8Ed.sol1.05 - CASE 1.5 THE LESLIE FAY COMPANIES Synopsis...

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CASE 1.5 THE LESLIE FAY COMPANIES Synopsis Fred Pomerantz founded Leslie Fay in the mid-1940s and built the company into one of the leading firms in the highly competitive women’s apparel industry over the next four decades. Fred’s son, John, took over the company in 1982 after his father’s death. Over the next ten years, the younger Pomerantz added to his father’s legacy by maintaining Leslie Fay’s prominent position in its industry. In January 1993, John Pomerantz’s world was rocked when his company’s CFO, Paul Polishan, told him of a large accounting fraud that had inflated Leslie Fay’s operating results during the previous few years. Polishan had learned of the fraud from his top subordinate, Donald Kenia, Leslie Fay’s controller. Kenia revealed the fraud to Polishan and, at the same time, reportedly confessed that he was the mastermind behind the fraud. Public disclosure of the large-scale fraud sent Leslie Fay’s stock price into a tailspin and prompted the press to allege that Pomerantz and Polishan must have either participated in the various accounting scams or, at a minimum, been aware of them. Within a few months, Leslie Fay was forced to file for protection from its creditors in federal bankruptcy court. In the meantime, investigations by law enforcement authorities corroborated Pomerantz’s repeated denials that he was involved in, or aware of, the fraud. However, those same investigations implicated Polishan in the fraud. Another party tainted by the investigations was Leslie Fay’s former audit firm, BDO Seidman. One investigative report noted that negligence on the part of the accounting firm had likely prevented it from uncovering the fraud. In July 1997, BDO Seidman contributed $8 million to a settlement pool to resolve several lawsuits stemming from the Leslie Fay fraud. In the summer of 2000, federal prosecutors obtained an eighteen-count felony conviction against Paul Polishan. The key witness who sealed Polishan’s fate was his former subordinate, Donald Kenia. During the contentious criminal trial, Kenia admitted that Polishan was the true architect of the Leslie Fay fraud. Kenia had initially accepted responsibility for the fraud only after being coerced to do so by Polishan. In early 2002, Polishan began serving a nine-year sentence in a federal prison. Kenia received a two-year sentence for helping his superior perpetrate and conceal the fraud. Leslie Fay emerged from bankruptcy court in 1997 but was bought out by another firm in 2001. The Leslie Fay Companies--Key Facts
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Case 1.5 The Leslie Fay Companies 1. Under the leadership of Fred and John Pomerantz, Leslie Fay ranked as one of the leading firms in the very competitive women’s apparel industry during the latter decades of the twentieth century.
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8Ed.sol1.05 - CASE 1.5 THE LESLIE FAY COMPANIES Synopsis...

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