Out of sight

By Edward Martin

clientuploads/Archive_Images/2013/12/Smith-Spread.jpgSun filters through the pines on Skye Drive, which curves as gracefully as a swan’s neck around the centerpiece lake in this Fayetteville neighborhood. “We built here in 1957, the first house on the street,” Leon Shackleford says. A small, white dog darts into the yard. “Get in here, Mac! My wife would kill me if I ever let anything happen to that dog.” The family across the street had a little dog, too. “We used to see their maid walking him.”

Shack — “nobody knows me if you call me Leon” — was a car dealer for 50 years. He nods across the street, to the same house. “I sold him a couple,” including a Buick Riviera. Shackleford is of the age that he refers to the neighbor as “that nice young man,” even though the neighbor is 69. The old man shakes his head. “This has just been so heartbreaking to all of us up and down the street.” He’s talking about Gary Smith, who moved there in 1989, paying $310,000 — more than $740,000 in today’s dollars — for a single-story brick home in what politicians call a silk-stocking neighborhood. It was home for him and his wife, Lucy, and their three children, but it also amounted to a business investment: a prestige address for an image-obsessed ad man.

A few miles away is Highland Country Club, where the city’s elite talk business under the chandelier in the richly paneled dining room. Smith was a regular, as was son Todd. They were leaders in the chamber of commerce, and Todd, at his father’s urging, served on the city planning commission and spearheaded downtown redevelopment. Together, they pursued Gary Smith’s longtime dream: to push Smith Advertising & Associates Inc. into the ranks of the top agencies in the nation. Together, they saw that dream die in disgrace.

In March 2012, Smith Advertising abruptly shut down. Gregarious Gary Smith — “you couldn’t walk down the street with him without people constantly stopping him, wanting to talk,” an acquaintance says — dropped from sight, along with Todd, 44, its chief operating officer. Cumberland County sheriff’s deputies searched in vain, attempting to serve legal papers. That April, neighbors saw a moving van being loaded in front of Gary Smith’s house. “He said they just needed a change of scene,” the person who rents it now says.

In the crescendo of events to follow, federal agents raided the ad agency’s headquarters, hauling computers and file cabinets from the restored Victorian mansion overlooking downtown. Worsening news broke the decorous silence at the country club. After the Smiths didn’t show up to defend themselves, a federal civil judge in Florida ruled they had defaulted on a loan of more than $660,000. The owner of a Fayetteville-based Taco Bell franchise went public, alleging they had bilked him out of $700,000. Another Florida investor claimed they had taken him for more than $20 million. Though the Smiths have not been charged with any crime, investigations are underway, including a probe by a federal grand jury.

“Image is everything, Gary told me a dozen times,” says a local businessman who has known him for nearly 50 years. “It was all about ego. He always had to be the best-dressed, the best-looking, to drive the nicest car. He always had to have the prettiest girls working in his office.” Eventually, image could not save Smith Advertising. As it foundered, lawsuits and investigators allege, father and son crossed the line from desperate-but-legal maneuvers to fraud, creating fake invoices to get wealthy investors to pour money into a scheme that, they hoped, would keep the company afloat. A civil suit in Florida contends that the scheme, involving many investors in multiple states, churned through as much as $400 million.

Repeated efforts to reach the Smiths for comment were unsuccessful. But they have insisted to friends and business acquaintances — some believe them; others don’t — that they are victims of predatory lenders. “They found themselves in loan-sharking,” says someone knowledgeable with the ad agency’s inner workings. He, like many of those interviewed for this story, asked not to be identified, citing long-held friendships, embarrassment or fear of being targeted in subpoenas. Legal details might take years to unravel, but the stage on which the Smith saga will play out is set. It is the cloistered society that exists in many Southern cities, one in which hundreds of thousands of dollars can change hands on little more than a man’s word, but where keeping up appearances is a prerequisite and betrayal carries crushing costs.

The mammoth tanks of the Paw Creek petroleum terminal attract lines of tanker trucks 24 hours a day. It’s the core of a Charlotte blue-collar neighborhood 130 miles west of Fayetteville, and though he was born in Hawaii, it’s where Gary Smith grew up. His late mother was a telephone operator at AAA Carolinas, the motoring club. The occupation of his father, also deceased, is unclear, but young Gary and his sister had few pretensions. He would describe Paw Creek to an acquaintance as “a one-horse place.”

Climbing the social ladder at the University of Georgia — he was president of Pi Kappa Alpha fraternity for “men of integrity, intellect, success and high moral character” — he met Lucy Bennett, a year younger and daughter of Palm Beach, Fla., celebrity architect William Bennett. He was clever, charismatic and ambitious. After earning his bachelor’s in advertising and public relations, he sold spots for Wilmington television station WECT out of its Fayetteville office, then was hired by Murchison and Bailey Inc., a local ad agency. “He was the epitome of a salesman — good looking, quick-witted, at home everywhere,” says Mary Grace Cain, who ran the graphics department.

