College of Business Administration

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Daniel Golden

Teacher's Pet Project Tanks, to the Dismay Of Student-Investors

IRVING, Texas -- Whenever he taught entrepreneurship, Thomas Burnham relied on his favorite case study: South Beach Concepts Inc.

The fast-food chain was "bursting at the seams with potential," the University of Dallas business-school professor told students in a standard classroom handout. At the blackboard in a December 1998 class, Prof. Burnham graphed the future revenue of franchise start-ups like South Beach as a steep upward curve. He also predicted a "huge" initial public offering in the U.S. that would triple the company's share value.

Five students were so taken with South Beach that they eventually invested nearly $650,000 in shares and franchising rights. But South Beach is going south. There has been no U.S. IPO. Company losses have mounted, many of its restaurants have closed, payroll checks have bounced, and the students say their stock is virtually worthless. Four of the five say they were duped about South Beach's prospects by its founder and chief executive officer -- and they don't have to look far to find him.

He is Prof. Burnham.

"His responsibilities as an educator and faculty member were not his foremost concern," says one student, Ken Price, who invested $5,000. "His concern was getting South Beach off the ground."

While the 53-year-old professor says he didn't directly solicit money from his students, his dual role as teacher and stock seller illustrates some of the ethical risks posed by the growing emphasis on real-world experience in business schools. Nowadays, students at many schools get a head start for investment-management careers by picking stocks for the school endowment. Others start companies for college credit as part of entrepreneurship programs. Endowed entrepreneurship chairs have tripled since 1990, and full-time executives are regularly hired as part-time teachers.

But the overlapping of commerce and pedagogy can pose threats to long-held academic ideals, such as the integrity of grading, impartial analysis and the free exchange of ideas. At many schools, students and faculty routinely sign nondisclosure agreements before discussing student projects, in case they have commercial potential. The businesspeople hired as part-time instructors often teach their own companies as case studies and recruit promising students as employees.

To avoid conflicts of interest, the Harvard Business School bars financial relationships between faculty and students. But other schools aren't so strict. The Wharton School of the University of Pennsylvania, for example, allowed six professors last spring to be paid as consultants or directors for student-run businesses.

The University of Dallas Graduate School of Management has no conflict-of-interest policy for professors or bans on student-teacher financial dealings. When asked about Prof. Burnham's money-raising and the students' allegations of being misled, school officials initially said they saw no reason to discipline him, because they didn't believe the students invested while taking his classes. After further inquiries, the school last month suspended Prof. Burnham with pay pending a review, saying it had learned some of the students became investors while taking classes, after all.

The Easiest 'A'

"I have been robbed of $130,000 of my retirement," says Nicholas Hallack, 53 years old, a student of Prof. Burnham's who bought that much in South Beach shares. "It took me 10 years to accumulate that money."

Prof. Burnham acknowledges using South Beach as a case study in about a dozen entrepreneurship classes over four years, but denies misleading any students. He says the IPO didn't happen because securities regulations tightened up and underwriters were more interested in Internet dot-coms. He says the student investments didn't influence his grading -- although he acknowledges promising the "easiest 'A' you'll ever get" to an advanced entrepreneurship class focused on helping South Beach last year. The six students in the course included three investors; another investor attended to "audit" the course. Prof. Burnham says he gives "A's" to most of his students.

Although it may be inappropriate for a professor to have financial dealings with an undergraduate, Prof. Burnham says, the graduate students in his classes were grown-ups capable of making sophisticated investment decisions. "Most of them are making more money than I am," he adds.

The 2,000 M.B.A. candidates at the University of Dallas business school are mostly corporate middle managers who attend classes part-time, with their $1,200-per-course tuitions paid by their employers. Last year, the school had a net surplus of $2.9 million to subsidize other programs at the Catholic university. More than four-fifths of the business school's faculty -- 102 of 125 -- are adjunct, or part-time, professors.

Faculty scholarship isn't a big priority; only 45 business-school professors have doctorates. Last year, when Prof. Burnham withdrew from teaching a scheduled course, the school allowed his wife to substitute, even though she doesn't have a bachelor's degree. "We want professors that have real-world experience," says Paula Ann Hughes, dean of the business school. "That's what we do here."

In 1991, Ms. Hughes hired Prof. Burnham -- who has a law degree and an M.B.A. from the University of Michigan -- to start the school's entrepreneurship program. She says she turned to him because of his success at Domino's Pizza LLC's international unit, where as vice president and general counsel he had helped extend the pizza chain to 20 countries.

Blustery and energetic, the lawyer-turned-businessman was known for his high-living ways in Domino's hometown of Ann Arbor, Mich. On trips to Europe he sometimes flew the Concorde, and he owned a 54-foot-long Hatteras yacht and a second home in Sarasota, Fla. His fund-raising for the Republican Party allowed him to rub elbows with the likes of Texas oilman T. Boone Pickens.

