Who Played Dress Up With The Books?

Imagine the horror. You're the chief executive of a major company attending an important meeting. Your second-in-command is called away for a moment, then returns ashen-faced. His news: Your company's last five quarters have been a lie. Reported profits never existed, and your books have been cooked for several quarters.

According to John J. Pomerantz, whose Leslie Fay Cos. is the nation's second-largest maker of women's apparel sold to department stores, that's what happened to him in late January. By Feb. 26, outside auditors combing through the wreckage of Leslie Fay's books estimated that the company lost $13.7 million last year, rather than earning the $23.9 million previously reported. Estimated profits for 1991 were slashed 42%, to $17 million. Wall Street's reaction was swift: Leslie Fay's stock dropped from 12 3/8 on Jan. 1 to 5 1/4 on Mar. 3 (chart).

FROSTED BUNS. The scandal is a knotty tangle of questions with few sure answers. But it may say as much about Seventh Avenue's peculiarities as about Leslie Fay's financial controls. Analysts point to Pomerantz' lack of financial acumen and his love for clubby schmoozing with fashion pals to explain why the problems went undetected for so long.

Pomerantz himself traces the trouble to now-suspended Controller Donald F. Kenia, who, he says, overstated profits. No one in senior management, including himself or Chief Financial Officer Paul F. Polishan, knew of the cooked books before Jan. 29, Pomerantz says. Kenia's attorney, Bradley Beckman, however, hints that others may have been involved: "Kenia did not all by his lonesome conceive of this plan," he says.

So far, though, no one, including Kenia, has been charged with a crime. And motive remains a mystery. Kenia's compensation wasn't tied to financial results. Arthur Andersen & Co., the accounting firm hired by the board's audit committee, has not detected any missing funds. Meanwhile, Kenia is assisting the company with its internal audit.

However the tale unfolds, analysts blame Pomerantz in the end. The affable CEO, whose father founded Leslie Fay in 1947, seems to cultivate the image of a creative guy awash in a sea of numbers. He admits he seldom visited his Wilkes-Barre (Pa.) base of financial operations, though he did receive its torrents of data. "We get records upon records upon records. The amount of volume we get is voluminous," he says, eyeing a pile of papers on his desk.

Even facing a dozen shareholder suits while working frantically to persuade his banks to keep his credit lines intact, Pomerantz revels in the daft humor of the fashion world. In early February, for instance, he was sent a token of support that he says came from an executive at Federated Department Stores Inc.--an excruciatingly anatomically correct frosted cake in the form of a derriere. Written in frosting: "We're behind you." Pomerantz loved it.

Such schmoozing aside, Pomerantz' life is deeply interwined with the company. His wife, Laura Pomerantz, is an executive vice-president at the company, and a line of Leslie Fay dresses is named after Andrea Gayle, one of the couple's three daughters. Pomerantz himself, 59, joined up in 1960, right after getting a bachelor's degree from the Wharton School.

`PRESSURE COOKER.' But despite his inattention to finances, Pomerantz is a demanding boss. "I'm never satisfied," he says. Leslie Fay has long had a reputation as a "pressure cooker to make the figures," notes Bud Konheim, president of rival apparel maker Nicole Miller Ltd. With many department stores in financial trouble, meeting his profit goals may have seemed impossible to some employees, industry sources suspect.

Cooking the books couldn't mask Leslie Fay's weaknesses for long, however. Dress sales have been in decline for 20 years, yet they still account for about a third of its sales. Prudential Securities Inc. analyst Deborah Bronston predicts that the company will soon dump some divisions to cut expenses. Chief Operating Officer Michael J. Babcock, hired just five months ago, has been charged with getting financial controls in order.

As for Pomerantz, he has returned his 1992 profit-tied bonus of $2.2 million, but he doesn't blame himself for Leslie Fay's troubles. Indeed, as the company's largest shareholder, he feels pinched. "Do I hold myself personally responsible? No," he says. "In my heart of hearts, I feel that I'm a victim. I know there are other victims. But I'm the biggest victim." Maybe. But his bigger worry now is how to keep his Leslie Fay from coming apart at the seams.

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