English Case Studies
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leslie_fay.pdf
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SECTION ONE COVPRNHT,NSIVE CASES
not have an incentive-based compensatio contract tied to the company's earnings, from tJire grossly inflated earnings figures Pomerantz, Polishan, and several other
meaning that he had not benefited directl he had manufactured. On the other ha Leslie Fay executives held large blocks of t stantial year-end bonuses, in some cases as a result of Kenias alleged scam.
company's stock and had received sub- uses larger than their annual salaries,
Even after Kenia pleaded guilty to fra charges, many third parties remained unconvinced that he had directed the fra d. When asked by a reporter to comment on Kenias confession, a Leslie Fay em and ,:lose friend of Kenia indicated that he was a "straight arrow, a real decent guy thing doesn't add up here."l
Fred Pomerantz took his company publ went private for a period of several years v Pomerantz, who became the company's
and thLen went on to observe that, "some-
Lipstick-Red Rolls Royces ond Orient Express Similar to many of his peers, Fred Pome II. But instead of storming the beaches
ntz served his country during World War Normandy or pursuing Rommel across
North Africa, Pomerantz had served his c ntry by making uniforms-uniforms for
the Women's Army Corps. Following the skills he had acquired in the military by c
r, Pomerantz decided to make use of the ting a company to manufacture women's
dresses. He named the company after his ghte:r, Leslie Fay. Pomerantz's former subordinates and leagues in the industry recall that he was
devel,cped a strong interest in gambling, d reveled in shocking new friends and to revr:al knife scars he had collected in brk's tougher neighborhoods. Adding to
red Rolls Royce that he used to cruise up New \brk's high society was his lipstick-
nd douln Manhattan's crowded streets.
Pomerantz's penchant for adventure a revelry did not prevent him from quickly in the volatile and intensely competitive ing, Pomerantz focused Leslie Fay on one
establishing his company as a key playe women's apparel industry. From the begin key segment of that industry. He and his igners; developed moderately priced and stvlishlv conservative dresses for women 30 through 55.
Leslie Fay's principal customers were th large department store chains that flour- ished in major metropolitan areas in the ades following World War II. By the late 1980s, Leslie Fay was the largest supplier At the time, Leslie Fay's principal compe
f wornen's dresses to department stores. itors included Donna Karan, Oscar de la
Renta. Nichole Miller Jones New York, a Albert Nipon. But, in the minds of most industrv observers, Liz Claiborne, an u rt company that had been founded in
nd. elasilv ranked as Leslie Fav's closest1976 by an unknown designer and her hu and fiercest rival. Liz Claiborne was the o facturer in the late 1980s that had larger a
pubU.cly owned women's apparel manu- nual sa.les than Leslie Fav.
a "character." Over the years, he reportedl enjoyed throwing extravagant parties, a business associates by pulling up his shir encounters with ruffians in some of New Pomerantz's legend within the top rung o
in 19ii2. In the early 1980s, the company a leverraged buyout orchestrated by John
EO and chairman of the board following
his father's death in 1982. The younger P erantz pocketed $40 million and a large bundle of Leslie Fav stock when the firm mergerd as a public company in 1986.
Like his fatherbefore him, John Pomera believed that the top executive of a com- pany involved in the world of fashion d exhibit a certain amount of panache. As a result, the popular and outgoing busi man invested in several Broadway shows
