7-Eleven's Legal Unease

A series of publicity nightmares put the retailer and its franchisees on the defensive.

Steve Holtz, Editor in Chief, CSP Daily News

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Brand Questions

An industry expert raises questions aboutthe potential adverse effect the federalcharges could have on 7-Eleven’s brandvalue. Specifically, if the federal investigationfinds widespread wrongdoing acrossthe company’s franchise network, will theadversity undermine not only the powerof 7-Eleven’s name but also how much afranchise is worth?

The industry veteran, who spoke oncondition of anonymity, cited a statementby Rebelez in his letter to franchisees: “Wehave a critical need to protect the integrityand reputation of the 7-Eleven brand.”

The industry expert said, “Ever since7-Eleven made a conscious decision to have 100% franchised stores a few yearsago, I have been concerned that, absentappropriate policing (e.g., that franchiseescomply with immigration and other laws),our industry landscape of franchisedstores could become havens for inconsistentbusiness operandi, exploiting illegalsor other dynamics that could be a threat tothe enhanced reputation our industry hasearned the last couple decades.

“If 7-Eleven can modify their payrollsystem to more proactively fi lter out systemicviolators, they can ultimately buildan effective alliance with the federal andstate governments and their franchisees,”the expert continued. “They can be aleader in immigration compliance whilealso protecting their brand by taking afi rm stand against payroll abuses.”

Khan’s Alleged Con

While 7-Eleven’s systems—and its attentivenessto them—come into question inthe human-trafficking case, the corporateentity is calling foul on Tariq Khanfor misusing those systems in his alleged“illicit, wide-ranging schemes” to bilk hisfranchisor out of more than $2.43 million.

“Tariq intentionally failed to reportmultiple hundreds of thousands of dollarsof merchandise sales, including taxablesales, at the stores by manipulationof the cash registers and working from‘open drawers,’ ” 7-Eleven claims in a59-page court complaint.

“Tariq intentionally caused inventoryshortages to be created artificially and,thus, falsely underreported his net incometo the federal and state governments,”7-Eleven says in the complaint, the resultof a three-year investigation that beganin March 2010 following an “operationalreview” in connection with the renewalof one of the franchise agreements. “Theresults [of the review] were so startlingthat, in lieu of confronting Tariq with such results, an investigation of all stores, underthe auspices of 7-Eleven’s Asset ProtectionDepartment, was commenced.”

It’s at this point that other franchiseesreadily line up to profess that, while theypersonally operate above-board, cheatingthe 7-Eleven system is all too common,and they wonder why the corporate officehasn’t done something about it sooner.“The 7-Eleven system is certainlysophisticated enough to determine abnormalities.The word in the franchise communityis that 7-Eleven chose to look theother way,” one longtime franchisee says.

Some franchisees say the charges againstKhan, which were leveled just four daysafter the federal indictments, are a reactionto the DOJ arrests, that “a spotlight has beenput on 7-Eleven by the federal governmentand the authorities, and that has caused7-Eleven to take seriously accountabilityissues,” as one franchisee says.

The truth, however, is that 7-Elevenhas charged several franchisees on similarallegations going back to at least September2012. Still, franchisees see the Khanaction, because of his notoriety, as “a warningto franchisees who are not honoringthe [franchise] agreement, the system andthe law that they need to stop.”

“I think this is the tip of the iceberg,”says another operator. “There’s more ofthis to come.”

‘A Political Witch Hunt’

For Khan’s part, he maintains “there is notruth to” the charges against him, his wife,son and employees, calling the lawsuit “apolitical witch hunt” in a statement madeexclusively to CSP.

In a declaration to the court, Khanexpanded on his claim, accusing 7-Elevenof targeting him for being an “outspokenadvocate” for franchisee rights. “[7-Eleven’s]motivation is not my alleged misconduct,”he wrote. “It is vindictive animus predicatedon my many years of being an outspokenadvocate for myself and fellow franchiseeowners who are viewed by corporatemanagement not as partners in a successfulbusiness plan, but essentially as low-levelindividuals whose voice is irrelevant.”

