April 16 (Bloomberg) -- Aeropostale Inc.’s former chief executive officer testified that he fired Christopher Finazzo from his job as a merchandise executive in 2006 after learning about his secret dealings with a vendor.
Ex-CEO Julian Geiger, who oversaw more than 14-fold growth in sales at the teen clothing retailer, told jurors at Finazzo’s fraud trial today in federal court in Brooklyn, New York, that he was “incredulous” when he found out about the side deals.
“I loved Chris. He was like a brother,” Geiger, 67, said under questioning by Assistant U.S. Attorney Winston M. Paes. In a recording of the Nov. 7, 2006, termination meeting, played in court, Geiger could be heard telling Finazzo: “My heart is broken.”
“What you’ve done is some terrible judgment,” Geiger could be heard saying on the recording.
Finazzo, 57, is accused of conspiring with the owner of T-shirt supplier South Bay Apparel Inc. to overcharge New York-based Aeropostale and split the profits. The scheme netted Finazzo as much as $25 million from about 1996 until he was fired, according to prosecutors.
Geiger, now CEO of Crumbs Bake Shop Inc., told jurors he met Finazzo in 1988 while the two were working for the Macy’s department-store chain.
“I was very impressed with him. He was dedicated and hardworking,” Geiger said. Geiger hired Finazzo in 1996 after he became CEO of Aeropostale, which was at the time a unit of Cincinnati-based Federated Department Stores Inc., now known as Macy’s Inc.
Geiger testified that he oversaw Aeropostale during a buyout of the company in 1998 and an initial public offering in 2002. From 1998 to 2010, sales at the retailer grew to $2.23 billion from $141 million, according to the company’s financial statements.
The retailer is the fourth-largest teen specialty apparel company by market capitalization.
Throughout his time at Aeropostale, Finazzo appeared to have a close relationship with South Bay and reacted harshly to criticism of it, Geiger said. The former CEO said he knew shirts could have been purchased for 30 percent less from another supplier and had asked Finazzo to lower his costs.
“He was a staunch advocate of theirs,” Geiger said.
“He told me I wasn’t allowed to ask him any questions about graphic T-shirts for a month,” Geiger said.
Geiger’s testimony came in the second week of a trial before U.S. District Judge Roslynn R. Mauskopf. Finazzo is facing 16 counts, including conspiracy, mail fraud and wire fraud charges. He could be sentenced to as long as 20 years in prison if convicted of a fraud charge.
South Bay owner Douglas Dey, a friend of Finazzo’s, pleaded guilty to a conspiracy charge in September.
When the trial began on April 9, defense lawyer Robert J.A. Zito told jurors that his client wasn’t aware he was doing anything wrong by making deals with Dey. The relationship with the vendor, a major supplier to Aeropostale, helped boost the retailer’s sales to $1.4 billion in 2006, Zito said in his opening statement.
Geiger and others at Aeropostale first learned of Finazzo’s side arrangements following an unrelated investigation sparked by the former CEO’s use of a Las Vegas hotel suite which served as a location for MTV’s “Real World” program in 2002.
Wanting to rent the suite for his son to celebrate a birthday, Geiger discovered it was unavailable except as a complimentary lodging for serious gamblers, he told jurors today. Geiger said he asked for help from a vendor, who was also a gambler, in securing the suite. Although Geiger said he repeatedly attempted to pay, the vendor told him the $18,000 charge was waived.
While the investigation didn’t result in repercussions for Geiger, it did turn up an e-mail to Finazzo from his personal attorney which included a list of assets with items labeled “South Bay,” according to records shown in court.
At the November 2006 meeting, Geiger and Aeropostale General Counsel Edward Slezak confronted Finazzo with their findings and told him they would have to restate filings with the U.S. Securities and Exchange Commission and issue a press release on his termination.
The relationship with South Bay violated Aeropostale policies and should have been disclosed to investors under securities regulations, Geiger told jurors today.
According to the recording of the meeting, Finazzo said he lent Dey money for operations in Peru and participated with him other partnerships. Finazzo told the other executives he “never profited” from South Bay, according to the recording.
The case is U.S. v. Finazzo, 10-cr-00457, U.S. District Court, Eastern District of New York (Brooklyn).
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