Did Epilady Fleece More Than Legs? : Bankruptcy: Hope and hype helped push EPI Products over the edge. Less charitable creditors blame fraud.

The rich young Krok sisters were masterful at selling the success story that made them famous.

Even as their family’s legal problems mounted and their firm sank into Chapter 11 bankruptcy last month, the four sisters appeared smiling on the cover of Family Business magazine. The publication credited the Kroks with creating “an important force in the personal care products industry.”

For the Kroks’ Santa Monica company, EPI Products USA, glamorous, enticing images were essential sales tools. Its one-time smash hit product, the Epilady, was an electric hair removal gadget that promised women soft, silky legs--that is, if they used the device every two weeks, an ordeal that some said was excruciating.

“You had Johnny Carson and Arsenio Hall on television talking about how painful it was, but you had millions of ladies buying it. It became bigger than the Hula-Hoop,” said Richard L. Faun, a senior sales executive with EPI until quitting Aug. 1.

Today, EPI’s collapse is an example of the hazards of hype, over-optimism and, some creditors allege, of wild spending and financial fraud. Consumers got so caught up in the Epilady fad that many who shouldn’t have bought them--women who couldn’t tolerate the pain--got the gadgets anyway, only to return them later.

The South African-born Krok sisters, meanwhile, may have let their meteoric rise go to their heads. Business people who dealt with the Kroks and their associates say they ignored suggestions on how to manage EPI more professionally--advice that, critics contend, was needed badly when the firm’s annual sales (after returns) zoomed to more than $150 million quickly after Epilady was introduced in 1987.

Worse yet, a batch of private lawsuits accuse privately held EPI and some of the people behind the firm--notably Solomon Krok, the sisters’ father--of looting the company and cheating business associates out of millions of dollars.

“EPI’s officers and controlling shareholders used EPI as their personal piggy bank,” charges a suit by the Bank of New York, Daiwa Bank and Bank One. The EPI principals, the suit says, secretly diverted “more than $20 million into other enterprises in which they were personally involved,” including a Broadway play, real estate and automotive supplies.

In an affidavit filed in New York Thursday, a Bank of New York vice president contends that he was told by an EPI lawyer that Solomon Krok this spring received a “preferential transfer” of at least $3 million from the company. According to the affidavit, the payment was authorized because the elder Krok “had been threatened with prosecution under South African law for violation of currency control regulations.”

Allan Browne, an attorney for the Kroks, said he knows of no investigations of the Kroks, either in the United States or South Africa. He said the banks’ suit consists of “wild and reckless charges that have no basis in fact.”

Browne maintained that the Kroks never misrepresented how they were going to use their $25-million bank loan. In fact, he said, the investments in the play and other ventures were intended to diversify EPI and promote the company.

“It may have been, in retrospect, that those investments were not wise and didn’t pay off, but that’s not fraud,” Browne said.

Speaking through Browne, the Kroks blamed EPI’s collapse mainly on softness in the entire retail industry, over-optimistic sales projections and the money-losing investments. They also cited what now appears to be excessive advertising spending and the high cost of developing new products.

“The company simply grew too fast, and in the process of growing too fast, it consumed its capital too quickly,” Browne said.

Amid the raft of litigation and so soon after EPI’s fall, what really happened is unclear. The Kroks declined to be interviewed, but they authorized Browne and Geoffrey D. Lurie, a turnaround specialist EPI hired just before the bankruptcy filing, to comment.

What emerges from legal documents and interviews is a picture filled with contradictions, a family that was warm, friendly and close-knit but also nasty at times toward outsiders. The sisters are described as deft marketers and unrelenting negotiators, yet naive about other aspects of business. Their father is portrayed as philanthropic yet someone who, the banks allege, orchestrated a fraud.

Even the matter of who really ran EPI is murky. The three sisters with EPI from early on--30-year-old Arlene Krok, Sharon Krok Feuer, 32, and Loren Krok, 25--all worked long days and indisputably played significant roles. Arlene, who carried the title of president, was considered the street-smart leader, while a fourth sister, Bernice Krok, 26, didn’t come aboard until a year ago.