1. S. Strom, 'Accounting Scandal at Leslie Fay," York Times,2 February 1993, D1.
CASE 1.5 THr Lrslte FnY ConaPLNtss
and beca reali:zed i
in Palm York CitY' lLegendar
Despi contin comPetit ing tas ing each his com had de cusl-o telephon ness the
slow to iVIana
within t John Po
e a mainstay on Manhattans celebrity circuit"
ifre miO-f9li0s allowed him to buy an elegant
ach, Florida, where he often consorted during
rich and famous. To reward his company's be
Oti"* Express for a festive railway iaunt from
Leslie Fay's size and prominenc-e.in ll".ul,pu 6;ttig the company much
like his father
o, porn"rlntz shunned extensiv.e.marf$ ]11ti in clothes. Instead, he relied orr his and his
de
uuron', new offerings' Pomerantz was also slot
women's apparel industry did not prevent I
erantz succeeded his father' Thanks to the
he windfall that Pomerantz
Mediterranean-stYle estate
winter months with New
clientsi, he once rented the
ris to lstanbul' i industrY, John Pomerantz ad for decades. Unlike his
q to gauge women's chang- gn.tt' intuition in develoP-
io inte'grate comPuters into
en apparel manufacturers of their Products at maior
re progress of their sales bY
z's insi,stence on doing busi- 's Wilkes-Barre location was
puteriz:ed data Processing' nd the intense comPetition ie Fay from ProsPering after
unger lPomerantz's business
nuitlv under his leadershiP' skills, lie Fay's annual revenues and earnings
grew
Foslhion Becomes Unfoshionoble I By the l[te 1e80s, a trend that had ueen !11:9t':s, il**l;ffiIil: ilifi:? iJ.ffi fi:r'r'#;i#ir"rffi 1* *uu
n m o re ev id e n"t. I n ur i n g, that d e c ad e, r ash i o n
gradually n".u'Ju'nJu'r'ionuur*' ji'; :::'1'f1 -'^i:ii:?::'*J,lltffi:fr"#ifi ilHiiH:TTffiffi ffi ; ;6q4 rry :'ry f.:'ll :::":keted bv apparer
manufabturers, opting instead t"t O*ni*s'ishirts' i?d 411"j:3:""::5::i:l:ilffi illii,TffiT:ffi#, i;;;:;, garme nrs that they I had
puuc.has e d ve a rs e a rrier'
Initiallyl, this trend had a much more pronounc"g lthT'-"Ji.i1-:lJtl"t"ff:i;,| fr lli+ffi :ffi;e':.yl'tt::;.Y:,T""1-*li::P"f;*T;:';"'oagebracket' rh e co n pu me rs, d# ; or, i:;i: _yt g" :f i * :y: :"T1i1,:1fi JIX ::{:*: n,s d re s s-';il;
rf*J to*uri .utuil clothing had the most.dramlattc tmpacr o
sales" Sflnce Leslie Fay's inceptionif," to*panyhad doncentrated its product offer-
i n gs on dresses, even a f ter q "'1'" i13 ;:l:* :'?:y li :,::i#: nT i:]ffi:i :til:llf; i:lffi:Ti ; "",1 *:=i sF; ffi ; "'7' : : :lij*: i:h:i"u ar d re ss s a I e s
began$raduallydeclining'Y?";'p"l+"l':::l*;:i"^t::l::*T;lt;li:tJ:l;; ffitf;:,fJl3liilrffiffitoutJ;v-eniuauy reverse.
