NEW YORK — Christopher Finazzo, the former chief merchandising officer at Aéropostale Inc., is finally having his day in court.
This story first appeared in the April 10, 2013 issue of WWD. Subscribe Today.
Charged with 16 counts of mail and wire fraud, as well as conspiracy charges, Finazzo was ensnared in a multimillion-dollar kickback scheme that also involved Douglas Dey, his best friend and owner of Aéropostale’s graphic T-shirt vendor, South Bay Apparel.
The criminal trial began Monday, with jury selection, in a Brooklyn federal court before Federal District Court Judge Roslynn R. Mauskopf.
Wearing a navy suit, white shirt with navy stripes and a navy tie, Finazzo seemed in good spirits, supported by family and friends who were in attendance.
Opening statements from both sides were heard Tuesday. There was no contest over the fact that Finazzo received money from South Bay Apparel as a shareholder in a company called C & D Retail Consultants Inc. that Finazzo set up. And while the government prosecutors focused on the financial harm caused to Aéropostale from the alleged kickback scheme and the nondisclosure of his relationship with Dey, South Bay and C & D, the defense elected to zero in on how “this case is about success.”
Assistant U.S. District Attorney Winston Paes told the 12-member jury panel, “As cmo, he was the second most powerful man at Aéropostale. With $20 million in salary, bonuses and stock options, it was not enough. He was greedy. He wanted more.”
Paes told jurors how Finazzo began at the teen retailer in 1996 as the chief merchant for men’s before moving up to cmo and having oversight of women’s as well. “The defendant saw an opportunity to make money for himself at Aéropostale’s expense,” the prosecutor said, noting how orders for graphic tees were “diverted” to South Bay, with Finazzo receiving “kickbacks in the amount of 50 percent of South Bay’s profits from its business with Aéropostale.” Paes also noted that when the retailer became a public company in 2000, Finazzo as a corporate officer did not disclose his “outside business arrangement” in required regulatory filings with the Securities and Exchange Commission.
Paes also noted that if Aérsopostale paid more for the items, South Bay made more money, with Finazzo in turn getting the benefit. “You can’t be on both sides,” Paes emphasized, and explained that Finazzo’s decisions to give orders to South Bay also hampered the retailer’s employees, whose bonuses were tied to profits. “Employees could not increase the profitability of the graphic-tee business. Their hands were tied. They could not bring in competition or freely negotiate prices,” he said.
South Bay, whose core competency was in graphic Ts, later obtained orders for fleece merchandise, and when they couldn’t make their deliveries, that resulted in lost money to Aéropostale, Paes added.
He described the scheme as a “masterful manipulation,” and said that the “defendant had a choice, but he chose to steal.”
Robert Zito of Carter Ledyard & Milburn, Finazzo’s lead defense counsel, told the jurors, “Contrary to what the government tells you, this is about success. Joint success; partnership success.”
He told them that in 1996, Aéropostale had $123 million in sales, which grew to $1.4 billion in 2006. Those two years also reflect Finazzo’s starting year at the retailer, and the year in which he was fired from the company.
“As Aéropostale grew sales, it also grew gross profit,” Zito said. He emphasized that gross profit was 13.8 percent in 1997 and 32 percent in 2006, giving jurors the impression that much of that growth can be attributed to Finazzo.
Zito also explained the differences between overseas production, and how it requires several months of lead time, and the benefit of working with a domestic supplier such as South Bay and its ability for quick replenishment. The latter’s ability was centered on its purchase of blank T-shirts and being able to print the graphics as needed, with delivery to the retailer’s stores within 24 hours. He concluded that South Bay’s sophistication in quick replenishment justified the higher costs: “It’s more expensive because it has to be.”
According to Zito, “Finazzo caused no harm to Aéropostale. He helped Aéropostale succeed in a competitive marketplace.”
Zito described his client and his friend Dey as “not sophisticated guys. They were unsure of the legal system. They split profits before [Finazzo joined] Aéropostale and after. Sometimes they split the profits 50 percent.”
The lawyer then shifted the focus to Finazzo’s accountant, who knew Finazzo and Dey were friends and who was the one who “decided how the finances work.”
As for the nondisclosures on the SEC documents, Zito noted that Finazzo “did not even graduate from college.” And when questioned about his relationship with South Bay during his exit interview, Zito said: “He doesn’t answer the way he should. He doesn’t answer financial details. Chris is stunned. He doesn’t know what to say.”
Zito closed his overview by noting, “No one gets hurt in this case. There is no victim in this case….This case is about success.”
The day’s testimony began with that of Michael Cunningham, former chief financial offer and president at the teen chain, who retired in March.
Cunningham told the court that the nondisclosure was important because if an employee is also transacting business with a vendor, the company needs to make sure the prices it pays are the best for the services being rendered.
As for knowledge of the nondisclosure, Cunningham said that in preparation for the initial public offering, the retailer hired the law firm of Kirkland & Ellis to hold a training session, which Finazzo was a part of, to go over the questionnaire filed with the SEC in which Finazzo is alleged to have failed to disclose his relationship with South Bay.
He also testified that at one point, former chief executive officer Julian Geiger wanted to move 25 percent of the orders to South Bay to overseas suppliers to lower the retailer’s costs. According to Cunningham, as Geiger pressed to move on overseas production, Finazzo became more agitated. During the last meeting that Cunningham, Geiger and Finazzo had on the topic, Finazzo became “agitated, slapped the table, slammed the door and the entire room vibrated.”
According to the U.S. Attorney’s Office, if Finazzo is convicted, the maximum term of imprisonment for each count of mail and wire fraud, as well as the conspiracy charges, is 20 years.
Mauskopf, in her preliminary instructions to the jury in a trial expected to last from four to five weeks, reminded the panel that Finazzo pleaded “not guilty,” and that the government has the “burden of proof beyond a reasonable doubt….The defendant is presumed innocent of the charges that he has received.”
Dey in September pled guilty to a conspiracy charge to violate the Travel Act, which carries a penalty of five years imprisonment and the forfeiture of $7.5 million. He is still awaiting sentencing. The federal Travel Act essentially bars traveling between states or countries or the use of U.S. mail or “any facility in interstate or foreign commerce” to further certain types of criminal activity.