Kitson Founder Files New Lawsuit

Legal

As of Thursday, August 31, 2017

Retailer Fraser Ross filed a lawsuit in July against its former executive Christopher Lee, lender Salus Capital Partners LLC, HGI Asset Management Holdings LLC and Spencer Spirit Holdings LLC.

The suit, filed in Superior Court in California, is the latest in a series Ross has filed regarding the unexpected closure of the Kitson retail chain two years ago. Ross founded Kitson in 2000 on LA’s Robertson Boulevard and over the years grew the business into a 19-store chain with an e-commerce business. In December 2015, the business announced plans to shutter all stores. Ross told the California Apparel News in 2016 that he was no longer with the business at the time of the chain’s closure. Ross has since opened a new retail store, Kitross, in the same location on Robertson Boulevard as the original Kitson.

The latest lawsuit details Ross’s account of the events that led up to Kitson’s closure, including a “life-threatening illness” Ross suffered in 2012 “that left him in a medically induced coma and required years of recovery and rehabilitation.”

During that time, according to the lawsuit, Lee, Salus and Spencer’s “seized on [Ross’s] illness as an occasion to prey upon [Ross], steal his money and ruin his business.”

Among the charges in Ross’s complaint: that Lee and Salus “conspired” to “rob [Ross] of more than $2 million of his own personal funds,” which Ross had loaned the company to pay down Kitson’s line of credit, according to the suit.

The suit also alleges that Salus and Spencer’s “quadrupled orders to Kitson’s vendors and even opened a new, 9,000-square-foot store in Fashion Valley [in] San Diego just three weeks prior to shutting down every boutique nationwide—all in a guise to lead vendors to believe they would be paid.” Describing this as a “pump and dump” scheme, the suit alleges that Salus and Spencer’s “refused to pay the vendors for their merchandise and profited off the stockpiled merchandise in the liquidation.”

Ross’s lawsuit further claims that Salus loaned Kitson money “without the commercial lending license required under California Financial Code.”

Salus had issued a $15 million revolving line of credit in May 2013, the suit states. Salus is a subsidiary of the Harbinger Group/HGI, which is named in the suit because HGI, which was funding Salus, “provided no more capital to Salus for its loan portfolio” after Salus’s “largest borrower, Radio Shack,” filed bankruptcy, the suit states.

According to the lawsuit, Salus brought in Spencer’s in mid-2015 to “improve its security position” as a secondary lender and ‘infuse an additional $4 million into Kitson.” The suit claims Spencer’s also “had no California lending license.”

Spencer’s then installed its own personnel at Kitson, the suit states. Kitson employees were told “they could not pay vendors for merchandise without approval from Spencer’s personnel,” according to the suit.

Kitson closed all doors in early 2016 after a series of liquidation sales.

The lawsuit lists “numerous examples of Salus and Spencer’s stockpiling high-value goods to inflate the company inventory, when such merchandising decisions made no sense for Kitson from a sales standpoint.” For example, according to the lawsuit, “Salus and Spencer’s amassed an excess of designer sunglasses in the middle of winter, when sunglasses were obviously summer merchandise.”

According to the lawsuit, Salus and Spencer’s actions have “resulted in severe reputational and financial harm to [Ross].” Since returning to retail with the opening of Kitross, Ross said vendors have “either refused to furnish merchandise to Kitross or required [Ross] to pay thousands of dollars in upfront costs for the merchandise—all before it is sold,” the lawsuit states, continuing, “the vendors believe they will be burned by Kitross because they associate [Ross]’s new boutique with Salus and Spencer’s fraudulent ‘pump and dump’ scheme at Kitson.”

The lawsuit includes examples of complaints and comments Ross has received from vendors regarding the association between Ross and Salus and Spencer’s.

Ross originally filed the lawsuit in 2016. At that time, Lee said in court papers that he denied the allegations in the lawsuit and that he is not legally liable for the loss and damages alleged by Ross.

The current amended complaint was filed in July and named Salus Capital Partners, HGI Asset Management Holdings and Spencer Spirit Holdings as defendants. The court has given the companies until Sept. 12 to respond to the charges.

Calls to Spencer Spirit Holdings’ office in Egg Harbor Township, N.J., HRG’s investor-relations department and emails to attorneys for Salus, HGI, Spencer Spirit and Lee were not returned at press time.