LESLIE FAY ACCOUNTANTS SUE POMERANTZ, 15 OTHER EXECS

Byline: Jeff Siegel

NEW YORK — Former accountants of The Leslie Fay Cos. charged in federal court Wednesday that John J. Pomerantz and other key executives of the apparel company launched a conspiracy lasting for more than two years to fraudulently inflate profits and sales in order to reap huge stock gains and performance bonuses.
BDO Seidman, which promised Tuesday to file the charges, is the first party to implicate Pomerantz, Leslie Fay’s chairman and chief executive officer, in the accounting scandal that rocked the company into Chapter 11 in April 1993.
BDO’s action was brought against Pomerantz, several senior managers and members of Leslie Fay’s board of directors, alleging the group “had knowledge of, and were ultimately responsible for, Leslie Fay’s accounting irregularities.”
In all, the accounting firm, in filing crossclaims and third-party charges in a long-pending class action suit by various Leslie Fay shareholders, named 16 defendants.
Leslie Fay, which has consistently denied that Pomerantz or any executives at the very top rung of management were involved in any wrongdoing, reiterated that denial Wednesday, calling BDO’s charges “unsubstantiated and unfounded.”
Until Wednesday, Donald F. Kenia, the former corporate controller, was the only Leslie Fay executive implicated in the scandal. Kenia pleaded guilty to federal criminal charges of filing a false financial instrument with the Securities and Exchange Commission. He is believed currently to be cooperating with a probe being conducted by the United States Attorney in Scranton, Pa.
Kenia testified that Paul F. Polishan, former senior vice president and chief financial officer of Leslie Fay, was part of the fraud. However, Polishan, who was dismissed from his post in March 1993 — about a month after the accounting scandal was revealed — has not been charged with any crime, and he has denied those accusations. BDO Seidman charged Pomerantz and other senior officials orchestrated the fraud through “systematic coordination” to make the company look better and to reap large bonuses and cash out of Leslie Fay stock soon after a 1991 secondary public offering.
According to BDO Seidman’s summary of claims, Pomerantz “set out to save” the company’s disappointing 1991 second-quarter results by “urging division management to make up the loss in June [1991] through fraudulent pre-billing.”
BDO claims that the fraud, beginning in late 1990, allowed Leslie Fay to conceal a downturn in its business and go ahead with a secondary offering in June 1991. At that time, Odyssey Partners LP, a private investment firm, was able to sell 2.5 million shares of Leslie Fay stock, “reaping profits of over $49 million.” Steven M. Friedman, a general partner with Odyssey, sits on the Leslie Fay board.
BDO contends Pomerantz and his wife, Laura, at the time a senior vice president and a member of the board, sold 10,000 shares of Leslie Fay stock shortly after the June 1991 secondary offering, netting about $200,000.
Early in 1992, after the fraudulently inflated earnings for 1991 were announced, John and Laura Pomerantz and Alan Golub — who retired as president and chief operating officer of Leslie Fay at the end of that year — sold a combined 120,000 shares, resulting in more than $2.4 million in proceeds, BDO charges.
At the time, Leslie Fay stock traded at about $20 a share. Leslie Fay shares, traded on the New York Stock Exchange, closed Wednesday at 1/4, up 1/32. Shareholders are not expected to receive any payout under the Chapter 11 reorganization plan.
As reported, Kenia has admitted to falsely inflating sales, profit margins and profits during the scam by creating fictitious shipping tickets and inventory.
In addition to the stock profits, BDO said Pomerantz received “additional compensation” of $2.85 million in 1991. Golub was given a $1.89 million bonus that year, BDO said in court papers.
Ira J. Hechler, an outside member of Leslie Fay’s board, was another who cashed out of Leslie Fay stock early in 1992. Hechler, according to court documents, sold 89,700 shares in Leslie Fay stock in February of that year, realizing a $1.86 million return.
BDO Seidman went on the attack Tuesday after a federal judge unsealed a nearly two-year-old report written by Leslie Fay’s audit committee. The report was critical of Leslie Fay’s senior management but noted that BDO could be liable for damages for not detecting the fraud.
Both the audit committee report and a later report by a court-appointed examiner cleared Pomerantz and other top management of any direct participation in the accounting fraud.
BDO Seidman maintains it cannot be held responsible for the scandal and Leslie Fay’s subsequent misfortunes because, says the firm, the scandal spread from the top, with Pomerantz, Polishan and divisional managers and controllers engaging in pre-billing and other illegal activities that were designed to improve Leslie Fay’s bottom line.
“These fraudulent and unsupported adjustments were widely known and were the subject of gossip and jokes within the company,” BDO wrote in its complaint summary. BDO claims Polishan was referred to in the company as “the magician” for his skill in “creating record earnings despite adverse business conditions.”
The accounting firm further defended itself in court papers by noting that it warned senior management and outside directors that it had detected instances of pre-billing in 1989, 1990 and 1991. BDO said Polishan responded in a letter dated Aug. 8, 1990, saying the company’s various divisions were instructed that pre-billing was “against company policy.”
Besides denials from Leslie Fay, John Pomerantz also denied BDO’s charges, saying that he “knew nothing” about the accounting irregularities until the weekend before they became public. — Fairchild News Service

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