NEW YORK — The heat’s getting turned up on the accounting practices of bankrupt companies, and the flames are moving closer to those in the fashion business.
Bankrupt Warnaco Group in its annual report, Form 10-K, filed with the Securities and Exchange Commission on Wednesday, said that it was informed by the SEC staff that they intend to "recommend that the SEC authorize an enforcement action against the company and certain persons who have been employed by or affiliated with the company since prior to Jan. 3, 1999, alleging violations of the federal securities laws." Enforcement actions tend to be civil, not criminal, in nature, and several sources suggested this was the case with Warnaco.
Separately, a Delaware bankruptcy court on Thursday set a trial date in the $500 million litigation between the Montgomery Ward unsecured creditors committee and General Electric Capital Corp., now scheduled for June 2003. The lawsuit details allegations of accounting games played by GE Capital’s management and their effect on the defunct retailer, as well as the granting of stock options. Thursday’s decision came as part of a bankruptcy-court hearing in which the judge, based on votes cast by Ward’s creditors, confirmed the unsecured creditors’ plan to liquidate Ward’s assets, and let the litigation against GE Capital proceed.
As reported, Warnaco’s 10-K named its Designer Holdings Ltd. subsidiary as the source of some of the accounting errors that necessitated a $43 million charge announced in August 2001, along with the restatement of financial results for three years beginning with fiscal 1999. The unit, which held the Calvin Klein jeanswear license, was acquired by Warnaco in September 1997, and Warnaco retains the license.
Speaking of the SEC authorization, Arnold Simon, president of Aris Industries, and president and chief executive officer of Designer Holdings at the time of its acquisition by Warnaco, said: "It couldn’t have anything to do with Designer Holdings. It was a public company and it had as its auditor Coopers & Lybrand. Besides, Warnaco conducted due diligence when it bought the company."
Coopers & Lybrand today is PricewaterhouseCoopers.
According to the SEC filing, the errors involved the recording of inter-company pricing arrangements, the recording of accounts payable primarily related to the purchase of inventory from suppliers and the accrual of certain liabilities. The filing attributed certain of these errors to the company’s European subsidiaries.Both the SEC and Warnaco executives declined comment. Linda Wachner, former Warnaco ceo and current board member, wasn’t available for comment, but her spokesman Howard Rubenstein, of Rubenstein Associates, said: "It is the company that is doing the filing and we have no comment." The filing referred to by Rubenstein is a document called the Wells Submission.
Ira Sorkin, a partner at Carter Ledyard & Milburn and a former deputy chief of the criminal division at the U.S. attorney’s office in Manhattan, explained that a Wells document is "submitted by a potential defendant or respondent in an SEC potential action." He said that those filing such a document earlier receive from the SEC staff information on what violations a possible enforcement action might address.
The document is initially read by the SEC staff, Sorkin said, who will decide whether to proceed with the recommendation that further action be undertaken by the Commission. If the staff chooses to recommend an enforcement action, the Commission then reads the Wells document to determine whether or not it should proceed with the initiation of the action.
Sources said that SEC procedures give Warnaco a few weeks to file the paper work, which under the Commission’s rules must be kept to under 40 pages.
Warnaco, for its part, said in its 10-K that it "does not expect the resolution of this matter as to the company to have a material effect on the company’s financial condition, results of operation or business."
It could not be ascertained at press time which individuals — either former or current executives — might be a party to the SEC enforcement action if one was initiated.
In addition to the SEC, New York State Attorney General Eliot Spitzer is reportedly investigating the legality of stock options and other forms of executive compensation, particularly those granted to executives at bankrupt companies. His office declined comment on the status of the investigation.
Still to be determined is the status of the SEC investigation that is currently ongoing in the Kmart bankruptcy. As reported, that investigation, with the assistance of the Detroit office of the Federal Bureau of Investigation, has been ongoing since the beginning of the year.At Kmart’s launch of the Joe Boxer collection at its Astor Place store in Manhattan on Thursday, James Adamson, the retailer’s chairman and ceo, said that the investigation is being conducted through the stewardship of three committees: trade, finance and equity. "The investigation will take time. The board wants to know what happened and why," he said. Adamson also said that the investigation is an internal one, with the "SEC relying on our own investigation."
