"All We Want To Do Is Brew Our Brains Out"

May 28, 2010

Russell T. Ippolito, Esq.
New York State Attorney General
Main Place Tower, Suite 300A
350 Main Street
Buffalo, NY 14202

Dear Mr. Ippolito:

The following details set forth my belief that multiple violations of New York and Federal law may have been committed by Timothy Herzog, the President and Director of Flying Bison Brewing Company (“FBBC”) located at 491 Ontario Street, Buffalo, NY. Mr. Herzog is attempting to sell the assets of FBBC to Matt Brewing Co., Inc.

Misleading Financial Statements Provided To Investors

By way of background, I am advised that Mr. Herzog incorporated FBBC in 1995 and filed a statement with the Secretary of State to raise funds through an offering for FBBC. During the first couple of years of the FBBC’s existence, Mr. Herzog began to raise funds, but did not properly record the receipt of funds for shares sold. Herzog also failed to notify the accounting firm of the improper recognition of the funds. Herzog’s failure to properly record the receipt of funds resulted in the generation of false financial statements for a significant period of time. More importantly, the false financial statements were used to entice investors and were provided to financial institutions, i.e. the City of Buffalo Economic Renaissance Corporation, falsely representing FBBC’s firm financial situation.

Likewise, Mr. Herzog’s wife, Mary Herzog, loaned FBBC $50,000.00 from her 401K fund. However, like the failure to record the receipt of funds, this loan was not properly recorded in FBBC’s books and records and investors were mislead as to the financial health of FBBC at the time they invested.

Currently, Mr. Herzog has not provided financial statements and/or records for the close of the financial year 2009 and is attempting to sell FBBC without providing the shareholders the information to make a proper analysis on whether to approve the sale of FBBC.

It is my understanding that audit of FBBC’s records has not been done in over 10 years.

FBBC Is Herzog’s Alter Ego

I have personally witnessed Mr. Herzog and his wife treat FBBC as their personal business. In the 10 weeks I observed operations at FBBC, I witnessed Mr. Herzog take approximately $6,000.00 of FBBC’s capital to purchase personal items and for his personal travel or the travel of his family members. For example, the day Mr. Herzog and his wife were scheduled to leave Buffalo for a trip to Europe, Mrs. Herzog opened the cash register and removed $800.00 in cash. Shockingly, she never documented the removal of the cash. Similarly, Mr. Herzog used FBBC’s capital to travel to Washington D.C. to lobby Congress regarding a tax on microbreweries. It is perplexing that FBBC’s Board of Directors would approve the spending of the FBBC’s capital for Mr. Herzog’s personal items, when FBBC was behind on loan payments, rent, utilities and payroll tax and could not afford to purchase raw ingredients to continue operations of FBBC. The unilateral decision to use the FBBC’s capital for personal use appears to be a breach of Mr. Herzog’s fiduciary duties to FBBC and his fellow shareholders.

Sale Of Alcohol Without A License And Failure To Pay New York And Federal Sales Tax

I am told that FBBC has routinely sold alcohol at its facility. However, such activity is troubling for two reasons. First, FBBC has failed to obtain the proper license from New York State to sell alcohol at its facility. Second, it is my understanding that the books and records indicate that FBBC has never paid Federal or New York State sales tax for said sales.

FBBC Has Altered Its Documents To Avoid New York and Federal Excise Taxes

It is my understanding that Mr. Herzog has failed to properly file accurate information on FBBC’s Excise Tax Reports. For example, when FBBC would produce 21.25 bottles of beer, the records would actually reflect FBBC produced 20 bottles of beer. Additionally, all of the alcohol sold on the premises was never recorded and converted to case equivalents so the proper excise tax could be paid. Finally, on several occasions Mr. Herzog filed false Federal Excise Tax Reports representing batches of beer were dumped. In reality, Mr. Herzog was giving the beer away and not destroying it.

Beer Labels

I am also told that Mr. Herzog would alter beer formulas from the filled beer label, a violation of New York law. He would also permit unregistered beer label to be used in violation of New York and Federal law.

Personal Income Taxes

As set forth above, Mr. and Mrs. Herzog would use FBBC capital as if it was their own. It is highly likely that the capital taken from FBBC was not reported as income on their Federal and State returns.

