Byline: Jeff Siegel and Arthur Friedman

NEW YORK--The tough going for The Leslie Fay Cos. keeps getting more and more difficult.
The latest pothole came when the U.S. Trustee overseeing Leslie Fay's Chapter 11 case filed a motion late Wednesday seeking to remove Weil, Gotshal & Manges as Leslie Fay's bankruptcy counsel, a job it has held since Leslie Fay filed for bankruptcy in April 1993.
In a statement Thursday, Leslie Fay said it "strongly disagrees" with the U.S. Trustee's motion to disqualify Weil, Gotshal and said that such a move would have a "devastating impact" on its reorganization efforts.
The trustee's recommendation comes as the company has been forced to cut its earnings projections twice in the last month and last week announced the closing of its Theo Miles division. This week Donald F. Kenia, Leslie Fay's former controller, was charged with fraud by federal authorities for his role in the massive accounting scandal that forced the company into Chapter 11. Kenia, authorities said, is cooperating in a continuing investigation of the fraud and has signed a plea agreement.
In his motion on Weil, Gotshal, trustee Arthur J. Gonzalez argued that the law firm was not a disinterested party when it signed on as Leslie Fay's counsel, because the law firm represented several different parties, including members of Leslie Fay's board--Odyssey Partners, Bear Stearns and BDO Seidman--when the fashion company conducted its independent examination into the accounting scandal that resulted in its bankruptcy filing.
Gonzalez, who also wants the court to levy a fine against the powerful bankruptcy firm for failing to disclose the potential conflict of interest, said he disagreed with the court-appointed examiner's report released in August which said there was no evidence of actual harm to Leslie Fay as a result of the law firm's actions.
In that report, examiner Charles Stillman found the law firm acted improperly by not disclosing its potential conflicts of interest, but that its actions did not warrant disqualification. Instead, Stillman suggested that an "appropriate sanction" would be partial disallowance of future fees.
Gonzalez, however, said in his motion, "Weil, Gotshal had an actual conflict of interest because its connections with members of the audit committee, who were themselves connected with significant clients of Weil, Gotshal, deprived the audit committee's report of its necessary credibility to the detriment of the estate."
Even if the court were to find that there was not an actual conflict of interest but only the appearance of one, Gonzalez said he believes that Weil, Gotshal's disqualification is "warranted."
As for possible economic sanctions, Gonzalez said the court should impose a fine that "will preserve the integrity of--and the public's confidence in--the bankruptcy system."
Leslie Fay said in its statement that it has "full confidence" in Weil, Gotshal and believes the firm has "served us extraordinarily well throughout the reorganization process," the company said.
Leslie Fay added that it would ask the court to deny the trustee's motion.
Weil, Gotshal responded to the motion by charging that Gonzalez's claim that it was not
a disinterested party is "totally without merit."
"The assertion that our firm lacked the required disinterestedness in this matter is inconsistent with the actual facts and we will vigorously contest it," the law firm said in a statement.
Weil, Gotshal said it will respond to the Trustee's motion on Nov. 4.
Ronald S. Itzler, a partner at Fischbein, Badillo, Wagner & Itzler, said a change of counsel at this stage would have a "detrimental effect, but not a fatal effect," on Leslie Fay's reorganization.
A change would "slow things down," said Itzler, explaining that there is a "learning curve" that must be met before the case can resume its normal speed.
He added that each bankruptcy case has its own intangibles, such as the attitudes and relationships of all those involved in the case, and "that's going to disappear with new counsel."
Another attorney who spoke on the condition of anonymity said Leslie Fay's Bankruptcy Judge, Tina L. Brozman, will not blindly follow the U.S. Trustee's motion and will instead "make her own determination." For industry executives and analysts familiar with Leslie Fay, the continuing "negative news," as one source put it, can only have a detrimental effect.
Andrew Jassin, a partner in Marketing Management Group, an industry consulting firm, noted: "Weil, Gotshal has been a real friend to management throughout the proceedings, and it's no wonder, given their relationships to members of the board. If they are dismissed from the Chapter 11 case, it will hurt Leslie Fay because it could take two to three months for a new law firm to get up to speed."
Jassin said the real victim in the Leslie Fay scandal is the small investor who tried to get a piece of "the American dream, a flourishing fashion company," but instead got fooled or duped in the accounting scandal.
As for the criminal aspect of the situation, Jassin said, "Donald Kenia did not do this himself. The chain always breaks at its weakest link. It will be interesting to see who he fingers as giving him the orders or of having knowledge of the accounting irregularities. I'm sure his counsel is advising him to tell all. The more he tells, the less time he will likely serve."
One industry veteran familiar with Leslie Fay agreed "the news has been all negative."
"Nobody knows what will happen criminally," he said. "They seem to have their interim financing in place. So, in the end, it will all come back to product. Their reputation has been tarnished, but only among the retailers. Leslie Fay still has strong consumer recognition. If the product is good, the company will be good."
The industry source feels Leslie Fay is missing key personnel in merchandising that can update the line and give it excitement. The same source said the "word on the street" is that middle management, not top management, may have pressured Kenia to juggle the books because their bonuses and job security depended on it.
Meanwhile, Arthur Levine, chairman of the Kasper for ASL division of Leslie Fay, is still trying to buy back the firm he sold to the company 12 years ago.
A source close to the company said the problem is trying to reach an agreement with creditors that would keep Levine and other top Kasper management in place.
"I would say the sale will come sooner than later," said the source.
Sale of the Kasper division would cut Leslie Fay's volume by more than half, and make it even less profitable than it already is.
"Basically, you would have an empty shell, with nothing but trouble filling it," said another source close to the company.

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