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Former Hampshire Group CEO’s Response Sought in Fraud Case

Ludwig Kuttner, who was the chairman and chief executive officer of Hampshire Group Ltd., has at least two more weeks to file an answer responding to a lawsuit filed against him last month by his former employer.

WILMINGTON, Del. — Ludwig Kuttner, who was the chairman and chief executive officer of Hampshire Group Ltd., has at least two more weeks to file an answer responding to a lawsuit filed against him last month by his former employer.

Attorneys said the response is not due until April 29. Last month, Hampshire sued Kuttner and two other officers, former executive vice president and treasurer Charles Clayton and former vice president of finance Roger Clark, in the Delaware Court of Chancery. They were charged with fraud, mismanagement and tax evasion that Hampshire claimed subjected it to serious financial and legal risk.

Kuttner, 60, owns 31.1 percent of the Hampshire Group stock. He left the company in 2006 after Hampshire suspended his employment. Kuttner is still a member of the board, and last year received total compensation of $723,496, according to a regulatory filing with the Securities and Exchange Commission. The company was delisted from the Nasdaq on Jan. 19, 2007, and now trades on Pink Sheets as HAMP.PK.

In the lawsuit filed on March 7, Hampshire asked the court for damages plus interest and costs stemming from the executives’ alleged wrongdoing, as determined at trial. The company claimed $11 million in financial harm just from its investigation alone of the three men, which began in June 2006, when some executives reported irregularities to the board’s audit committee. Hampshire Group said in August that the company had been advised that the SEC was also conducting an investigation and that it had also been contacted by the U.S. Attorney’s office.

In addition to the cost of its probe, the company said there was a restatement and relisting cost of $1 million; a reimbursement for fraudulent and unsubstantiated expenses of $1.4 million; unspecified costs related to Hampshire’s tax liability and penalties, and for charitable donations made to avoid paying taxes. Finally, the three former executives were charged with awarding themselves $7.2 million in unjustified bonuses.

Kuttner, with the help of Clayton and Clark, “engaged in a pattern of misconduct over many years to take fraudulently money from the company and to deny the government taxes that were duly owed, thereby enriching himself and putting the company and its many loyal employees at serious legal and financial risk,” court papers said.

This story first appeared in the April 14, 2008 issue of WWD.  Subscribe Today.

Between 1989 and 2005, Kuttner allegedly submitted $1.7 million in expenses. Of that amount, Hampshire said $1.4 million was fraudulent or unjustified. In 2003, Kuttner also allegedly reported expenses of $175,000 for the period between 1995 and 2003 in violation of a rule requiring biweekly expense reports.

Kuttner sought reimbursement for nonbusiness items based on duplicate receipts, the lawsuit said. Legal documents also contended that the former ceo once submitted 30 receipts for meals on the same day, many of them generated “within minutes of each other.” According to court records, the expenses escaped being taxed as compensation, causing the company to have “erroneous books and records and to misstate” SEC filings. A similar system was used to avoid taxes for other employees, court papers said.

In a voice mail, Kuttner allegedly was heard advising Clark to conceal the true nature of an investment “so that we will be able to change the papers on this later in case anybody ever asks,” the lawsuit said.

When Kuttner learned that Hampshire did not have a policy to cover an assistant’s tuition at Columbia University Teachers College, he had checks sent to Columbia with the student’s social security number for the amount of the tuition, and then erased the social security number in order to claim the checks as charitable donations, according to the lawsuit.

He donated Hampshire-owned sweaters to charity and encouraged employees to do the same so they could take a tax deduction, and charged Hampshire for personal transactions related to his farm in Estouteville, Va., court papers alleged.

The sweater and sportswear manufacturer is based in Anderson, S.C., but is incorporated in Delaware. The Chancery court has no jury system, and cases are decided by a judge in accordance with Delaware practice.

The Hampshire Group markets its products for men, women and children under Hampshire Studio, Mercer Street Studio, Spring + Mercer, Levi’s, Geoffrey Beene, Dockers and Aqua-Blues brand names. The company sells its products primarily to department stores, mass merchants, specialty retail stores and catalogue companies.

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