Dungarees and Dragons : A ‘blood feud’ raging between the Marcianos of Guess and the Nakashes of Jordache has landed in court. At stake: a denim empire worth millions.
The Great Jeans War is raging, with Guess and Jordache locked in a desperate, bitter struggle.
It has nothing to do with fashion or to see who can dominate department store shelves.
This battle is for control of Guess, a fabulously profitable company that is riding the edge of jeans fashion with multiple-zippered, stone-washed, tight-fitting denim goods, the essence of ‘80s casual chic. The bitter warriors are the Marcianos, four Beverly Hills brothers who founded the Guess firm in 1981, and the three Nakash brothers of New York, who run Jordache.
The war moves into Los Angeles County Superior Court today as the Marcianos ask for cancellation of the 1983 deal in which they sold half their company to the Nakash brothers for $5 million, and agreements for the Marcianos to receive salaries totaling $1 million a year, plus big bonuses.
The fallout has gone far beyond a saga of nasty doings in the garment business:
- Both companies are under investigation by U.S. attorneys for possible tax evasion. The probe of Jordache, which also includes an inquiry into possible customs violations, has been under way in New York since 1986. The U.S. attorney in Los Angeles began a probe of Guess in 1987.
- A congressional subcommittee is searching for evidence of possible misconduct by high Internal Revenue Service officials in Los Angeles. Three investigators from Washington have been working full time since the summer, looking closely at the activities of the IRS criminal investigation division, which handles the most serious tax violations. The probe, which began as an inquiry into the relationship of Guess and key IRS officials, has expanded to a detailed look at the way the IRS handles potential corruption in its own ranks.
- The FBI is investigating how the Immigration and Naturalization Service was fed false information alleging that Georges Marciano had been arrested in France for possession of explosives. Because Marciano is applying for citizenship, the charge could have resulted in his deportation.
The Marcianos believe that Octavio Pena, a security consultant and investigator for Jordache, is responsible for the false information in the immigration file on Georges Marciano. And they have filled their offices and production plants with posters of Pena. The reward is $20,000 for anyone who can identify his plentiful sources of information at the Guess company.
“I’m not stupid enough to plant any forged documents,” Pena said.
Both sides have deep pockets, the kind of money that can buy the services of platoons of aggressive lawyers, diligent researchers and resourceful private detectives. With these resources, the Marcianos and Nakashes have assembled masses of damaging material on their opponents to feed to federal agencies. Unlike ordinary citizens, they have the clout to drag the government deep into their prolonged business dispute.
Legal bills have climbed into the millions, but it is an easily affordable burden for both sides, since the Marcianos and Nakashes are multimillionaires.
“I used to say I want to be a dog in Beverly Hills,” Hardolf Wolf, an Israeli businessman who brought the two families together for the first deal, said in a taped conversation admitted into evidence. “The best life is a dog in Beverly Hills. Now when they ask me, I say I want to be Georges Marciano’s lawyer.”
Marshall B. Grossman, the head of the Marcianos’ legal team, said in an interview, “It’s a pleasure to be Georges Marciano’s lawyer, and since I’ve never been a dog in Beverly Hills I really can’t compare the benefits of each.”
Access to Funding
The marriage of Guess talents and Jordache capital seemed made in corporate heaven. Jordache, owned by Avi, Ralph and Joe Nakash, immigrants from Israel, has sold almost $2 billion worth of jeans in the last 10 years. It is a major player in the basic market for jeans.
Georges, Paul, Maurice and Armand Marciano, immigrants from France, created Guess--its logo is written “Guess?”--to fill a specialized niche, the high-style, sophisticated and expensive end of the market.
The combination offered the Marcianos access to the administrative and computer expertise of Jordache and the support of the big established company in gaining access to bankers and vendors. In return, the Nakashes won ownership of a hot new fashion product.
The new Guess was an immediate success, becoming a veritable money machine for the owners.
In 1984, the company had sales of $83.6 million and a net profit of $22 million, according to reports obtained by The Times. In 1985, sales totaled $84.1 million, and profit was $18.8 million.
The Marcianos awarded themselves generous shares of the company’s earnings. In 1984, they withdrew $1.5 million in April, $341,000 in June, $1.5 million in August, according to confidential documents. The Nakashes received equal amounts of profit distributions, but not until months later, after they complained vociferously that the Marcianos were acting improperly.
But Grossman says the Marcianos were entitled to get the money first, because they had tax obligations on the $5 million they had received for selling half the company. The Nakashes had said they could help the Marcianos avoid paying taxes on the $5 million by setting up an offshore trust, according to Grossman.
But the Marcianos met with accountants and declined on their advice to participate in the plan. Since the Marcianos would have to pay taxes, the Nakashes told them to go ahead and take distributions from the company before the Nakashes took their own share of profits, the lawyer said.
