Fired Exec’s Suit Alleges St. John Cooked Books

St. John Knits Inc. executives used improper accounting maneuvers to shore up the Irvine apparel maker’s bottom line while it was under pressure to meet Wall Street analysts’ expectations, according to a lawsuit filed late Monday.

The wrongful-termination suit was filed by Amen Wardy Jr., who was fired last month as chief executive of St. John’s unprofitable Amen Wardy Home Stores subsidiary.

Wardy charged that the home stores unit was reduced to a “sacrificial lamb,” and that St. John officials used “accounting gimmicks and financial hocus-pocus” to boost St. John’s profits. Wardy said he was fired for refusing to participate in the alleged scheme.

Wardy also said St. John President Kelly Gray told him in July that the company was meeting with officials from Louis Vuitton Moet Hennessy regarding the possibility of the Paris-based company buying St. John. Wardy said he was assured he would get a “high profile and lucrative” position if the two companies merged.

St. John Chief Executive Robert E. Gray on Tuesday adamantly denied the allegations and said no merger discussions have been held with Vuitton.

“Everything [alleged in the lawsuit] is totally untrue,” Gray said.

Kelly Gray said she and Wardy never discussed Vuitton.

“The Amen I have seen in this lawsuit is an Amen I didn’t know in the past,” she said. “I’m very disappointed that he’s taken this action against myself and my family.”

Specifically, the lawsuit says St. John claimed 100% of the tax losses from Amen Wardy Home Stores, although it was entitled to no more than 51% because of its 51% stake in the chain. The suit says the losses effectively helped St. John’s bottom line by reducing its tax bill.

Robert Gray, however, said St. John was entitled to claim 100% of the first $500,000 of the subsidiary’s losses, which he said it still has not done.

The lawsuit includes an Aug. 5 memo to Wardy from Roger Ruppert, St. John’s chief financial officer, which states that under a written agreement, St. John would be allocated 51% of the first $500,000 in losses.

However, the memo adds that St. John later decided to interpret the agreement differently, and claim 100% of the losses unless the Wardy unit had enough money to absorb its share of the losses.

Robert Gray declined to discuss the details of the memo.

“We may have asked to change the arrangement, but there was no coercion,” he said. “All we did was ask, and in the meantime we have never taken advantage of that thing. Based on proper accounting principles, we’ve done everything properly.”

Wardy said the defendants continued to pressure him to change written agreements to justify the accounting treatments, warning that their tactics would soon become “ugly.”

Robert Gray said that allegation is “so ludicrous that it’s unbelievable.”

St. John launched the small home-store chain with Wardy and his father, Amen Wardy Sr., last year and have since opened five stores.

Meanwhile, St. John has been struggling with its upscale women’s clothing business. Over the past two quarters, St. John failed to meet analysts’ earnings expectations, a problem the company blamed on a variety of factors, including losses at the Amen Wardy stores, which have not yet shown a profit.

Robert Gray said Tuesday that the company’s third-quarter earnings were 8 cents a share below analysts expectations and only 2 cents of that was the home stores’ loss.

“Obviously, we didn’t blame the whole thing on Amen Wardy,” he said.

Robert Gray has blamed a variety of factors ranging from production difficulties to merchandise markdowns.

In the lawsuit, Wardy said he was accused of poorly managing the home stores, but that the subsidiary was “totally controlled” by the Grays, who “manipulated the operations of [Amen Wardy Home Stores] to best suit the needs of St. John.”

In an interview Tuesday, Wardy said he feels “hurt” by the Grays, who once treated him as part of their family. Wardy, 30, said he has been “best friends” with Kelly Gray for years.

According to the lawsuit, the two met in about 1990 and socialized together. Their friendship prompted the partnership after Kelly Gray toured the Amen Wardy store in Aspen, Colo.

In 1997, the Wardys and St. John officials struck a deal to launch the home-store chain. Wardy was named chief executive of the subsidiary and given an annual salary of $100,000, the suit says. He was also retained as a consultant for St. John, in charge of supervising wholesale home furnishing and gifts operations for an additional $50,000 annually.

Despite the recent difficulties, Wardy said he was invited to Kelly Gray’s recent 32nd birthday party in Newport Beach, but the Costa Mesa resident said he did not feel comfortable attending.

Kelly Gray also expressed disappointment, but she defended her father.

“He may be tough but he has always been totally and completely fair with all his partners and employees,” she said. “I feel terrible that this has come to pass from someone who was a friend to me.”