By  on June 26, 2007

NEW YORK — Nine months after Elie Tahari filed a lawsuit against Andrew Rosen, his former business partner in Theory, the case has been decided overwhelmingly in Rosen's favor.

Justice Helen E. Freedman, of New York State Supreme Court, dismissed six claims related to the sale of Theory, but granted one that involves royalties Tahari claimed he is owed for the sale of Theory clothing in Asia.

Besides Rosen, the defendants included Ricky C. Sasaki, Link International, Link Theory Holdings Co., Fast Retailing Co. and L&F Holdings.

In September, Tahari filed a lawsuit seeking no less than $180 million in damages from Rosen and nine other defendants, alleging "commercial treachery and fraudulent self-dealing." In the suit, Tahari charged Rosen defrauded him into selling Theory at a price that didn't reflect the U.S. company's true value. Further, the suit alleged the new Japanese owners resold Theory in an initial public offering on the Tokyo Stock Exchange in 2005 at a market capitalization of more than $500 million — nearly five times the sale price of Theory LLC less than two years before. Tahari sought to recover half of the $500 million market capitalization of Link Theory Holdings in 2005, minus the amount that he received for his interest in Theory in 2003, as well as royalty payments.

In 2003, when Tahari agreed to sell his interest in Theory to an acquiring entity created by Link International, Fast Retailing and L&F Holdings, Tahari received approximately $53 million, according to the suit. Rosen sold his one-half interest for about $49 million, together with 11 percent of L&F Holdings, which held the U.S. operations of Theory.

Dismissing the six causes of action, the judge ruled that "allegations that consist of bare legal conclusions or that are flatly contradicted by documentary evidence or are inherently incredible are not entitled to such consideration." The legal filing states that theories in which Tahari sought to recover the proceeds of Link Theory Holding's public offering "are either contradicted by the relevant contracts or are purely speculative and conclusory."

According to the court documents, the crux of the defendants' position "is that this is a ‘classic case of seller's remorse' for which Tahari has suffered no cognizable injury.""The fact that all material information was disclosed in the purchase agreement and accompanying documents belies Tahari's claim that he reasonably relied on Rosen's oral statements and was defrauded into selling his interest. In any event, Tahari is not entitled to the damages he seeks, a portion of the market capitalization of LTH in 2005, because Tahari received full compensation for his interest in Theory," according to the legal documents.

Furthermore, the ruling states, "It is also speculative to assume that had Tahari not sold his interest, he could have expanded Theory himself, convinced Rosen to continue to work for him or hired a comparable replacement to manage Theory, commenced an initial public offering, and realized the same amount from a public sale as did the owners of LTH. Thus, Tahari cannot demonstrate reasonable reliance or an actual out-of-pocket injury and the fraud case is dismissed," according to the ruling.

The document states that at the time of the sale, "Rosen's and Tahari's financial interests were aligned. If the $100 million sale price of Theory understated the value of the company, then Rosen and Tahari would have been equally harmed.…There is no indication that Rosen concealed specific financial information relevant to the valuation of Theory or that Rosen prevented Tahari from discovering relevant information or obtaining an independent appraisal."

The ruling noted that Tahari and Rosen hired separate counsel to represent them in the sale of Theory "and Tahari had a duty to review the documents."

"Thus, the fact that all relevant information was disclosed to Tahari and that he had an opportunity to perform an independent investigation bars the breach of fiduciary duty and negligence claims, and those claims are dismissed," according to the decision.

However, the judge upheld the seventh cause of action for breach of contract. In the suit, Tahari contended the defendants "colluded to conceal the actual royalty obligations owed to Tahari for the sale of Theory clothing by underreporting Theory sales in Asia, and that they breached the Purchase Agreement by refusing to cooperate with his demands to produce books and records reflecting royalty obligations."

In her decision, the judge wrote, "Tahari's cross motion is granted only to the extent that the remaining defendants are directed to furnish documents related to the obligation to pay royalties." The remaining defendants (LTH, LTH U.S. and Fast Retailing) have 20 days to respond.Reached for comment Monday, Rosen told WWD, "I expected a good result from this, and we couldn't be happier with the way it came out. The work we did in building the company, I couldn't understand how this all came about and why it came about.

"When Elie filed the lawsuit last September, I was shocked. I never saw it coming and didn't understand why, so the judge's decision is a good thing," continued Rosen. "It's good to have this behind us with this kind of result. I think we'll move on from here. It was unfortunate that Elie would take that kind of position. I feel it's important that the truth of the whole thing came out in the end. When someone is making accusations against myself, the Japanese people and the company, I didn't feel good about it. I do feel the judge's ruling was very satisfying."

In a statement, Tahari said, "I am pleased and grateful that the core and backbone claim which we made against my former, disloyal business associates has been sustained. We look forward to a thorough and careful evidentiary discovery where our claim and damages will be substantially amplified. In the meantime, we believe that the mistakes and conduct of those involved will become ever more visible."

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