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The Leslie Fay Companies
Paul Polishan graduated with an accounting degree in 1969 and immediately accepted an entrylevel position in the accounting department of The Leslie Fay Companies, a women’s apparel
manufacturer based in New York City. Fred Pomerantz, Leslie Fay’s founder, personally hired
Polishan. Company insiders recall that Pomerantz saw in the young accounting graduate many of
the same traits that he possessed. Both men were ambitious, hard driving, and impetuous by
After joining Leslie Fay, Polishan quickly struck up a relationship with John Pomerantz, the son of
the company’s founder. John had joined the company in 1960 after earning an economics degree
from the Wharton School at the University of Pennsylvania. In 1972, the younger Pomerantz
became Leslie Fay’s president and assumed responsibility for the company’s day-to-day
operations. Over the next few years, Polishan would become one of John Pomerantz’s most
trusted allies within the company. Polishan quickly rose through the ranks of Leslie Fay,
eventually becoming the company’s chief financial officer (CFO) and senior vice president of
Leslie Fay’s corporate headquarters were located in the heart of Manhattan’s bustling garment
district. The company’s accounting offices, however, were 100 miles to the northwest in WilkesBarre, Pennsylvania. During Polishan’s tenure as Leslie Fay’s top accounting and finance officer,
the Wilkes-Barre location was tagged with the nickname “Poliworld.”
The strict and autocratic Polishan ruled the Wilkes-Barre site with an iron fist. When closing the
books at the end of an accounting period, Polishan often required his subordinates to put in 16hour shifts and to work through the weekend. Arriving two minutes late for work exposed
Poliworld inhabitants to a scathing reprimand from the CFO. To make certain that his employees
understood what he expected of them, Polishan posted a list of rules within the Wilkes-Barre
offices that documented their rights and privileges in minute detail. For example, they had the
right to place one, and only one, family photo on their desks. Even Leslie Fay personnel in the
company’s Manhattan headquarters had to cope with Polishan’s domineering manner. When
senior managers in the headquarters office requested financial information from Wilkes-Barre,
Polishan often sent them a note demanding to know why they needed the information.
Polishan’s top lieutenant at the Wilkes-Barre site was the company controller, Donald Kenia. On
Polishan’s frequent trips to Manhattan, Kenia assumed control of the accounting offices. Unlike
his boss, Kenia was a soft-spoken individual who enjoyed following orders much more than
giving them. Because of Kenia’s meek personality, friends and coworkers were stunned in early
February 1993 when he took full responsibility for a large accounting fraud revealed to the press
by John Pomerantz. Investigators subsequently determined that Leslie Fay’s earnings had been
overstated by approximately $80 million from 1990 through 1992.
Following the public disclosure of the large fraud, John Pomerantz repeatedly and adamantly
insisted that he and the other top executives of Leslie Fay, including Paul Polishan, had been
unaware of the accounting irregularities perpetrated by Kenia. Nevertheless, many parties inside
and outside the company expressed doubts regarding Pomerantz’s indignant denials. Kenia was
not a major stockholder and did not have an incentive-based compensation contract tied to the
company’s earnings, meaning that he had not benefited directly from the inflated earnings figures
he had manufactured. On the other hand, Pomerantz, Polishan, and several other Leslie Fay
executives held large blocks of the company’s stock and had received substantial year-end
bonuses, in some cases bonuses larger than their annual salaries, as a result of Kenia’s alleged
Even after Kenia pleaded guilty to fraud charges, many third parties remained unconvinced that
he had directed the fraud. When asked by a reporter to comment on Kenia’s confession, a Leslie
Fay employee and close friend of Kenia indicated that he was a “straight arrow, a real decent guy”
and then went on to observe that, “something doesn’t add up here.”
Lipstick-Red Rolls Royces and the Orient Express
Similar to many of his peers, Fred Pomerantz served his country during World War II. But instead
of storming the beaches of Normandy or pursuing Rommel across North Africa, Pomerantz had
served his country by making uniforms—uniforms for the Women’s Army Corps. Following the
war, Pomerantz decided to make use of the skills he had acquired in the military by creating a
company to manufacture women’s dresses. He named the company after his daughter, Leslie Fay.
Pomerantz’s former subordinates and colleagues in the industry recall that he was a “character.”
