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BEHIND THE NEWS: Blame game rages on: What killed Paul Harris?

June 12, 2006

It's been five years since the o n c e - m i g h t y women's apparel chain Paul Harris Stores liquidated in bankruptcy court. To this day, an army of attorneys continues to battle over who's to blame.

On one side are attorneys for the Indianapolis company, which four years ago sued outside auditing firm PricewaterhouseCoopers, charging it with "gross negligence" for failing to detect a $7.5 million inventory overstatement and other accounting breakdowns.

As the lawyers tell it, the inventory discrepancy surfaced in 2001, ultimately scuttling the final stages of negotiations to line up new financing for the company and keep it afloat.

The suit, filed in federal court in Indianapolis, seeks to recoup millions of dollars for Paul Harris' battered creditors.

But in what must be one of the hardest fought corporate legal battles in Indianapolis history, Pricewaterhouse-Coopers is casting itself as the company's deep-pocketed scapegoat and is conceding nothing.

The two sides have sparred almost everything, swelling case files to encyclopedic proportions.

In a strongly worded brief last month asking Judge Larry McKinney to toss the case, the accounting firm says Paul Harris never was that close to lining up new financing and, in effect, bungled its way into oblivion.

"The record establishes that Paul Harris' ultimate liquidation was the result of the implementation of an untried business strategy, bad business decisions about sales, marketing and pricing that drove performance downward [and] bad clothes," read the filing by attorneys with Kirkland & Ellis and McTurnan & Turner.

Such is the latest chapter in the always-colorful history of the company, which began in 1952 as a merchant of prepackaged apparel in supermarkets.

The company grew rapidly in the 1980s, only to land in bankruptcy court in 1992. It rebounded and, for a time, prospered under CEO Charlotte Fischer.

But then performance plummeted, and just months after Fischer orchestrated the purchase of the J. Peterman retail business made famous on "Seinfeld," the board fired her.

Enter Glenn Lyon, an East Coast retail veteran who succeeded Fischer in March 2000. As Lyon tells it in a newly public deposition, he inherited an abundance of woes that proved too much to overcome.

By October 2001, the company was in bankruptcy court. Over that winter, company officials tried to right the ship, announcing plans to shutter 100 of 266 locations. But ultimately LaSalle Bank, the company's largest creditor, pulled the financial plug.

In the deposition, Lyon, now president of Finish Line Inc., said that before he arrived the company had been hawking merchandise that wasn't high enough quality and wasn't targeted to a specific enough segment of female customer.

Worse, the company had held onto prior seasons' merchandise that hadn't sold, rather than following the industry custom of unloading such goods at the best price possible.

Suddenly, Paul Harris found itself in a cash-flow pinch. It wasn't generating enough sales to give it the financial might to buy enough new merchandise. That, in turn, depressed future sales.

"It is a vicious cycle you can get into," Lyon said in his deposition. "And unless you can break that logjam and create a turnover in your inventory ... you can't generate the cash flow that you need."

Such complexities may work in favor of PricewaterhouseCoopers, which asserts that with so many issues at play in the final months of the company's life, it's unjustified to pin blame on the accounting firm.

"The ultimate liquidation of Paul Harris [stemmed from] a business failure, not an audit failure," PricewaterhouseCoopers spokesman Steven Silber said last week.

But in court papers, the accounting giant suggests that if Lyon wants to cast blame, he should look in the mirror.

"Lyon's new strategies aggravated the company's woes," the filing said. "The customers' reaction to the merchandise in the stores was not as positive as Lyon had forecasted, and Paul Harris was forced repeatedly to cut prices and margins to generate cash."

Paul Harris' law firms, Sommer Barnard and Rubin & Levin, say they expect McKinney to deny PricewaterhouseCoopers' motion to dismiss the case.

If they're right, gear up for a trial drenched with drama. It's scheduled to begin Nov. 6 and last about 10 days.

Fischer's second chance

When Paul Harris liquidated in bankruptcy court, Fischer was one of the buyers, scooping up the rights to the retailer's name for $43,000. She announced bold plans to build the chain anew, with the goal of eventually operating hundreds of stores.

But those plans have not come to pass. Fischer, who could not be reached, opened at least six locations, but all appear to have closed, and the company's Web site has not been updated since April.

Meanwhile, a former piece of the Paul Harris empire lives on-J. Peterman. After Paul Harris sold the business to a consortium of liquidators in 2000, namesake John Peterson purchased it from the liquidators.

He reopened the Web site and brought in business partners-including John O'Hurley, who had portrayed Peterman as a well-meaning nitwit on "Seinfield."
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