Please feel free to contact me if I can answer any questions or provide additional information.

Very truly yours,

D. Scot Elliott

cc: New York State Liquor Authority
Bureau of Alcohol, Tobacco, Firearms and Explosives
United States Attorney’s Office, Western District of New York
New York State Department of Tax and Finance
David Stillwell, Esq., counsel to Flying Bison Brewing Company
Dennis McCoy, Esq., counsel to Matt Brewing Company, Inc.

I guess a Utica-owned locally-operated brewery is better than no brewery in Buffalo at all, but it sure is a shame Flying Bison couldn't make it work under local ownership.

I do have to wonder how long the brewery will remain in operation here before FX Matt shuts it down and centralizes Flying Bison production in Utica, the way they did with Lake Placid. Seems like their past history is against continued long-term operation here.

Someone has a bug up their butt!! The only thing that I have seen the Liquor Authority do is create some many BS rules, change them a few years later, and make it difficult for bars to survive. That whole thing a few years back with Bev napkins and the SoCo lime chillers makes it seem like someone is trying to justify their salary. Is it me or is it a whole control thing?

Although I don't know the motives behind Mr. Railrider's post (if there are any), he does bring up some interesting accusations. Income fraud is pretty serious, among the others.

Bufgal: The crimes listed, though crimes, are almost joke crimes. Nonetheless, there are probably a thousand Bob Johnsons, what's the evidence these are the same D. Scot Elliots?

How is Ithaca Beer Co doing? Have they been bought-out by a big concern? Last I knew, they were working with their local farmers, trying to grow hops in New York for the first time in many decades.

BufGal (aka Betsy?)

There is no personal vendetta against Tim. He makes great beer and apparently bilked the investors out of their investment and broke many laws as he ran the company into the ground. He sold off the assets of FBBC for far less then than they are worth at the expense of the shareholders in exchange for his self-dealing and his own personal job security.

Where there is smoke there is fire... Time will tell if any of the agencies decide to investigate and press charges on behalf of the State and Federal Governments.

Until then enjoy the beer that is being made, while it is still being made in Buffalo.

Cheers!

The truth of the matter is that Tim Herzog is an extremely good guy; engaging, intelligent, funny. Unfortunately, his beer is not a commercially viable product in that it is unusually malty, perhaps underattenuated, lacking hops, and is glorified homebrew. The yeast is not a commercially viable yeast. It's just not very good. Rusty Chain is the best commercial beer he's ever made, and he's still trying to jam Aviator Red down Buffalo's throat. Dawn Patrol? Eesh.

Worse than all of this, of course, is that Tim has very little business acumen. You have a demand, you can't meet it (forget about exceeding it), your partners want you out of business, and you don't have beer on tap anywhere. The man can't even keep raw materials in his building. Tim is supposedly a leader in the state advocating on the behalf of other brewers, and he can't keep his doors open or his orders filled. Shut it down. No great loss.

I guess I would be behind it more if the beer was good, but it isn't.

Wanna know why Buffalo is a Labatt and Genny Screamer kind of town? Because it costs around $2 a pint, while FB costs around $5 a pint. We love our cheap beer. That simple.

In Cleavland, Great Lakes is around $3 a pint, and frankly, tastes better than FB.

I agree with Beer Boy, make a better beer and I'll buy gallons of it.

Nah, price has nothing to do with it. People will go out of their way if the beer is worth the money. Look around at some other craft breweries.

There are beer releases that have people sleeping in the streets as if they were waiting on concert tickets to go on sale (yeah, i remember when people use to do that). People will pay if the beer is good. Even throughout this recession, one area of business that didn't see a loss in sales is craft beer.

While I don't agree that it's glorified homebrew, it definitely has never been my first choice when perusing the aisles of Premier. I think product quality (or lack of) definitely added to FB's demise.

Regardless, FB is good for Buffalo. Much better than what the alternative could have been.

I do fond their beer a bit tinny but love the ideA of buffalo beer . I was shocked to read that they only employee four peeps

Southern Tier IPA etc. shows up through the Capital ale House chain through Central Virginia too including Richmond and Fredericksburg. I would love to see more WNY micro brews offered through Cap Ale.