Over the years, he reportedly developed a strong interest in gambling, enjoyed throwing
extravagant parties, and reveled in shocking new friends and business associates by pulling up
his shirt to reveal knife scars he had collected in encounters with ruffians in some of New York’s
tougher neighborhoods. Adding to Pomerantz’s legend within the top rung of New York’s high
society was his lipstick-red Rolls Royce that he used to cruise up and down Manhattan’s crowded
Pomerantz’s penchant for adventure and revelry did not prevent him from quickly establishing
his company as a key player in the volatile and intensely competitive women’s apparel industry.
From the beginning, Pomerantz focused Leslie Fay on one key segment of that industry. He and
his designers developed moderately priced and stylishly conservative dresses for women age 30
through 55.
Leslie Fay’s principal customers were the large department store chains that flourished in major
metropolitan areas in the decades following World War II. By the late 1980s, Leslie Fay was the
largest supplier of women’s dresses to department stores. At the time, Leslie Fay’s principal
competitors included Donna Karan, Oscar de la Renta, Nichole Miller, Jones New York, and Albert
Nipon. But, in the minds of most industry observers, Liz Claiborne, an upstart company that had
been founded in 1976 by an unknown designer and her husband, easily ranked as Leslie Fay’s
closest and fiercest rival. Liz Claiborne was the only publicly owned women’s apparel
manufacturer in the late 1980s that had larger annual sales than Leslie Fay.
Fred Pomerantz took his company public in 1952. In the early 1980s, the company went private
for a period of several years via a leveraged buyout orchestrated by John Pomerantz, who became
the company’s CEO and chairman of the board following his father’s death in 1982. The younger
Pomerantz pocketed $40 million and a large bundle of Leslie Fay stock when the firm reemerged
as a public company in 1986.
Like his father before him, John Pomerantz believed that the top executive of a company involved
in the world of fashion should exhibit a certain amount of panache. As a result, the popular and
outgoing businessman invested in several Broadway shows and became a mainstay on
Manhattan’s celebrity circuit. The windfall that Pomerantz realized in the mid-1980s allowed him
to buy an elegant, Mediterranean-style estate in Palm Beach, Florida, where he often consorted
during the winter months with New York City’s rich and famous. To reward his company’s best
clients, he once rented the legendary Orient Express for a festive railway jaunt from Paris to
Despite Leslie Fay’s size and prominence in the apparel industry, John Pomerantz continued
operating the company much like his father had for decades. Unlike his competitors, Pomerantz
shunned extensive market testing to gauge women’s changing tastes in clothes. Instead, he relied
on his and his designers’ intuition in developing each season’s new offerings. Pomerantz was also
slow to integrate computers into his company’s key internal functions. Long after most women
apparel manufacturers had developed computer networks to monitor daily sales of their
products at major customer outlets, Leslie Fay officials continued to track the progress of their
sales by telephoning large customers on a weekly basis. Pomerantz’s insistence on doing business
the “old-fashioned way” also meant that the company’s Wilkes-Barre location was slow to take
advantage of the speed and efficiency of computerized data processing.
Management’s aversion to modern business practices and the intense competition within the
women’s apparel industry did not prevent Leslie Fay from prospering after John Pomerantz
succeeded his father. Thanks to the younger Pomerantz’s business skills, Leslie Fay’s annual
revenues and earnings grew robustly under his leadership.
Fashion Becomes Unfashionable
By the late 1980s, a trend that had been developing within the women’s apparel industry for
several years became even more evident. During that decade, fashion gradually became
unfashionable. The so-called “casualization” of America meant that millions of consumers began
balking at the new designs marketed by apparel manufacturers, opting instead for denims, tshirts, and other more comfortable attire, including well-worn, if not tattered, garments that they
had purchased years earlier. Initially, this trend had a much more pronounced impact on the
buying habits of younger women. But, gradually, even women in the 30-to-55-year-old age
bracket, the consumers targeted by Leslie Fay, decided that casual was the way to go.
