The defense of commercial bribery interposed by Edison Brothers Stores, Inc., defendant-counterclaimant, to a claim of $436,000 for goods sold and delivered by Jaclyn, Inc., and its subsidiaries, plaintiffs, presents issues not previously decided in our civil reports. Defendant counterclaims against plaintiff corporations and the principals of Jaclyn for damages.
Jaclyn, Inc., together with its subsidiaries, Bonnie International and Empress Handbag Co., Inc., hereinafter collectively referred to as Jaclyn, a leading manufacturer of handbags, maintains offices and a factory in West New York, N.J. Edison Brothers Stores, Inc. (Edison) owns a chain of 650 shoe stores
trading as Chandler's, Leed's, John Bari and Baker's. The parties stipulated that handbags were sold and delivered by Jaclyn to Edison between February and July 1976 at an invoiced price of $436,284.32.
The record, consisting of numerous exhibits, transcripts of depositions and trial testimony has been collated into five segments of proof.
The Role of Joseph Fingerhut
The business dealings between the parties may be divided into two chronological periods, pre-January 1975 and thereafter. Prior to 1975 Jaclyn and its subsidiaries sold to Edison relative modest quantities of merchandise, in dollar value $25,000 during 1972, $170,590 in 1973 and $125,800 in 1974. Edison points to a private meeting on January 10, 1975 at the Tuscany Hotel in New York City at which a "secret deal" was struck under the terms of which Jaclyn, through Abe Ginsburg, its president, promised covert compensation to Joseph Fingerhut, Edison's senior buyer, in exchange for placing orders. Edison relies upon the profile of purchases made during the ensuing 17 months, upon asserted declarations against penal interest by Fingerhut, and upon an analysis of Fingerhut's financial status following his discharge by Edison on May 10, 1976 to establish commercial bribery.
Following the initial meeting there was a sudden and conspicuous surge in purchases, which totaled $1,229,021 for 1975. The decision-making authority for placing orders assumed one of the central issues of the trial as between Fingerhut and the head of his division, Herbert Talcoff, vice-president and director of accessories of Edison. The court finds that although Fingerhut was responsible for placing many, if not most, of the orders, another buyer and associate buyers also placed orders. Moreover, the controlling judgment reposed in Talcoff, who monitored his buyers by a refined system of statistical controls and by weekly and bi-weekly conferences.
The increased volume of sales is attributable to a new manufacturing process -- flo-molding -- developed exclusively by Jaclyn in 1974. That technique enabled Jaclyn to produce facsimiles of leather handbags at a competitively low cost. The popularity of Jaclyn's entire flo-molded line exerted irresistible economic pressures upon Edison such that it would have paid the maximum asking price.
In December 1975 Talcoff received the first of several reports that Jaclyn was making kick-backs to Edison's buyers. Ed Rosen, associate buyer, reported that he had received four bank checks of $25 value each with a Christmas card from Kenneth Orr of Empress Handbag. In early January 1975 Rosen reported that Howard Ginsburg, son of Jaclyn's president, gave him $500 in cash. Talcoff promptly relayed these reports to Julian Edison, to whom it was also reported that Jaclyn paid Joe Fingerhut $25,000 recently.*fn1 Additional inculpatory information was received by Talcoff in the same month that Olla Industries, another handbag manufacturer, had paid sums to Fingerhut and that currently a scheme was set up whereby money was being "laundered" through Fingerhut's son. Confirmatory evidence of the kick-backs took the form of a cancelled check which was passed on to Julian Edison, who decided not to confront his buyer with evidence of his disloyalty because "he wanted to get more information about the activities of our buyers." At the trial Julian Edison, as well as Eric Newman, Edison's legal counsel and executive vice-president, acknowledged that they had received reports of payments to their buyers which they considered to amount to "attempted bribery."
The highest officers of Edison formed a committee to investigate, and engaged outside counsel, Herbert Robinson, of New York City. On May 10, 1976 Fingerhut was summoned to an
interview. Julian Edison testified that after persistent denials from Fingerhut, he was terminated. At that point in the interview the senior buyer acknowledged that he had received cash payments from several vendors, including "occasional $600" in cash from Jaclyn, as well as payments from other vendors. The court viewed a videotape of Fingerhut's deposition during which the senior buyer admitted only to have received "gifts." He did not recall having made the admissions during the interview in May 1976. Fingerhut's deposition was frustrated at every turn by the witness and his private counsel, from which this court draws the broadest adverse inferences.
