The Franchise Owner's most trusted news source


Log In / Register | Dec 15, 2017

Maryland Finalizes Enforcement Action against Chris Conner, RedRhino

Chris Conner Image from YouTube video

BALTIMORE – As an update to the saga of Christopher J. Conner, the Office of the Attorney General of Maryland has finalized its consent order against the franchise consultant, his firm Franchise Marketing Systems, and client RedRhino epoxy floor company and its owner Michael Kenealy. The order dated April 5, 2016 declares the respondents "shall immediately and permanently cease and desist from the offer and sale of franchises in violation of Maryland Franchise Law."

The document mandates that Chris Conner, who also identified himself as a director of RedRhino, shall attend a remedial education program acceptable to the Securities Commissioner consisting of at least eight hours of instruction regarding the legal requirements for offering and selling franchises and, upon completion of that program, shall provide written confirmation to the Commissioner of his attendance. Conner, Kenealy and their firms shall jointly pay the Attorney General of Maryland a civil monetary penalty of $7,500, and acknowledge that the order must be disclosed in Item 3 of the North American Securities Administrators Association (NASAA) Franchise Registration and Disclosure Guidelines and amended FTC Franchise Rule.

Commissioner Melanie Senter Lubin filed her Order to Show Cause on November 4, 2015, alleging that after an investigation into the franchise-related activities of RedRhino and Conner, she found grounds to allege the parties had violated the anti-fraud, registration, and disclosure provisions of the Maryland Franchise Law, in relation to the offer and sell, and sale of RedRhino franchises in Maryland. Lubin filed four counts against the respondents: violation of registration provisions, violation of disclosure provisions, misrepresentation in connection with the offer or sale of franchises, and unlawful earnings claims.

Facts of the franchise scam

As background to the Maryland Securities' investigation against Christopher Conner, his consulting and franchise brokerage firm Franchise Marketing Systems, and his California-based client RedRhino flooring company, the Commissioner stated that RedRhino founder Michael Kenealy solicited buyers in a 2012 brochure. He expressed that four years after RedRhino was started it grossed over $750,000 annually. Kenealy also promoted that his company's ongoing success had led to its further expansion "through the benefits and force of franchising." RedRhino also maintained an Internet website at www.redrhinoflooring.com, with a link captioned "franchise-opportunities."

When a prospective buyer in Maryland took the bait, Conner sent him materials about RedRhino that included a document entitled "franchise assumptions." Kenealy was copied on the correspondence dated October 11, 2013.

The worksheet of assumptions showed franchisee gross sales from $265,000 in the first year to $876,000 in the fifth year. They included a $25,000 franchise fee, 7 percent royalty on gross sales, 1 percent for local advertising, and 5 percent for corporate advertising. The assumptions also included a representation of the amount of initial investment a prospective RedRhino franchisee could expect to make, from a "low" of $25,300 to a "high" of $43,800. The pro forma included in the assumption document included a representation that franchisees could expect a return on their investment of between 137 percent in the first year, to 983 percent in the fifth year.

After speaking to Conner and the RedRhino CEO, the prospective buyer signed the five-year "management agreement" to purchase a franchise, authorizing him to an exclusive territory that included parts of Maryland, Washington, D.C. and its surrounding areas, and parts of Northern Virginia, West Virginia and Pittsburg. The franchisee later signed two additional agreements to expand his territory, again paying the franchise fee. Although RedRhino had agreed to provide sales and marketing support for a minimum of two weeks training at its Los Angeles headquarters, and to provide ongoing support and guidance, the franchisee received only four days of training.

The investigation also revealed that RedRhino also offered and sold a franchise to another buyer in Maryland, only providing him with a document dated January 6, 2012, entitled "addendum to RedRhino Franchise Agreement," granting him exclusive territories also in the Baltimore, Maryland market. That franchisee agreed to pay a royalty fee of 8 percent, and an initial franchise fee of $5,000. But under the addendum the franchisee was told that after he paid the $5,000 fee, he would no longer be charged the 8 percent royalty fees. But in March of that year, RedRhino sent him a notice of default and violation of non-compete for failing to submit his royalty payments.

In her consent order, Commissioner Lubin asserted that RedRhino had never registered to offer and sell franchises under the Maryland Franchise Law. And the company and its "franchise director" and consultant Christopher Conner never gave the buyers a franchise disclosure document (FDD) before the franchisees signed his franchise agreement, in violation of Maryland franchise laws. And, because RedRhino and Conner gave the franchisees "earnings claims" in the form of projections as to how much he could expect to make operating his franchise, the Commissioner charged them with another count of violating Maryland's Franchise Law.

Commissioner Lubin states in her order that if Christopher J. Conner and his firm Franchise Marketing Systems and the other respondents fail to comply with the terms of the Consent Order, "the Securities Division may bring administrative or judicial proceedings against it to enforce this Consent Order or to sanction it for violating an order of the Securities Commissioner, and may take any other action authorized under the Maryland Franchise Law or any other applicable law. In any such proceeding in which, after an opportunity for a hearing, the Securities Commissioner or a court finds that a respondent has violated this Consent Order, the Findings of Fact and the violations of the Maryland Franchise Law alleged in the Consent Order shall be deemed admitted and may be introduced into evidence against it."

Conner's argument against state regulator enforcement

Conner and RedRhino argued that they had not offered or sold any other franchises in Maryland. They told the Commissioner that they had obtained new legal counsel with experience in franchise disclosure and registration laws to now advise them going forward.

But on his website Franchise Marketing Systems Conner promotes himself as having spent the last decade in the franchise industry working with several hundred different franchise systems in management, franchise sales and franchise development work. He says his experience ranges across all fields of franchise expertise, with the focus in marketing and franchise sales. Conner states he has also worked with multiple international franchise and licensed organizations throughout the U.S., Middle East, India and Europe.

Conner also features on his webpage a franchise video of him being interviewed by Money Magazine at a New York franchise show (YouTube video) in 2012, the same time he was selling franchises without registering the RedRhino company. Conner tells Money Magazine that his concept is to partner with his clients. "We're in the business of franchise development, we've been doing it for 11 years." He says combining his clients' expertise in their business with his firm's resources is the most successful way for companies to replicate their businesses through franchising.

Maryland was not the only state that caught Conner and his firm Franchise Marketing Systems violating state franchise laws. In March of this year, the California Department of Business Oversight entered an agreement with Christopher J. Conner, Conner and Associates d/b/a Franchise Marketing Systems, banning him and his companies from offering or selling franchises until January 1, 2021. Tom Dresslar, spokesperson for the Department, told Blue MauMau, "This is an unprecedented enforcement action in the DBO annals. We now have the signed settlement agreement with Christopher Conner, and he is barred from engaging in the business of franchising for five years."


Related Articles:

AttachmentSize
RedRhino, Conner Consent Order75 KB
Your rating: None Average: 5 (2 votes)

About Janet Sparks

Janet Sparks's picture

Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.