NEW YORK — A simple 18-month-old landlord-tenant dispute involving Saks Fifth Avenue’s Wilshire Boulevard store has mushroomed into allegations of fraud and destruction of sales records against the retailer.
This story first appeared in the July 16, 2002 issue of WWD. Subscribe Today.
Alexander and Betty Haagen, landlords of the Saks Fifth Avenue store in Los Angeles, last week charged the luxury retailer with “breach of fiduciary duty to account,” constructive fraud and fraudulent concealment.
A Saks Inc. spokeswoman said: “This lawsuit was filed a couple of years ago and involves only part of one of our 360 stores. The lawsuit is without merit and we are defending it vigorously.”
The lawsuit was first filed in December 2000 in a Los Angeles federal court against both Saks & Co. and Saks Inc., and began uneventfully as a breach of contract action when Saks allegedly failed to provide documentation to allow the landlords to conduct an audit of Saks’ sales figures. Discovery, or pre-litigation procedures to gather evidence, led to the filing of new legal charges by the landlords against the luxury retailer.
Court papers filed last week said that documentation provided by Saks indicated that “accounting issues remain unresolved, involving…the apparent overstatement of employee discounts, noninclusion of sales from leased departments, improper inclusion of reductions for returns on catalog sales and understatement of studio sales.” Studio sales are the businesses that Saks does with several Hollywood studios.
Another charge raised in the legal documentation was that Saks failed to maintain proper records, as required under the terms of the lease. SFA was also accused of “destroying documents which recorded sales generated on the premises,” as well as a failure to create proper accounting controls and procedures concerning how sales are recorded.
Alan Yudkowsky of Stroock & Stroock & Lavan, counsel to the Haagens, said that the documents destroyed were cash register receipt tapes which, under the terms of the lease, Saks was supposed to keep for three years. He noted that, at a minimum, receipts for the 13 months prior to the Dec. 2000 filing of the lawsuit should have been retained, but that Saks supposedly has kept tapes only from January 2001 to the present. The attorney said that Saks’ policy is to keep those tapes for just 13 months.
Complicating matters is the actual setup of the Saks store on Wilshire, which operates out of two locations on different sides of the street. One, referred to as Saks East, is owned by the retailer, and the other, known as Saks West, is owned by the Haagens and was the former I. Magnin home. Saks was obligated to pay the Haagens, under the terms of the lease, an annual base rent due in monthly installments. The retailer was also obligated to pay on a yearly basis an additional amount based on a set percentage of the sales that exceeded a $20 million threshold.
The landlords, who were familiar with potential sales levels that could be generated at the site through their experience with I. Magnin, attempted to conduct an audit of Saks’ sales figures to find out why only the monthly installments were paid in recent years, and not the annual percentage amount. In addition, the Haagens charged that Saks “engaged in a pattern of placing its most expensive items for sale in Saks East, such as jewelry, watches, furs, designer handbags and cosmetics,” instead of selling such items at the site rented by Saks.
According to the audit investigator hired by the Haagens, John Forte of FTI Kahn, preliminary information had sales in 1996 understated by $435,847; in 1997 by $623,400 and in 1998 by $544,365. However, court documents filed by Saks’ expert, J. Duross O’Bryan of PricewaterhouseCoopers, suggest that whatever was understated had minimal impact on what was owed to the landlords.
O’Bryan’s statement to the court in May 2002, based on new computer programs created to retrieve daily sales receipts as far back as October 1999, indicated that only in 1996 did sales rise above the threshold level, and that Saks would have owed the Haagens another $7,300 for 1996. His statement said that the annual net sales figures for the Wilshire store reported to the landlords were $19.8 million in 1996, $18.9 million in 1997, $18.2 million in 1998, $18.9 million in 1999 and $18.7 million in 2000.
A trial date initially set for Sept. 3 has been pushed back to Dec. 17. According to Yudkowsky, Saks has until Aug. 1 to file its motion to dismiss the lawsuit. The Haagens are seeking the additional amounts allegedly owed as well as unspecified damages to be determined at trial and, for the fraud claims, punitive damages.
An earlier contempt motion involving Saks’ nondelivery of documentation was put on hold, but Yudkowsky said that the plan is to renew that motion. The basis for the renewal is twofold — the destruction of the cash register tapes and the withholding of electronic sales data. Yudkowsky said that Saks had represented that it did not have any electronic data available for the years in question to back up the destroyed tape receipts, but disclosed earlier this year that the data was available after all.
Saks’ attorneys at Seyfarth Shaw couldn’t be reached for comment.