Fired Executive Accuses St. John Knits of False Accounting

Executives of St. John Knits Inc. have been accused in a lawsuit of using improper accounting maneuvers to shore up the Irvine company’s bottom line while it was under pressure to meet Wall Street analysts’ expectations.

The suit was filed this week by Amen Wardy Jr., who is claiming wrongful termination. Wardy was fired recently as head of a loss-ridden St. John’s subsidiary.

Wardy claims in the lawsuit that he was replaced as chief executive of Amen Wardy Home Stores because he refused to participate in a scheme to illegally back-date documents to help justify the questionable accounting.

Wardy also said that St. John President Kelly Gray told him in July that the company was meeting with officials from Louis Vuitton Moet Hennessy regarding the possibility of the Paris-based company buying St. John. Wardy said he was assured he would get a “high-profile and lucrative” position if the two companies merged.

On Tuesday, St. John Chief Executive Robert E. Gray adamantly denied all of the allegations against the family-operated company. He said no merger discussions have been held with Louis Vuitton.

He also said the company used proper accounting methods.

St. John, which makes upscale women’s clothing, launched the small chain of home stores with Wardy and his father, Amen Wardy Sr., last year and has since opened five new stores.

Meanwhile, St. John has been struggling with its upscale women’s clothing business. Over the last two quarters, it failed to meet analysts’ earnings expectations, which the company blamed on a variety of factors, including losses at the Amen Wardy stores, which had not yet shown a profit.

Robert Gray said Tuesday that the company’s third-quarter earnings per share this year were 8 cents below analysts’ estimates but that Amen Wardy Home Stores’ losses accounted for only 2 cents of that.

“Obviously, we didn’t blame the whole thing on Amen Wardy,” he said.

In his lawsuit, Wardy contends that St. John turned the home stores into a “sacrificial lamb,” using “accounting gimmicks and financial hocus-pocus” to prop up St. John’s retail outlets.

Specifically, the suit says that St. John claimed 100% of the tax losses from Amen Wardy Home Stores, although it knew that it was entitled by agreement to no more than 51% of the losses.