Opinion ID: 8414535
Heading Depth: 4
Heading Rank: 2

Heading: South Bay’s Transactions with Aéropostale

Text: CEO Geiger testified that Aéropostale started using South Bay as a vendor on Finazzo’s recommendation in either late 1996 or early 1997. South Bay sold Aéro-postale graphic T-shirts and, eventually, fleeces. Various former and current employees of Aéropostale testified about the complete control Finazzo had over Aéro-postale’s vendor selection and pricing, and his use of that control to direct business towards South Bay. CFO Cunningham testified that the “quantities of goods” bought from particular vendors needed to be approved by Fi-nazzo and that Finazzo was “responsible for the overall final price that was being negotiated with the vendors.” Dey App’x at 615. Edward Slezak — Aéropostale’s General Counsel — stated that Finazzo was “the number two person” at Aéropostale. Id. at 829. He testified that Finazzo “was responsible for all aspects of our product.” Id. “[Finazzo] decided what type of product we would buy, how much of it, which vendors would manufacture the product, how it looked, [and] how it was merchandised in our stores.” Id.; see also id. at 857 (“[Finazzo] was the one who directed all of our product placement, what we made, how much we made, ... who got .the orders, who made the product.”).
Regarding graphic T-shirts, Geiger testified that from 2002 through 2006 Finazzo was the executive primarily responsible for vendors, vendor selection, and vendor pricing. He also stated that Finazzo had “the final say” regarding the number of graphic T-shirts ordered by Aéropostale. Dey App’x at 1400-01. Cunningham and Geiger both recounted that, in early 2005, Geiger recommended to Finazzo that Aéropostale shift 25% of the T-shirts it was buying from South Bay to overseas vendors in order to achieve “significant cost savings.” Id. at 639. Geiger believed that, for certain “core” graphic T-shirts with demand that was easy to predict, Aéropostale could accommodate the longer delivery time from overseas, 7 while taking advantage of lower costs. Id. at 639-40, 1384. Geiger estimated that Aé-ropostale could save $1.50 per T-shirt made overseas. Given the volume of T-shirts being sold, Cunningham estimated that this would have saved Aéropostale at least $5 million, while Geiger estimated savings of $6 million. ' Finazzo initially stated that “he would look into it.” Id. at 640. As the year progressed, Finazzo became “agitated” that Geiger continued to press him on the matter. Id. At one meeting where the topic was discussed, Finazzo smacked the table, told Geiger that the meeting was over, and slammed the door shut as he left. Finazzo never moved 25% of the graphic T-shirt business overseas as Geiger had directed. Geiger also testified that Aéropostale’s profit margin on graphic T-shirts during the time Finazzo was the head of merchandising tended to be less than the profit margin of other similar products Aéropos-tale sold. Geiger discussed these low margins at executive meetings attended by Finazzo. On many occasions, Finazzo would respond by hitting the table with his hands “and basically say[ing] why are people looking so closely at this?” Id. at 1381. Geiger recalled that Finazzo once declared that Geiger “wasn’t allowed to ask [Finaz-zo] any questions about graphic T-shirts for a month.” Id. Jennifer Heiser- — an Aéropostale employee who merchandised graphic T-shirts and reported to Finazzo — testified that the graphic T-shirt business in particular “was [Finazzo’s] baby” and that he was involved in that business “a lot more than [he was involved in] any other department.” Id. at 708. She also testified that she “really was not allowed to bring in other manufacturers [besides South Bay].” Id. at 707. Heiser believed that bringing in additional manufacturers would allow Aéropostale to obtain “the best price and the best quality” because vendors would be forced to bid against each other for Aéropostale’s business. Id. at 707-08. She stated that she therefore tried to place graphic T-shirt orders with vendors in Singapore. However, .Finazzo “discouraged” Heiser from placing orders in Singapore, such that she “really felt that [she] had to put all of [her] business with South Bay.” Id. at 707. On one occasion, when Heiser pushed Finazzo regarding the poor margins achieved by only using South Bay for graphic T-shirts, Finazzo “broke a pencil and said, we are using South Bay, end of story.” Id. at 718. Heiser ultimately placed 97-99% of her graphic T-shirt orders with South Bay. Heiser also testified that Jody Green— an associate merchandiser in men’s graphic T-shirts — often challenged Finazzo about the pricing of graphic T-shirts and asked why they could not use other manufacturers to get a better cost. Finazzo fired Green just three months after she started working at Aéropostale. John DiBarto — Aéropostale’s Divisional Merchandising Manager for the Men’s Division at the time of Finazzo’s scheme— testified that Finazzo “was responsible for negotiating prices on the graphic tee products with South Bay.” Id. at 1098. DiBarto stated that he did not try to negotiate prices with South Bay “[bjecause ... that was [Finazzo’s] thing. He controlled production. And that was ... his baby from the beginning, so ... we did whatever he wanted.” Id. Similarly, DiBarto never asked for an overall reduction in price from South Bay “[b]ecause it wasn’t going to happen. ... Those were variables that wouldn’t change, because they were [Fi-nazzo’s] ■... he’s in charge of that.” Id. at 1128-29. When employees tried to “mess[] with [pricing] a little bit, it wasn’t worth it, [Finazzo] would get angry.” Id. at 1129. For instance, when DiBarto asked Dey for a price breakdown of South Bay’s T-shirts by component to compare to another vendor, Finazzo and Dey yelled at him, saying “we’re not going to do this, why are you doing this, we’re not going to do business with anybody else but South Bay, don’t waste your time.” Id. at 1182-34. When Finazzo heard that Thomas Carberry — a new employee working under DiBarto— had questioned South Bay’s costing structure, Finazzo emailed DiBarto: “John, I would like to let you know that I hear that Tom Carberry is talking about South Bay to other people in the company. I will not tolerate that, and I will be swift in my actions.” Id. at 1144. In an October 21, 2006 email to DiBarto and others, Finazzo summarized his position on using South Bay as the primary graphic T-shirt supplier: “I will not change our vendor structure or the way we set up this business and I guess I can make that decision. I want South Bay to be the main T-shirt supplier.” Id. at 1175-76. Jill Kronenberg — the former head of the Women’s Division at Aéropostale — testified that prior to 2008, Aéropostale’s women’s graphic T-shirt business was split between South Bay and a vendor called Mias, with Mias having the majority of the business. Finazzo instructed Kronenberg to transfer business from Mias so that South Bay would have 50% of the women’s graphic T-shirt business. Finazzo issued this instruction despite the fact that the graphic T-shirts made by Mias were of better quality and lower priced. Although she did not want to move business away from Mias, Kronenberg ultimately did so in 2004 “[b]eeause it reached a point where ... basically [she] had no choice.” Id. at 994-95. Kronenberg voiced concerns with Finazzo about the decision to transfer more business to South Bay but was unable to change his mind.
