Opinion ID: 8414535
Heading Depth: 4
Heading Rank: 1

Heading: The Creation of the South Bay Relationship with Aéropostale

Text: In July 1996, Julian Geiger — Aéropos-tale’s President and CEO — hired Finazzo as its Men’s Divisional Merchandising Manager. 5 Prior to being hired by Aéropostale, Fi-nazzo owned a small sports-clothing retailing business called C&E Marketing, at which Dey was an employee. Shortly after Finazzo was hired by Aéropostale, Peter Conefry — Finazzo’s and Dey’s former private accountant and a cooperating Government witness — attended a meeting with Finazzo and Dey in which Finazzo stated that he and Dey were going to a start a new company that would do business with Aéropostale. 6 Conefry testified that he told Finazzo that Finazzo “better be careful because if you have a relationship with a vendor as an employee of [a] company it could create a problem.” Dey App’x at 1229. Conefry advised Finazzo to check with Aéropostale before proceeding with the new company. Finazzo responded that he “didn’t think Aéropostale would go for it.” Id. Nevertheless, in August 1996, Dey incorporated South Bay Apparel, Inc. South Bay’s business with Aéropostale comprised approximately 99% of South Bay’s total business from 1996 to 2006. In 1998, Finazzo started C&D. Finazzo told Conefry — who also acted as South Bay’s and C&D’s accountant — that he formed C&D so that he could receive “consulting fees” for directing Aéropostale’s business to South Bay. Id. at 1232. Indeed, Conefry testified that C&D primarily received payments from South Bay. Initially, Finazzo and Dey had an informal agreement pursuant to which Finazzo simply told Dey to send funds to C&D. As the South Bay supply business with Aéro-postale grew larger, Conefry was directed to split South Bay’s net profits nearly evenly between South Bay — owned by Dey— and C&D — owned by Finazzo. Although these payments from South Bay to C&D were not for actual consulting, Conefry classified them as such on South Bay’s books. Id. at 1234-36. The payments steadily increased from $355,000 in 1998 to $5,161,550 in 2004. In 2005, the payments from South Bay to C&D totaled approximately $13 million, and Conefry classified them as cost of sales, because $13 million in consulting fees “would be a red flag.” Id. at 1236. Conefry testified that, throughout this time period, he discussed these payments with Finazzo annually during the preparation and filing of Finazzo’s tax returns. When Conefry pushed Finazzo to disclose the arrangement to Aéropostale, Finazzo responded that “it was too late at this time.” Id. at 1238. In response to Conefry’s concern that Aéropostale becoming a public company in 2002 could bring scrutiny from the Securities and Exchange Commission, Finazzo told Conefry “it’s gone along so far so we will just continue.” Id. at 1240. Finazzo and Dey also jointly owned the Vertical Line entities. These entities served as vendors to Aéropostale as well. In addition, Finazzo and Dey jointly owned other South Bay entities, including South Bay Sports Plex, South Bay Ticketing, and South Bay Knitting (the “related South Bay entities”). Michael Cunningham — the Chief Financial Officer of Aéropostale during this time period — testified that once Aéropostale went public in 2002, Finazzo was required to regularly complete director and officer (“D&O”) questionnaires and other related-party transaction documents. The D&O questionnaires asked whether Finazzo had a significant ownership interest in any Aé-ropostale vendor or received money from the vendor. Finazzo received training on multiple occasions to ensure that he understood his responsibility to disclose any such interests. Nevertheless, Finazzo stated on these questionnaires that he was not an officer, director, or partner of any other company; received no bribes or kickbacks from any third-party vendor; and did not engage in any related-party transactions.