But Prof. Burnham's business record was far from spotless. In 1987, he had co-founded one of Ann Arbor's largest law firms, Burnham, Connolly, Oesterle & Henry, which soon expanded to swank offices in Washington, D.C. The following year it filed a liquidation petition in a Detroit bankruptcy court, owing creditors more than $2 million.

Ho-Lee Chow and Clucker's

Prof. Burnham says he was concentrating on his duties at Domino's and wasn't focused on the law firm's financial problems. He says he ultimately paid creditors $500,000 out of his own pocket.

Upon leaving Domino's in 1990, after it was put up for sale, Prof. Burnham recruited several other veterans from the company and started Ho-Lee Chow Inc., a Chinese fast-food home-delivery company. But the company's Mexican backers became worried that Prof. Burnham was spending their money on himself and forced him out as president shortly before Ho-Lee Chow went out of business in June 1993, says Daniel Tanur, who led the investment group. Prof. Burnham says he was merely taking an agreed-upon salary.

He landed on his feet as president and director of Clucker's International Franchise Corp., a unit of Clucker's Wood Roasted Chicken Inc. He says he expanded the rotisserie-chicken chain from three stores to 20, prior to its acquisition by Roasters Corp. in 1994.

Ms. Hughes says she hasn't closely followed the ups and downs of Prof. Burnham's business career. The law-firm collapse never came up during his interview by a hiring committee, she says. Although he told her about Ho-Lee Chow's shutdown, it didn't lead her to rethink his value as a teacher. "You learn from your failures as well as your successes," she says.

For learning experiences, few ventures would rival his next start-up: South Beach Concepts.

Pizzeria Problems

Begun in 1995 with a single South Beach Cafe in East Lansing, Mich., featuring bagels and smoothies, the company soon went global. Prof. Burnham established South Beach Concepts PLC in London, a move that allowed him to raise about $3 million on two new small-cap stock exchanges there, where it was easy to obtain a public listing.

Flush with capital, Prof. Burnham opened a string of London cafes and went shopping for acquisitions. In 1997, Eric Wortham sold his small Midwestern chain, Pizza World International Inc., to South Beach Concepts PLC -- largely, Mr. Wortham says, because Prof. Burnham convinced him he would get a U.S. listing for the combined company. But soon, several of the dozen Pizza World franchisees began witholding royalties, citing a lack of support and promised funds. Mr. Burnham says it was his decision to waive the royalties until the franchises got on their feet.

The British operations also began faltering. In December 1998, South Beach announced the closing of its six London restaurants. With losses and debts piling up, the stock eventually dropped to a half-pence a share, or less than a penny, down from its six-pence initial-public-offering price.

'Gigantic Offering'

But by then Prof. Burnham had already incorporated another company in the U.S. -- South Beach Concepts Inc. He transferred the British company's U.S. assets, including South Beach Cafe and Pizza World, to the U.S. company. Creditors, who were owed $1.2 million by the London company, received stock in the U.S. company.

In December 1998, as his London operation was crumbling, Prof. Burnham taught a two-week intensive course on entrepreneurship back at the University of Dallas, using South Beach as the case study. He told the students he had a unique concept -- combining a variety of fast-food cuisines, from bagels to burritos, under one roof. Prof. Burnham predicted to the class that the company would go public in February in the U.S. at an IPO price of $3 a share. The "end of the story," he told the class, according to a tape recording of the course made by one of the students, would be "a buyout, a gigantic offering, some $20 million arrangement, a joint venture of some sort."

A business plan distributed to the class projected an increase in restaurants from 27 in 1998 to 75 in 2000, a rise in revenue from $1.6 million in 1998 to $2.5 million in 1999 and a turnaround from a loss of $407,000 in 1998 to net income of $565,000 the following year. As it turned out, the company would have 1999 revenue of $1.3 million, and a $1.3 million net loss. Today, only one company-owned and -operated restaurant remains open, plus about a dozen Pizza World franchises.

The students say they weren't told about the angry Pizza World franchisees and their withheld revenues. According to the tape recording of the December course, Prof. Burnham acknowledged that some London restaurants were closing, but said they would soon reopen, and that others were "doing great."

He also didn't mention the failure of Ho-Lee Chow. When one student asked whether he had ever been involved in an unsuccessful start-up that he could learn from, Prof. Burnham paused and replied, "No, because remember, most of my 1980s experience was in Domino's," according to the tape. Prof. Burnham says he didn't mention Ho-Lee Chow because the course was about taking a start-up public.

A Hypothetical Pitch

The business plan also stated that Prof. Burnham had been nominated for "Entrepreneur of the Year" in 1998 by Nasdaq, Ernst & Young LLP and USA Today -- when, in fact, he was nominated by a South Beach marketing employee. Prof. Burnham says it was an inadvertent mistake.

