Case of Missing CEO : Cascade Investors Fear Stock Is Worthless

Victor G. Incendy, a high-flying Florida retailing entrepreneur, has vanished, his chain of inexpensive women’s clothing and cosmetics stores is in shambles, and Tom Maguire, a Seattle investment fund operator, still can’t figure out how it all happened.

Neither can anyone else--yet.

Thursday afternoon, the day after Incendy was reported missing and executives of Cascade International admitted that financial statements filed by the retailer “may not be accurate,” shaken investors such as Maguire, manager of the Safeco Growth Fund, were left wondering how they got trapped by a stock that apparently was too good to be true.

“It was easy to get sucked in by the story they were telling,” recalls Maguire, whose fund holds 895,000 shares of Cascade. “You read a 10K, a report that is filed with the Securities and Exchange Commission, and you don’t think they’re going to lie. But now I’ve learned that if it seems too good to be true, it probably is.”

The story of Cascade International, a Boca Raton-based retailer with a still-disputed number of outlets across the nation, appears to be another of those classic tales of a penny-stock company’s almost unbelievable success that is rapidly followed by a flaming burnout amid allegations of fraud, minimal scrutiny from federal regulators and questionable work-a-day practices within the investment community.

In the wake of the revelations about Cascade, trading in the company’s stock has been halted, and the Federal Bureau of Investigation and the Securities and Exchange Commission are said to be investigating whether the company and its officers broke any laws.

A company spokesman said Thursday, “We don’t know anything.” He did say, however, that Cascade Vice President John T. Sirmons has been appointed president and Aaron Karp, the company’s attorney, was named chief executive late Tuesday to replace Incendy.

Founded in 1985 by the 57-year-old Hungarian-born Incendy, Cascade grew quickly. According to financial reports it filed with the SEC, sales and earnings jumped 40% or more almost every year as the company opened more and more outlets--with such names as Allison’s Boutique, Diana’s and Fran’s Fashions--across the country.

The handful of analysts who tracked the company, most from regional firms in Florida, reported glowingly about it, ranking it a “strong buy” and repeating some of the company’s internally generated propaganda in their investment analyses.

By early this year, shares had jumped to $11 from just pennies in 1985.

But about three months ago, David Brown and Michael Murphy of the Overpriced Stock Service in San Francisco began to sense something was amiss. While searching for retailers’ stocks that were likely to drop in value, Brown discovered that Cascade--unlike the vast majority of the retailing community--was reporting strong sales and fantastic growth. Something seemed odd, and he pursued it.

Over the next few weeks, Brown said, he uncovered a string of “strange things” that led him to question the company even further. First there was the matter of its auditor--not a Big Six firm that companies with nearly $60 million in sales might have--but a New York accountant who had once been disciplined by that state’s accountancy board.

Then there were inconsistent reports of Cascade’s planned expansion of its cosmetics line into a chain of East Coast stores, an absence of up-to-date sales accounting systems in Cascade’s retail outlets and a lack of qualified outside directors on the company’s board.

Finally, Brown decided to determine the number of stores operated by Cascade, a figure the company refused to give him in September. Earlier reports indicated that the company had 29 outlets in California. Brown could find only 19, at least three of which have since closed. In Connecticut, the company said it had 13 stores, but Brown could find only one.

“At that point I said, ‘Why should anyone believe their financial statements if they lie about their store counts?’ ” Brown explained.

Lawsuits subsequently filed by shareholders in Florida allege that Cascade failed to report a decrease in sales to the SEC, overstated its cosmetics sales and operates only 126 stores, not the 170 it had earlier claimed.

Of the Southern California stores still open, eight are in the Los Angeles area, including La Habra, Riverside and East Los Angeles.

“As far as we’re concerned, everything is smooth,” said the manager of the Riverside store. “There’s been no interruption.”

Brown and Murphy detailed their concerns about Cascade in their October, November and December newsletters, each time offering a more ominous warning to investors about the company’s problems and potential downfall.

But Ed Bernstein, who operates the Prudent Speculator Leveraged Fund in Los Angeles, said it was easy to dismiss Brown’s and Murphy’s warnings as vague and unfounded rumors.

“There were no hard facts until Wednesday, when the company said Incendy was missing and its financial statements were wrong,” said Bernstein, whose fund holds 135,000 Cascade shares.

Bernstein said he talked with Incendy as recently as three weeks ago about the allegations in the Overpriced Stock Newsletter and received assurances that Cascade was in good shape. He said Incendy told him that he owned 10 million--or more than half of the company’s 19.4 million outstanding shares--and had never sold any.

But in the wake of Incendy’s disappearance last weekend, investors and regulators are wondering if he holds the shares--or if he sold them during the three days of heavy selling volume that preceded Tuesday’s halt in trading. A total of nearly 4 million shares changed hands Nov. 15, 18 and 19.

Investors said they believe that Incendy fled to avoid a meeting with Wall Street analysts that had been scheduled for Wednesday precisely to lay to rest the questions about the company’s finances and number of stores. Incendy had reportedly promised to deliver a list of store outlets at the meeting, but it was canceled Monday.

Meanwhile, investors such as Bernstein and Maguire are left questioning how they, as seasoned pros, could have been left holding a bag of potentially worthless stock.

“Up to this point, I’ve always taken the integrity of a financial statement for granted. But now I guess you have to question these, too,” Maguire said. “You get a little tougher after one of these.”