Iconix founder accused of 'dirty deals' at fraud trial

The federal court building at 500 Centre Street is pictured in the Manhattan borough of New York
REUTERS/Carlo Allegri

(Reuters) - The criminal trial of Iconix Brand Group Inc founder Neil Cole began on Wednesday in Manhattan federal court, with prosecutors saying Cole used "secret dirty deals" to commit accounting fraud.

Assistant U.S. Attorney Noah Solowiejczyk said during opening arguments that Cole used joint venture agreements in 2013 and 2014 to inflate Iconix revenue by $13 million, and then misled auditors and the U.S. Securities and Exchange Commission.

"Everyone who could have stopped this fraud was kept in the dark," he said.

Cole, 64, was charged in December 2019 with inflating the deals and agreeing to later reimburse the partner company through sham consulting or marketing fees.

Lorin Reisner, an attorney for Cole, told jurors the three deals at issue were the product of tough negotiations over joint ventures with Hong Kong-based global supply chain company Li & Fung Ltd.

"These were not sham transactions. They involved real assets," and generated "real profits" for Iconix, he said.

Reisner said that Cole had no reason to question the deals, which were reviewed by accountants and lawyers.

Jurors also heard testimony from former Iconix chief operating officer Seth Horowitz, 45, who pleaded guilty and is cooperating against his former boss.

Horowitz said Cole, who stepped down in 2015 after 10 years leading the company, referred to joint ventures as a "drug" that the company was addicted to in an attempt to make up for flagging profits on traditional licensing deals.

Horowitz testified on Wednesday that he and Cole had "a very high pressure, 'how do we make a deal, how do we get these numbers' mentality" regarding revenue and earnings numbers.

As they worked to beat prior year revenues in the second quarter of 2014, Horowitz said Cole told him about a $5 million increase in the price Iconix would receive for an amended joint venture.

Cole said Iconix would later pay the amount back as marketing fees, but instructed Horowitz not to tell the company's in-house lawyers, he said.

"By leaving that out, it was wrong, it was inaccurate," Horowitz said.

The trial before U.S. District Judge Edgardo Ramos is expected to resume on Thursday and last three weeks.

Iconix paid $5.5 million in 2019 to settle with the SEC over alleged accounting violations, which the company neither admitted nor denied.

Lancer Capital took Iconix private in August.

The case is United States v. Cole, U.S. District Court, Southern District of New York, No. 19-cr-00869.

For Cole: Lorin Reisner, Richard Tarlowe and Andrew Reich of Paul, Weiss, Rifkind, Wharton & Garrison

For the government: Scott Hartman, Andrew Thomas and Noah Solowiejczyk of the Department of Justice

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Thomson Reuters

Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com