rhb prererrence ror more casual
apparQl that develope{ during the 1980s, however, tufuit"A irn declining dress sales
'\"#f:::ilff 11?i:T,:"ffi il;andearrv1ee0s.i.l11is:*:::?:',:T:i,T; il?:Er;'"?H;#;"i'iig*'*i*j::**:*:i##'l;ffi "*"rstocurtair ttreir d[scretionuriu*p*nditures' inctuaing purchasetl"] Y:t:*:*Tt:::"t::H; il,";: T:ffi: ilff;'ffi ffi ;; ii u J p i'ti cu I gry tar]1e
a5!l'': Tl"c ati ons ro r the
nationls malor d;;;;"t storJchaini, Lesiig Fay's pt":tl:],:::t:T::kness
in thenatronls *at?I uepdl LrrrsrrL DL\''rv vr u;h, contirnued weakness in the Everft as other segments of the economy lmpro
retail dector cut deeplv into the t";;;; earning' otlO1.11l::::t:,:::;if"t'i?l?;
::Hllffjru"':|ffiiiJ""to** to merge with conr]puiito*' or !3 riouidate'
In rate
1989, Ileslie Fay incurred a substantial loss when ft y+5:f :-:":::T::Ji:TAlf:i l::?,|!:[T:ilil,Hlliir?"''X #", ir," rarge retairer] riled,1.1il::l'uptcv
Manv or the ddpartmenr srore chains that survived wranSled
flnancilt::t=t*::""rT"tl,:t;
;il;,til towari .uruil ctothing had the most d
rne ogpal rrrrurrL luded ionger paymlent terrns, more
lenient return suppl{ers. These concesslons lncluoeu lurr5sr PcJ I
SEcTloN oNE CotuPReHeNstvr CRsEs
policies, and increased financial assista
plays, kiosks, and apparel boutiques'- fft. structural and economic changes aff
ing the late 1980s and early 1990s had a ma
nies. Even Lil Claiborne, whose revenues more than $1 billion by 1987, faced slowin
was eventually forced to take large invent
publications reported modest quarterly sa
efited the most from those increases were
to develop and maintain in-store dis-
ting the women's apparel industry dur-
r impact on most of its leading compa-
ad zoomed from $47 miliion in 1979 to sales from its maior product lines and rv write-downs. Occasionally, industry increases. But the companies that ben- the leading apparel manufacturers but
asures for major industries.
impressive sales and earnings throughout t
typical quarterly earnings release during th
hid posted record earnings and sales for
earnings for the third quarter of the year de
sales and consumer sPending."2
rather firms that marketed their wares to di t nnerchandisers.
Despite the trauma being experienced its key competitors, Leslie Fay reported
e late 1980s and early 1990s. Leslie Fay's
t time lrame indicated that the company e just-completed period. For example,
in October 1991, John Pomerantz annou ed that Leslie Fay had achieved record ite the "continued sluggishness in retail
Exhibit I presents Leslie Fay's consolida balance sheets and income statements
for 1987 through 1991. For comparison pu
financial ratios within the women's apparel
are composite amounts derived from data publish financial ratios and other financial
, Exhibit 2 presents norms for keY
ndustry in 1991. These benchmark ratios porterd by the investment services that
ing his company's future prospects even the company was able to sustain strong born recession gripping the retail sector'
Pomerantz's first reaction to the startling
The gregarious John Pornerantz rematn upbeat with the business press regard- Leslie Fay's competitors questioned how les ancl earnings in the face of the stub- ivately, though, Pomerantz was worried.
Pomerantz realized that retailers were in
Iine. "Old-fashioned," "matronly," "drab," easingiy critical of Leslie Fay's product
d "overpriced" were adjectives that the
company's sales reps routinely heard as th made their sales calls-
To keep his major customers haPPY, P rantz:, had to approve significant mark-
downs in Leslie Fay's wholesale prices and they found themselves "stuck" with exce
nt ttrose customers large rebates when s quantities of the company's products.
To keep investors happy, Pomerantz lobbi financial analysts tracking Leslie Fay's
stock. One analyst reported that an "irate'Pomerantz called her in 1992 and chas- Leslie Fay that was too "pessimistic-"3tised her for issuing an earnings forecasi
-'Houston, We Hove q Problem" On Friday morning, 29 January 1993, Paul olishan called John Pomerantz who was
on a business trip in Canada. Polishan to Pomerantz, "We got a problem ... maybe then informed his boss of the enormousa little more than just a problem.'a Polisha
accounting hoax that Donald Kenia had retiveity carried out over the past several
years. According to Polishan, Kenia had ad itted to masterminding the fraud, although
some of his subordinates had helped him i plemelnt and conceal the various scams. ;? Disbelief. "l thought it was a joke."s
2. Business Wire,"Leslie Fay Announces Record Ea ings," li ' October 1991.
m That's; in a Modern Fix," Wall Street Journal,3. T. Agins, "Dressmaker Leslie Fay Is an Old-Style 23 February 1993, A8.
