Joe Solmonese leads the Gavin/Solmonese Corporate Engagement practice, helping organizations break down problems and find actionable solutions. Prior to forming Gavin/Solmonese, he was president of the Human Rights Campaign and CEO of EMILY's List.

In a creditors' committee case earlier this year, we participated in a bankruptcy auction in which the debtors, Hampshire Brands, Inc. et al.¸ a fashion designer and producer, sold their James Campbell brand to a competitive buyer. In this case, the extreme seasonality of the retail clothing business, combined with the need for James Campbell's largest customer to see stability and expediency in its supply chain, resulted in a fast sale process being both warranted and necessary.  After a breakneck marketing process and several robust rounds of bidding, all parties (except, perhaps, for the bidders who did not win the auction) were satisfied with the outcome and the sale was completed in just a few weeks.

This chain of events got me thinking about brand health, especially as it relates to distressed sale situations. When I was helping re-launch the Philadelphia Soul arena football team, I was reminded of the chilling effect the word "bankruptcy" can have on brands. We often hear people ask, "aren't they bankrupt?" as if bankruptcy means the death of a brand. We know that's not always the case.

Although various issues can negatively impact brand health, in the instance of James Campbell, the compelling characteristics that made the brand attractive were the positioning of the brand and product delivery.

Positioning is the space a brand occupies in a consumer's mind. Every day, we make hundreds of decisions about products and services. There are certain things we know - or think we know - about various brands based on our personal experiences, information gleaned from others, and what we see or hear in the media.

When dealing with a distressed company, both buyer and seller must evaluate how a bankruptcy filing might impact the value of its brands. In many cases, consumers are unaware of the company's financial status and the associated brand positioning remains the same. In other cases, consumers know about the filing and their perception of the brand, correctly or not, is indeed, changed. In that case, the parties must take a hard look at how this influences the brand's potential to be successful going forward. 

I used to tell my marketing students that among the four "Ps" of marketing (product, promotion, price, and place), place is often the forgotten "P." In the James Campbell sale, distribution was at the crux of the brand's viability. When retailers don't receive shipments from a vendor on time, they are forced to replace shelf space with a competing vendor's products - space the seller is not guaranteed to get back from the retailer. Cancelled orders, excess inventory, and poor and even negative margins caused by liquidation compound the problem. Consumers get a chance to sample replacement products and might quickly lose interest in the brand.

In our business, we must understand how interruptions affect a brand's future. Have there been delivery gaps? Have retailers moved on? Do we have a home for current and future orders?

Jeremy VanEtten is a member of the Gavin/Solmonese Corporate Recovery team providing consulting services to trustees, debtors, senior lenders, indentured trustees, and unsecured creditors in Chapter 7 and 11 bankruptcies, as well as out-of-court matters. He has a broad range of experience, serving industries such as technology, automotive, entertainment, gaming, construction, large retail, and wholesale.

Most people have trouble picturing financial statement fraud. Not many people go to jail for committing it, and often the perpetrators don't even profit from it. In fact, many of the individuals involved in financial statement fraud consider their actions to be beneficial to the company.                                                                                                              

Financial statement fraud is a "scheme in which an employee intentionally causes a misstatement or omission of material information in the organization's financial reports." [1] While the number of cases of financial statement fraud is much lower than with other types of fraud (such as embezzlement or corruption), the losses are much higher. [2]

 

In this article, I present three examples of financial statement fraud to illustrate several ways fraud is committed.

 

Overvalued Complex Financial Instruments

HF, a hedge fund, provided liquidity to companies in the form of convertible debentures, earning its  fees based on the dollar value of assets under management (AUM): the higher the AUM, the higher the fees, thus creating an incentive for HF to report its assets at the highest possible values.

 

As a subprime lender, all of HF's investments began to shrink during the global financial crisis that began in the second half of 2007. Nevertheless, during its year-end reporting, HF continued reporting its positions at a gain.

 

Overstated Intangible Assets

In April of 2016, the SEC issued a Cease-and-Desist Proceeding against Logitech International after the discovery of recurring improper accounting practices. Among the issues was the failure to amortize intangible assets properly, when senior accounting officials ignored significant errors in the calculation of the amortization of its investment in an entity the company had acquired several years before.

 

Understated Liabilities

Gerry and Tom formed a partnership in which Gerry provided a small amount of equity along with access to substantial lines of credit. Tom arranged for all the credit line information to be sent to his Florida office, enabling him to draw on the credit lines without informing Gerry, who lived in California.

 

Once he had drawn all of Gerry's credit lines, Tom sought additional credit. He prepared personal financial statements, listing his interest in the assets - but not the liabilities - of his partnership with Gerry. Tom succeeded in obtaining a significant loan based on the perceived strength of his deceptive financial statements.

 

In early 2009, Tom defaulted on the loan, which was material to the bank's lending portfolio, forcing the bank itself to close. Federal regulators pursued a bank fraud case against Tom for misrepresenting his financial position.

 

Human ingenuity knows no bounds, and ingenuity at committing fraud is no exception. Frauds are doubtless occurring today that will shock us when they are finally revealed. Nevertheless, as consumers of public financial information, it is helpful to understand how fraud has been perpetrated in the past, and what ruses have been applied, to provide an understanding of the vulnerabilities inherent in the financial reporting process.

[1] ACFE Report to the Nations on Occupational Fraud and Abuse:  2016 Global Fraud Study, Glossary of Terminology, pg. 90.

[2] Ibid.,pg. 12. 

This article is an abridged version of an article that appeared in the July/August 2017 issue of the ABF Journal.

Based in New York City, Anne Eberhardt is responsible for furthering the firm's forensic investigation practice. As an expert witness and forensic accountant, Anne is experienced in conducting forensic analyses, building and testing financial models, resolving economic disputes, and leading teams in large-scale investigations.