Sewing Seams of Discontent : Guess, Jordache Merged but It Wasn’t a Perfect Fit
It seemed a perfect marriage of individuals living the American dream of rags to riches in the most literal sense.
Joining forces were the founders of two jeans companies--one a powerhouse named Jordache with vast financial and manufacturing resources and the other a Los Angeles-based upstart called Guess that was hard-pressed to meet the demand for its tight-legged, fanny-hugging pants.
Jordache Enterprises is the empire of three Israeli-born brothers named Nakash. Guess is the brainchild of Georges Marciano and his three brothers, sons of a French-Algerian Orthodox rabbi, who left their 12-store chain of clothing boutiques on the Cote d’Azur in France in 1981 and headed for Los Angeles.
When the Nakashes agreed in 1983 to provide expertise for Guess and pay the Marcianos several million dollars in exchange for half of Guess’ stock and three of its six directors’ seats, the combination sounded like a formula for connubial bliss.
Hardly. After a short-lived honeymoon, the relationship deteriorated into an acrimonious dispute over control of Guess that in recent months has taken some of its nastiest turns. Only last January, an estimated 50 armed federal agents staged a two-day raid on Jordache’s New York headquarters, seizing boxes full of the company’s business records.
The interest of the Internal Revenue Service and the U.S. Customs Service had been piqued by the Marcianos’ allegations last year that Jordache had participated in a scheme to underpay import duties and evade taxes.
In an industry where tempers run hot, stakes are high and nasty disputes are commonplace, the story of how the Nakash-Marciano arrangement started unraveling at the seams has become one of the hottest topics. With the two sides channeling millions of dollars and thousands of hours into the effort, attorneys describe the case as perhaps the most complex they’ve ever seen.
One apparel executive, contending that the battle ultimately could destroy Guess, likens the situation to Samson toppling the temple to destroy his enemies--and himself.
“I’m not an objective bystander,” acknowledges Menachem Treivush, a friend of Georges Marciano who is president of Ton Sur Ton, a Los Angeles apparel maker. “But my heart really bleeds for both of them. It’s a pity to see all these energies wasted.”
The allegations of customs and tax fraud marked the escalation of a suit filed by the Marcianos in November, 1984, in Los Angeles County Superior Court. It accused the Nakashes of breaching their fiduciary duties and competing unfairly by “knocking off”--or stealing--Guess designs. The Marcianos asked that the Nakashes’ purchase agreement be rescinded.
The Nakashes in turn alleged, among other things, that the Marcianos were taking unauthorized fees out of Guess and paying themselves almost double the salaries specified in their employment contracts, without the required two-thirds board approval.
In February, 1985, both sides won partial court victories. The Nakashes were ordered to set up a trust fund for profits from three Jordache styles that the judge agreed might have been Guess knockoffs. He also prohibited the Nakashes and Jordache from using any Guess or Gasoline designs.
For their part, the Marcianos were required to separate profits from some licensed Guess lines that had not been authorized by the full board.
Reprimanded Brothers
Then last August, the judge reprimanded the Marcianos for receiving from contractors what he said appeared to be kickbacks. However, he would not take the drastic step of honoring the Nakashes’ request that the Marcianos be removed from the Guess board.
“This is a trendy business,” Judge Norman L. Epstein said. “It’s the kind of thing where it’s important to be ahead of the market, and apparently he (Georges Marciano) has managed to do that with enormous success.”
Guess began its legendary rise four years ago. At a time when the market for designer jeans had faded, Georges Marciano started making high-priced pants with zippers at the ankles out of “stone-washed” denim. (The fabric was washed with special soap, then tumbled in a dryer with pumice stones to make it softer and lighter in color.)
As the lore goes, Marciano walked into Bloomingdale’s in New York, hoping to persuade the store to stock a few pairs of his jeans. Before he had left, a dozen had been sold, and the store was soon placing orders for hundreds more.
Along with his brothers--Maurice, 36, in charge of production; Armand, 40, responsible for shipping, and Paul, 33, the head of advertising--Marciano, 39, started living an American success story complete with trappings, from Rolls-Royces to a Beverly Hills villa.
In a January, 1984, interview with the French magazine Le Point, Georges, who spoke very little English on his arrival in Los Angeles, freely acknowledged that his move here was prompted by a hefty tax bill on his chain of clothing shops in France.
“Everything is allowed here,” he said. “If you are successful, you can show your success.”
According to Guess officials, the company manufactures nearly 95% of its products--which now include jackets, overalls, shirts and other items--in Los Angeles. Each week at the company’s offices, 400 employees put the finishing touches on 200,000 garments, which then are shipped to stores where they retail for between $42 and $150.
The company had net income of about $23 million last year on sales of more than $80 million; it projects $100 million in revenue for 1986.
Needed Structuring
In its infancy, fast-growing Guess was badly in need of the kind of corporate structuring and access to cheap labor abroad that the Nakashes could provide. For their half-share in the company, the Nakashes agreed to pay the Marcianos a hefty $5 million.