As for the Ward matter, the lawsuit involved charges that GE Capital "manipulated Ward’s financial structure" and that creditors were "duped into extending hundreds of millions of dollars in unsecured credits to the debtors. In addition, the lawsuit charged that Jack Welch, former ceo of GE Corp., the parent of finance arm GE Capital, "arranged a GE grant of stock worth $2.5 million to [former Ward’s ceo Roger] Goddu as a quid pro quo for Goddu rejecting J.C. Penney’s offer" of the ceo spot and remaining at Ward’s. Goddu was approached by Penney’s in May 2000.
GE Capital filed its answer in March, denying the charges and seeking to dismiss the lawsuit. Creditors, in addition to the $500 million in damages, also want an order that GE’s $1 billion in claims be subordinated behind the claims of creditors. GE Capital had filed a competing plan of reorganization that would have included the dismissal of the lawsuit, a move that creditors voted down.
As corporate scandals dominated the headlines, the Dow Jones Industrial Average suffered a 229.97 point, or 2.6 percent, setback, ending the day at 8,506.62. The Nasdaq dropped 48.26 points, or 3.6 percent, to 1280.00, but the Standard & Poor’s Retail Index pulled back even further, withering 11.61 points, or 4.1 percent, to end a stormy session at 272.63.
“My personal philosophy to beauty is paying attention to oneself. I love to be outdoors, lots of fresh air, trying to take care of yourself as best you can. I always notice that comes through,” says Felicity Jones, the global face of @shiseido-owned @cledepeaubeauteus, which launches today. Head to WWD.com to read more about the actress’ love for beauty and how she prepared for her new role in “The Basis of Sex,” playing the young Ruth Bader Ginsburg. #wwdbeauty (📷: @dandoperalski)
For men’s fall 2018, @giuseppezanotti drew on elements from streetwear, sport, biker, combat and rock ‘n’ roll. Pictured here are a pair of shoes from the collection, featuring zippers, rhinestones, and silver hardware. Head to WWD.com to see a roundup of the accessories from Milan’s men’s fall 2018 shows. #wwdfashion (📷: Andrea Delb)
To celebrate the 25th anniversary of @ralphlauren’s snowboarding collection, the brand is mining its archives. The iconic brand is reintroducing vintage styles and dropping new designs for a color capsule that will be available in Ralph Lauren stores and @openingceremony on January 25. The capsule will consist of 10 pieces, including the Snow Beach Pullover, pictured here, which is a collector’s item that rapper Raekwon wore in Wu-Tang Clan’s “Can It Be All So Simple” video. #wwdfashion (📷: Tom Gould)
For @rochasofficial’s pre-fall 2018 collection, creative director Alessandro Dell’Acqua channeled the sophisticated and intriguing Catherine Denevue in the film “Belle de Jour.” Polished collarless coats, midi skirts, suits and ’60s graphic motifs were all featured in the collection, adding a sense of discreet luxury. See the rest of the photos on WWD.com #wwdfashion
“We tried to produce clothing of that couture quality, but the most daunting part was that we only had a matter of days [to do it],” said costume designer Lou Eyrich, who recreated Gianni Versace’s iconic looks for @americancrimestoryfx. Eyrich searched online retailers and vintage shops for original pieces from the design house and for @penelopecruzoficial, who plays Donatella Versace. Head to WWD.com to read how she created the Versace world. #wwdfashion
Only three months after her stellar debut catwalk season, @kaiagerber has inked her first big design collaboration –– with @karllagerfeld. The collection blends Lagerfeld’s Parisian chic aesthetic and the model’s signature West Coast casual style via RTW, accessories, footwear and more. The #KarlLagerfeldxKaia collection will launch in September with a series of events. Get all the details on WWD.com. #wwdnews #wwdfashion
Harrods plans to remove the famous statue of Princess Diana and Dodi Al Fayed from the bottom of the Egyptian escalators and hand it back to Mohamed Al-Fayed. “We are very proud to have played our role in celebrating the lives of Diana, Princess of Wales and Dodi Al Fayed at Harrods and to have welcomed people from around the world to visit the memorial for the past 20 years,” said Michael Ward, Harrods managing director. “With the announcement of the new official memorial statue to Diana, Princess of Wales at Kensington Palace, we feel that the time is right to return this memorial to Mr. Al Fayed and for the public to be invited to pay their respects at the palace.” More on the news, with reporting by @loreleimarfil, at WWD.com. #wwdnews