4. Strom,'Accounting Scandal at Leslie Fay."
5. T. Agins, "Leslie Fay Says Irregularities in Books
Journal,2 FebruarY 1993, A5. ld Wipre Out'92 Profit;Stock Skids," Wall Street
Fay had ing his c responsi a rePorte
Fropl Goodwi
Qefqrre
Long'
CASE 1.5 THn LrsLE FaY CoivtPLNtEs
When having financial ata. Pomerantzalso denied that he and
the ot
'ealing the fraud to the press the following
clue is to what might have motivated Kenia
spected Kenia of any wrongdoing" He was pa
sL friend Paul Polishan who had supervised l
te for the integrity of Leslie Fay's accounting re
that Polishan "didn t know anything about thi
?iil,r;,,u orin, cu,.,.rt".,, " "''1??i3''
onday, Pomerantz denied misrelpresent Leslie FaY's r top executives of Leslie
ticularly strident in defend- enia and who was directlY
Pomerantz firmlY told
#::l::::#*;i ji*i ( continued)
EXHIBIT I
THU Lsslln FAY CoupLnms 1987-1991 Bauq,ncn Ssnnrs
"Current AssetC' ,,' : ,,'
rtant, a"Jiqu;p'tu*t'
Af ntg,fayabte . , , Ctirre
A.g Ad
on:Stock .. ,, ee
nqd Eaini19.s 0t Tre S,,! elo
Stoi ttr o tUers',Eq uitY
IntereslPiy"ab!e, Compehs-at'iOn: .
a inpeniet,.a 'Otner,l r 'Taxes Pi.yabte L'"
rqulti:
Total Liabilitie1 1ni..,, StoCkhotders' EquitY
t,' .?o-.; t, .'t ioiJl, ;; 18-?.2,", L:82.:2,1
,''iil:?i r. i3i,[i' ','i9.0.) ' J194 .21.i .8, . ," , ,787.:,6,
'--:---::-.; . il==-
,sr;l,r'.:si*;, ; : , ,
c
Deferr, tiab
Stockh Cotn
T
i:rir ,i.i
EXHIBI]I l- continued
THE Lr,sue.F,a.Y CoupaNms 1987-1991 INcotvtl Starnmnnrs
EXHIBIT 2
THe L,nslu:FaY Coupr,Nms 1991 InousrRY ron KEv Ftt\.q Rartos
sEcrtoN oNE CotvtpRsuENstvn Cesns
During the following weeks and mon
hounded Pomerantz for more details of
whether he was being totally forthcomin accounting scams. Responding to th
that rather than being involved in the fr
s, an increasingly hostile business press
he fraud, while critics openly questioned
regariling his lack of knowledge of Kenias
critics, the beleaguered CEO maintained ud, he was its principal victim. "Do I hold y heart of hearts, I feel that I'm a victim'
it;ii'
ii iiii ':ii
itl''# j
myself personally responsible? No' In
cAsE 1.5
I know th not prevent Fay's impre struggling fi
Shortly af mittee laun cial stateme Andersen &
ritics from questioning why Pomerantz had
ive operating results while many of the com ny's competitors were
Leslie Fay's audit com-
ed an intensive investigation of its impact the companY's finan- mittee retained Arthurts for the previous several years. The audit co
. to help complete that study' Pending the tcome of the investiga-
.ncially. r Pomerantz publicly disclosed Kenias fraud
(SEC) and inquired regarding the status of t
ry given the pending lawsuits. The SEC inforr
THr LEst-Iu FnY CoNaPa.IrEs
are other victims. But I'm the biggest victim' Such protestations did lithely accePted Leslie
wasrft an entrY on the subject to some tYPe of
's inverntorY. Kenia and factur,ad each quarterly
tion, Pom z reluctantly placed Polishan on temporary id leave.
