Editor’s Note: This story was updated on August 18th to reflect a clarification below.
The Los Angeles retailer, frequented by celebrities and ahead of the curve when it came to the labels it carried, in December 2015 was in the midst of liquidating, discounting everything from Diesel jeans to gift cards, before closing its 17 doors for good and its intellectual property quietly sold off at the end of last year.
But the passage of time has done little to quell the whispers and accusations about what happened in the end, with questions now arising about whether Kitson fell victim to predatory lenders in an alleged pump-and-dump scheme that has a founder crying foul and an executive now whistleblowing on his former firm.
“You just can’t write this stuff,” Kitson founder Fraser Ross said of what he alleges happened in the end.
WWD spoke with more than 15 people who were involved with Kitson prior to its closure, from former executives, store employees and company consultants to vendors. Most would only speak anonymously, citing fear of retaliation in future job prospects or against their own businesses, some cringing at the thought of being associated with the mess Kitson became in the end. Similar themes emerged throughout those interviews, which painted a company in its final years that, at best, was one of the hottest retailers around but was disorganized and lacking in leadership and, at worst, fell prey to the very financial and professional services firms it had turned to when the business went awry.
Attorneys for Ross last week filed an amendment to a lawsuit now nearly a year old in Los Angeles Superior Court that was originally against former Kitson chief executive officer Chris Lee. The amendment now tacks on Salus Capital — the lender that turned heads with its $250 million loan to RadioShack in 2013 — and HGI Asset Management Holdings LLC, along with Spencer Spirit Holdings Inc. whose affiliate BHK Investments LLC later provided Kitson with additional capital. The groups’ actions in aggregate, the lawsuit claims, ultimately conspired to bring down the House of Kitson.
HRG Group Inc. — the holding company for HGI and the now defunct Salus — and Spencer did not respond to requests for comment. Lee, reached last week, also declined to discuss the allegations in the case related to him, but regarding the amended complaint, which he said he had not seen, stated, “The truth will come out and the courts will decide.”
But in the lawsuit, former Salus president Andy Moser criticized the lender, stating his opinion to Ross’ attorneys that “it was not commercially reasonable for Salus and Spencer to take over the company’s operations and hiring decisions in light of their role as lenders.” Moser also said Salus made loans to California companies without a license and twice attempted to apply for one with the state. Reached by phone, Moser declined comment to WWD on what was attributed to him in the Kitson complaint.
Amjad M. Khan, Ross’ attorney and a partner at Brown, Neri, Smith & Khan LLP, declined to estimate potential damages in the case other than to say Ross “suffered severe financial and emotional harm” from the loss of his business.
Ross, who has been trying to rebuild a retail business for the past year with a new shop called Kitross — located in the exact spot on Robertson Boulevard in Los Angeles where he launched Kitson — said he’s taken hits for the way things ended, despite the fact he wasn’t there when the company closed nor had he been controlling the business for some time before then. Some vendors now refuse to work with him or are unwilling to extend terms to his new venture, demanding some or all payment upfront, he said.
“They’ve opened up again under a different name and they’ve approached us to sell product so I don’t want to jeopardize that,” said one vendor, perpetuating the misconception in the marketplace that the same people who owned Kitson in the end opened the new Kitross concept.
“I’ve heard at the tail end of things people were saying they were talking to Fraser and he said it wasn’t his fault. I don’t know. I think that’s a bunch of bulls–t because then I heard Kitson now has opened on Robertson and it’s called Kitross,” another vendor said.
Above the dressing rooms of Kitross reads a quote from Ziad K. Abdelnour’s book “Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics.” The inscription reads: “Rumors are carried by haters, spread by fools and accepted by idiots.”
But to cut through the rumors of what actually happened at Kitson requires a dizzying schematic to comprehend the twists and turns that led to the demise of a more than 10-year-old business in less than four years.
By 2011, Kitson totaled eight stores, but Ross, its founder, had grown tired.
He was on site as early as 5 a.m. for store floor moves, oversaw the buys, checked and rechecked merchandise displays, pounded the trade show floors to find the next brand on the verge of blowing up and stalked The New York Times bestseller lists to stay in the know about what books were hot.
