LOS ANGELES — “I am so happy to see you be a voice and will help you in any way I can. These guys s–t on the little guys for a living and steal any way they can!”
The e-mail from former Salus Capital Partners LLC chief executive officer Andy Moser about the asset-based lender he helped create certainly caught Fraser Ross’ attention. It was the early morning hours of March 27, 2016. Ross had been pumping Moser for information for months now, mining for anything that could explain who was to blame for the closure of Ross’ Los Angeles boutique chain Kitson.
Back-and-forth exchanges between Moser and Ross went on between 2015 and 2017, according to nearly 300 e-mails reviewed by WWD. It was information in those e-mails that served as the catalyst for Ross’ 2016 lawsuit against Salus and Kitson’s junior lender BHK Investments Advisors LLC (an affiliate to the giftables retailer Spencer Spirit Holdings Inc.) alleging, among other things, breach of fiduciary duty, negligence and unjust enrichment.
The demise of Kitson could just be another tale of a once-hot retailer led by an eccentric creative that lost its footing under the stress of competing egos, expanding too much, fashion missteps and losing its customers against increasing competition and the growth of e-commerce. Thousands of stores have closed since 2016, so why should Kitson matter?
Well, for one thing, the legal actions between Ross and Salus continue to rumble on in Los Angeles Superior Court, with a hearing next month on whether his lawsuit moves forward to a Nov. 6 jury trial. The case paints a picture of a firm — Salus — in over its head with a $250 million loan to Radio Shack — its largest-ever loan — and appearing to be desperate to recoup its losses by allegedly preying on other businesses. Salus’ strategy was “taking down ‘troubled’ companies and looking to buy them when on their knees,’” another Moser e-mail read.
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But Kitson also matters because Ross has revived it. As he works to rebuild the business, he continues to battle the loss of reputation that resulted from the previous iteration going bust, not to mention the losses involved for about 300 vendors that sold to the former Kitson, with some now weighing a possible class-action lawsuit.
All in all, that chapter in Kitson’s history shows just how easy it is to snuff out a business when few people are watching, and for reasons that can be beyond the true health of that individual company.
The e-mails from Moser to Ross were cryptic at times. The communication was combative in other instances as Ross’ frustration grew. Moser’s messages were sometimes more akin to riddles as the financier continually prodded Ross to take action, but those efforts were going nowhere.
Ross directly contacted Salus executives to demand answers until the firm’s outside counsel at the time, John Ventola, sent a legal letter calling the retail executive’s inquiries aggressive, intimidating and said neither Salus nor its parent “discloses their licensing practices.”
“The records show when Salus applied for a license for California and as president of Salus you would know this information, am I correct,” Ross asked in a May 10, 2017 e-mail to Moser. “It’s protocol to get a license in each state. Please help in exposing the truth.”
A minute later Moser responded back, “I’ve always told you I’d help you and others as we were all f—ed.”
Little did Ross know that behind the scenes, Moser was getting his hands slapped by his former employer in arbitration for racking up personal charges on a corporate credit card: home audio equipment, patio furniture and use of the corporate jet. Salus came out the victor in 2017, awarded some $2.6 million in damages, attorney fees and interest.
Given that case, Moser certainly had motive to want to paint his former firm in a bad light, but do his transgressions cancel out the validity of the information he was funneling to Ross? That the former head of Salus Capital was blowing the whistle on the firm seemed to be enough to prove a case — or so Ross thought.
It is three years into the lawsuit filed by Kitson’s shareholders — composed of majority owner Ross and former Kitson ceo Chris Lee — against Salus and BHK, and it’s hard to say if closure is any closer. What’s changed since Ross set out down this path, crying out that something foul had run amuck at his business, is the sentiments are being echoed by more executives and another business that has come forward more recently in court with similar allegations.
At the heart of the stories told by Ross and others is the age-old struggle between the creative side and the professional services firms — as well as a question of whether the undoing of a high-profile retailer was merely business as usual or something more.
The apparent linchpin to Ross’ case is Salus’ lack of a commercial lending license from the California Department of Business Oversight — the tip-off of which originally came from Moser.
Salus in December 2014 was in the process of reopening an earlier attempt to obtain a license, according to documents reviewed by WWD. Its attorneys answered the DBO’s questions related to the leadership team, paid fingerprint fees and provided documents on Philip Falcone and his former hedge fund Harbinger Capital Partners’ settlement with the U.S. Securities & Exchange Commission. The settlement included an $18.02 million fine and a five-year ban from the industry for Falcone. The ban and fine for Falcone were relevant to Salus’ application because HCP was a majority shareholder in then-Salus parent Harbinger Group Inc.
Salus, according to documents and a DBO spokesman, withdrew its application for a license on May 18, 2015. The DBO’s spokesman confirmed there is no record of a license for Salus or Harbinger.