BDO Seid unqualified
an had served as Leslie Fay's audit firm since e mid-1970s and issued
nions each vear on the company's financi I statements. Foliowing
Pomeretntz'disclosure of the fraud, BDO Seidman withd its a'udit opinions on
the compan s 1990 and 1991 financial statements. ln the uing'weeks, Leslie FaY
stockholde filed several large lawsuits narning the com 's management team
and BDO Se In April 1
man as defendants. 3. BDO Seidman officials contacted the curitie,s and Exchange
Commissio from Leslie
eir firnr's indePendence BDO Seidman that its
independen was jeopardized by those iawsuits, which f the firm to resign as
Leslie Fay's uditor in early May 1993. Company managemet immediatelY aPPointed
Arthur An n as Leslie's FaY new auditor. In Septe er 1993. Leslie Fav's audit committee comple its eight-month inves-
tigation of accounting fraud. The resulting 600-page port was reviewed bY
members Leslie Fay's board and then submitted to the ancl federal prosecu-
tors. Althou h the report was not released publicly' sever t of its key findings were
press. The most startling feature of the fraud s its pervasive nature,
period to increa:se the comPany's
gross profit tors "manuf
argin on sales. During period-ending physical inventories, the consPira-
ctured" the phantom inventory they had previ entered in the com-
pany's ac nting records. Forging inventory tags for non istent tDroducts, inflating
the numbe of dresses of a specific style on hand, and fab icating; large amounts of
bogus in-t sit inventory were common ru.9es used to ove e inrentory during the
period-endi Other nting gimmicks used by Kenia included failinp to accrue period-ending
expenses mated sal
leaked to t Accordling a company insider who read the report,
cost side of e company's ledgers for those years that was
rejiggering. The key
his subordi
failing to w receivabl produ,cts. should re ulent j,ourn the accoun
8. T. Agins, " 1993,83.
d liabilities, "prerecording" orders received frQm customers as consum-
to boost Leslie Fay's revenues near the end pt an accounting period,
ite off uncollectible receivables, and ignoring piscounts on outstanding
riencing slojv sales of the. company's
llegedly, Kenia decided each period what ar{rount of profit Leslie Fay
rt. He and his subordinates then a'djusted LeslielFay's a<lcounts with fraud-
I entries to achieve that profit figure. From l99Q throu{lh the end of 1992,
Lng fraud overstated the iompuny't profits by a{proximately $80 million'
us of the fraudulent activity was Leslie F
tes had inflated the number of dresses man
uce the per-unit cost of finished goods and
7. E. Lesly, played Dress-up with the Books?" Buslness Week,15 Mfrch 199:i,34.
port Is Said to Show Pervasive Fraud at Leslie Fay," Wall $treet Journal, 27 September
x' i78 ,
SECTION ONE COIUPNEHENSIVE CASES
Kenia and his co-conspirators molded slie Fay's financial statements so that key
Leslie Fay's headquarters management t am had been aware of those irregulari-
ties, but the report did criticize those ex cutives for failing to aggressively pursue
unusual and suspicious circumstances th had encountered during the course of Kenia's fraud. If those circumstances ha been vigorously investigated, the audit
have been uncovered much earlier than mittee questioned why Pomerantz had
committee concluded that the fraud mig January 1993. In particular, the audit co
financial ratios would be consistent with h
fraudsters paid particular attention to wa
several years, the company's gross profit
Leslie Fay's actual gross profit percentage
1990s, but Kenia relied on his assorted ba
cial ratio to near its historical norm. Excerpts released to the press from th
erated John Pomerantz of responsibility The report indicated that there was no
not investigated Leslie Fay's remarkably 1990s given the significant problems fa
In April 1993, Leslie Fay filed for protecti the federal bankruptcy code. Press repo off the company's access to the additiona continue normal operations. By early Ap dropped by nearly 85 percent since the fi two months earlier. The company's plum cism of its officers in the business press t holders against Pomerantz, other Leslie F, auditor, BDO Seidman.