“He’s a genius,” said one longtime former employee of Ross.
“That is what Fraser liked to do,” said another former employee. “He would love to reorganize products, especially gifts. Anything that was a top seller, he would make sure it would be in the right place. I don’t know if you’ve ever been in a Kitson, but it’s a lot of gift tables packed with books and coffee mugs. Fraser liked it a certain way. Mugs are turned so you could see the quotes on them. And if there’s a cool pen in a box, the pen should be turned so you could see the Los Angeles logo.”
It was his thing, but it was a lot.
So, in April 2011, for the first time ever, Kitson brought on a ceo in Lee, a former Forever 21 senior vice president, to help prepare the business, which had about $25 million in revenue at the time, for a sale.
“I did want to sell because it was too big for me to handle,” Ross said of that point in time. “You have to have more infrastructure. You have to have a legal team. But no matter if you hire the staff and director of stores, you’re still the person that doesn’t sleep at night, worrying if you’re going to pay the bills and if the lights are going to get switched off.”
The idea was that Lee would serve as extra padding and help bring in the right people to take the business to the next level.
“Fraser is a gifted merchant, but he’s not a nuts-and-bolts operator,” said a source with knowledge of the matter. “A handful of stores, yes, but not a retail chain with multiple, disparate locations. Having somebody as a cushion beneath him was important and Chris was supposed to play that role. But Chris never brought in a chief financial officer that was a seasoned retail cfo. He instead brought in a family friend. And Chris himself didn’t appear to break a sweat. Fraser used to constantly complain about that. Fraser’s a workaholic, so he’d pop up in the stores all the time, fussing over every little detail. He’s a perfectionist.”
The following year, in 2012, Ross suffered from a staph infection following a dental procedure that sent him to Cedars Sinai on life support, placed in a medically induced coma. That incident would hold implications for the next several years, wreaking havoc on Ross’ health and ultimately on Kitson.
Lee, with his background in real estate at Forever 21 and ideas about what Kitson could become, exerted plenty of influence on Ross, according to one source and Ross himself, so much so that the ceo was able to persuade the founder to turn down a $26 million offer for the retailer from private equity firm Tengram in spring 2013.
Instead, Ross found himself at Spago Beverly Hills sitting with Lee and Salus’ Moser talking about a possible loan. Moser confirmed to WWD the deal was indeed consummated at the restaurant.
“Their reputation precedes them,” a source said of Salus. “They’re known as a ‘loan-to-own’ shop. They’re not known as being particularly borrower-friendly.”
Ross, direct and to the point per usual, recalled telling Moser, “I heard Salus puts people in bankruptcy.” The accusation was waved off, Ross said, and Kitson received a $15 million senior secured facility from Salus in May 2013 to pay down its debt and provide capital to grow. Ross contends the loan wasn’t necessary.
One key piece of information was left out of that fateful meal at Spago: Salus didn’t have a license to lend in California.
The firm applied for one with the California Department of Business Oversight on Jan. 29, 2015 — well after Kitson and many other loans were struck — but withdrew its application on May 18, 2015, according to a DBO spokesman. The spokesman also confirmed no license is on record for Salus parent HRG Group, or under its previous name Harbinger Group Inc.
In August 2013, Kitson opened the doors to its Beverly Center boutique, which was the start of a rapid expansion plan for the retailer now armed with fresh capital. That same month, Philip Falcone, former ceo and chairman of Harbinger Group, and his hedge fund Harbinger Capital Partners reached a settlement with the Securities and Exchange Commission in which they admitted to securities fraud and paid out more than $18 million. Falcone was also banned from the industry for at least five years and prohibited from managing Harbinger subsidiaries such as Salus. Ross’ lawsuit alleges it was Falcone’s reputation that made California unwilling to extend a license to Salus. WWD, however, was unable to confirm with the state that the lender applied twice and, if indeed denied, what the reason would have been.
