers,” said Lewis.
Fox got an importers license for Premier Cru in the late 1990s so he no longer had to go through a broker like AIW, said Lewis.
Another way Fox created a “float” was by not paying his bills on time, according to both Lewis and Elder. He would buy wine on credit and would often not pay within 30 days, as required by state law. He got to be so well known for stretching out his payments that he was the frequent topic of discussion at the regular meetings of northern Californian wine distributors, said Elder. Fox took this approach to paying his bills for more than 20 years, he said.
“John’s basic business plan, John’s m.o., was to pay as late as he possibly could on any invoice he ever got,” said Elder. “That was for everybody — for any distributor, anyone who sold him wine. If he needed wine the next month, he would pay the bill but if he didn’t need wine until a year later he would pay you then. His business model has always been to stretch things out.”
On Wednesday, U.S. Bankruptcy Judge William Lafferty approved the settlement of a class-action lawsuit brought by former Premier Cru customers against the trustee. The settlement means that Kasolas can sell most of the 79,000 bottles of wine in Premier Cru’s warehouse in Berkeley and distribute the funds to its creditors.
That sale should happen in the next month to six weeks, Bostick told the court. Unfortunately, it does not look like the sale will bring in as much money as the trustee had hoped, which means there is less to distribute to creditors.
The trustee received an offer to purchase the bottles for around $3.3 million, significantly less than the $5 million once projected, Bostick told the court. Most of those who were Premier Cru’s customers will only get pennies on the dollar of the wine they had paid for, and some will not get even that, according to court documents.
Frances Dinkelspiel is the author of the New York Times bestselling Tangled Vines: Greed, Murder, Obsession and an Arsonist in the Vineyards of California.
Related:
Premier Cru lawsuit: Some customers to get refunds (06.23.16)
Bankrupt Premier Cru not run in ‘a reliable fashion’ (05.09.16)
Premier Cru owner had penchant for expensive cars (03.08.16)
Customers confront owner of bankrupt wine store (02.25.16)
FBI investigating whether Premier Cru ran a Ponzi scheme (02.22.16)
Troubles mount for Premier Cru as FBI steps in (02.11.16)
Berkeley’s Premier Cru paid its tech staffer in wine (02.04.16)
Shop Talk: The ins and outs of Berkeley businesses (12.22.15)
Berkeley store sued for not delivering $3M worth of wine (10.29.15)
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