Some fellow franchisees back Khan’sclaim, while others said his behavior hascome into question before, specificallyreferring to his exit from the chairmanshipof NCASEF. Several referenced a2008 attempt to audit Khan’s NCASEFbooks. Khan’s alleged lack of cooperationled to the challenge being droppedto avoid an expensive court battle.

On either front—claims of siphoningmoney from 7-Eleven and charges ofhuman trafficking—a harsh spotlight isshining on the c-store industry’s largestretailer and its systems, and there’s reasonto believe we haven’t seen the worstof it. Whether more charges of takingadvantage of illegal immigrants are filedagainst additional franchisees, executivesin 7-Eleven’s corporate offices are indictedfor willful negligence or more franchiseesare outed by corporate for breaking the lawor franchise agreements, 7-Eleven and itsfranchisees face an uphill PR battle.

“There are a lot of hard-workingfranchisees who are in no way, shape orform involved in wrongdoing,” says a longtimestore operator. “The consequencesof all this stuff that’s going on is damageto the brand, damage to the reputation,and in some extreme cases, such as is inLong Island and Virginia, there may becustomers who simply choose not to shopat 7-Eleven because they don’t want to supporta brand that is facing allegations ofhuman trafficking.”

Breaking Down the Cases

Federal Indictment

When: June 17, 2013

Plaintiff: United States of America

Defendants: Nine 7-Eleven franchisees: In New York, Farrukh Baig, Bushra Baig, Malik Yousaf,Ramon Nanas, Azhar Zia, Ummar Uppal. In Virginia, Zahid Baig, Shannawaz Baig, Tariq Rana.

Charges: Charges vary from defendant to defendant. Among them: conspiracy to commitwire fraud, concealing and harboring illegal aliens for fi nancial gain, aggravated identity theft.

Potential outcome: More than 20 years in prison, loss of stores

Why: The defendants, who owned, managed and controlled 14 7-Eleven franchise stores,allegedly hired dozens of illegal immigrants, equipped them with more than 20 identitiesstolen from United States citizens—including that of a former U.S. Marine and an 8-year-oldchild—housed them at residences owned by the defendants and stole substantial portionsof their wages.

Follow-up: All defendants pleaded not guilty to the charges when arraigned. A source closeto the case tells CSP most are expected to strike plea agreements.

Franchisee Civil Action

When: June 21, 2013

Plaintiff: 7-Eleven Inc.

Defendants: 7-Eleven franchisees and employees Tariq Khan, Senita Khan, Farouq Khan,Rajesh M. Ajmeri, Iram M. Khan, Mohammed Tariq Wattoo, Asaid Sohail, Ansarul H. Rana,Mohammed Tanveer, Faith E. Camacho, Shahid F. Khan, several John and Jane Does.

Claims: Claims vary from defendant to defendant. Among them: violation of the RacketeerInfl uenced and Corrupt Organizations (RICO) Act, common-law fraud, breach of contract,trademark infringement.

Potential outcome: Franchisee agreements terminated, stores and property claimed by7-Eleven, $1 million in damages.

Why: Tariq Khan, his wife, son and employees allegedly used “illicit, wide-ranging schemes”to “secretly and successfully siphon hundreds of thousands of dollars in cash” from his fi veconvenience stores on Long Island, N.Y. “Tariq intentionally failed to report multiple hundredsof thousands of dollars of merchandise sales, including taxable sales, at the stores bymanipulation of the cash registers and working from ‘open drawers,’ “ according to 7-Eleven’s59-page court complaint. “Tariq intentionally caused inventory shortages to be created artifi -cially and, thus, falsely underreported his net income to the federal and state governments.”7-Eleven claims more than $2.43 million was stolen through inventory shortages.

Follow-up: Khan vehemently denies all the accusations, calling the lawsuit a “witch hunt”for being a vocal franchisee activist. He also refused to vacate his stores, claiming 7-Elevenviolated its own franchisee agreement when its representatives “ransacked” the fi ve stores.He also fears irreparable damage to his business should 7-Eleven corporate take over operationof the stores.


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