The lawsuits that named BDO Seidman been at least reckless in auditinq Leslie the early 1990s. Howard Schilit, an acc specialist, suggested in the business pre replete with red flags. These red flags incl ny's financial data, implausible relationsh and unreasonably generous bonuses paid to the record earnings Ler;lie Fay reporte Pomerantz had received total salarv and
toricall trends. The financial ratio that the Leslie Fay's gross profit percentage. For
ercentage had hovered near 30 percent. s approximately 20 percent by the early
of accounting tricks to inflate that finan-
audit committee's report largely exon- or Leslie Fay's accounting irregularities. videnr:e that he and other members of
able gross profit percentage in the early ng other women's dress manufacturers
ts of K.enia's fraudulent scheme had cut debt and equity capital that it needed to I 1993, the price of Leslie Fay's stock had
detalls of the fraud had become public ting r;tock price and the mounting criti-
gered additional lawsuits by angry stock- executives, and the company's longtime
a defendant charged that the firm had 's periodic financial statements during
nting professor and forensic accounting that Lr:slie Fav's financial data had been
imrplausible trend lines in the compa- betvreen key financial statement items,
to top executives, bonuses linked directly each successive period. For 1991, John
uses of $3.6 million, three times more
and the apparently poor response to man of ther company's new product offerings during that period.
Following the completion of the auditlcommittee's investigation in September 1993, Leslie Fay's board of directors all John Pomerantz to remain as the CEO but relieved him of all financial responsibillities related to the company's operations. The board created a committee of outside ldirectors to oversee the company's opera- tions while Leslie Fay dealt with the after]math of the large-scale fraud. The board also dismissed Paul Polishan as Leslie Fay'b CFO a'nd senior vice president of finance
and replaced him with an Arthur Anderspn partner who had been involved in the audit committee investigatjion.
BDO Seidmon: Odd Mon Out from its creditors under Chapter 11 of
than the 1991 compensation of Liz Clai more than double those of Leslie Fav's.
e's CEIO, whose company reported sales
C,ASH 1.5 THs LEsl-E Fav CouPa'NtEs
BDO Seid audits. T on the basis maintained shoulder the
During va many Partie Leslie F'aY's
tics sugg cize Pome
Fay's bankr prepare an identifYing to discover
In Augu This docu
board of di
The Still claims" ag ently avail nomicallY Stillman R
ing that th "it is llikel Leslie FaY.
FollLowi civil lawsu the same including cials laid fives and i
Leslie had na lawsuit. Seid:man
an officials chafed at published reports criticiz
: officials insisted tfrat gnO Seidman was bei
innu.nOo and incomplete information' The
.t Leslie Fay's top management' principally
>ulk of the respontininty for the massive fraud'
ous court proceedings following the disclosut
questioned the obieitivity of the forensic inv
.ii, .o,n,,'ittee thai had ef f ectively vindicated
J tftut the members of the audit committee
ntr. to squelch such criticism' the federal i
Oi.Oiifittg appointed an independent exami
["i t"p"u on'the details of the fraud' Slil]T1
igg+, the U.S. Bankruptcy Court released the s
ent corroborated the key findings of the au
to the audit committee report' the Stillman
"ih" examiner's report concludes there is n
:ctors."9 an Report went on to suggeslt tl,"'?t'!::g}
inst former company executivtls Kenia and P
.Ut" intot.ation,"10 the limited assets of thos
nfeasibleforthebankruptcycourttopursue fort indicted the quality of
BDO Seidl{1 aur --- rs worth Pursuing against " 're may be "clairn
BDO Seidman acted negligenl'ly in performi
g the release of the Stillman Report' Leslie Fay'
i"g"i"t, BDO Seidman in the federalb-anliy:
im;, gno Seidman filed a lawr;uit against Le:
tohnPomerantz'Incommentingonthislatter . Utu." for the fraud squarely upon the
shot
sisted that they had been interrrtionatly misled
Ly's management responded immediately to t