The store opening spree continued for Kitson as 2013 saw six more units rolled out after the August opening of the Beverly Center. The following year brought new locations at Orlando International Airport along with Santa Anita and Brea in California and Las Vegas.
The real estate decisions were puzzling to some, Ross included, who said he argued against some of the locations or wasn’t even aware of others, such as Las Vegas, until opening day.
“It was just weird. Every week we’d be opening up a new store in the most random places ever,” a longtime employee said. “Like Brea? They’ve never even been to or heard of us [in Brea], and we just thought it was really weird but [Lee] was the ceo.”
The merchandise mix was also shifting, reported the employee, switching over to what seemed like fast-fashion vendors, fitting for a Forever 21 but not Kitson, where Ross had mastered the art of carrying high-low through the lens of pop culture and the Los Angeles lifestyle. Kitson through the years provided a platform for then-emerging brands such as Wildfox, True Religion, Von Dutch, Ed Hardy, Rebel Yell, Lauren Moshi and so on. It was also a backdrop for celebrities to launch and promote their own products, including Paris Hilton‘s namesake clothing label in 2007 or Victoria Beckham with her dVb denim line in 2008.
But with more than one conductor trying to lead the company, Kitson was being pulled in different directions and it was beginning to show.
“As Colette said, Colette couldn’t be Colette without Colette [Roussaux] and Kitson couldn’t be Kitson without me,” Ross said. “Yes, the computer tells you [historical sales data], but I know exactly what sold and what didn’t and how big the L.A. culture was.”
Vendors certainly felt the change when it came to getting paid. Late payments, sure. That’s not headline news in the retail business; they happen. But they were happening more frequently at Kitson.
“It felt awkward,” said a former employee. “Basically, there were times where, when the vendors were not getting paid, we were getting calls by these vendors and they would just be really upset. I would be with Fraser and I would be, like, ‘We can’t go into this showroom or [trade show] booth because they haven’t gotten paid yet.’ He would get really pissed off and call Chris. Then Chris said, ‘Don’t tell Fraser they’re not getting paid. Go to me.’ It was just weird to keep something from the founder of the company.”
The working environment, as one employee described it, had become toxic with workers taking sides: Team Ross or Team Lee.
By early 2015, Ross said he sent Lee an ultimatum: Either find a buyer or he was out of the company.
But on April 13, 2015, the lawsuit alleges, Lee took Ross to a doctor’s appointment where it was advised Ross was not to work given his fragile health following a relapse stemming from the staph infection. Immediately following the appointment, Ross, under heavy medication, was taken to the law offices of Jeffer Mangels Butler & Mitchell LLP — the subject of another lawsuit brought by Ross for legal malpractice and breach of fiduciary duty — where he was told the company was close to insolvency. Ross claims he then, unknowingly, proceeded to sign off on not only his resignation, but the transfer of his equity in the business to Lee for $300. The check was never endorsed or deposited by Ross and was later returned for insufficient funds, according to Ross’ lawsuit.
Ross, when asked why a lawsuit or greater push back hadn’t occurred sooner, said that watching the business erode as he was continuing to recover from his illness took an emotional toll.
“I couldn’t believe it,” he said. “Ask anyone that was in a position of my level. Ask anyone that. You can’t recuperate. You have an emotional breakdown. What was done to me — I worked 18 hours a day and this guy did nothing. It was the hardest thing you can go through in life. People don’t know. It’s like losing a loved one because, you know, the problem is people don’t know the back history. My parents abandoned me at a young age. I [was] in an orphanage. Kitson was my middle name. The business was my child and it was — they don’t know. People don’t realize and they can [assume] whatever they want.”
As all of Salus’ business began its wind down in 2015, the focus turned to recovering money from its loans, following its disastrous $250 million bet on RadioShack.
“Finance companies are not wound down the way that Salus was,” an industry source said. “Capital providers decide to go home all the time and people change their minds about what they do and there’s ways to do that, and a lot of these companies were victimized in the process. That’s unfortunate.”
