FIRST SIGNS OF TROUBLE PROBED IN POLISHAN TRIAL TESTIMONY

Byline: Kate Fleisher

SCRANTON, Pa. — Prosecutors turned their focus toward the key moments when financial irregularities at Leslie Fay first surfaced in 1993, as testimony in the fraud trial of former chief financial officer Paul Polishan entered its third week on Wednesday.
Terry Erwine, who was the head of internal auditing during the scandal and is now the vice president of information systems for The Leslie Fay Co., testified that he was called into Polishan’s office at 8:30 a.m. on Jan. 29, 1993.
“Mr. Polishan asked me to close the door,” Erwine said. “He was visibly shaken and upset.”
Polishan, Erwine testified, told him that on the previous night, corporate controller Donald Kenia said he had misstated company results for 1992.
“Mr. Polishan said he went home because he couldn’t believe it,” said Erwine, adding that Polishan then wanted Kenia to repeat what he had said the night before with Erwine as a witness.
“Kenia said he had misstated the results,” Erwine said. “He looked very tired, distraught, kind of in a stupor. He looked like he hadn’t slept in days. Then we asked him to leave.”
Erwine said Polishan wanted to fire Kenia immediately, but Erwine suggested contacting corporate counsel and other executives. Then Polishan and Erwine held separate five-minute meetings with divisional controllers Pat Doyle, Bill Perkoski and Dave Nishlick, he said, each of whom acknowledged they were aware of what Kenia had done.
“Paul asked them, ‘Why didn’t you tell me?”‘ Erwine said. “My recollection was they didn’t answer. They just stood there.”
Erwine said he was asked by Polishan to also gauge how much money was involved in the misstatements.
“Don [Kenia] tried to reconstruct it from his head,” Erwine said. “Kenia produced a handwritten memo listing two areas. The first, differences by division, amounted to $43,639,000, and the second, at $5,703,000, was described as ‘less gains covering specific assets and liabilities.”‘
Polishan is charged with 21 counts of orchestrating an alleged $159 million fraud scheme that plunged Leslie Fay into bankruptcy.
Kenia is awaiting sentencing for his 1994 guilty plea to filing false information with the Securities and Exchange Commission. Prosecutors have promised not to seek the maximum penalty of 10 years in prison in exchange for his cooperation against Polishan.
Erwine testified the time frame that Kenia covered was primarily 1992 but he implied that 1991 inventory was involved.
Erwine documented comments from Kenia in a memo that he faxed to Polishan’s New York office, including references to how he had “hurt Paul Polishan,” as well as other colleagues.
“He told me he would accept total responsibility,” Erwine wrote.
After that, Erwine said he coordinated assistance requested by officials who arrived the next day from BDO Seidman, Leslie Fay’s external auditing firm.
Asked by Assistant U.S. Attorney Lorna Graham to describe the work relationship of Polishan and Kenia, Erwine said, “Don was totally dedicated and subservient to Paul, and Paul trusted Don implicitly. Don did very little without checking with Paul first. If you asked him for information, he’d have to check with Paul, or said, ‘You’d have to check with Paul.”‘
On cross-examination by defense attorney Michael Berger, Erwine said he had a B.S. degree in commerce and finance and, prior to Leslie Fay, had worked for an accounting firm. He testified that the internal auditing staff was “competent and professional, as were BDO personnel.”
Cross continued on technical aspects of how the internal auditing team assisted BDO with compliance audits and testing. Areas included sales testing with memos prepared for the president and cfo and, if exceptions required their attention, divisional managers.
BDO would make a statistical selection and Leslie Fay’s internal auditing team would select documents at random for testing, he said.
Erwine said he had hired Kenia, and he described him as “very bright, very energetic, hardworking” and someone whom Polishan trusted.
Questioned about his Jan. 29, 1993, conversation, Erwine said Kenia mentioned a discrepancy between “shrinkage versus physical inventory,” for what led him to doctor the financial reports.
“He said he didn’t believe the shrinkage figures were real, but he didn’t have time to concentrate on it,” meaning to verify the accuracy of the shrinkage data, Erwine said.
Berger read from Erwine’s memo of that day, from which he quoted Kenia as having said, “He loved Leslie Fay and he committed the misconduct because he loved Leslie Fay,” so if he received large amounts of shrink in gross profits workup, Kenia “would book the physical inventory as it was.”
“He didn’t believe those were the results,” Erwine said of the shrinkage figures. “Kenia said he would estimate gross profit inventory so he could go back to see where the problem was.”

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