Ross argues having no license would make all Salus’ California loans and the interest paid to the lender invalid. And, more specifically in his case, he argues that, had Kitson executives known about the lack of a license and chosen not to work with the firm, the outcome for the business could have been very different.
Verdicts, either in a law court or in the court of public opinion, are never that black and white. The showdown in court has now come down to whether Ross has legal standing to even sue.
Salus, BHK and Spencer Spirit have in court denied the allegations against them and last October launched their own separate lawsuits against Ross and Kitson, arguing he and former Kitson ceo Lee were what brought down the retailer, citing poor business decisions and $1.3 million in unpaid California and Nevada sales taxes. Ross paid about $150,000 in back taxes last year to make the company active, but it is unclear where the $1.3 million figure came from in the Salus lawsuit. Why any outstanding back taxes would not have been prioritized and taken care of from proceeds in the Kitson liquidation also remains unclear.
The perception held by some observers that Ross was the one who let his business go off the rails and vendor invoices left unpaid prevailed in late 2015 as Kitson was spiraling downward. No one was saying otherwise or coming to his defense.
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Ross isn’t flashy, but he’s also no wallflower. His typical uniform of an untucked, long-sleeved button down shirt and sneakers has him usually mistaken for just another employee in his stores. That is, until he calls out the passerby littering in front of his shop or pushes back on the customer who looks to return year-old, used merchandise with a line of questioning that would suggest a past life as a cop or reporter.
Some have called out his exacting, meticulous behavior as the reason for Kitson’s success in winning a celebrity clientele in the early Aughts and earning the retailer steady press as the go-to boutique of Hollywood stars. It was recently filmed in an episode of “The Real Housewives of Beverly Hills,” and also counts Kate Beckinsale and Angelina Jolie as shoppers.
Others have interpreted how Ross operates as controlling and obsessive. Perhaps because of that, the louder Ross has been about his case against the lenders, the more dismissive people in some business circles have been, casting doubt on him personally as the nut on Robertson Boulevard more than happy to go off on a rant or pick a fight in court.
WWD reported two years ago on the curious circumstances surrounding Kitson’s early 2016 closure, with more than 15 former executives, store employees, consultants and vendors speaking anonymously about their experiences. The picture painted wasn’t pretty and indicated a lack of vision once its founder lost control and later left, all exacerbated by executive in-fighting.
A greater level of detail about what happened at Kitson has emerged through new witnesses who recall lenders installing their own management team and exercising control over the flow of inventory, while spending money on third-party consulting and services firms to which, in certain circumstances, they had ties to.
Retail was rife with bankruptcies and store closures in 2015, making the reporting of stories around restructures and liquidations rote. What the general public thought was happening at Kitson could easily slide into that mainstream media narrative of another business that fell prey to the changing retail landscape.
However, the situation was far more complex.
Some news outlets reported Ross and Lee had left the business just a few weeks prior to the retailer’s December 2015 wind down, a key detail that’s dogged Ross to this day, giving off the appearance the founder and his ceo were still steering the ship up until its closure.
Ross actually left in August 2015, frustrated at his inability to write orders for a business he once fully controlled, from 5 a.m. store-floor moves to buying at trade shows. Instead, key decisions were being run up the flagpole to executives at Spencer, purveyor of everything from fake pregnancy tests to septum rings — not comparable to the high-low, pop-culture-inspired assortment that made Kitson the springboard for brands such as Wildfox, True Religion and Von Dutch.
Lee had also been relegated to a largely lame-duck position at the retailer. He told WWD in an e-mail that he was asked by Spencer’s management in September 2015 to resign as ceo or be terminated. Even before that ultimatum, Lee said he was “stripped of any authority” beginning in May 2015 when Spencer’s lending arm BHK made a loan to Kitson “as they took full control of management decisions,” he said.
Those details are important to Ross’ allegations of lender liability.
“With anything, the devil is in the details of the question. If you’re talking about participation in management of a company by the lender, that is known, no, you do not do that,” said A. Barry Cappello, managing partner of Cappello & Noël LLP. “The question is are you a lender or are you a shareholder or a manager? If you have dual loyalties, that’s an axiomatic breach of fiduciary duty.”
Cappello’s Santa Barbara firm is not involved in the Kitson case, but it specializes in complex commercial litigation matters such as lender liability and class actions.
“Lender liability cases are a lot like bankruptcies. When the economy is good, there’s not a lot of them, but when the economy’s bad, there’s a lot of them,” Cappello said. “Lenders can get in trouble financially. Look at the 2008 Great Recession. When they’re in trouble financially, they make decisions, which oftentimes adversely affect their borrowers. The lenders can go ‘We’ve got too much of these crappy home loans on the book, we’re being audited, we’ve got capital calls. I want everybody to tighten things up.’ They start what we call ‘cleaning up the portfolio.’ That happens when the economy’s real bad.”