South of Los Angeles, another case in U.S. bankruptcy court for the central district of California has pit some vendors of the discount home goods retailer Anna’s Linens against several defendants, including Salus Capital. (Anna’s Linens filed for Chapter 11 in June 2015.) Accusations of a pump-and-dump scheme have also reared their head in that lawsuit. An attorney for the Anna’s Linens vendors declined to discuss the case. Damages, based on calculations from the complaint, are estimated to be at least $150 million.
In another matter, Canadian retailer Laura’s Shoppe Inc. — which in July 2015 filed its notice of intention under Canada’s Bankruptcy and Insolvency Act — claimed in court its planned restructure was initially supported by Salus, but the firm later reneged on that support, instead sending a demand latter for repayment of its loan and pushing for the retailer to liquidate its stores. Real estate firm Cadillac Fairview ultimately provided Laura’s with $10 million to buy inventory for the fall 2015 season and move forward with a restructure.
Dallas-based Tandy Brands Accessories Inc., which struck a deal with Salus in July 2013 on a $29 million loan, filed for Chapter 7 liquidation in March 2014. Last spring, the trustee in its liquidation case filed separate complaints against Salus and 360 Merchant Solutions. The trustee alleged Salus paid itself $1.35 million after Tandy’s Chapter 7 filing along with $774,532 in additional fees paid out to professional services firms, of which a little over $500,000 went to 360 Merchant Solutions. The payments to 360 were approved by then-Salus president Kyle Shonak, according to the trustee’s complaint. (Money exiting a company in the midst of a bankruptcy proceeding must receive court approval.) This spring, the parties reached a settlement that included Salus paying $550,000 to the trustee in exchange for the dismissal of all claims.
In Kitson’s case, Ross’ lawsuit claimed Salus tightened the screws and sought to pad its security position by getting BHK Investments LLC to pump $4 million into the business in May 2015. BHK is an affiliate of the parent to retailer Spencer. The deal brought Ross on as a consultant, although he claimed in the lawsuit only the signature page was produced for him to sign and buried in that document was the waiver of his right to be repaid on a $2 million loan he made to Kitson months earlier.
Salus and Spencer then began working together to control the retailer, according to the lawsuit.
The complaint alleges former Salus president Shonak and former HRG president and ceo Omar Asali worked with Spencer ceo Steven Silverstein and cfo Isaac Silvera to “run 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.”
Shonak did not respond to a request for comment. Asali left HRG in November and WWD was unable to reach the executive. The lawsuit also posits Fidelity & Guaranty Life, part of HRG Group, was part of an investment committee that approved the Kitson loan and alleges Asali “was motivated to perpetrate the ‘pump-and-dump’ scheme so that he could protect his balance sheet at Fidelity & Guarantee Life.”
The lawsuit claims the two lenders drove Kitson inventory levels up to unsustainable levels to turn a profit via the liquidation.
“Immediately after funding the $4 million loan, Spencer installed its own personnel at Kitson to make all of the company’s financial buying decisions and merchandise plans,” the lawsuit alleged, adding that Silverstein and Silvera hired Mark Howell, the former head of global retail for Oakley, for a 90-day consulting gig less than two months prior to the liquidation, to serve as vice president of retail. The lenders also brought on chief merchandising officer Dyan Jozwick, who had before that worked for the multibrand, off-price operator National Stores Inc. She had also served as president of Delia’s and held executive positions at Sears, Bebe and Wet Seal.
Jozwick would later be named president of Kitson, but her seven-month stint appears to have been cut short based on a LinkedIn recommendation from former Kitson spokeswoman Courtney Diroll Saavedra. The recommendation noted “[Jozwick’s] tenure was interrupted by the decision from outside financial sources to sever ties with the brand, precipitating its dissolution…”
The recommendation was removed not long after WWD put in a request for comment from Jozwick on the meaning of the financial sources being referenced.
Meanwhile, the product mix at Kitson continued to change and there was greater pressure to bring inventory in, two former employees reported.
“Even the stock guys would come in asking, ‘Are we putting this on the floor? Look at the quality.’ It was from downtown L.A.,” one employee said. “It was this mass-produced stuff that was just garbage that we wouldn’t put in our store. It was just not our customer. It was not our look and I don’t know if they were just trying to bring stuff in to get those receipt dollars in. I’m sure that had something to do with it from all the pressure from Spencer. They didn’t care what we were bringing in as long as we got the dollar amount.”
