POLISHAN TRIAL WITNESS: FEAR AT ‘PAUL’S CASTLE’
Byline: Kate Fleisher
SCRANTON, Pa. — The corporate culture at Leslie Fay’s Hanover, Pa., plant during the early Nineties, when the firm was rocked by an accounting scandal that plunged it into bankruptcy, was described as a place dominated by fears of reprimand and reprisals during ongoing testimony in the trial of former chief financial officer Paul Polishan on Friday in U.S. District Court.
The facility was described as “Paul’s Castle,” an empire where prosecutors alleged Polishan bullied subordinates into concealing a $159 million fraud by manipulating sales figures and reports. At one point, he was said to have ordered controller Donald Kenia, who pleaded guilty in 1994 to his role in the accounting scandal, to repeat “I am a f—ing idiot.”
Assistant U.S. Attorney Lorna Graham introduced the author of an initial, internal human resources report on the Hanover facility, who pinpointed fear as the prime motivation for underlings who participated in the financial irregularities that eventually forced the company to seek bankruptcy protection and defend itself against a class-action lawsuit by shareholders.
Requested by Leslie Fay president Michael Babcock, the report was prepared by Roger J. Vallecorse, who had just resigned from the firm after acting as vice president of human resources for a year.
Vallecorse testified he had received a call from Babcock, who had replaced Alan Golub as president in January 1993, asking him to prepare the report. He testified that Babcock said “they have been doctoring the numbers, and it’s going to hit the fan Monday in the New York Times, the Wall Street Journal and [Women’s Wear Daily.]”
Vallecorse said he went to Hanover and talked first to Polishan on Feb. 1, 1993.
“He knew I was coming, I greeted him, and he was clearly concerned,” Vallecorse said. “I asked him ‘What the hell happened, Paul?’ and his answer was, ‘I cannot understand why Don Kenia would alter the numbers.’ He said that over and over.”
He described Polishan as “extremely introspective and very concerned” about the events, saying, “I saw fear in his face.”
Vallecorse said he went on that morning to speak to Kenia, whom he also described as concerned and upset.
When he asked how did the accounting irregularities happen, Kenia’s answer was, “I did it. I altered the financials,” and he implicated divisional controllers, Vallecorse said. Kenia also told him that Polishan was not involved, but Vallecorse said he did not believe him.
Vallecorse then recounted conversations with about a half-dozen controllers and other financial executives, each of whom said they were altering the figures, and each said he was directed to do so by Kenia.
In his report, which has at been quoted at various points throughout the trial, Vallecorse wrote, “I think to understand why the divisional controllers changed financials or why they were active participants to the corporate controller altering financials, you have to understand the culture of the Hanover facility.”
Vallecorse said the facility is viewed by many as the chief financial officer’s empire and it is frequently referred to as “Paul’s Castle.”
“Nothing happens in Hanover unless the cfo knows and approves,” Vallecorse said. “That rule goes from getting reports to something as simple as what color paint to use in the cafeteria.”
The report states that this culture led to a “healthy dislike for the company” and that a group of employees motivated by fear for their jobs and fear of reprimand “is the fertile soil where this type of activity can take place.”
During his prior year of employment at Leslie Fay, Vallecorse said he spent much of his time at the Hanover facility because many documents and resources were located there. He said he personally witnessed Polishan’s interaction with staff on several occasions.
In response to questions from the prosecution, Vallecorse described Polishan’s management style as that of a benevolent dictator. ‘There was a kind side to Paul, and a dictator side to him,” Vallercors said. “He was hard, determined, at times uncompromising — a pretty tough manager.”
Asked about the relationship between Kenia and Polishan, he said, “I would say Don was totally committed to Paul Polishan. Don would do anything for Paul Polishan. Clearly Don was subservient to Paul. Paul was his boss. Paul’s personality was much more dominant.”
Pressed for examples, he said there were a number of times that he had the impression “that Don was walking on eggshells. He was afraid. He was stripped of all dignity.”
Vallecorse cited a time he was in Polishan’s office when the cfo called Kenia on the carpet over some kind of financial issue.
“I could have left, but I stayed,” Vallecorse said. “Paul was getting angrier as the minutes went by. You could see that Don was in distress. He called him a ‘f—ing idiot.’
“Don didn’t say anything, then Paul told him to repeat what he had said. After a great deal of anguish, Don did it. Don said, ‘I am a f—ing idiot.’ He repeated it and he left.”
On another occasion, Vallecorse said he was present when Polishan took a call from Alan Golub that centered on the financial performance of the company or one of its divisions and was extremely upset by the conversation.
Vallecorse said he asked Polishan if, as vice president of finances, he felt responsible for creating the results or reporting them for the company.
“He said he felt he was responsible for creating the results,” Vallecorse said.
Vallecorse also testified that all the divisional controllers at Hanover indicated they were instructed by Kenia to alter financials, or they learned financials were altered after the fact.
The controllers also indicated they believed Polishan was aware of the modifications, Vallecorse said, adding that one controller indicated that flash reports were altered and appeared to be done in Polishan’s handwriting.
None of the controllers offered any explanation as to why they thought Kenia would alter reports, but Vallecorse said their thoughts centered around two theories — fear of bringing in bad numbers or for financial gain — but they also said there was such a “closed loop system” at the plant that they felt there was no one to whom they could report the problem.
Later in his report, Vallecorse discounted financial gain as a motive.
“Don, I believe, was motivated by fear of Paul. Each divisional controller, I believe, was motivated by fear of not following orders. This fear overrode good judgment on the part of all who should have known better,” Vallecorse said.
“Given the culture at Hanover, it is inconceivable that Paul was unaware that modifications were being made to financials. What motivated individuals who should have known better had to be the fear of reporting poor results,” he said.
In his report, Vallecorse also said Polishan had denied knowing Kenia had modified reports “and that he could not understand the motivation.”
“Don Kenia swore up and down that he altered financial records without Paul’s knowledge and was willing to take a lie detector test to prove that point,” Vallecorse wrote, but added, “it is difficult to believe that, given the culture in Hanover, that Don Kenia would have altered financials without Paul’s knowledge or direction.”
Vallecorse also wrote, “I have no proof, but my suspicion is that Paul and Don acted on their own to bring in acceptable numbers to senior management.”
During cross-examination, defense attorney Michael Berger asked Vallecorse if he was aware that another Leslie Fay facility in Wilkes-Barre, Pa., was commonly known as “Sandy’s Castle,” after Sandy Mazar, and one in Atlanta was called “Ken’s Castle,” after Ken Martin. Vallecorse responded, “No.”
Asked if he felt the Hanover facility was cleaner and less cluttered than others, he said, “Absolutely.” Asked if it was a more pleasant work environment than the other two, he said, “Physically, yes.”
Vallecorse also acknowledged during cross-examination that during his employment with Leslie Fay, Polishan had requested a $20,000 pay increase for him in lieu of a yearend bonus to help Vallecorse with moving expenses.
Polishan is charged with 21 charges related to an elaborate scheme that inflated Leslie Fay’s earnings by $81 million from 1990 to 1992. Kenia is awaiting sentencing for his plea to filing false information with the Securities and Exchange Commission.