As Kitson executives recounted how they lost power to make decisions, former staff said they were was also being directed to continue to bring in excessive amounts of inventory, even as the company struggled to pay vendors. Former Kitson chief merchandising officer and president Dyan Jozwick noted in a signed declaration that inventory coming into the Kitson warehouse in November 2015 was three to five times more than historical levels for the retailer. She went on to call out Salus as “unethical” for pushing staff to continue bringing in merchandise knowing full well there was no money to pay for any of it.
Jozwick estimated in her declaration at least 300 vendors were never paid.
An attorney for Spencer Spirit and BHK declined comment for this story. Jozwick, Moser and attorneys for Salus did not respond to requests for comment.
“We, as a whole were down, and that’s why it [the inventory levels] didn’t make sense,” Kitson assistant men’s buyer Vagan Arutyunyan told WWD. “I thought we were bringing in all this inventory to drive the business. The conversation was never about closing; it was about what we need to improve.”
Where Kitson management previously believed it was only the company’s stores in Portland, Brea and Camarillo that were set for closure, the plans at some point abruptly changed to include the entire chain.
Kitson chief restructuring officer James Wong appeared surprised at the idea of closing all the retailer’s stores in a Nov. 15, 2015 group e-mail that included liquidation firm Gordon Brothers. “There’s quite a bit of confusion here at Kitson as to the go-forward plans,” Wong e-mailed the group upon reading about the plans for total liquidation.
Kyle Shonak, then copresident of Salus, responded, “Not sure where the disconnect is here. Why is there confusion? You are in a [loan] default and we are trying to work with you on the agreement to move forward.”
The default would have certainly given Salus the right to stop pumping capital into the business. However, the right, as a lender, to step in to make calls on the business?
“I mean, they [Salus] could stop funding, right, that’s their legal right,” Wong said in his April videotaped deposition. “But are they — if they’re directing the liquidation, yeah, that’s — that could get in the gray area.”
And while payment to vendors continued to be challenged, fees to service firms were going out right and left. The expense, for example, of a large liquidation firm like Gordon Bros. for such a small retailer was questioned by at least two Kitson executives. Kitson board member Matt Kahn, however, justified the hiring.
“I don’t think I’ve ever been involved in a case where a company says they can’t do it themselves,” Kahn said in his May deposition. “That is standard. They don’t like someone in their kind of stuff. This is their inventory; this is their company….I want the management team focused on the ongoing business. So if they are spending time working on that stuff that is not working, they are not working on fixing the business.”
Kahn, who could not be reached for comment for this story, is a former Gordon Bros. executive and a former board member for a Spencer Spirit subsidiary. He gave the green light, acting as the sole Kitson board member, on Dec. 15, 2015, to wind down the retailer via a process called assignment for the benefit of creditors, or ABC. It’s a speedier process than the typical Chapter 11 or Chapter 7 bankruptcy proceedings, although not nearly as transparent.
The only problem with Kahn signing off on the ABC is that former Kitson ceo Lee said he never transferred his shares in the business to Kahn and there’s no evidence to suggest Kitson’s by-laws were changed to allow for a one-person board.
In fact, last year Lee transferred an 85 percent stake in the business back to Ross (thereby settling a separate legal conflict between the two). Lee retains the remaining shares, but is not involved in the day-to-day operations of the current Kitson.
Attorneys for Ross have now questioned Kahn’s past work history as a former executive at Gordon Bros. and Spencer.
“I mean, well, does it — does it pass the smell test? Probably not,” Kitson chief restructuring officer Wong said in his deposition, when asked about a potential conflict given Kahn’s seat on the Kitson board and his past history at Gordon Bros. “Is it legally a conflict? I really can’t opine on that.”
Kahn also said in his deposition that Gordon Bros. holds a minority interest in Spencer Spirit, meaning the same liquidation firm brought on to liquidate Kitson is part owner of a lender that could potentially have benefited from those store closures.
Other alleged conflicts have also been raised. According to invoices reviewed by WWD, a consulting and services firm called 360 Merchant Solutions was hired by Kitson in spring 2015. The firm is composed of executives who previously worked at Gordon Bros. and Salus.
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It’s the so-called “gray-areas” that are curious, because Ross’ questioning of 360 and its ties to Kitson’s lenders has come up in other cases.
The trustee in the 2014 New Jersey Chapter 11 bankruptcy case of Kid Brands Inc., where Salus was senior secured lender and 360 had been hired for professional services, called out 360’s father-son team of Stephen Miller and Aaron Miller as a “disqualifying conflict.” The trustee’s argument boiled down to Stephen’s work assisting with a liquidation as his son worked at the lender benefiting from that same liquidation.