Robert Spiegelman, who represents the Nakashes and Jordache, said his clients never gave approval for the Marcianos to take the money. “The Marcianos were running the company on a day-to-day basis, and the Nakashes had no idea they were taking the money out until they received financial statements months later,” he said. The idea of an offshore trust to avoid taxes was proposed by Georges Marciano and rejected by accountants for both sides, Spiegelman says.
Further fighting between the partners erupted over the Marcianos’ claims that their designs were being stolen. Guess jeans were being copied by unauthorized manufacturers in the Far East who turned out low-priced imitations. To protect itself, Guess created the Gasoline line to make cheap versions of its own goods and win back the market from the unauthorized copies.
Jordache agreed to help by permitting the production of Gasoline jeans in the Hong Kong factories used by Jordache. But the Marcianos claim something else was going on too--that Jordache was cheating Guess by making extra supplies of Gasoline garments. These were sold under the Jordache label in Hong Kong and were distributed through Jordache licensees and distributors elsewhere in the world.
By buying into Guess, the Nakashes had gotten access to design and financial information, “knowing which Gasoline and Guess styles were hot and which were not,” said Grossman, the Marcianos’ lawyer. His clients claim that the Nakashes secretly intended to use their positions as owners of Guess to gain confidential information.
The heart of the trial beginning this week will be the Marcianos’ contention that the 1983 sale of half their company should be canceled because the Nakashes went into the deal planning to cheat Guess by stealing its styles.
“We didn’t need the Guess designs,” Spiegelman responded.
“Anybody could buy a pair of pants in a department store, take them apart, and copy the design in two hours,” he said. “Jordache had already sold $1 billion worth of pants, and Georges Marciano was unknown except in Southern California. We would be laughed at in the industry if we paid $5 million to buy designs. Jordache and the Nakashes never used any confidential information.”
Spiegelman said: “It is clear the Marcianos were trying to renege on the deal. When they saw the company take off, they realized maybe they sold too cheaply and they are trying to get their stock back. All these other issues, such as copying, are sideshows.”
The sale to the Nakashes helped transform Guess from a fledgling company with $15 million in sales into a $200-million powerhouse. Sales have grown steadily and are expected to exceed $400 million this year.
The Nakashes claim that the Marcianos were not satisfied with merely enormous profits and created dummy corporations to funnel kickbacks to themselves. The shell companies included Downtown LA Subcontracting, which earned $160,000, and Abel, later called Dynamic Sewing, which earned $735,647.
Pyoung T. Kwun, head of Dosin Enterprises, a subcontractor for Guess, said in a 1985 deposition that Georges Marciano asked him for kickbacks during a 1983 meeting. Guess “would supply all of the work that Dosin could handle and that, in return, Dosin was to overbill Guess Inc. and that the amount that was overbilled was to be repaid to Mr. Marciano by check payable to a different company,” Kwun said in his deposition. Kwun said he wrote checks for the difference to Downtown LA Subcontracting.
“For example, a shirt which which would normally be charged at $4 per item would be billed as $4.25 each, the 25-cent difference would be paid back to Mr. Marciano through another company,” Kwun said, describing the alleged kickback scheme. In one case, he said, the company charged $12.75 rather than $12 for each jacket and kicked back the excess 75 cents.
Grossman, the Marcianos’ attorney, said the Nakashes joined his clients in creating Downtown LA Subcontracting and the other firms for a legitimate purpose. “They were set up in an attempt to generate more revenue for the owners of Guess,” Grossman said.
$72 Million in Trust
The Nakashes changed their mind about the new companies, and the money was paid directly to Guess, he said, and none went to the Marcianos. “Not one penny of the money was distributed.”
Spiegelman calls this explanation “an outright falsehood. All these companies were set up by the Marcianos without our knowledge and consent. The Marcianos only put back the money after they were caught.”
The financial stakes keep climbing as the legal battles continue. Some $72 million has been put in trust, representing the dividends from Guess due the Nakashes since 1986, pending a decision on whether the original purchase of Guess should be canceled. This is the biggest sum ever placed in a trust in a California legal dispute of this type, Grossman said.
The court also ordered a separate trust for the profits, about $2 million or more, from $30 million worth of Jordache sales in different styles that may have been copied improperly from Guess.
The fight has spread to Hong Kong, where the Marcianos went to court to accuse the Nakashes of illegal copying activities in garment production, and to Israel, where both sides battled over the depositions of Hardolf Wolf, the middleman in the original deal.
The Los Angeles trial will run for weeks, with members of the Marciano and Nakash families as the star witnesses. The rival camps keep digging for dirt on each other, offering damaging documents, tips and rumors to government agencies.
“This is like a blood feud,” one knowledgeable source said. “A case like this should have been settled long ago, but these guys on both sides are so intense that it’s become a deadly fight.”
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