She, Smith and her husband, Al, started their own agency in 1974. Smith had befriended Benjamin Allen, who had gotten rich selling heating oil to the huge Fort Bragg Army base, and brought him in as the money man for the group, which opened as Cain, Allen & Smith. As their agency grew, so did tensions. “Al and I wanted to stay small and have an elite clientele,” Cain says. “Gary wanted to be big.” That wasn’t the only issue. Once, while she was buying a record album for her teenage son, the store clerk asked, “Why don’t you just charge it to the company the way Gary does?” After a similar experience with a home remodeler, “I confronted Gary about it, in a joking way. He didn’t think it was funny.”

The Cains left in 1978, forming Cain and Cain Inc. Their old agency became Allen & Smith Advertising. But on an autumn morning in 1979, Allen’s maid found him face-down in bloody water in an upstairs bathtub at his fashionable Vanstory Hills home, still clothed and stabbed multiple times in the back. Police suspected a friend who sometimes stayed at his home, but no one ever was charged. Allen & Smith died with him, and Smith Advertising & Associates was born in 1980.

Its first big break came from Fasco Consumer Products Inc., a Fayetteville manufacturer of household equipment such as range hoods and vacuum systems. “Gary’s an extremely likable person,” says David Wilson, Fasco’s former CEO. “I directed our marketing people to send business his way, and we became his major client. He could cover his overhead with billings to us, which got his company on its feet.” But Wilson became alarmed at what he considered “excessive billing, excessive hours, and we agreed to part ways.” Still, the relationship had allowed Smith Advertising to entrench itself. By the late ’80s, it was handling advertising for such prestigious clients as Pinehurst Resort & Country Club and, increasingly, public bodies such as the N.C. State Ports Authority and tourism bureaus, including Brunswick and Buncombe counties’.

Smith Advertising opened offices in Raleigh, Hilton Head, S.C., and Sarasota, Fla., where in the mid-’90s it landed one of its most-lucrative accounts — agency of record for the Sarasota Convention and Visitors Bureau, along with those for the local airport, real-estate developers and others. Smith bragged that his agency was running out of wall space for awards, as it layered on high-profile clients such as Southwest Airlines, Papa John’s Pizza, Subway and Ruth’s Chris Steakhouse. By 2003, Smith boasted to reporters that his staff numbered more than 30, despite the lingering effects of 9/11 on the economy.

He was adept at making strong first impressions, critical in a place such as Fayetteville. In the shadow of the transient, shifting military complex, an insular aristocracy thrives here, with many prominent families tracing bloodlines back to antebellum times. Soon after arriving in the early ’70s, the Smiths joined fashionable St. John’s Episcopal, founded in 1817, a white, heavily spired downtown church where woodwind quintets and the adagios of Albinoni blend with familiar hymns. “I saw him at church and remember thinking, ‘That’s an interesting fellow, all polished up like that,’” a neighbor recalls. With a fondness for expensive suits and Jaguar sedans, Smith fit the part of a big-time ad man.

“Gary always looked like he’d just walked out of a Great Gatsby film,” says Bill Bowman, CEO of F&B Publications Inc., a Fayetteville weekly newspaper publisher that Smith Advertising owed $15,000 when it went under. A former Sarasota tourism official recalls Smith, with his gray eyes, styled hair and perpetual smile flashing perfect teeth, arriving at informal pool parties in starched and creased jeans. “He and Todd always knew your kids’ birthdays, your wife’s name. They made it a point to make you think they were real close to you.” Todd, who joined the agency in 1992 after getting a political-science degree from College of Charleston in South Carolina, lacked his dad’s charisma. Bowman calls him “the typical boss’ son: arrogant and entitled. He was nowhere near the tour de force Gary was, but he was put on boards and positions like with the chamber of commerce because of the money and prestige of the firm.” He married Anne Hedgecoe, the daughter of a prominent Fayetteville dentist.

In Fayetteville, the Smiths were celebrities. But some were skeptical about what lurked beneath the genteel veneer. In 2003, Smith lured the Festival of Flight, a centennial celebration of the Wright brothers’ launch, in what appeared to be a marketing coup for the city. Dick West, a member of the local airport commission, had reservations. “I just didn’t understand what Fayetteville’s connection was.” The city, after all, is 150 miles from Kitty Hawk. “I asked questions: ‘Where are we going to get the money? This looks like an awful lot.’ Gary was almost incensed.” Few attended the festival, which ended up more than $260,000 in the hole. About 30 vendors suffered heavy losses. “A lot of people took haircuts on this thing,” West says, “but not Gary.”

