CHAPTER 15

No Kickbacks

With limited capital for such a massive operation, before approaching banks and lenders, the new Anne Klein II division needed an agent. Although I had an extensive network in the Far East, I could not oversee everything and we weren’t ready to get involved without the bridge line in production and selling in stores. For Anne Klein II to become successful, we needed the right production and manufacturers as well as proper quality control. We opened a small office in Hong Kong, but we preferred to spend less capital on labor than future distribution and production costs. Because of our budget for the launch of the line, however, we held a number of concerns. First and foremost would be the loss of control.

In Hong Kong, where we would do most of our manufacturing for Anne Klein II, there was a practice of giving incorrect yields for particular garments to distributors and wholesalers. More particularly, a manufacturer might need 2.5 yards to complete a dress, but the manufacturer would quote us at 3.1 yards. Although 0.6 yards may not be enough to make one dress, when buying many rolls of fabric and sending it to Hong Kong for manufacturing, that extra 0.6 yards per dress can add up. Many manufacturers would take that 0.6 yards and make another or similar dress for sale in wholesale or retail markets. Since many of our fabrics were unique, Anne Klein II couldn’t afford to let something like this happen. For this reason, we paid more to warehouse the unused textiles and held the Hong Kong office to supervise the manufacturing. Since our lines were coordinated across seasons, I reasoned it would not be too difficult to come up with uses for the unused materials.

Regardless, we needed help to launch Anne Klein II. We found and hired a contractor called Cambridge to manufacture Anne Klein II. At the time, Cambridge was under the Swire and Maclaine corporate umbrella, now called the Swire Group (Swire). Swire was and remains to this day a massive company spread across the Far East and Oceania. At first, I was unaware of Cambridge’s association until meeting with Lydia Dunne, leader of the subdivision. Lydia’s group was to work closely in correspondence with our Hong Kong office and our production manager in New York, Dan Homesly.

During our contract negotiations with Cambridge, I had mentioned the need for a letter of credit to purchase textiles from Italy for the bridge line. Anne Klein had a letter of credit from the banks in the United States, but we would need international financial support. Although Anne Klein was growing, we hadn’t touched all four corners of the globe. Swire, however, had. The majority equity holder in Cathay Pacific Airways and various other public companies, Swire had access to substantial capital. Lydia mentioned that Swire could act as financier for a part of the project to secure fabrics from Italy. Cambridge was also an evidence shipper and manufacturer.

To ship goods, one needs a quota allowance. Since we were manufacturing in Hong Kong and shipping to the United States, one of our cost concerns was this quota. The United States is infamous for taxing or disallowing the distribution of certain imported goods. Sometimes if unfulfilled quota allowances existed, an agent could sell the credits to another company. There are trading companies in the Far East that only buy and sell marked-up quotas for manufacturers. Evidence shippers like Cambridge can earn quotas. Because Cambridge had a factory and a shipping business, we had less cause for concern. After handling these logistics, all we had to do was wait for the line to hit the stores and pray my instincts were right.

And they were; we did much better than we anticipated. Anne Klein II was an instant success. We maintained the integrity of our collection line by timing the introduction properly, and we created the first large-scale bridge line catering to a new price-point for the American markets. The line required a new infrastructure. Although we wanted to oversee everything, we could not handle all the responsibility with our existing staff. We hired new personnel, creating a new division within the company.

Everything seemed to be going great until I received an odd phone call at Takihyo Inc. from Shorty Chow at Cambridge. Chow proposed putting some funds aside from the current pricing structure of production as if we were in the loop of whatever had been going on overseas. We didn’t know what to make of it. At the time, Frank Mori was in the United States and I was abroad, but I flew back immediately to initiate a conversation to solve the problem. We feared something was going on behind our backs. At the time, rebates were commonplace in Hong Kong, and no one was there to police or control these kinds of matters. We would be a laughingstock if we mentioned this issue to Chinese officials at the time since kickbacks were a part of nearly every business. To get to the bottom of this, we would have to dig.

The first place we looked had been our price quotes for production, and we cross-checked them with some of the other figures Chow could provide. We found that while Anne Klein may have been paying $10 and we were billed for that amount, the real cost of production may have been $8. That remaining $2 was sent somewhere else. Where, how much, and for how long, we had no idea, but we had identified the problem. Frank and I set up a meeting first with Lydia from Cambridge to go over our findings.

We hired Cambridge to handle some of our operations because it was a subsidiary of Swire and Maclaine. It owned public companies, such as Cathay Pacific Airways. We thought because Cambridge was within this massive corporate structure, little corruption could occur. We were dead wrong. I told Lydia frankly, “If someone is receiving rebates against the best interests of my company, I want to know the truth.” Lydia reacted with a similar response. The lines started to blur as to whom we could and could not trust.

We had a team of accountants dig through all money paid and received and compared those numbers to the price quotes offered to Anne Klein in the United States. They found money was moving in different directions. Making matters worse, although Lydia gave no direct confession, she may have been a player in the kickback operation. We found one of her employees, Gracie Fore, had been taking kickbacks as well. I mention Gracie here because a couple years after starting at Anne Klein, Gracie had married our production manager, Dan Homesly. The most disappointing element of this was that our own production manager was stealing from our company. Dan should have told us the manufacturers in Hong Kong could offer us a lesser price on production rather than pocket the difference and be dishonest about the numbers. Dan and Gracie were putting the corporation’s money into their own pockets.

Frank and I confronted Dan and Gracie. What they had done was wrong, and we asked they return what was owed. There was some resistance, but they knew what they had done was wrong and returned the money. I fired Dan for insubordination and found a replacement for the production manager. Afterward, I went to Cambridge and called Lydia out on her dishonesty and lack of integrity. Lydia thought she had Anne Klein wrapped around her finger because it was handling the overseas production. She responded, “If you don’t trust us and don’t want to do business with us, leave.” Frank and Larry Stern, our chief financial officer, didn’t know what to do. They didn’t like what had happened, but we had due dates for our production that we had to meet. They suggested we delay severing the relationship with Cambridge until our contract expired. This option would have allowed us to keep the same production schedule without any bumps in the road, but we would be giving those who stole from us more business and another chance to steal. Although Frank and Larry thought ending the relationship with Cambridge would be a bad idea for the Anne Klein Company, I refused to continue working with them. Against Frank and Larry’s advice, I terminated the relationship with Cambridge and hired Doris To full-time to fulfill Cambridge’s functions in the Far East.

Doris had been an office manager for the small Anne Klein operation in Hong Kong. This office specialized in quality control, and consequently, Doris had all the staff and knowledge necessary to oversee production quality control and shipping. I knew she was a hard worker and would have Anne Klein’s best interests at heart. Frank and Larry thought she could not get the job done in time, but I believed in her and I introduced her to some of my contacts in Hong Kong to expedite matters. An old family friend, Christopher Cheng, current CEO and Chairman of Wing-Tie, and Benson Tong, Chairman of Tong Textiles, supplied the new office with a chief operating officer and chief financial officer to help Doris. Only with the strong relationships I had fostered over the years in Hong Kong could I have terminated the Cambridge contract, knowing we could figure it out. The business was transferred out of the hands of Cambridge and into Doris’s hands. With all of Doris’s hard work, she wound up saving the Anne Klein Company time in the production process and money.