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The Leslie Fay Companies
Paul Polishan graduated with an accounting degree in 1969 and immediately accepted an
entry-level 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 nature.
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 finance.
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 Wilkes-Barre, Pennsylvania. During Polishan’s tenure as Leslie Fay’s top
accounting and finance officer, the Wilkes-Barre location was tagged with the nickname
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 16-hour 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 scam.
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 streets.
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 Istanbul.
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 “oldfashioned 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, t-shirts, 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
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
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
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.” Such 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 period-ending 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 intransit inventory were common ruses used to overstate inventory during the periodending 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 wa …
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