The failed venture underscores what few dispute: Gary and Todd Smith could sell not just their clients’ products but themselves. “Gary had established himself in this community as a likeable, straight, honest guy,” Wilson says. “When Gary told people something, it might sound too good to be true, but they’d say, ‘Hey, this is Gary Smith.’” What could go wrong?

Smith Advertising’s seemingly abrupt collapse left many wondering how it could have happened so quickly — a spokesman for Boca Raton, Fla.-based Cortera Business Directory estimates the agency had revenue between $5 million and $10 million and 30 to 50 employees in 2011. But there are indications it had long skated on thin ice. “Don’t leave the impression this was a sudden deal in which they just got in over their heads,” says a man who attended church with the Smiths and often shared their second home at Wrightsville Beach. At least 15 years ago, he and his wife lent Smith about $40,000, at no interest. “He told me his sister-in-law had loaned him an equal amount, and he also got help from his Florida relatives.”

Then, shortly after the turn of the millennium, the Smiths’ reputation among their friends got a black eye over a failed startup. Dot-coms had been the rage, and about 25 Fayetteville elite listened intently as the Smiths pitched a proposal for an Internet-based company that would auction travel and vacation services. “The first meeting was a dog-and-pony show you wouldn’t believe,” recalls one who says he invested about $20,000. “I’m a little guy in the business world, but there were some heavy hitters. A couple of doctors put in $250,000. When it unraveled, all we got was an email saying, ‘Sorry, we’ve had to close the business.’” The message, he says, cited the tourism-dampening impact of 9/11.

Another man, who had put in about $50,000, received a similarly cryptic message, but he cornered Gary Smith for details: “I said, ‘When will we get an accounting of assets?’ He said, ‘What do you mean? There are no assets.’ Hell, I’ve never known a business, including a brothel, that didn’t have some assets — a bed, a typewriter, computer or something.” Business records show that LastAvailable.com shut down in January 2001, nine months before 9/11, and was taken over by NavigantVacations.com, the Internet arm of a large Colorado-based travel agency. Published reports valued the equity transaction at $1 million. “Damn,” says another investor who never received a dime back. “I knew there was something fishy about it.”

Though insiders say it was investors who took a bath, the family was increasingly feeling financial strains. While Gary Smith was claiming his agency was thriving, it was shedding clients and scrambling for cash. It lost a large Buncombe County tourism account in a dispute in 2004, and the Ports Authority dropped Smith Advertising in 2005. Business filings show that a separate company set up by the Smiths and their wives took out bank loans for $331,500, secured by commercial property in Fayetteville. Later that year, they borrowed nearly $60,000 more, secured by vacant lots near the agency’s headquarters. In 2008, they borrowed more than $565,000 against its flagship — the Victorian house that had jump-started downtown redevelopment years before. All have been foreclosed.

 “In 2007, when the market collapsed, they had several large clients that walked away and didn’t pay,” says Sandy Morris, who worked with Smith Advertising first as a client, as marketing manager of a travel-related company, and later as a vendor. “Gary and Todd made sure every vendor was paid, even when they hadn’t been. They were stand-up guys.” But the situation got worse.

In early 2012, Vince Benbenek made a startling discovery. Someone tipped him that Cape Fear Valley Health System, where he was vice president of marketing, had come up in court documents related to civil proceedings against the Smiths in Florida. Accounts receivable from the Fayetteville-based health system had been cited as collateral for loans to the ad agency. “My friend in accounting sent me a list of all apparent invoices due from us. I said, ‘I’ve never done business with these guys — ever,’” recalls Benbenek, who had been in the job with the Fayetteville-based health system for four years. “But there were multiples — seven or eight — in the $10,000, $25,000, $30,000 range.” Many were recent. Similar invoices were popping up at businesses elsewhere. In Port Charlotte, Fla., south of Sarasota, the Charlotte Harbor Visitor and Convention Bureau had a contract with Smith Advertising until early 2012, tourism director Lorah Steiner says. But she was shocked when an investment group tried to collect $900,000 based on invoices the Smiths and their agency used to secure loans. Though she won’t comment further because of ongoing investigations, she has said in the past that the total was three times the bureau’s annual marketing budget and that her signature had been forged on some documents. So had her predecessor’s.

 “We believe what occurred, and what we can prove, is that these two individuals made some bad business decisions and essentially got involved in a Ponzi scheme,” says John Joyce, agent in charge of the Secret Service’s regional office in Tampa, Fla. “They were taking out loans on their accounts receivables and passing them off as investments.” In addition to protecting the president, the Secret Service investigates financial crimes. Separately, a federal grand jury in Sarasota is looking into possible violations of the Racketeer Influenced and Corrupt Organizations — RICO — Act. “We don’t think they went into business to get involved with criminal activities,” Joyce says. “But they made poor business decisions that led them down that road.”

