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BEHIND THE NEWS: Paul Harris auditor, accused of negligence, to pay $10M

February 19, 2007

It was a long time coming, but attorneys for the defunct Paul Harris women's apparel chain have won a whopper of a settlement-$9.9 million-with the company's auditor, PricewaterhouseCoopers.

In a lawsuit filed five years ago, they accused PwC of "gross negligence" for failing to detect a $7.5 million inventory shortfall and other accounting breakdowns. They charged that the discovery of the discrepancy in the spring of 2001 scuttled the final stages of negotiations to extricate the Indianapolis-based company from bankruptcy and keep open 166 of its remaining 266 locations.

From a spectator's seat, it's a shame the suit won't go to trial-it was shaping up to be a doozy.

In what must have been one of the hardest-fought corporate legal battles in Indianapolis history, the two sides had conceded nothing, filing mountains of paperwork blasting each other's positions.

Paul Harris last year charged that PwC had "set out to 'sanitize' its work papers ... to cover up" its negligence. For its part, the New York-based accounting giant cast itself as a deep-pocketed scapegoat.

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

Attorneys for Paul Harris declined to comment on the settlement, and PwC attorneys did not return calls. By settling, the accounting firm isn't acknowledging wrongdoing, according to the six-page agreement filed in bankruptcy court Feb. 7. Judge Basil Lorch III is scheduled to consider terms of the pact at a hearing Feb. 28.

"I think one of the reasons for the settlement was simply the passage of time," said Henry Efroymson, a partner with Ice Miller who represented landlords in the bankruptcy.

"It becomes more and more difficult for parties to prove their allegations when the events that occurred become more and more distant."

The settlement will provide creditor LaSalle Bank of Chicago the final $4.4 million it is owed.

Another class of creditors-those holding claims accumulated after Paul Harris sought bankruptcy protection in October 2000-is slated to receive $2.29 million, less than 20 percent of the amount owed. The pact leaves nothing for general unsecured creditors, who are still out millions of dollars.

Beyond LaSalle, the other big winners from the settlement are the Indianapolis law firms Sommer Barnard PC and Rubin & Levin PC, whose risky decision to pursue the case on a contingency basis has proved richly rewarding. The firms will collect $2.52 million in fees, plus receive $690,000 for expenses.

Getting PwC to open its bank account is satisfying for the attorneys representing Paul Harris, to be sure, but the cash doesn't rewrite history.

The central assertion of their suit was that if PwC had done its job, the chain would be in business today. No amount of money brings it back now.

That PwC bore the blame for the company's demise was a ridiculous assertion in the first place, the auditing firm's attorneys argued over and over in court filings through the years.

Yet PwC is dropping almost $10 million to put the matter to rest-an acknowledgement that, had the case advanced to a jury trial, there was no guarantee it would win.

Sweet holiday for Gregg

Strong sales of flat-panel TVs gave HH Gregg a big lift during the crucial Christmas shopping season.

The Indianapolis-based retailer reported Feb. 14 that same-store sales in the fiscal third quarter, which ended Dec. 31, rose 5.6 percent.

That's a far stronger performance than Gregg had enjoyed in recent quarters. Through the first two quarters, sales at existing stores climbed just 1.1 percent. For its last full fiscal year, they rose just 1.7 percent.

Gregg's top rivals also saw robust holiday sales. Minnesota-based Best Buy Inc. reported a 7-percent increase in samestore sales, while Virginia-based Circuit City reported a 4.2-percent boost.
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