Megan Lauritano — a senior product manager at Aérospostale from 2004 to 2006 — testified that, in 2004, Finazzo made the decision to expand Aéropostale’s use of South Bay as a supplier tó fleece products as well. 8 South Bay was not a “known vendor” for fleece products at the time. Dey App’x at 1958. Lauritano testified that Finazzo determined the price and quantity of fleece orders with South Bay. She explained that South Bay’s performance in the fleece business in 2004 was poor, including significant delivery delays that Aéropostale did not experience with-other fleece vendors. Nevertheless, Finaz-zo dictated that Aéropostale continue buying fleece product from South Bay. When Lauritano informed Finazzo in 2005 that she had done a cost comparison analysis of South Bay and other fleece vendors and found that South Bay was not competitive, Finazzo nevertheless directed her to place an order with South Bay. South Bay continued to have delivery problems in 2005, and Lauritano proposed that South Bay give Aéropostale discounts to account for the markdowns Aéropostale was forced to take on late fleece deliveries. Finazzo ultimately decided that South Bay would not be required to discount those products. Despite these problems, Finazzo still directed placement of fleece orders with South Bay in 2006, negotiating the prices himself. Lauritano testified that South Bay continued to have delivery delays, “some of them [by] several months.” Id. at 1984. She stated that she again proposed that South Bay give Aéropostale a discount, but Finazzo decided not to pursue one. George Justin Meno — a product manager of men’s knits at Aéropostale starting in September 2005 — estimated that South Bay’s “egregious” delivery delays for fleece products in 2005 and 2006 cost Aéro-postale approximately $1.8 million in lost sales. Id. at 760, 767. Because of these delivery delays, Meno suggested looking into pricing for overseas vendors. Finazzo did not authorize this effort. When Meno requested discounts from South Bay to compensate for the delays, Finazzo made it clear that Meno “needed to back off a little bit from South Bay” and refused to request any discounts. Id. at 766-68. Similarly, Jinah Jung — an Aéropostale product manager — testified that she did not want to purchase fleece products from South Bay “[bjecause their costs [were] always high and their quality was subpar.” Id. at 1051. Nevertheless, she purchased fleece products from South Bay at Finaz-zo’s direction, because Finazzo had “the final say” on the orders. Id. at 1052, 1055. On February 14, 2005, Jung sent Finazzo an email stating that the $6.85 price Finaz-zo agreed upon for a South Bay fleece order was “really high,” and that she “kn[e]w” she could “get it for a low $6 range.” Id. at 1053. She specifically noted that Aéropostale “could have saved approximately $300,000” on the order. Id. Finazzo refused to change the order, responding: ‘Tes, that is the price I agreed with [Dey] on.” Id. at 1055.
Aéropostale eventually learned of Finaz-zo’s and Dey’s scheme when, during an unrelated investigation of Finazzo’s conduct, Aéropostale discovered an August 24, 2006, email to Finazzo from his estate planning attorney that disclosed Finazzo’s ownership interest in South Bay, the related South Bay entities, and the Vertical Lines entities. 9 Finazzo was terminated on November 7, 2006. Michael Braconi, an FBI Special Agent, testified that, overall, Aéropostale paid South Bay and the Vertical Line entities $267,078,261.41 between June 2002 and November 2006. South Bay, in turn, paid C&D — which was wholly owned by Finaz-zo — $21,223,831.14 during that same time period. South Bay also paid the related South Bay entities — which were co-owned by Finazzo and Dey — $2,959,520. Additionally, South Bay paid the Vertical Line entities — which were also co-owned by Fi-nazzo and Dey — $6,174,463.60. Half of South Bay’s payments into those jointly-owned entities — equalling Finazzo’s share of the companies — amounted to $4,566,991.80. South Bay’s total payments to Finazzo therefore amounted to the sum of South Bay’s payments to C&D ($21,223,881.14) and Finazzo’s one-half share of South Bay’s payments to the jointly-owned entities ($4,566,991.80). Thus, Braconi testified that South Bay paid Finazzo $25,790,822.94 in kickbacks between June 2002 and November 2006. 10 In connection with the mail fraud counts, CFO Cunningham testified that Aéropostale sent fourteen checks via UPS to South Bay as listed at Counts Two through Fifteen of the indictment. In connection with the wire fraud count, David Libenson, Vice President of Financial Operations at Aéropostale, testified that Aé-ropostale sent a wire transfer to South Bay as listed in Count Sixteen of the indictment. These payments were made from June 9, 2005 through November 1, 2006.