Douglas Dey, the owner of a former supplier of Aéropostale Inc., was arraigned on Monday in Brooklyn federal court in connection with a multimillion-dollar kickback scheme that also has ensnared Christopher Finazzo, the chain’s former chief merchandising officer.

This story first appeared in the June 15, 2010 issue of WWD. Subscribe Today.

According to the U.S. Attorney’s Office in Brooklyn, the 28-count indictment — unsealed on Friday — charged the two with mail and wire fraud, money laundering conspiracy and conspiracy to violate the Travel Act. Finazzo was also charged with “causing Aéropostale to make a false statement in a report that was filed with the Securities and Exchange Commission.”

Dey, 53, owner of South Bay Apparel, entered a plea of not guilty and was released on a $2.5 million bond, according to a spokesman for the U.S. Attorney’s Office. Finazzo, 54, was arrested and arraigned on Friday and released on bail after posting a $3 million bond.

Finazzo was employed by Aéropostale from July 1996 through his termination in November 2006.

Representing Dey, T. Barry Kingham of the law firm of Curtis, Mallet-Prevost, Colt & Mosle LLP in New York, called the indictment of Dey “unfounded” and asserted he wasn’t guilty of any crime. “We are confident that, once the facts are fully established, the court and jury will realize there was nothing illegal about the highly successful relationship between these two companies and Doug Dey will be completely vindicated,” Kingham said.

According to the indictment, Finazzo incorporated a firm called C & D Retail Consultants Inc. The indictment said Finazzo “caused Aéropostale to pay South Bay more than $350 million as payment for its merchandise” between August 1996 and November 2006, and that, over the same period, Dey paid Finazzo, through bank transfers to C & D, more than $14 million.

Finazzo’s attorney, Robert Zito at Carter Ledyard & Milburn, said, “We hope to reach a speedy resolution with the government.”

FBI acting assistant director in charge George Venizelos said, “Finazzo and Dey allegedly entered into a sweetheart deal that was essentially a kickback scheme — Finazzo funneled a third of a billion dollars in purchases to Dey’s company and personally got millions in return.”

U.S. Attorney Loretta Lynch said, “We will aggressively pursue and prosecute those who use their positions of influence and trust in senior management to steal from their companies and the companies’ shareholders.”

According to the U.S. Attorney’s Office, if convicted, the maximum term of imprisonment for each count of mail fraud, wire fraud, money laundering conspiracy and making a false statement is 20 years.

If the cases do proceed to a trial, a legal source familiar with the matter said one possible point of contention would be that South Bay did provide “real goods and services to Aéropostale, under competitive market prices that were not inflated,” suggesting Aéropostale was also a beneficiary of merchandise produced by South Bay. Kingham asserted that South Bay’s products “made millions in profit for Aéropostale” and that the chain “only profited” from the relationship.

At the time of Finazzo’s termination in 2006, Aéropostale said its investigation into the matter revealed he held an ownership interest in an affiliate of South Bay. In 2008, he filed a lawsuit in Manhattan federal court against the U.S. Securities and Exchange Commission alleging the SEC used information it got from privileged communication between him and his lawyer in its probe related to his firing from the teen retailer. That lawsuit was subsequently dismissed as premature.

Finazzo was promoted to executive vice president of Anchor Blue, owned by private equity firm Sun Capital Partners Inc., in March.

Calls to Aéropostale, Anchor Blue and Sun Capital weren’t returned.

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