In EPI’s bid to capitalize on its winning “women making products for women” image, some key male executives stayed out of the spotlight. EPI’s banks maintain that the sisters’ father was the true boss, even though he professed to be no more than a consultant. Solomon Krok, known to his acquaintances as Solly, was said by a former company insider to call EPI daily to instruct managers.

One executive who did business with EPI said that when he talked with the firm’s principals, “it was always ‘Solly said this, Solly said that.’ ”

By all accounts, Solly is the original source of the family’s wealth. He made a fortune with Twins Pharmaceuticals, a company he has run with his twin brother, Abraham, and whose stock is traded on the Johannesburg Stock Exchange.

Solly, a 61-year-old father of seven, is no stranger to controversy. In South Africa, Twins has dominated the market for skin lighteners, which are popular among black consumers there but have come under fire from health authorities. Twins contested, unsuccessfully, a recent order by South Africa’s health minister requiring any skin lightener containing a substance called hydroquinone to be sold only by pharmacists.

Twins also is expected to clash with South African officials over its reported plans to export some of the restricted creams, which the company contends are harmful only when misused. A Twins official was quoted in a South African newspaper as saying that the company intends to sell the products to nearby countries, including Zambia, Namibia and Botswana, none of which ban these skin lighteners.

Shortly after daughter Arlene came to Los Angeles in her late teens, Solly set her up in business by giving her the U.S. rights to a product for bathing infants called the Baby Sitter. Beginning in 1981, Arlene, a partner and later Sharon marketed the Baby Sitter through a small but apparently successful firm, A-Plus Products.

Eventually, Solly heard about a beauty product that was the rage in Israel, a gizmo with a revolving coil that pulled hair out by the root. After negotiations with the Israeli kibbutz that manufactured the device, Solly acquired the rights in the United States and Canada, along with some overseas markets.

Again, Solly put the business in the hands of Arlene, Sharon and their associates. Only this time, the product was a giant success.

The firm that came to be known as EPI turned Epilady into a hit by, among other things, persuading upscale department stores to sell the device at their high-traffic cosmetics counters rather than at their slower-going housewares sections. After the $90 Epilady developed an avid following at high-end stores, EPI brought out a cheaper model for mass merchants such as K mart and Target.

Millions were spent on advertising, pitching the Epilady as an innovative product for the modern woman. As sales soared--and even after they started falling over the past year--glowing accounts of the high-flying sisters appeared on television and in magazines and newspapers, including The Times.

“If you were living in the United States between 1987 and 1990, you knew about Epilady,” Faun said.

Browne said, however, that the sisters “did not seek out publicity for their own self-aggrandizement” but that “the press was very interested” in them.

“The public likes to know about women, particularly young women, who are successful in business,” Browne said. The sisters “were willing to go along with it for the benefit of the company.”

In time, Epilady tripped over its hype and success. It didn’t take long before most of the women who wanted an Epilady owned one. In fact, so did many other women.

Lurie, EPI’s newly hired turnaround specialist, said the product should have been aimed principally at women who regularly wax their legs to remove hair. He explained that waxing involves the same kind of trade-off that an Epilady does--you get smooth, silky legs in exchange for a painful removal process.

Lurie said women who shave their legs typically are willing to put up with stubble but not the sort of pain that an Epilady inflicts on some users. Once lots of women who shaved their legs started buying Epilady, the product’s popularity waned and returns mounted.

Adding to Epilady’s problems were concerns raised by health officials that the device could cause skin infections.

Other firms have survived the demise of hot-selling items by coming out with new products. EPI tried to do the same, but it moved too late and came out with too many flops. The most promising items it sells today, Lurie said, are EpiSmile, a tooth whitener selling for $12 a tube, and EpiDent, a fancy electric toothbrush.

Meanwhile, sources said, the family resisted advice to adopt proper systems for keeping track of bills, inventory and cash flow.

Marshall Kline, the owner of a Los Angeles firm that buys merchandise for retailers, said EPI was “incredibly” disorganized. He said retailers he represented would return defective Epiladys and then would have to wait months to receive replacements or credit.

