Byline: Vicki M. Young

NEW YORK — The anticipated conclusion of the U.S. government’s criminal action against Richard Rubin — a final determination of his sentence — has hit two roadblocks, with the parties battling over both the impact of his impairment from Alzheimer’s disease and the government’s attempt to obtain an accurate accounting of Rubin’s assets and missing millions.
After months of delays, the former head of Donnkenny Inc. was scheduled to be sentenced Tuesday in a Brooklyn federal court, but that has been postponed until Sept. 5. According to court documents, the government is asserting that the federal prison facilities are able to monitor and develop an appropriate treatment plan for Rubin’s medical condition, so that neither house arrest nor a halfway house is necessary at this time.
The government is also trying to trace the disposition of at least $18 million that it said originated from Rubin’s financial fraud, saying it needs the information to determine the amount that Rubin can pay into a restitution fund for the victims of his accounting scandal. A December 20, 1999, letter from Kenneth M. Breen, the Assistant U.S. Attorney handling the case, to U.S. District Court Judge Jack B. Weinstein in Brooklyn charged that Rubin is “continuing his pattern of hiding assets and attempting to put them out of reach of the government, which he began soon after he learned that he was being criminally investigated.”
As reported, Rubin pled guilty Feb. 2, 1999, to conspiracy to commit securities fraud that overstated Donnkenny’s sales figures by millions of dollars. According to charges filed by the U.S. attorney in 1999, Rubin directed a scheme from 1994 through 1996 to inflate and misstate Donnkenny’s financial results in reports filed with the Securities and Exchange Commission and in press releases issued to the company’s shareholders and to the investing public.
Rubin, 58, whose father founded Donnkenny, served as president, chairman and chief executive officer of the women’s sportswear manufacturer until he resigned as both director and officer in December 1996 amid the accounting irregularity scandal. The former ceo was slated for sentencing in December 1999, but it was disclosed at the hearing that he was suffering from the early stages of Alzheimer’s disease. His attorney, Barry Slotnick of Slotnick Shapiro & Crocker, requested more time to provide the court with medical documentation concerning the special needs necessitated by Rubin’s illness.
Under federal sentencing guidelines, the government is seeking the maximum five-year jail term. In December, the government was hoping to get back the $111.2 million in losses suffered by Donnkenny’s shareholders. That’s not likely to happen. Court documents from December and May indicate that Rubin’s financial records “showing the disbursement and/or transfer” of certain assets are missing.
Slotnick could not be reached for comment.
Two other former Donnkenny officials — Edward Creevy, the former chief financial officer who entered his guilty plea on Jan. 4, 1999, and Ronald Hollandsworth, the former corporate controller who did the same on Dec. 2, 1998 — are still awaiting sentencing. They each pled guilty to one count of conspiracy to commit securities fraud in connection with their roles in the scheme. Each faces a maximum sentence of five years in prison and millions in fines and restitution.
For Rubin, it’s the impairment from Alzheimer’s disease that will have greater implications on his future.
According to the Alzheimer’s Association, four million Americans now have the disease, with the average lifetime cost per patient pegged at $174,000. The average yearly cost for nursing home care is $42,000, but can far exceed $70,000 in some areas of the country. At least seven of every 10 who suffer from the disease live at home. Although the average life expectancy after the onset of symptoms is eight years, it often reaches or exceeds 20.
Dr. Mark A. Seger, director of the University of Wisconsin Medical School, noted, “Alzheimer’s in someone under 60 is not unheard of, but is very rare. There’s no definitive test for the disease, which is considered a probable condition. It isn’t until after two to three years that one can take the symptoms and start ruling out other conditions. We see people in their 50s with memory problems related to depression, stress+. In the early stages, there’s very little functional impairment.”
According to a May 19 letter this year from Breen to Judge Weinstein, the government has elected not to contest the “probable” diagnosis. However, it is contesting whether the disease necessitates a lessening of any prison sentence, as well as where Rubin should be incarcerated. According to the letter, the condition is not an “extraordinary physical impairment” for sentencing purposes because the Federal Bureau of Prisons is able to accommodate those who suffer from the disease.
A letter from Dr. Newton E. Kendig, medical director of the BOP, also dated May 19, said that the BOP provides medical care for 118,500 inmates, of which 38,630 are monitored regularly for “acute, chronic, debilitating and terminal diseases.” He wrote, “Upon sentencing, Mr. Rubin’s medical/psychiatric needs will be fully evaluated and an appropriate treatment plan developed.” That plan includes the determination of which facility Rubin would be placed in to serve his sentence.
The other stumbling block that has kept the Rubin matter on the court’s calendar, as well as the related Creevy and Hollandsworth actions, deals with the issue of restitution. In Breen’s Dec. 20 letter to the court, Rubin is alleged to have “substantially understate[d] his net worth and substantially overstate[d] his monthly expenses in his submissions to the Probation Department and the Court.” An April 26, 1999, report listed his net worth at $11.5 million, with “necessary monthly expenses” of $116,602. The government said the financial statement omitted Rubin’s “$8 million home in Greenwich, Conn., and included exaggerated ‘necessary’ expenses, such as $11,048 per month for clothing, entertainment and dining.” Rubin bought the residence in Greenwich from Tommy Hilfiger several years ago, reportedly for $4 million in cash.