The trend toward casual clothing had the most dramatic impact on women’s dress sales. Since
Leslie Fay’s inception, the company had concentrated its product offerings on dresses, even after
pantsuits became widely recognized as suitable and stylish for women of all ages during the
1970s. In the early 1970s, annual dress sales began gradually declining. Most corporate
executives in the women’s apparel industry believed this trend would eventually reverse. The
preference for more casual apparel that developed during the 1980s, however, resulted in
declining dress sales throughout the end of the century.
The recession of the late 1980s and early 1990s compounded the problems facing the women’s
apparel industry. That recession caused many consumers to curtail their discretionary
expenditures, including purchases of new clothes. The economy-wide decline in retail spending
had particularly far-reaching implications for the nation’s major department store chains, Leslie
Fay’s principal customers.
Even as other segments of the economy improved, continued weakness in the retail sector cut
deeply into the sales and earnings of department stores. Eventually, several large chains were
forced to merge with competitors or to liquidate. In late 1989, Leslie Fay incurred a substantial
loss when it wrote off a receivable from Allied/Federated Department Stores after the large
retailer filed for bankruptcy. Many of the department store chains that survived wrangled
financial concessions from their suppliers. These concessions included longer payment terms,
more lenient return policies, and increased financial assistance to develop and maintain in-store
displays, kiosks, and apparel boutiques.
The structural and economic changes affecting the women’s apparel industry during the late
1980s and early 1990s had a major impact on most of its leading companies. Even Liz Claiborne,
whose revenues had zoomed from $47 million in 1979 to more than $1 billion by 1987, faced
slowing sales from its major product lines and was eventually forced to take large inventory
write-downs. Occasionally, industry publications reported modest quarterly sales increases. But
the companies that benefited the most from those increases were not the leading apparel
manufacturers but rather firms that marketed their wares to discount merchandisers.
Despite the trauma being experienced by its key competitors, Leslie Fay reported impressive
sales and earnings throughout the late 1980s and early 1990s. Leslie Fay’s typical quarterly
earnings release during that time frame indicated that the company had posted record earnings
and sales for the just-completed period. For example, in October 1991, John Pomerantz
announced that Leslie Fay had achieved record earnings for the third quarter of the year despite
the “continued sluggishness in retail sales and consumer spending.”
Exhibit 1 presents Leslie Fay’s consolidated balance sheets and income statements for 1987
through 1991. For comparison purposes, Exhibit 2 presents norms for key financial ratios within
the women’s apparel industry in 1991. These benchmark ratios are composite amounts derived
from data reported by the investment services that publish financial ratios and other financial
measures for major industries.
Exhibit 1The Leslie Fay Companies 1987–1991 Balance Sheets
Exhibit 1The Leslie Fay Companies 1987–1991 Income Statements
Exhibit 2The Leslie Fay Companies, 1991 Industry Norms for Key Financial Ratios
The gregarious John Pomerantz remained upbeat with the business press regarding his
company’s future prospects even as Leslie Fay’s competitors questioned how the company was
able to sustain strong sales and earnings in the face of the stubborn recession gripping the retail
sector. Privately, though, Pomerantz was worried. Pomerantz realized that retailers were
increasingly critical of Leslie Fay’s product line. “Old-fashioned,” “matronly,” “drab,” and
“overpriced” were adjectives that the company’s sales reps routinely heard as they made their
sales calls.
To keep his major customers happy, Pomerantz had to approve significant mark-downs in Leslie
Fay’s wholesale prices and grant those customers large rebates when they found themselves
“stuck” with excess quantities of the company’s products. To keep investors happy, Pomerantz
lobbied financial analysts tracking Leslie Fay’s stock. One analyst reported that an “irate”
Pomerantz called her in 1992 and chastised her for issuing an earnings forecast for Leslie Fay
that was too “pessimistic.”
“Houston, We Have a Problem”
On Friday morning, January 29, 1993, Paul Polishan called John Pomerantz who was on a
business trip in Canada. Polishan told Pomerantz, “We got a problem … maybe a little more than
just a problem.” Polishan then informed his boss of the accounting hoax that Donald Kenia had
secretively carried out over the past several years. According to Polishan, Kenia had admitted to
masterminding the fraud, although some of his subordinates had helped him implement and
conceal the various scams. Pomerantz’s first reaction to the startling news? Disbelief. “I thought it
was a joke.”