Others that have also claimed in California court to have fallen victim to Salus include the vendors of Anna’s Linens — the Costa Mesa home goods retailer, with more than $300 million in sales and just over 250 stores, filed for bankruptcy in 2015. The 2015 adversary case involved some of the home goods retailer’s largest vendors and alleged fraud and breach of fiduciary duty, among other counts. The plaintiffs stated they were duped into continuing to manufacture and provide inventory to the retailer, despite its declining business — an important piece of information left out of discussions with Anna’s Linens management. The defendants in the vendors’ case involved Anna’s Linens executives and the lenders, including Salus Capital and Downtown Capital Partners. The matter was settled last year, with the defendants paying $6.8 million.
Then there’s Bidz.com Inc., the once-publicly traded online jewelry and accessories retailer that at one time generated more than $200 million in sales. The parent company to Bidz, Glendon Group Inc., settled confidentially with Salus before any lawsuit could be filed.
Lester Winograde, the attorney for Bidz founder David Zinberg and his sister Marina Zinberg, in June of this year reactivated a lawsuit against Salus and former president Kyle Shonak, along with 360’s Aaron Miller on behalf of the Zinbergs. Winograde served as the company’s general counsel at the time Salus offered its $24 million loan to Glendon.
Under the terms of the Salus loan, one of Glendon’s subsidiaries was forced to buy what Winograde called “another Salus victim” in online retailer Totsy as a condition to obtaining the financing. Winograde argued the firm overpaid the $8 million for Totsy, which was already in the process of liquidating.
“We were in somewhat of a distressed financial position, so we just accepted it and thought we’d get out from under it quickly,” Winograde said in an interview of the terms. “We didn’t have a lot of other options.”
The firm 360 came in to evaluate the Bidz inventory, giving Salus the ability to control the flow of goods, Winograde said. “That was part of when Salus, in my opinion, began overreaching control on a business that they were just supposed to be a lender to,” he added.
Some companies thought that because Salus, which merged with Spectrum Brands Inc. in July 2018, began its own wind down in 2015, there would have been little point in trying to file claims against a business that was going to be closed.
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“Salus wasn’t around very long. It was an option that was started up to do these sorts of loans to these companies,” Winograde said. “When these companies are under distress, that’s why they accept these deals. Nobody figured out there was something actionable going on.”
Ross, on a recent weekday, is sitting inside the Coffee Bean & Tea Leaf just a short walk from his stores on Robertson Boulevard, talking about the three years that have passed since his lawsuit was first filed. He’s submitted formal complaints against Salus with the California DBO and U.S. Securities & Exchange Commission regarding it not having a license to operate in the state. Spokespeople for both agencies could not confirm the complaints or any investigation into the matter. Confirmation would not typically occur unless a decision was rendered and made public.
“I think everything was done so sloppy there at the end,” Ross said of Salus and the liquidation of Kitson. “They were so quick to close the business. They thought no one would notice and I believe this happens all the time on Wall Street. Certain people get caught and certain people get away with it. There’s a moral issue here and I was bullied by them all. I’m bullied by these executives in money positions, lawyers’ letters saying we’re going to sue you if you keep asking for a license.”
Ross doesn’t miss a beat as he chats away about his window displays, most recent celebrity customer and the latest gossip on the street where Kitson began nearly 20 years ago, before turning his attention to what’s directly in front of him.
“I’m a retailer. I’m looking at this coffee here,” he said, nodding toward a display. “I’m thinking they should move that here, that’s too high and take that one from the top.”
Even as Ross was digging for information for his case over the past few years, he managed to erect the spitting image of Kitson in Kitross (which was renamed back to Kitson last year when Lee’s shares went back to him), taking over space on Robertson Boulevard in Kitson’s original home, plus a second plot on the street for a Kitson kids’ and baby products store. He also operates a Santa Monica summer pop-up, while mulling where to bring temporary shops for the upcoming holidays. There have been pop-ups recently in the Pacific Palisades and Newport Beach, and he’s held talks with executives — he declined to say whom — at larger department stores looking to woo him into bringing the Kitson concept to their floors.
The legal wrangling — perhaps not even close to being complete — has been draining, Ross admitted. Former vendors still walk into the store accusing him of owing them money from a time when he was no longer running the business. Others posit enough time has passed for Ross to get over it and move on.
For Ross, no one’s ever going to care about a business more than its founder and when Salus’ Moser began feeding him information, there was no turning away.
“No one was looking to see if this book had a dent in it and should it be taken off the floor, or did they clean off this pencil with this gunk on it. The eyes of an entrepreneur are much different than the eyes of a paid employee because you’re looking at every little thing,” Ross said. “A lot of people can’t believe it when I tell them [what happened]. That’s the problem. It’s very telling. But people — don’t they want to hear the real story?”