Prof. Burnham's skills as a salesman infused his classroom presentations. During one session in the December 1998 intensive course, he pretended to pitch the business plan to an imaginary English investor. "Now you can invest or not," he concluded. "It's up to you." One student, a software engineer, says he didn't realize Prof. Burnham was role-playing, and took the hypothetical pitch for a real one directed at the class. The student invested $5,000.

The confusion was understandable. Twice during that course, Prof. Burnham told the students South Beach shares were still available. He also noted that some former students were helping South Beach raise money, adding that one intrepid graduate had persuaded a priest and a monsignor to put in $10,000 each.

Impressed by his credentials and folksy storytelling, student Brian Hammer, then an advertising manager for a corporate-travel dot-com, handed Prof. Burnham a $5,000 check for South Beach shares on the last day of class, purchasing 5,000 shares at $1 each. "When I gave him the money, I said, 'I'm not investing in restaurants, I'm investing in you,' " recalls the 31-year-old Mr. Hammer, now an adjunct professor himself at the school of management. "In hindsight, it makes me feel even more duped."

Two months later, Mr. Hammer quit his job to start a Web advertising company -- largely, he says, on the strength of Prof. Burnham's promise to give him the South Beach account. However, South Beach didn't pay his $18,000 retainer and only paid about $3,000 of the $11,500 Mr. Hammer billed for designing a Web site and other services. Mr. Hammer's firm almost went under. Prof. Burnham acknowledges hiring Mr. Hammer's firm and says he didn't pay because the work was "incredibly incompetent" -- a characterization Mr. Hammer disputes -- and South Beach never used it.

Following the December course, Prof. Burnham offered an advanced, semester-long class for students who wanted to help launch South Beach Concepts in the U.S. stock market. After only a few sessions, however, he confirms he told the students that he had discovered an expedited way of taking the company public. The class wouldn't have to meet again, but students would still receive credit and "A's."

Cafeteria Meeting

His brainstorm was to acquire a "shell" company that he had found, and to fold South Beach Concepts assets into it. The shell company had negligible operations, but was already reporting results to the Securities and Exchange Commission in preparation for eventual public trading. Mr. Hallack and other students say he told them the company would cost $100,000 -- but investors would triple or quadruple their money when the attractive restaurant operations were part of a publicly traded company.

Prof. Burnham then adjourned the class. He, Mr. Hallack and another student, Dallas anesthesiologist Michael Hicks, immediately retreated to a quiet corner table in the campus cafeteria, where the two students offered to put up most of the money.

Weeks later at the same table, according to Mr. Hallack, Prof. Burnham told him and Dr. Hicks that the cost of the shell company had doubled to $200,000 but the investment would be a "gold mine" because now the combined entity could begin trading immediately. The two students agreed to invest $100,000 each. Prof. Burnham denies telling Mr. Hallack the shares would trade right after the transaction.

South Beach did acquire the shell company, but by late July 1999, there was still no public market for South Beach shares, and Mr. Hallack was becoming worried about his investment. He called Blake Frank, the assistant dean of the business school. Mr. Frank and Ms. Hughes spoke to Prof. Burnham, and, satisfied with his explanation, they conducted no further investigation. Ms. Hughes says she thinks Mr. Hallack was just stirring up trouble, adding that he is "a student we probably wish had gone elsewhere."

Unlike Mr. Hallack, Dr. Hicks says he invested in South Beach with his eyes wide open. He became a director of South Beach Concepts Inc. and maintained his faith in Prof. Burnham. While taking five courses from him, Dr. Hicks paid $500,000 for South Beach shares and franchising rights, and persuaded fellow anesthesiologists to put in an additional $400,000.

Earlier this year, Dr. Hicks and his colleagues opened their first franchised restaurant, a Pizza World four miles from campus. But the restaurant closed this summer, owing $80,000 in back rent, according to Lloyd Ward, attorney for the landlord. Dr. Hicks and Mr. Ward say South Beach is responsible for paying the rent; Prof. Burnham says Dr. Hicks's group is responsible.

Last month, two days after Ms. Hughes and Mr. Frank, the assistant dean, defended Prof. Burnham in interviews, the president of the University of Dallas, Monsignor Milam J. Joseph, suspended the professor with pay, pending an investigation. He wrote in a letter to The Wall Street Journal that the college's responsibility to its students should not "be blurred or confused by the concerns of the marketplace." In addition, the business school established a task force on ethics.

As for Prof. Burnham, he's transforming South Beach into an Internet-franchising company. "It's been incredibly well-received," he says. He predicts it will go public this fall.

Write to Daniel Golden at dan.golden@wsj.com

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