Frederick’s Sues Arthur Andersen

Though it’s in the news for its role in the Enron Corp. bankruptcy debacle, Chicago-based Big Four accounting firm Arthur Andersen is also dealing with at least one other unhappy former client: women’s apparel cataloger/retailer Frederick’s of Hollywood.

In January, Los Angeles-based Frederick’s sued Andersen for negligence, which it claims ultimately led the cataloger to file for Chapter 11 bankruptcy protection in July 2000.

The suit, filed in Los Angeles Superior Court on Jan. 2, claims that Andersen “knew or should have known” while conducting audits in 1998 and 1999 that former Frederick’s CEO Teresa Patterson had built up $22 million of excess inventory that wasn’t disclosed.

In the suit, Frederick’s also contends that it couldn’t get financing because it lacked audit information that potential lenders required. “Andersen’s misleading tactics, concealment of material information, and ultimate termination of all work destroyed Frederick’s ability to carry on its operations,” says Robert Retana, an attorney with Burlingame, CA-based law firm Cotchett, Pitrie, Simon, & McCarthy, which is representing Frederick’s in the case.

“This lawsuit has no bearing on when Frederick’s will emerge from bankruptcy,” says attorney Michael Tuchin of Los Angeles-based Klee, Tuchin, Bogdanoff & Stearn, which is handling Frederick’s bankruptcy case. “However, it could affect the timing of recovery of Frederick’s creditors.”

Catalogers’ audits not an issue

Andersen, under investigation as the auditor of Enron Corp., which in December filed the biggest bankruptcy in U.S. history after overstating earnings, did not return repeated phone calls at press time. The accounting firm’s catalog clients include Dodgeville, WI-based apparel and home goods mailer Lands’ End, Weehawken, NJ-based multititle cataloger Hanover Direct, and Westlake Village, CA-based children’s products marketer The Right Start.

Jim Adams, managing director of Wellesley, MA-based investment banking concern Tully & Holland, says that the Arthur Andersen woes likely won’t result in any far-reaching effects for the catalog industry, because “the financial statements of the typical catalog company aren’t as complex as those of the conglomerates, such as Enron.” In other words, there are fewer intricacies for potential investors to consider.