a.lof,n Pomerantz and his fellow officers as
I e unsubstantiated and unfounded ailega
re a classic example of 'revisiclnist history' at
Wire,"LeslteFay Responds to Unfounded Allegations oy
t)lre, "BDASeidman Announces Cross-Claims and Third
g their firm's Leslie FaY
g indicted in the Press i surn. individuals also
hn Pomerantz, should
of the Leslie FaY fraud,
been reluctant to criti- pres;iding over Leslie
r, Charles Stillman, to
was allso charged with
individuals responsible for tlie fraud and t responsible for failing
callerl Stillman RePort'
it committee investiga-
:stigation suPervised bY
Pomeriantz. These skeP-
:port liirgelY exonerated
evidence to suggest thattion. Simila Pomerantz
t';" iluintt any members of Leslie Fay's c
viable clai rrent nnanagement or its
here vsere iikelY "viable
lishan'based upon "Pres-
individuals made it eco-
hose claims. FinallY, the
its of Leslie FaY bY assert-
DO Seidman,"ll and that
accounting services for
stocktroiders filed a large
courts. At aPProximatelY
ders ol Leslie FaY's execu-
the comPany.l3 news that BDO Seidman
fendinnts in a large civil
ns made todaY bY BDO
are cliearlY an attempt bY
nt nelgligence bY blaming
Seidman,l' 29 March i995'
ComPlaints Against KeY
ie Fay'r; PrinciPal officers, awsuit, BDO Seidman offi-
the ting firm to divert attention from its own ap
9. Wire,"lndependent Examiner Confirms Findings of Lesli Fay's Atrdit
Committee
Investigat
10. Ibtd.
11. Ibid.
" 16August 1994-
others."14
12.
13. PT? Leslie FaY igures," 29 March 1995'
Wire, "Leslie Fay Responds to Unfounded Allegations'"
14. Busi
f f i f f i # t "
July 1997, a federal judge approved a $34 llion settlement to the large number of law- its filed by Leslie Fay's stockholders and ditors against the company, ilis executives,
BDO Seidman, BDO Seidman contributed million to the settlement pool, although the
m reported that it was agreeing to the settle- nt onlv because it was the most economical expeditious way to "put this matter behind
."15 In June 1997, Leslie Fay emerged frorn ral bankruptcy court. Over the next several
rs, the much smaller coilponi! returned to rofitable condition before being purchased late 2001 by a large investment fund. A few nths later, in April 2002, John Pomerantz ived a lifetime achievement award at the
nual American Image Awards, a glitzy event
by the major companies and organi ions in the fashion industries. n 31 October 1996, federal prosecutors filed a
nt fraud indictment against Paul Polishan. e specific charges included conspiracy, mak- false statements to the SEC. barnk fraud, and
re fraud. Unknown to the public, three years rlier. Donald Kenia had broken down under entless questioning by federal investigators d admitted that Polishan. his former boss,
been the architect of the Leslie Fav fraud, cording to Kenia's testimony, Polishan had rseen and directed every major facet of the
ud. Because of Polishan's intimidating per- nality, Kenia and several of his subordinates d agreed to make the enormous number of udulent entries in Leslie Fay's accounting ords that he had demanded. Polishan had
compelled Kenia to accept full responsi- ity for the accounting irregularities when it
me apparent in late January 1993 that the ud would soon be exposed. Following a series of lengthy and fiercely ntested pretrial hearings, Polishan's criminal
15. The Electronic Accountant (online), "BDO to Pay
1997. As a point of information, there is no public John Pomerantz et al. by BDO Seidman. Most likely, the settlement approved by the federal judge.
16. United States of America u. Paul Polishan,2001
sEcnoN oNE CoirapREHnwstvt CsEs
b
c a
{ffi rilT ffi
case was finally heard in federal court in the summer of 2000. Polishan was convicted on 18 of the 21 fraud counts filed against him. His attorrreys immediately appealed the guilty ver- dict.'[he attorneys' principal contention during the appeal was that there was almost no phLysi- cal evidence to link their client to the fra.ud. Ihste;rd, they maintained that Polishan's convic- tion had hinged almost entirely upon the verac- ity of Kenias testimony.
