LOS ANGELES — New allegations have emerged in court of a pump-and-dump scheme that may have contributed to the shuttering of the famed Los Angeles boutique chain Kitson back in 2015.
An amendment filed Wednesday to a now year-old lawsuit in Los Angeles Superior Court by Kitson founder Fraser Ross alleges the retailer’s lenders overstepped their role to take charge of the business for their own gain.
The original lawsuit filed last year named former Kitson chief executive officer Chris Lee as a defendant, alleging fraud, unfair competition and unjust enrichment, among other things. Ross in that complaint accused the ceo of taking advantage of him when he was most vulnerable, recovering from a staph infection that placed him on life support and in a state of recovery in the years following. Among the original charges was the allegation that Lee fraudulently induced Ross into signing away his shares in Kitson for $300.
The amended complaint adds Kitson lenders Salus Capital, HGI Asset Management Holdings LLC and Spencer Spirit Holdings Inc. to the lawsuit based on additional information, some of which stems from Salus president Andy Moser. Salus and HGI Asset Management are part of holding company HRG Group Inc.
HRG Group, Spencer and Moser did not respond to requests for comment.
Moser is cited in the amended complaint stating that “in his opinion, it was not commercially reasonable for Salus and Spencer’s to take over the company’s operations and hiring decisions in light of their role as lenders.”
Salus, which provided a $15 million revolving line of credit to Kitson in May 2013, did so without a license to lend in the state of California, which WWD confirmed with the California Department of Business Oversight.
The lawsuit states, according to Moser, that Salus was twice denied for a license. The complaint goes on to claim the lender couldn’t obtain a license because of its affiliation with HRG, previously known as Harbinger Group. Harbinger founder Philip Falcone and his advisory firm Harbinger Capital Partners paid out more than $18 million in 2013 as part of a settlement agreement with the Securities and Exchange Commission for securities fraud.
Salus’ lending spree, despite not having a license, continued in the state. However, as it started to wind down operations in 2015, it began increasing pressure on borrowers to repay their loans as it scrambled to offset significant losses from its $250 million loan to RadioShack, according to the lawsuit.
In Kitson’s case, Salus brought on Spencer — parent to the Spencer’s retail gift chain — and its affiliate BHK Investments LLC to supply Kitson with a $4 million loan.
“After Spencer’s infused capital into Kitson, Spencer’s and Salus began to assert direct operational control over Kitson, acting entirely outside of their capacity as lenders, and running the company to ruin, solely to privilege their interests as lenders,” the complaint said.
The lawsuit alleges former HRG Group and Spencer’s executives “ran the company in a way that exposed the conflicts of interest: they made business decisions on behalf of the company that privileged their interests as lenders over the best interests of the company.”
The two lenders also worked together to pump the boutique retailer’s stores with inventory while avoiding payment to vendors in a bid to boost their security positions just ahead of the chain’s liquidation, the lawsuit alleged.
“Salus and Spencer’s ordered more inventory than Kitson could sell, and promised the vendors that they would be paid upon the sale of their merchandise,” the complaint said.
Kitson began store closing sales in mid-December 2015 and later fell into general assignment, an alternative to Chapter 7 liquidation. Its doors closed for good in January 2016 with the trademark rights subsequently being acquired by Tokyo-based firm Kitson Co. Ltd. in December.
Amjad M. Khan, partner at Brown, Neri, Smith & Khan and Ross’ legal counsel, declined to estimate how much damages could potentially total in the case.
“The truth will come out and the courts will decide,” said Lee, who declined further comment on the allegations made against him and the amended complaint, which he said he had not yet seen.
Ross appears to have similar faith in the legal system: “As my lawyers inform me, we’ll let the courts decide.”
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