Apparent fraud in Dylex case: Judge

The unfortunate death of retail chain Dylex Ltd. came after an apparent fraud at the hands of its purchaser, a bankruptcy court judge ruled yesterday. The ruling by Justice James Spence of Ontario Superior Court is significant in that it endorses the evidence of misconduct by the doomed retailer's owner, Hardof Wolf Group, presented by bankruptcy trustee Richter & Partners Inc. since Dylex's demise.

The National Post
February 28, 2002

Apparent fraud in Dylex case: Judge
Hardof Wolf Group: Court endorses evidence of misconduct
Hollie Shaw

The unfortunate death of retail chain Dylex Ltd. came after an apparent fraud at the hands of its purchaser, a bankruptcy court judge ruled yesterday.

The ruling by Justice James Spence of Ontario Superior Court is significant in that it endorses the evidence of misconduct by the doomed retailer's owner, Hardof Wolf Group, presented by bankruptcy trustee Richter & Partners Inc. since Dylex's demise.

Buckling under a heavy debt load, Dylex was declared bankrupt in September after a strong of creditors petitioned the troubled operator of BiWay and Fairweather into receivership. Claims against the company now exceed $80-million.

Richter is investigating the actions of Dylex executives before and after the company's $68-million sale to Hardof, a shell company connected to McCrory Corp., an insolvent U.S. dollar store chain.

"There is a prima facie case of fraud on the part of Hardof Wolf in its course of conduct in the acquisition of control of Dylex," the judge wrote in his decision, which lifted any residual solicitor-client privilege between Hardof and its legal counsel on the Dylex purchase.

Justice Spence noted that Hardof Wolf had sought $70-million in bridge financing from Bank of Montreal to acquire Dylex, which was struggling financially before the acquisition.

Bank officials were concerned that the structure of the deal, a complicated arrangement wherein Hardof was to use some cash from Dylex's own accounts to buy out Dylex shareholders, would render the retailer insolvent.

The financing never went through.

"Hardof Wolf knew that Dylex was effectively on the brink of insolvency, and it proceeded with a transaction whereby it took control and paid out $62-million to shareholders to the detriment of the creditors," the judge noted.

Hardof contributed just $7-million of its own money towards the purchase of Dylex while the bulk of $68-million money that shareholders were paid came from Dylex's own accounts.

Hardof Wolf, a shell with no assets, issued unsecured promissory notes to Dylex for $62-million.

Justice Spence added that after the deal closed, evidence suggests Hardof Wolf and its U.S. affiliate reaped financial benefits from acquiring Dylex.

Richter's probe has revealed that Hardof Wolf funnelled $11.6-million of Dylex money earmarked for dollar store inventory directly into the accounts of McCrory Corp. to pay down debt.

The shell company also forwarded $853,000 to McCrory for alleged "consulting fees" related to the takeover and $868,000 to the personal account of Meshulam Riklis, Hardof Wolf's owner and the principal of McCrory.

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