alerted the company to the accounting manipulations and worked with auditors to
untangle the books.
By April 1993, Leslie Fay, under intense pressure from creditors, filed for Chapter 11
bankruptcy (reorganization) in Manhattan. Both Mr. Polishan and Mr. Kenia were fired.
Mr. Kenia, charged with two counts of filing false statements with the SEC, has entered
into a plea bargain with the U.S. Attorney in exchange for his cooperation in the
continuing investigation of the Leslie Fay accounting improprieties.
Also in April 1993, two new outside directors were named to the Leslie Fay board. The
audit committee of the board discovered, through continuing investigation, that
accounting irregularities had inflated the company's profits for at least five quarters
beginning in the fall of 1990.
As Leslie Fay continued its climb from bankruptcy, it was discovered that its law firm,
Weil Gotshall & Manges, had failed to disclose its close ties to two board audit
committee members. A federal bankruptcy judge ordered the law firm to pay fines
totaling $800,000, which was the cost of having an independent review of the law firm's
representation and conduct in the case.
In March 1995, Leslie Fay placed its flagship dress and retail business up for sale and
offered its CEO a success fee of $1.5 million if those businesses were sold.
Also in March 1995, a report detailing accounting improprieties was released by the
audit committee of the Leslie Fay board. The board found that when executives realized
they would not meet pre-established goals, they would ship goods out to a
Wilkes-Barre, Pennsylvania, facility to inflate sales. The executives also forged
inventory tags, multiplied the value of inventory, developed phantom inventory and
altered records to meet sales target. Some goods were invoiced to be shipped in the final
day of a quarter even though they were not actually shipped until the next quarter.
Numerous shareholders have filed suit against the Leslie Fay board and BDO Seidman,
the company's auditor during this period.
John Pomerantz continued as CEO from 1993 onward. The company has tried to find a
buyer but has remained unsuccessful in doing so.
a. What signals about the importance of earnings at Leslie Fay were sent to the officers
who committed the accounting improprieties?
b. Wouldn"t employees have been aware of the financial fraud? Why didn"t they speak
up? Why didn"t they tell someone?
c. How might Leslie Fay have prevented what happened?
d. If you were the new chief financial officer, what message would you most want to
impress upon all Leslie Fay employees?
e. Of what significance are the law firm's ties to the board's audit committee members?
Did these ties set a poor tone at the top?