Dylex trustee claims new owner's actions 'unlawful'

Strong initial evidence shows that the new owner of Dylex Ltd. engaged in ""fraudulent or otherwise unlawful activities"" before and after last May's takeover, the trustee of the now bankrupt retailing company says.

The Globe and Mail
January 15, 2002

Dylex trustee claims new owner's actions 'unlawful'
Court document outlines activities after May takeover
Marina Strauss

Strong initial evidence shows that the new owner of Dylex Ltd. engaged in "fraudulent or otherwise unlawful activities" before and after last May's takeover, the trustee of the now bankrupt retailing company says.

In a stinging court document filed yesterday, the trustee accuses Hardof Wolf Group Ltd. of a string of improper actions which rendered Dylex insolvent and saw it transfer millions of dollars to Hardof Wolf's controlling company, McCrory Corp. of Pennsylvania and its owner, Meshulam Riklis.

McCrory went into Chapter 11 bankruptcy protection in September.

The trustee outlines a series of key events related to the $68-million acquisition and subsequent operation of Dylex in which it says Hardof Wolf, a shell company, misrepresented information to groups involved.

In other situations, Hardof Wolf and Dylex officers simply failed to disclose vital information to stakeholders, it says.

The trustee, Richter & Partners Inc., will ask Ontario Superior Court tomorrow to lift various protections of privilege and confidentiality, which will permit the trustee to continue its inquiry into the demise of Dylex.

In the document the trustee says: "… Its investigation to date has revealed a prima facie case of fraudulent or other unlawful activity by [Hardof Wolf], such that it is entitled to otherwise privileged communications belonging to" the company.

The inquiry is looking at the final stages in the life of 34-year-old Dylex, a Toronto-based retailer that once dominated Canadian malls with such household names as Tip Top Tailors and Harry Rosen.

In the end, Dylex owned only two chains, the discounter BiWay and Fairweather, a women's wear retailer that the trustee divested late last year.

"Where a client's dealings with its solicitor are for the purposes of perpetrating a fraud or other unlawful act, solicitor-client privilege has no application," the report says.

Dylex creditors are owed an estimated $78-million. Robert Harlang, a senior vice-president at Richter, said in an interview they can expect soon to recover between 15- and 25-cents on the dollar as an interim dividend.

One U.S. vulture fund is offering unsecured creditors 15 cents on the dollar for their claims.

Among other things, the trustee says it found that Dylex, under Hardof Wolf's control, sent millions of dollars in payments to McCrory or its advisers while creditors bills went unpaid.

Dylex wired $11.6-million to a U.S. company controlled by dollar-store operator McCrory in June.

As well, within a week or so of the acquisition, Dylex paid $868,000 to Mr. Riklis personally; more than $1-million to McCrory for alleged consulting fees tied to the takeover; and another $349,000 to a U.S.-based company that provided advisory services to Hardof Wolf.

Hardof Wolf paid its Canadian law firm, Stikeman Elliot, more than $1-million for its acquisition-related fees.

The trustee also found that:

  • Wolf used Dylex money to pay for the acquisition, even though it told shareholders that it had secured Bank of Montreal financing for the deal;
  • BMO Nesbitt Burns provided shareholders with a fairness opinion about the acquisition that did not address the impact of the deal on Dylex creditors or any of Nesbitt's underlying concerns, which were contained in an internal report;
  • information circular to Dylex shareholders failed to disclose the company's financial difficulties at the time, the problems that Nesbitt had identified at BiWay, the auditor's concerns about Dylex's solvency or the instructions given by Dylex senior management to its auditor to stop work on the audit;
  • Dylex or its advisers failed to make "meaningful" investigations into the financial ability of Hardof Wolf, McCrory or their principals. In fact, McCrory's senior officers had previously been involved in more than 30

Chapter 11 bankruptcy proceedings, while McCrory's involvement in the acquisition was not publicly disclosed;

  • At the end of June, 2001, a senior executive at McCrory had prepared a script for Dylex officials that contained "many serious misrepresentations" suggesting that the company had sunk a lot of money into Dylex.

Contrary to these claims, "McCrory did not invest any resources into the transaction," the trustee says.

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