When revealing the fraud to the press the following Monday, Pomerantz denied having any clue
as to what might have motivated Kenia to misrepresent Leslie Fay’s financial data. Pomerantz
also denied that he and the other top executives of Leslie Fay had suspected Kenia of any
wrongdoing. He was particularly strident in defending his close friend Paul Polishan who had
supervised Kenia and who was directly responsible for the integrity of Leslie Fay’s accounting
records. Pomerantz firmly told a reporter that Polishan “didn’t know anything about this.”
During the following weeks and months, an increasingly hostile business press hounded
Pomerantz for more details of the fraud, while critics openly questioned whether he was being
totally forthcoming regarding his lack of knowledge of Kenia’s accounting scams. Responding to
those critics, the beleaguered CEO maintained that rather than being involved in the fraud, he
was its principal victim. “Do I hold myself personally responsible? No. In my heart of hearts, I feel
that I’m a victim. I know there are other victims. But I’m the biggest victim.”
protestations did not prevent critics from questioning why Pomerantz had blithely accepted
Leslie Fay’s impressive operating results while many of the company’s competitors were
struggling financially.
Shortly after Pomerantz publicly disclosed Kenia’s fraud, Leslie Fay’s audit committee launched
an intensive investigation of its impact on the company’s financial statements for the previous
several years. The audit committee retained Arthur Andersen & Co. to help complete that study.
Pending the outcome of the investigation, Pomerantz reluctantly placed Polishan on temporary
paid leave.
BDO Seidman had served as Leslie Fay’s audit firm since the mid-1970s and issued unqualified
opinions each year on the company’s financial statements. Following Pomerantz’s disclosure of
the fraud, BDO Seidman withdrew its audit opinions on the company’s 1990 and 1991 financial
statements. In the ensuing weeks, Leslie Fay stockholders filed several large lawsuits naming the
company’s management team and BDO Seidman as defendants.
In April 1993, BDO Seidman officials contacted the Securities and Exchange Commission (SEC)
and inquired regarding the status of their firm’s independence from Leslie Fay given the pending
lawsuits. The SEC informed BDO Seidman that its independence was jeopardized by those
lawsuits, which forced the firm to resign as Leslie Fay’s auditor in early May 1993. Company
management immediately appointed Arthur Andersen as Leslie’s Fay new auditor.
In September 1993, Leslie Fay’s audit committee completed its eight-month investigation of the
accounting fraud. The resulting 600-page report was reviewed by members of Leslie Fay’s board
and then submitted to the SEC and federal prosecutors. Although the report was not released
publicly, several of its key findings were leaked to the press. The most startling feature of the
fraud was its pervasive nature. According to a company insider who read the report, “There
wasn’t an entry on the cost side of the company’s ledgers for those years that wasn’t subject to
some type of rejiggering.”
The key focus of the fraudulent activity was Leslie Fay’s inventory. Kenia and his subordinates
had inflated the number of dresses manufactured each quarterly period to reduce the per-unit
cost of finished goods and increase the company’s gross profit margin on sales. During periodending physical inventories, the conspirators “manufactured” the phantom inventory they had
previously entered in the company’s accounting records. Forging inventory tags for nonexistent
products, inflating the number of dresses of a specific style on hand, and fabricating large
amounts of bogus in-transit inventory were common ruses used to overstate inventory during
the period-ending counts.
Other accounting gimmicks used by Kenia included failing to accrue period-ending expenses and
liabilities, “prerecording” orders received from customers as consummated sales to boost Leslie
Fay’s revenues near the end of an accounting period, failing to write off uncollectible receivables,
and ignoring discounts on outstanding receivables granted to large customers experiencing slow
sales of the company’s products. Allegedly, Kenia decided each period what amount of profit
Leslie Fay should report. He and his subordinates then adjusted Leslie Fay’s accounts with
fraudulent journal entries to achieve that profit figure. From 1990 through the end of 1992, the
accounting fraud overstated the company’s profits by approximately $80 million.
Kenia and his co-conspirators molded Leslie Fay’s financial statements so that key financial ratios
would be consistent with historical trends. The financial ratio that the fraudsters paid particular
attention to was Leslie Fay’s gross profit percentage. For several years, the company’s gross
profit percentage had hovered near 30 percent. Leslie Fay’s actual gross profit percentage was
appro …
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