“That’s why it (was to be) the perfect marriage,” said one Guess official recently as he sipped espresso in a room decorated with framed newspaper clippings about the legal dispute. “The Marcianos would control the fashion side; they (the Nakashes) would control the basic business.”
Soon after Guess was founded, Georges Marciano complained in newspaper interviews that his designs were being knocked off and sold at lower prices by competitors. In an unusual move to profit on the demand for these cheaper imitations without marring Guess’ image, the Marcianos started an affiliate called Gasoline that was licensed to use some Guess designs. After the Nakashes’ purchase went through, they became responsible for running Gasoline and manufacturing the division’s garments in Hong Kong.
In court documents, Georges said the Nakashes assured him numerous times during negotiations that Jordache had no intention of knocking off Guess designs and “had no need to do so since Jordache was itself very successful.” However, the Marcianos allege that the Nakashes turned over some of Georges’ designs for the Gasoline division to Jordache, which copied them.
The Marcianos are seeking in a state court in Delaware to dissolve Gasoline, a move that the Nakashes oppose.
Operations of Gasoline are also at issue in proceedings initiated by the Marcianos in Hong Kong against Jordache Enterprises; its Hong Kong operation, Jordache International, and various factories that make garments for Jordache and Gasoline.
Procured Search Order
The Marcianos procured an order permitting the search of Jordache facilities in Hong Kong and the seizure of documents that might detail what they alleged was a scheme to circumvent U.S. customs duties and tax revenue. Just days after federal agents raided Jordache headquarters in New York, representatives of the Marcianos spent two days finding documents at the Hong Kong facilities.
In a declaration seeking a stay of those proceedings, Dan Woods, an attorney for the Nakashes, characterized the order as an “extremely drastic form” of relief.
The Nakashes have not yet responded to the Hong Kong allegations, but they asked the court in Los Angeles to prohibit the Marcianos from providing documents obtained in the civil case to third parties, including the government, for use in the New York investigation. The Nakashes’ request was denied.
By getting access to Jordache documents, the government is able “to take a look at a side of the garment industry it normally would not see,” says Marshall Grossman, a Los Angeles attorney for the Marcianos.
Jordache’s quick rise--and its growth into a conglomerate encompassing such brands as JeanJer and Kikit--was also an industry phenomenon.
In the 1960s, when the Nakash brothers--Joe, Ralph and Avi--worked their ways individually from Israel to New York, they could scarcely have foreseen that one day they would operate one of the nation’s largest clothing companies and have worldwide investments in banking, real estate, hotels and other ventures.
Started With Nothing
Joe, 43, recalls his first days in New York as “a very scary time” during which he slept in Central Park and subway stations. He made his way up to a $90-a-week job, to ownership of a Brooklyn retail store and on to Jordache.
“It is true that when my brothers and I were growing up in south Tel Aviv in the ‘50s and ‘60s, what I related to and dreamed about were the fast cars, the beautiful girls and the parties I used to see in all of those beach movies,” he said in an April, 1985, interview with the Jerusalem Post.
“I came here (to the United States) in 1962 with $25 in my pocket. And I was determined to get a piece of all that. It took a lot of hard work, but we have achieved more than I ever could have dreamed.”
Early on, Jordache turned for its manufacturing to Hong Kong, with its abundant, cheap labor force.
Much of Jordache’s initial success stemmed from an advertising campaign that emblazoned the company’s slogan--”the Jordache look”--on the minds of mass America. The investment paid off handsomely for a time. As recently as 1984, Nakash has said, jeans accounted for half of the company’s $600 million in revenue.
However, the luster appears to have faded from the company’s mainstay, which one competitor describes as “the McDonald’s of jeans” because of its basic mass-produced nature. The four major department stores in Southern California have stopped carrying Jordache lines for women as consumers have turned toward more high-fashion lines. Most of the stores report strong business in Guess.
Good Deal for Both
Although Jordache deserves “all the credit in the world” for its early success, the company was “looking for a good horse to carry the carriage,” says Treivush, who as a boy in Israel was acquainted with Joe Nakash. “(The Guess agreement) was a good deal for both of them at the time.”
Garment industry sources are of two minds as to why the deal went sour. Some contend that Jordache was simply seeking new blood and wanted Guess as a design source. Others say that Guess, desperate for resources, leaped at the first offer of aid and now rues having sold out too cheaply.
Now that Guess has grown significantly, “the Marcianos are trying to turn back the clock and unscramble the egg and get it back,” says Edwin P. Rome, a Philadelphia attorney representing the Nakashes in Delaware.
Meantime, business goes on--although hardly as usual--at Guess. Both sides agree that board meetings have been much more productive since the naming last August of a provisional director, a retired judge named Richard Schauer. He breaks frequent logjams between the Nakashes and Marcianos, who have stopped speaking to one another.
The Guess faction can’t resist equating the whole affair with David and Goliath. “It’s not just a fight,” says one principal. “If we lose, we’re out of business. If Jordache loses, it will still have a $600-million company.”
Times correspondent Dan Fisher in Jerusalem contributed to this story.