“You had to call and call and call them, and then, finally, maybe the store would get a new one,” Kline said.

According to lawsuits, chicanery also may have played a pivotal role in EPI’s fall. A suit by EPI’s banks accuses the company and some of its principals of an array of abuses.

For example, the banks’ federal suit in Los Angeles charges that EPI invested and lost nearly $7 million on a Broadway play that bombed, “Meet Me in St. Louis.” The investment, the suit says, was misrepresented as “prepaid advertising” in the company’s financial statements and actually was intended for the personal benefit of Solly and Arlene Krok.

Similarly, the suit maintains, $11 million that EPI officials said was allocated to distribute the firm’s personal care products in Europe was in fact money put into Solly Krok’s personal, and unsuccessful, “Quickwheel” venture. The Quickwheel has been described as “a skateboard for a car,” a device enabling motorists with a flat tire to get to a service station without changing the bad tire themselves.

Further, the banks charge, Solly Krok and daughters Arlene Krok and Sharon Krok Feuer siphoned more than $2 million out of EPI to pay for their personal credit card bills and home mortgages and for “exorbitant” pay for Arlene and Sharon.

According to a deposition in another case, Arlene and Sharon received bonuses of $1.1 million each from EPI in March, 1989. Three other executives, including Loren, each got $900,000 bonuses, according to the deposition.

Browne, the Kroks’ lawyer, characterized the banks’ suit as an “outrageous” attempt to trump up a case against EPI principals to collect money that EPI itself can no longer pay because it is insolvent. The banks, he said, had “a straight-forward collection matter and turned it into a cause celebre.”

He added that the banks were fully aware of how EPI was using its money because they performed a thorough due diligence review of the firm’s finances.

A separate pending suit in Los Angeles Superior Court against EPI was filed last year by Patricia Jones, a 20% partner with the Kroks in A-Plus who contends that she was cast aside by the Kroks when EPI’s business took off. Jones’ suit maintains that EPI was an outgrowth of A-Plus and that she was fully involved in developing EPI’s business. Consequently, she contends, she is entitled to 20% of EPI’s past profits, which one of her lawyers suggests could be $40 million or more.

“It was only after EPI got off to a rocket-like start that they forgot who our client was,” said Victor Rosenblatt, one of Jones’ lawyers.

The Jones suit further alleges that Solly Krok withdrew millions in supposed royalties from EPI to “fraudulently avoid the payment” of U.S. taxes.

Browne denied Jones’ allegations and said her suit was motivated by “greed and jealousy.”

Yet another federal suit in New York against EPI was filed by Michael Ackerman, a sales agent in New York, who contends that EPI reneged on a commission agreement under which it may owe him as much as $1 million. Browne denied the charge.

EPI’s future is being fought over in bankruptcy court. Lurie has reached a tentative agreement with a New York investment firm interested in financing EPI and eventually acquiring majority control, but the banks are challenging the deal as a possible fraud intended to benefit Solly Krok.

For their part, the Kroks maintain that the company still has an attractive image, product line and distribution network.

One part of the product line that could disappear, however, is the Epilady. The Israeli manufacturer has gone to court to take away EPI’s marketing rights for the device.

EPI, meanwhile, continues to wind down. Its Santa Monica headquarters on Ocean Park Boulevard is for sale, and employment, which peaked at 250 or more, now is around 25.

Sources close to the family say the home the Kroks bought for $3.7 million last year in the flats of Beverly Hills, where Solly and his wife are now staying and where some of the sisters have lived, is about to go up for sale too.

Even if the Kroks pull EPI out of bankruptcy, there is still the matter of the family’s tarnished image.

Faun, the former EPI executive, fears that the Krok sisters, after getting so much publicity when EPI was flying high, now will be viewed as failures. He says that the sisters followed the poor advice of their public relations department, which he faults for making them, not the company, the focus of attention.

“As a result of that kind of PR campaign, yesterday’s geniuses became today’s jerks,” Faun said.

Still, he said, “their setback is just a temporary one. These girls have just begun to live.”

Times staff writer Scott Kraft in Johannesburg contributed to this story.