“It was just really all about bringing in merchandise,” another former employee said. “I can’t explain it, but the day-to-day activity focused more on sales and numbers and it was chaotic.”
In one curious story, a Kitson vendor recalled order sizes growing and a final shipment to Kitson in late 2015 that came into the warehouse but was kicked back to the company with no explanation. Yet, the retailer accepted a shipment from the vendor’s friend that arrived to the warehouse that same day.
Another vendor, who also noted a surge in order sizes, said in retrospect it was a red flag but it seemed justified at the time because Kitson said the line was being expanded to more doors. Plus the vendor’s executives shipped their final order to Kitson because the previous order had been paid — or so they thought. The money was removed from the company’s bank account a few weeks after the check had been deposited.
“It felt grimy, the whole situation,” the vendor said. “We’re sitting there as a small business. We’re trying to find a good presence in the L.A. market and we try and build a partnership with each store. In retrospect, I wish we had known.”
Another vendor, who had been doing business with Kitson for only a handful of months, reported strong sales from a November in-store event but was crushed to find out a few weeks later from a client that the company’s product was on mark down.
“We had no control; it was painful. People literally in their Vegas location and their L.A. location were just getting our [merchandise] for really cheap,” the vendor said.
All the while, Ross’ role at Kitson continued to dwindle. In the beginning, he tried to inject his two cents on the buying team. Some listened; others thought he was being overbearing.
“I’m firm with the staff, you know, whether they like it or not because I call them out,” Ross said. “You have to understand when you’ve got the power of the pen, as a buyer, that’s a big pen to hold. You know, [your] ethics need to be very strong and I tried to teach them. I tried to be their mentor.”
In the end, he was directed to handle the book buying. His office was a desk in the middle of the warehouse where he also spent time on allocation — an art in itself, directing what merchandise was to go to what store. It was a change from the hands-on, high-touch approach he had leading across the entire business just a few years prior.
“They all thought it was so easy. This company — it’s not like you’re buying someone who’s selling potato chips,” Ross said. “It’s a very hard business to understand — lifestyle. People try to do it, but you have to have everything. You’ve got to have the baby assortment and then apothecary and accessories and the clothing. You’ve got to have the luxury items that you know people can’t afford. You’ve got to have all this type of soup to nuts, cradle to grave type of business.”
By September 2015, Lee was gone from the company, although his position largely diminished once the Spencer affiliate deal was struck that spring. Ross, fed up with the situation and suspecting something very wrong, had already put in his notice the month before and came back for a few days, he said, to tie up loose ends, leaving Jozwick as the last known executive running Kitson.
In mid-November 2015, Kitson relocated within the Fashion Valley Mall in San Diego, quadrupling its footprint there to 9,000 square feet. A spokeswoman for the mall confirmed the space was a temporary shop. Was this part of the three-year plan one Kitson executive said Spencer had alluded to with employees to address their questions of whether the business was closing?
In the End
Three weeks after the Fashion Valley opening, on Dec. 11, 2015, store liquidations were announced. Chief restructuring officer James Wong said in a press release that the company was talking to “interested parties” on a transaction “that preserves the iconic brand.” The next day the company quietly entered into the alternative to Chapter 7 liquidation known as assignment for the benefit of creditors. Gordon Brothers Group and Hilco Merchant Resources were brought in to liquidate the stores.
“We didn’t need them for that and they were paid a great deal of money to do that,” said one former employee. “We were way too small for that kind of company to come in. If we had to liquidate, we could have facilitated the sales. The things they did were completely against our image. They came into our stores and hung these hideous banners all over the ceiling.”
The store sales caused a stir among vendors and stoked the anger of some who attempted to remove their product from store shelves, according to two former store employees.
One vendor knew something was wrong when the company’s final check bounced. Calls and texts to a Kitson contact went unanswered until the employee finally responded to say he had been let go and didn’t know what happened to the merchandise. The vendor went to Kitson’s Robertson Boulevard store.
