California Apparel News

GMAC Commercial Credit, LLC, filed suit last month against Levine Leichtman Capital Partners (LLCP), claiming that the private equity partnership defrauded GMAC on a $40 million loan to Chorus Line Corporation, which LLCP controlled. The complaint names as defendants Arthur Levine, co-founder of the partnership and chairman of Chorus Line since its acquisition by LLCP in 1996, and Herman Roup, former president of Chorus Line.

The complaint, filed in New York, alleges that LLCP, in controlling Chorus Line, fraudulently altered the books and records of the apparel company to “make it appear that Chorus Line had more orders and work-in-process than it actually had.”The complaint describes the altering of the books in an event called the “Mother’s Day Falsification,” alleging that on Mother’s Day (May 14) of 2000, several Chorus Line employees worked into the night fabricating orders totalling more than $7 million, as well as work-in-process entries, and were asked not to disclose their activities to anyone.

Leonard Rabinowitz, co-chairman and founder of California Fashion Industries, attests to the lack of sales in that amount for the company.

“By the time of the acquisition, I believe that at a minimum they never existed in a form that would allow them to be shipped.”

The purpose of altering the books, according to the suit, was to make Chorus Line look stronger so it would be better able to secure a line of credit from GMAC. Financing arrangements were also made with GMAC to allow LLCP to acquire California Fashion Industries/Carole Little, merging that company’s loan with its original loan, which the complaint refers to as the “Transfer Scheme.”

The suit outlines how merging the two loans would mask weakness in Chorus Line brought on by mismanagement by LLCP. Chorus Line’s sales decreased from $200 million annually in 1996, when it came under the control of LLCP, to $130 million by 1999, according to the complaint.

Both Rabinowitz and the complaint allege that most of the key designers and sales staff of Chorus Line were gone prior to July of 2000, when LLCP aquired the stock of California Fashions.

Rabinowitz said that in anticipation of the acquisition, projections were prepared for California Fashions and for Chorus Line, but that while his company’s projections played out well, Chorus Line’s projections turned out to be grossly exaggerated.

The projections of Chorus Line called for more than $2 million in orders for the month of June, but according to the complaint, the actual orders for that month were less than half a million dollars.

By November of the same year, LLCP filed for Chapter 7 protection in U.S. Bankruptcy Court for the joint entity of Chorus Line and California Fashions, eventually converting that case to Chapter 11 protection.

Rabinowitz said that the Carole Little product was selling well at the time of the filing, but that the company failed because LLCP did not live up to the commitments it made to GMAC and to the company’s officers. He also said that the assets of both Chorus Line and California Fashions dissipated during the four months of operation before LLCP filed for bankruptcy.

In addition to Levine and Roup, the complaint also names Mark J. Mickelson and Steven E. Hartman, directors of Chorus Line.

Attempts to reach Levine, Hartman and Roup were unsuccessful. Mickelson is no longer with LLCP.