An analysis of Fingerhut's bank and tax records disclosed that $35,415.91 was deposited in Fingerhut's personal and family accounts in the Mercantile Trust Company, N.A., St. Louis, between January 1975 and May 1976. On May 11, 1976 a search of Fingerhut's safe deposit box disclosed $35,000 in cash. At the trial Eric Newman qualified as an expert on the circulation of money and was permitted to express the opinion that 74.72% of the currency, stored in three envelopes bearing the name of the Tuscany Hotel, New York City, issued out of and was in circulation in New York. This evidence supports the inference that Fingerhut received a substantial portion of the $35,000 while he was in New York City where Jaclyn was the main resource of his company.*fn2
This court finds that Jaclyn made payments of cash to Joseph Fingerhut during the months following the resumption of business relationships in January 1975 and that those payments were intended to influence the buying decisions of Edison's purchasing agent in favor of Jaclyn. This finding is supported by Fingerhut's admission of having received an "occasional $500 or $600," his earlier connotation of a bribe ascribed to payments of that size if received from a vendor, and by the large sums of
unaccounted-for cash found in envelopes of the Tuscany Hotel in Fingerhut's safe deposit box.
This court also finds that Edison acquired reliable knowledge early in January 1976 of Jaclyn's practice of making pay-offs to purchasing agents. Lastly, the court finds that Edison was acutely aware of the steady surge in purchase orders placed by the "Fingerhut Group" of its buying staff, notwithstanding a slump in the market for Jaclyn's products as reflected in its statistical tools. Before describing the steps taken by Edison following Fingerhut's termination in May 1976, three other segments of proofs will be summarized.
The remaining three segments of proof require a prefatory description of the economic setting in the latter months of 1975 as viewed by Edison. The popularity of the "Gulf Stream" and "Windjammer" handbag models, introduced in 1974, began to wane. Edison's profit margins dropped from an average of 54% to approximately 42%. Edison suggests that these developments confirm its allegation that Jaclyn resorted to the payment of "gifts" to buyers in order to "perpetuate" the initial success of its flo-molded products, and points to two incidents testified to by Edward Rosen, an associate buyer. At Christmas 1975 he received by mail in St. Louis from Kenneth Orr, vice-president of sales of Empress Handbag, four bank checks of $25 each. Orr testified that the checks represented a token of appreciation for expediting the orders placed during the past year, not in expectation of future orders. Orr admitted, however, that he sent the gift certificates to buyers' homes so that their employers would not learn of them, well aware of the formal policy of many companies which enjoined the receipt of such gifts.
Rosen viewed the checks as a bribe, although he asked his superior, Talcoff, whether or not he should send them back or
keep them.*fn3 On a trip to New York Rosen returned the checks without any reference to Edison's policy against the practice, a policy promulgated in 1957 and republished among Edison's vendors as late as November 1975.
A second incident occurred when Rosen came to New York on January 11, 1976 and had dinner with Howard Ginsburg, vice-president and son of Jaclyn's chief executive. Midway through the dinner Howard Ginsburg passed an envelope to Rosen with the words, "Better late than never," and described the contents as "Just a little token." The envelope contained ten $50 bills. When Rosen returned the envelope upon instructions from his superior, Howard is quoted as having said, "My father's going to kill me." At the trial, Howard Ginsburg recalled the dinner meeting with Rosen, but denied that he had passed any money, branding the statement about his father's anticipated ire as a lie.
Both incidents were contemporaneously reported to the president of Edison Brothers.
This court finds that the events of the dinner meeting and its sequel between Rosen and Howard Ginsburg did take place as related by Rosen. The court also finds that the episodes of Orr and Ginsburg were reported to the highest echelons of Edison Brothers in January 1976. The court also concludes that Eric Newman considered the payments in both instances to amount to "attempted bribery." The evidence also confirms that neither
Rosen nor other associate buyers were given any "precautionary steps," as he phrased it, with respect to trading in the future with Jaclyn or its subsidiaries. On the contrary, after the January 1976 visit to New York Rosen and Henry Winer placed orders with Jaclyn during their buying trip in March.
It is the determination of this court that the so-called "transactions" of Kenneth Orr and Howard Ginsburg did not induce Rosen to place orders with Jaclyn because Rosen testified that Jaclyn's merchandise were staple items that filled the need of Edison's stores. However, the two incidents of payments to Rosen refute Jaclyn's assertion that payments, whether denominated "gifts" or other, never exceeded $25 in value. The court determines that the payments were designed to influence Rosen in his dealings with Jaclyn, although that design was frustrated by the intervention of Talcoff.
Jaclyn's Relations with Non-Edison Buyers
Edison submitted evidence of gifts to three non-Edison employees. Gordon English, buyer for Bradlees of the Stop & Shop Companies, was deposed in Massachusetts. Documentary evidence established that English redeemed 18 Macy's gift certificates of a total value of $700, of which $200 came from Jaclyn during December 1975 -- January 1976. English said the gifts were accompanied by a Christmas card, and that such gifts never affected his decision to place orders.
Nellie M. Thomas, buyer for Kuhn's Big K Stores, admitted that every year since 1971 she received gifts or gift certificates from Jaclyn but not in exchange for an order. Documentary evidence established that Mrs. Thomas redeemed gift certificates from Macy's in March 1976 in the total value of $1,200, of which Jaclyn was one of some 250 vendors; she would be "surprised," she testified, if Jaclyn's gift exceeded $100.
