Epi Products files Chapter 11, fends off $25 million fraud suit.

Epi Products files Chapter 11, fends off $25 million fraud suit

The Krok sisters of Santa Monica-based Epi Products USA Inc., once nationally acclaimed for the smash retail success of the Epilady hair remover, have declared Chapter 11 bankruptcy and now are the target of a Bank of New York federal lawsuit alleging a $25 million fraud conspiracy.

Epi Products USA's Chapter 11 bankruptcy petition, possibly provoked by the Bank of New York litigation, was quietly filed the week of Aug. 20 in New York, although Epi is incorporated in California. "We filed in New York because that's where the major creditors are, as well as the entity that is prepared to fund ongoing operations," explained Barton Nachamie, partner in the New York law firm Nachamie, Hendler & Spizz.

The Chapter 11 petitiion largely stays the Bank of New York claims, unless a bankruptcy court judge grants relief. The New York bankruptcy filing may be challenged as the improper venue for a California corporation.

"We believe that the venue (New York bankruptcy court) is improper, and that the bankruptcy should have been filed in Los Angeles," said attorney for the Bank of New York. "We have not yet made a decision whether to contest it."

The bankruptcy is a stunning reversal of fortunes for Epi Products, which is estimated to have posted $200 million in sales in 1989, largely on the strength of the Epilady depilator and a brilliant, big-dollar marketing campaign.

Since splashing upon the American personal products scene in 1987, the sisters Krok -- Sharon, 32, Arlene, 30, and Loren, 24 -- have been lionized in the media as savvy businesswomen and marketers extraordinaire, who planned a multi-products dynasty for the 1990s.

This January, the Los Angeles Times reported that the Krok sisters, variously and collectively, were "smart," "glamorous," "hip dressing," "workaholic" and were "down to earth" despite a "heady string of successes." Additionally, the company had "undeniable clout."

Instead, last week, Epi Products operated under protection of the federal bankruptcy code, had fired much of its staff, and had suffered the departure of two senior executives.

The Bank of New York, lead bank for a consortium including the Dayton, Ohio-based Bank One and The Daiwa Bank of Japan, has hired the downtown Los Angeles-based law firm O'Melveny & Myers to press its case in U.S. District Court in Los Angeles. Mark Samuels is lead lawyer for O'Melveny & Myers.

The Bank of New York alleged in federal court that the Krok family, including patriarch Solomon Krok and his brother Abraham, engaged in a massive fraud scheme, in which they "misrepresented assets, liabilities and overall financial condition of Epi Products, so as to include the Bank of New York to extend it loans aggregating nearly $25 million which are due and remain unpaid. This scheme was carried out through an intricate web of concealment and self dealing among defendants and various companies, foreign and domestic, that they controlled."

The Bank of New York further alleged that the Krok family "used Epi as a personal piggybank" and secretly diverted $20 million from Epi to fund such enterprises as a Broadway play, East Coast real estate ventures and an automotive device called "Quickwheel."

Last week the Kroks did not respond to calls or written requests for an interview, and referred calls to their New York law firm.

Also named as a defendant in the federal suit are brothers Harvey and Stan Ross, former senior Epi executives who departed the company this May. The Ross brothers, and Solomon and Arlene Krok "were the real brains behind the company," said a former company insider last week.

(Loren and another Krok sister, Bernice, are not named in the Bank of New York suit.)

The Epilady device, manufactured on a kibbutz in the Upper Galilee section of Israel, removes body hair by the roots, by gripping follicles with rotating springs.

Boosted by a massive $25 million advertising barrage, sales of the Epilady and other Epi products soared to an estimated $200 million last year, although some reports placed company sales as low as $130 million -- even so, a phenomenal figure for a start-up, 3-year-old enterprise.

Epi Products has introduced a plethora of new personal products under the Epi banner, none of which has matched the Epilady sales, including the controversial Epismile toothpaste, touted to brighten teeth. Some have complained the toothpaste may damage gums.

Other products include Episauna> a portable facial sauna, Epissage> a water-massager obliquely advertised as a fat-fighting device> and Epissentia, a line of skin care products.

Sales of the Epilady have possibly been slowed by an action by the State Attorney General of New York, which forced the Epilady to carry a warning that its use can lead to ingrown hairs and infections. Some women have complained that the Epilady hurts as it yanks out hair by the roots.

Pulling their hair out must be Bank of New York officials, who allege in their federal filing that the Kroks fraudulently misrepresented large multi-million expenditures on the Broadway play "Meet Me in St. Louis," and the Quickwheel device, as bona fide Epi Product advertising expenditures, thus threatening the repayment of $25 million in loans.

Alleged the bank, "The financial statements indicated that Epi's assets included prepaid advertising in the sum of $6.85 million at Oct. 31, 1989. In truth and in fact, the line entry reflected... sums...transferred to defendants Solomon Krok and Arlene Krok, which funds had been invested by them for their personal benefit in a limited partnership known as The New St. Louis Limited Partnership, formed for the purposes od producing a Broadway play."

The bank further alleged that $11 million, which the Kroks represented as having been expended to secure rights to distribute Epi products in Europe, was in fact transferred to Solomon Krok in 1989 to finance a limited partnership engaged in the "distribution of an automotive device known as Quickwheel."

The Bank of New York also alleged that from January 1989 through the present, the Kroks transferred $2 million out of Epi for individual and personal benefit, and for "direct payment of personal expenses (including personal credit card bills, other personal expenses, home mortgages) and exorbitant 'salaries' to the Kroks."

Former Epi consultants in Los Angeles last week were especially curious about the Broadway play. The production was panned by at least one reviewer: Kevin Kelly of the Boston Globe newspaper wrote, "In this day and age how could anyone possibly think about adapting the sog-sappy sweetness of the gummy old 1944 Vincente Minnelli movie?"

Kelly found the stage program notes better that the play, at least in terms of amusement, for it revealed that three "business-savvy young sisters -- Arlene, Sharon and Loren Krok -- introduced a revolutionary hair removal device to the U.S. called Epilady," one of several Epi products now "lending support to the theatre arts via 'Meet Me in St. Louis.'"

The play, put on at New York's Gershwin Theater, is no longer in production.

At 9 a.m. on Sept. 4, lawyers from Westside-based Manatt Phelps & Phillips, Epi Products former law firm, were ordered by a Los Angeles federal court judge to appear in the downtown offices of law firm O'Melveny & Myers, where they must produce Epi Products legal and financial documents in their possession, and answer questions under oath.

A lawyer at Manatt Phelps said the firm ceased serving as general counsel for Epi Products early this year, and that it no longer acted as custodian for the financial records.