Anger wells in a Florida investor’s voice. “If I’d never met them, I’d have $1.5 million in the bank I don’t have today.” He was introduced to Gary Smith in the ’90s soon after Smith Advertising landed the plum contract to manage Sarasota County’s tourism marketing. He says he soon began handing money to the Smiths and knows of about 20 other Florida investors and lenders who dealt with them. “We’d be told, ‘We’ve landed this $100,000 job to print catalogs, but the printer can’t advance the money, and our line of credit won’t carry it. He’ll give us a 20% discount if we can pay upfront, so if you put in $50,000, we’ll put in $50,000, and we’ll split the discount with you.’” Promised returns — in that case, $10,000 on a 30- or 45-day $50,000 investment — didn’t raise red flags. “That’s not outrageous,” the investor says. But, he adds, they were encouraged to reinvest their earnings in subsequent deals and usually saw their gains only on paper.

Selling shares of contract discounts is a legitimate practice in the advertising industry, but at some point, Joyce says, Smith Advertising apparently had too few actual contracts to stay afloat on such deals. A lawsuit filed on behalf of Sarasota developer Marvin Kaplan alleges that’s when the Smiths began creating fake invoices and printing deals as collateral for loans and that, as the agency’s fortunes dipped further, Todd Smith raised the ante by telling people he had a new way to bunch contracts for quicker, even higher returns. The suit says Kaplan lost $22 million.

In Florida, promissory notes, most bearing Gary Smith’s signature, show more than 60 loans, ranging from $100,000 to more than $500,000, were executed in January 2012 alone. A Jan. 20 note for $500,000 called for the Smiths to pay $50,000 upfront — the investment company’s share of the return on the printer discount — then to repay the principal in less than a day. Supporters of the Smiths point to such severe terms as evidence that they were in the grips of predatory lenders. “They had a gun to their heads and were trying to comply with the demands of their lenders to stay afloat,” says a Fayetteville businessman and family friend. “They were working 12- and 14-hour days, running themselves into the ground.”

But Kaplan’s attorney, Jon Parrish, has a different take. In an interview published by Gulf Coast Business Review, he says the fast turnaround and big returns were proposed by the Smiths to lure investors and encourage them to keep reinvesting rather than cashing out. Investigators believe much of the money coming in was used to string along earlier investors with payouts, in typical Ponzi fashion, with the remainder used to prop up Smith Advertising. The Smiths got in over their heads, Joyce says. “You think that eventually your ship will come in and make everything square, and you’ll start all over again.”

The way Parrish tells it, the scheme collapsed in January 2012 after Kaplan tried to cash a number of checks that the Smiths had sent him as loan repayments. The checks, totaling millions of dollars, bounced, and Regions Bank sued Kaplan, accusing him of check kiting. Parrish, who did not return phone calls to Business North Carolina, told the Florida newspaper that this prompted him, with Kaplan in his office, to call the companies whose contracts and invoices were used to obtain the loans. The documents, Parrish says, were “all bogus.” The Secret Service had started its investigation, triggered by the Regions Bank suit. Parrish says his client asked to meet with the agents. He wanted to tell them everything he knew about the Smiths.

Where have the Smiths been for nearly two years? At least in part, hiding in plain sight. Though his Holly Lane home near Skye Drive is rented out, Todd Smith has been seen frequently in Fayetteville, residing in rental houses he had as investment property. Gary and Lucy Smith lived at least part of the time in Greensboro, where he briefly advertised himself on Internet networking sites as a marketing consultant. “We aren’t looking for them because we are well aware of where they are,” Joyce says. “We’re confident when the time comes to wrap up this investigation, they’ll willingly come to court.” Possible charges, he says, include mail and wire fraud, which could carry federal prison sentences.

Why didn’t the Smiths head off the collapse? “If you run a business where your assets are less than your liabilities and you don’t see a light at the end of the tunnel, there’s a way to manage that,” says Wilson, the manufacturing executive who gave the agency its first big account. “It’s called Chapter 11 bankruptcy. You lick your wounds, apologize and walk away.” Was Gary Smith too proud to do that? “How much pride do you think he has now?” In Florida, an investor who says he lost more than $1 million sizes up his own future. “They took my savings. I’ll work for the rest of my life, but that’s my shortcoming. I feel sorry for my wife, though. She deserves a retirement she’ll never get.”

Gary Smith confided to a Fayetteville businessman — after asking for a job — that he and his wife had exhausted retirement accounts and were living on Social Security. Since the ad agency’s collapse, she has been diagnosed with breast cancer, a family member says. She has been treated, and her husband told a business contact that she was working as a nanny for two children of a Greensboro doctor. Reports like that still make their way to Skye Drive, but less often now. On a warm fall afternoon, a woman jogs past Shack Shackleford’s home and waves at him. She doesn’t glance at the house across the street, where his attention is focused and where a foreclosure notice was placed just weeks earlier. “Such a nice family,” he says.