Th ,a federa l j udge who p res ided over Polishan's appeal did not dispute his attorneys' principal contention. Throughout the fraud, the formelr CFO had painstakingly avoided leaving incrirninating physical evidence that linked lhim directly to the accounting irregularities. Despite that fact, the judge denied Polishan's appeal. The jrudge observed that a substantial amounl: of cir,cumstantlal evidence had been preserrted during the trial. After studying the evidenc,e in pains;taking detail, the judge ruled that it was muclr more consistent with Kenia's testimony than that of Folishan.
A key factor contributing to the judge's deci- sion was the unusual relat ionship that hadi existred between Polishan and Kenia during their long tenure with Leslie Fay, a relationship that had been documented and discussed al: length during the trial. The judge noted thal: Polishan had "dominated" Kenia through intim- idation and fear. In the opinion he issued in the case, the judge referred on multiple occa- sions to an episode during 1992 to demonstrate how completely Polishan had controlled Kenia., In forcing Kenia to take responsibility for an accounting error that had been discovered in Leslie Fay's accounting records, Polishanr insist,ed that Kenia tell another company execu- tive, '"1 am a idiot."16
On 21 January 2002, almost exactly ni ine vears after the news of the Leslie Fay fraud
Million to Settle Leslie Fay Lawsuit." 10 March
of any resolution to the lawsuit filed against hat lawsuit was dropped by BDO Seidman following
. Dist.I.EXIS 10662.
THn Lnsl,ln FaY CouPl't'tlEs
s, Paul Polishan was sen- County, Pennsy
e'years in federal prison to begin servi
t ing and overseeing that exchange for h
lo i i}"d for personal bank- Donald Kenia
Ling assets of only $17,000, to two counis
. A]ter losing an appeal to the SEC' In 200
:tion, Polishan reported to years in the AII'
ional facility in Schuylkill Montgomery' P
cAsE 1.5
surfaced in the P tenced to serve nt
for his rolie irr Plo fraud.17 Polishan,
ania, in earlY SePtember 2003
g his nine-Year sentence' In
i testiinonY against Polishan,
ruptcY in 1999 clai was also fined $9t overturn his convt the federai correc
Questflo 1. Pre
1991. F Gilen t been o Fay? Ex lain.
2. In addi inllo the 199
3. List
4" Paul reporti
common-sized financial statements for Leslie
: that same period, compute for Leslie Fay the
ese data, *fti.h financial statement items do yt
particular interest to BDO Seidrnan during that
as al lowed to Plead gui l tY
f making false statements to
, Kenia was sentenced to two
nwood Federal Prison CamP in
nnsylv;lnia.
for the Period 1987-
ios shown in Exhibit 2'
u believe should have firm's 1991 audit of Leslie
, what other financial
sponsible for Planning
industrY that auditors se items, brieflY
ion to the data shown in Exhibit 1 and Exhibit
tion would you have obtained if you had been
Leslie FaY audit?
should descri their audit imPlications.
nting and financial
bordinates. What
implic How s
tions do such circumstances pose for a compa y's independent auditors?
ld auditors take such circumstances into ideration when Planning
an au ence was jeoPardized
financial variables or factors regarding a client
:onsider when planning an audit' For each of tl
lishan apparently dominated Leslie Fay's accc
rg functions and the individuals who were his
5. Explai by the Leslie
why the SEC ruled that BDO Seidman's indel
awsuits that named the accounting firm' Lesli Fay, and toP executives of
t's sentence because Polishan
hy as codefendants.
17. Polisha 's attorneys asked the presiding ludge to reduce their
clie
ffered from a narcissistic personality disorder. The iudgeallegedly ied that request.