“I told [a sales associate], ‘my stuff is sitting there. You guys gave me a check that bounced so that means that clothing is rightfully mine,’” the vendor recalled. “She said, ‘If you try to pull your clothing, we’re going to call the cops on you for shoplifting.’ I’ve got a family. I can’t go to jail for shoplifting my own items. I knew at that point I was screwed.”
One store associate recalled that incident and offered to place the merchandise in the back of the store so no one could buy it and then, once approved, the product could be picked up. Instead the store was told Salus owned the merchandise and nothing was to be removed. The product was eventually swallowed up in the frenzy of the liquidation.
“After that, I remember going home to my parents and just being so upset and telling them I’m going to quit because what was the incentive for me to stay,” the store employee said. “A lot of the Kitson brands were big names, but a lot were small where if they gave us $10,000 of product that was a really big deal for them.”
Ross said he was contacted and offered $100,000 to be the stalking horse bidder in an auction of Kitson. The deal? Start the offer at $1 million, with an option to take one or two stores. Ross, as much as he wanted the brand back, wasn’t going to pay for a business he contends was stolen from him or a name that was rapidly becoming soiled by the actions of others.
“It’s my name. It’s not like it was called Starbucks. Kitson was my middle name. I want it back,” Ross said.
An entity calling itself Kitson Co. Ltd., which is part of brand management firm Crown Creative, issued a press release in December 2016 saying it acquired Kitson’s global trademark and would take the business to $120 million in sales across three years in Japan.
Satoko Sakakibara, a representative with Kitson Co., reached by e-mail, declined to provide information about the company’s future plans for the brand nor respond to whether the firm was aware of Ross’ allegations related to his past ownership stake.
No trace of claims from vendors or other creditors exist on the site for the company’s general assignment case, nor is there information on the liquidation’s proceeds. An update online posted in March said proceeds from the liquidation were not enough to pay out to the company’s creditors, followed by the perfunctory statement: “Therefore, all filed claims are deemed to be canceled for no consideration and are no longer outstanding.” The attorney handling Kitson’s general assignment, David Golubchik, did not respond to requests for comment.
A separate lawsuit between the company charged with handling Kitson’s general assignment, Winter Harbor LLC, and Salus along with HRG states within the complaint that proceeds from the retailer’s liquidation were more than $5 million, while a PricewaterhouseCoopers report filed with the lawsuit estimated proceeds from the sale of the intellectual property to be $2 million. Winter Harbor filed the claim against Salus and HRG in October 2016 in a bid to reclaim monies to pay off a tax lien from years earlier on Kitson, but earlier this year requested the complaint be dismissed.
In Kitson’s final days, the warehouse closed up to receipts in early December. The company filed notice to the state Employment Development Department on Dec. 24, 2015, of its closure, citing “difficult financial times” as the reason for the liquidation, warning of 258 jobs that would be shed once the stores officially closed.
“It all seemed like a shady backroom deal. Spencer leaving with no word. No saying, ‘Well, we decided this is what we’re doing and this is why we’re doing it’” said an employee. “Spencer is a huge corporation. They should know how to end a relationship.”
In the end, if Ross were to get Kitson back, he’s unsure if he would merge it with Kitross or keep the brands separate. That no longer seems the point. If given the chance, he said his preference would be to not take a settlement deal and instead have his case go to trial, making a very public example of the many who he said took advantage of his good will and, worse, thinking they could get away with it.
“I don’t want people to feel sorry for me. It’s not like I’m here for ‘I’m sorry.’ People have to understand this is what we’re dealing with in this country,” Ross said. “[It’s] this corruption in Wall Street that will do anything and leach on to businesses and look a blind eye. They need to be exposed. The mistake was to lend to me. I guess they messed with the wrong person.”
Clarification: This story has since been updated to reflect the fact that a quote previously attributed to Dyan Jozwick has been removed. Jozwick has stated that it was never her intention to comment for this story, or to refer to the Ross lawsuit as frivolous or harmful.
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