'What Happened Is a Long Story'

Cigarette discount king John Roscoe to be sentenced in bank fraud, but still building business

Carole Donoghue, Petroleum Editor

SAN JOSE, Calif. -- Time was when John Roscoe's 852-store Cigarettes Cheaper! chain stretched over 40 states, bringing in nearly $1 billion a year. But the retail empire is gone now, along with his home high in the Napa Valley hills, and soon he will be sentenced for his part in a scheme that cost Comerica Bank $27 million.

But don't count John Roscoe out just yet. At 82, he's working for his grandchildren's company, Fresh Choice Tobacco Inc. The Vacaville, Calif., firm just launched a commercial cigarette-rolling machine, "The Revolution," to complement the roll-your-own (RYO) machine it unveiled in 2006 that can produce a pack in two minutes. Retailers can buy the tabletop machines for use in-store by customers who want to roll their own with natural tobacco they shred on site, or they can sell the machines for $499 each.

"He's as feisty as ever. I don't think John Roscoe will ever stop trying to build his business, and he is optimistic about the future," said his attorney, Peter A. Leeming.

Roscoe is due to be sentenced Wednesday after pleading guilty last year to one count of making false statements to a bank. Under a plea deal reached just as the jury was being selected, U.S. prosecutors agreed to recommend that he serve a year in house detention and five years probation.

"I made an agreement ... to plead guilty to avoid any time in confinement," Roscoe told CSP Daily News. "When someone says to you, 'Your money or your life,' it's best to give them your money."

But his son faces a lengthy prison term. Ned Roscoe was convicted of 28 counts of bank fraud, conspiracy and making false statements. Prosecutors are recommending that the former Smokers' Party candidate for governor serve 168 months in prison. Ned Roscoe's lawyer disputes the government's fraud calculations. In court papers, she said the case is an overreach of an issue that should have been dealt with in a civil suit between Comerica and the Roscoes.

The government is also seeking a restitution order against John and Ned Roscoe for $27.4 million.

Dinosaurs, aliens and "bagatorials"

John Roscoe has made headlines throughout his career. He was a founder of the National Association of Convenience Stores (NACS) and in 1964 added the first cashier-controlled self-serve gasoline pumps to a c-store.

He once airlifted a 50-feet-tall fiberglass dinosaur to promote a store on Interstate 80 but neglected to get permits for the 71-foot-long beast, named "Dixie." When objections were raised, he launched a "Save Dixie" petition and got around regulations by calling the gigantic Brachiosaurus a piece of art. TV cameras rolled again when he placed a green alien figure in a coffin at another store. The alien had decorated the roof with a mock-up of a crashed UFO until it plunged into the parking lot during a storm.

Roscoe he is a libertarian "with a small 'l" with little time for regulations. His said his basic philosophy is, "My rights stop at the end of your nose." When his company practices were disparaged by local politician Deborah Ortiz, he bought newspaper ads criticizing her, distributed anti-Ortiz buttons and printed his political views on his grocery bags--messages that he dubbed "bagatorials."

Roscoe said Cigarettes Cheaper! had about 4% of the U.S. cigarette market and hoped to add another 5,000 outlets to its Benicia, Calif.-based chain when R.J. Reynolds sued the company for making gray-market cigarette sales. It was that suit that helped propel the Roscoes into their current predicament.

The family fired back with an antitrust lawsuit, citing internal RJR documents that discussed how to "shut down" Cigarettes Cheaper! They claimed RJR resented them because they gave more shelf space to Philip Morris, and complained that RJR gave discounts to retailers like Albertsons, but not to them. But RJR won and was awarded $3.6 million in damages. In 2007 the U.S. Supreme Court refused to take up the Roscoes' case. By then, his legal fees amounted to $19 million, John Roscoe told CSP Daily News.

The Roscoes had banked with Comerica since the early 1990s. Their agreement allowed them to borrow up to $21 million, based on 65% of the value of their inventory, as long as they deposited store revenues into a special account. If they maintained $32 million worth of inventory each week, the funds would be returned to them. If inventory fell below $32 million, Comerica would take 65% of the difference in value to pay down the credit line.

The Roscoes had believed they would reap millions from a victory in the RJR case and could use the money to pay off Comerica. But in 2003, under financial stress, they had to close some stores, reducing their inventory value. Fearing the bank would call the loan and jeopardize the RJR case, Ned Roscoe ordered company employees to falsify the weekly inventory reports that he sent to Comerica.

The scheme revolved largely around private-label Revenge cigarettes the company bought from Bailey Tobacco. The reports sent to Comerica claimed a "promotional coupon price" of $27.64 per carton, but the actual cost was only $6.80. Ned Roscoe ordered employees to claim that truckloads of nonexistent Revenge cigarettes were in transit. If Comerica questioned the reports, employees were told to blame "clerical or accounting" errors for the discrepancies, according to court records. A three-year FBI investigation later uncovered a secret spreadsheet showing that inventory values had been inflated by more than $16 million, enabling the Roscoes to borrow $10.43 million more than their limit.

"What happened is a long story," John Roscoe said. "In short, R.J. Reynolds effectively stopped us from marketing their cigarettes economically because they believed we increased the Philip Morris market share more than theirs."

Roscoe recently filed court papers showing that he lost his $100 million net worth trying to keep Cigarettes Cheaper! alive. His $17 million mansion 2,200 feet up in the Napa Valley Hills with its wraparound floor-to-ceiling windows and swimming pool cantilevered into the mountainside was pledged to Comerica and his primary cigarette supplier.

Despite his troubles, Roscoe remains upbeat. He said Fresh Choice Tobacco is on course to double sales of the RYO machine this year. As for Dixie, she still exists, sort of. One of her fans reported on the Internet that he had found her in the Napa Valley hills, cut into three pieces and bearing scorch marks from a forest fire.

And Roscoe's biggest regret? "I should have gone into the pizza business in 1956," he told CSP Daily News.