Dollie Mae Huffman, buyer for 359 stores of G.C. Murphy Co., McKeesport, Pa., admitted to the receipt of gift certificates from Jaclyn "of various denominations over the years," going back 20 years. The gifts, "anywhere from $50 to $100" in value, were usually accompanied by a Christmas card. When confronted with a Macy's Gift Bond Redemption Form, Mrs. Huffman admitted that at Christmas 1975 she received gift certificates valued at $500 from Jaclyn which she ascribed to her impending retirement that did not occur until May 1978.
Ed Breitbart, sales manager of Jaclyn and Bonnie International, denied the gift to Mrs. Huffman of $500, but allowed that he "may have" given to Mrs. Thomas gift certificates of a value of $225. "It was not a bribe. There was an occasion, I'm positive of that," Breitbart insisted. Breitbart provided insight into the magnitude of the practice in the industry, stating that Jaclyn could not forego giving gifts "when everybody else does," to maintain market position and good will.
It is the finding of this court that Jaclyn followed a pattern over the years of giving gift certificates to non-Edison buyers, the value of which far exceeded the $25 limitation reiterated by its principals in pretrial discovery. The court also concludes that the motivation of Jaclyn's policy was to foster business relationships with the recipients of its generosity.
Jaclyn's Methods of Generating Cash
Edison pointed to four possible sources from which Jaclyn allegedly generated unexplained and unaccounted-for cash which would be available for "payoffs." Edison submitted numerous exhibits of cancelled checks issued by Jaclyn which were used to purchase gift certificates from Macy's, Bloomingdale's, Altman's, Sak's and Schlesinger's in a total amount of $20,100 in 1974 and $30,500 in 1976. The volume of purchases and the policy of Macy's to redeem its certificates for cash are
urged upon the court to support the inference that Jaclyn used covert means to accelerate its sales volume.
It was also established that Jaclyn maintained two retail outlet stores in North Hudson from which distressed merchandise was sold. The transactions of those stores were not attended by internal controls; the amount of cash so generated was not disclosed.
On another occasion Alex Chestnov held 24 cashier's checks of $25 denomination, plus four checks returned by Orr and intended for Ed Rosen. Chestnov said he endorsed Rosen's name to the four checks as well as fictitious names on the other instruments and placed the proceeds of $700 in his desk drawer to be used for "expenses."
Jaclyn's financial records were audited by Israel M. Pogash, C.P.A., who offered his opinion that a series of checks made out to cash, totalling $2,800 over a two-year period, would not arouse suspicion in the context of a company doing $40 million annual business in 1975. The accountant concluded that his audit did not show any pattern that Jaclyn was accumulating a fund intended to be used for "pay-offs."
The court finds that the evidence here collated, viewed in the context of the controversy as a whole, is of insufficient weight to establish the contention that Jaclyn generated a cash fund intended for the bribery of buyers of its merchandise. This finding is made giving full effect to the role of circumstantial evidence in establishing the defense of commercial bribery.
Relations Following May 10, 1976
Following Fingerhut's discharge on May 10, 1976 Edison adopted a "clearance policy" under which no invoices would be paid or normal business resumed until the vendor "told the truth" about payments to Edison's buyers. Eric Newman, executive vice-president, and Herbert Robinson, special New York
counsel, comprised the "clearance committee." That policy was conveyed to Jaclyn during a visit by Robinson on May 27, 1976. On June 3, 1976 Howard Ginsburg went to St. Louis at the invitation of Newman to discuss "clearance," but reiterated that no written admissions of wrongdoing would be forthcoming.
In the meantime Jaclyn's auditors, Touche, Ross & Co., were pressing Edison for payment of $216,875.51 allegedly due as of May 30, 1976. Newman replied, inviting their cooperation in the investigation of the reports of "improper payments." Between late June and October when suit was filed, the record reflects maneuvering on the part of both parties, Jaclyn seeking to extricate itself from the checkmate and Edison exploring a strategy which would both satisfy its declared policy and, at the same time, insure the delivery of needed merchandise. Just as powerful economic forces kindled the resumption of business between the parties in January 1975, so equally compelling economic forces continued to motivate Edison, notwithstanding its knowledge of "attempted bribery" of its associate buyer and of payments to its senior buyer.
On July 20 the first of 22 shipments was released to Edison, which it retained and retailed throughout its stores. That merchandise had a value of $173,016.20 and forms a substantial part of plaintiffs' claims. Edison's argument that the handbags were shipped by design of Jaclyn deliberately to increase the dollar value of its claim in contemplation of litigation is not supported by the record. At a meeting between Newman and Abe Ginsburg on August 26 in New York, Ginsburg reiterated the general denials of payments to Edison's agents. By letter of September 10 Eric Newman wrote to Jaclyn's auditors, Touche, Ross & Co., suggesting a partial payment as an inducement to get some cooperation with its investigation of kick-backs. The pending suit was filed October 6, 1976.
This court finds that although Edison was endowed after May 10, 1976 with the maximum amount of ...