The government, the letter said, is relying on an April 1996 financial statement Rubin submitted to the Bank of New York, prior to the disclosure of his fraud scheme, in which he listed a net worth of $37.98 million. That now should be in excess of $40 million, the letter said. A Nov. 16, 1999, preliminary report to the government indicated a net worth of $17.4 million. The government said in its December letter that even in subsequent documentation, Rubin has failed to “accurately state his current net worth or account for the disposition of the April 1996 assets.” About $18 million remains unaccounted for. The government specified in its letter that $5 million was transferred from Rubin’s brokerage account “into accounts in the names of his wife and children, then into living trust accounts as to which the defendant and his wife are trustees, and then into limited liability partnerships.”
Whether money remains in the partnerships is unknown, the government told the court, “because the statements from February 1999 through October 1999 are missing.” According to a source familiar with the negotiations, the parties are still trying to determine the “nature of Rubin’s financial resources.”
While the circumstances surrounding Rubin’s legal woes still seem unusual, accounting irregularities have been on the Securities and Exchange Commission’s radar screen for some time. Since the fall of 1998, SEC chairman Arthur Levitt Jr. has pushed for an overhaul of corporate governance rules. Board audit committees now have new rules to which to adhere from the SEC, New York Stock Exchange and National Association of Securities Dealers.
Michael Young, securities litigation partner at Willkie Farr & Gallagher, specializing in financial fraud, said, “Like public companies in many sectors, the fashion industry is just as vulnerable to the pressures resulting from the need to meet analysts’ quarterly earnings expectations. What makes it worse for fashion companies, by their nature, is their high profile. The fashion industry tends to be gossipy and somewhat glamorous. All of that serves to elevate the prominence of their performance — whether good or bad.”
According to Young, there’s one aspect of the fashion industry that makes it susceptible to misreporting. “It stems from the ease with which applicable accounting principles can allow a company to almost inadvertently slip into the acceleration of quarterly revenue. Normally, revenue is recognized on shipment, and those under pressure to increase revenue can simply accelerate shipments. There is nothing necessarily wrong with that, but it can lay the groundwork for a company to slip into borrowing business out of future quarters to meet analysts expectations in the present month.”
And a number of them — Donnkenny, Leslie Fay, The Sirena Apparel Group, The North Face, Candie’s and the now-defunct Woolworth Corp. — have had to deal with the issue of improper accounting procedures.
In the case of Rubin, he was specifically charged with instructing employees in Donnkenny’s accounting department to artificially inflate the company’s sales figures by using journal vouchers to record large amounts of fictitious sales in the company’s books and records. In the second quarter of 1995, the company reported $40.1 million in sales, of which $25 million were fictitious sales, according to the charges.
Rubin was also charged with instructing employees to generate sales invoices in 1994 totaling $15 million based solely on preliminary orders from customers, even though the orders had not been shipped and customers had not confirmed acceptance of the goods, according to the information filed with the court. Because Donnkenny had not actually sold the goods and was not entitled to payment, the invoices were never sent to the customers and were voided in subsequent quarters.
Rubin, the charges said, instructed Donnkenny subordinates in 1995 to inflate sales further by recording in its books that the company had sold $6.4 million of apparel even though the merchandise hadn’t been ordered and was sitting in Donnkenny’s warehouse. The U.S. attorney alleged at the time that the merchandise was moved to a closed warehouse so that it would not be discovered by outside auditors.
Donnkenny’s disclosure in November 1996 that it would restate financial reports for six fiscal quarters because of the fraud also spawned a series of shareholder lawsuits against Rubin, Creevy and Hollandsworth. The suits charged the three former executives with insider trading and withholding material information.
The first such suit was filed in Manhattan federal court, alleging that the three former executives sold $13.5 million in company stock from June 1995 through August 1996 at prices ranging from $17.25 to $33.88 a share. Rubin was specifically charged in the stockholder suit with selling over $2.5 million in company stock “only three weeks before Donnkenny disclosed that its financial statements were materially incorrect and would need to be restated.” The class action lawsuits were consolidated and, in October 1999, Donnkenny agreed to pay $10 million to settle the action. In addition, Donnkenny agreed to issue three million shares of common stock to the plaintiffs.
The restitution that the government is seeking is for a fund that covers a slightly larger group of victims than those who elected to take part in the class action suit. The government said in court documents it was seeking a court order giving the SEC authority over identification of potential victims and administration of their claims.
When the fraud was discovered and publicly disclosed in November 1996, the price of Donnkenny stock dropped by two-thirds, causing losses to shareholders of more than $100 million, according to the U.S. attorney at the time of the guilty plea.
Donnkenny, which went public in 1993, made its mark on Wall Street as a hot fashion stock for some time. The stock split in November 1995, and during that year, the stock price, adjusted for the split, rose to 18 1/8 from 7 1/2. On April 18 of this year, the company reported reduced losses of $2.8 million for the fourth quarter.
The company also announced on April 18 that shareholders approved a four-for-one reverse stock split, in which four shares of common stock were converted to one share effective April 20. The split reduced the company’s outstanding shares to approximately 3.56 million from about 14.23 million. By increasing the value of individual shares fourfold, the reverse split prevented a possible delisting of Donnkenny stock on Nasdaq, which requires that shares maintain a bid price of $1 or higher. Donnkenny shares closed at 5/8 in over-the-counter trading on Wednesday.

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