Risk & Compliance

Standing By “Chainsaw Al”

Sunbeam's former CFO and CEO are targets of an SEC probe.
Lisa YoonNovember 30, 2000

It appears that Russell Kersh is standing by his man.

During the infamous, iron-fisted reign of Albert “Chainsaw Al” Dunlap as chief executive, Kersh served as Sunbeam Corp.’s vice chairman and CFO. Boasting of his exploits during the company’s meteoric rise, Kersh, who also acted as Dunlap’s henchman, called himself Sunbeam’s “biggest profit center.”

Now, however, with both men shorn of power and facing action by the Securities and Exchange Commission, they are being represented by attorney, Donald Zakarin.

Despite his harrowing fall from his perch as mighty first lieutenant to the celebrity CEO who practically air-lifted Sunbeam’s languishing stock to record highs, Kersh maintains a steadfast solidarity with Chainsaw Al.

In 1998, the two men were ousted five days apart by Sunbeam’s board. Shortly after that the SEC launched an investigation into Sunbeam’s accounting practices. Last week, the SEC finished its investigation and informed the Delray Beach, Fla.-based, small appliance maker that it plans to recommend action against both the company and Dunlap and Kersh.

To this day, there are analysts who believe that less-than-ethical accounting practices occurred. “Certainly, there were significant accounting irregularities going on while these two were CEO and CFO of the company,” says one analyst.

Such “highly questionable” practices include “booking the revenues before even shipping the product in order to boost sales-on-earnings results,” the source says. Other practices, he notes, though not necessarily illegal, were “fairly unscrupulous,” such as shipping excess products at cut-rate prices just to boost near- term results.

Further, in the 1999 tell-all book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (HarperBusiness, October 1999), about Dunlap’s relentless, unforgiving management style, BusinessWeek writer John A. Byrne describes Kersh’s deft accounting techniques, which included shifting $21.5 million from reserves into income in 1996—a move investors were unaware of until the following year, when the company restated its financials.

The move “enabled Kersh to disguise the company’s calamitous erosion in profit margins. It helped to cover up the deep discounts given to customers by Sunbeam to stuff and load the retail channels. Auditors later concluded that grill sales made under massive discounts, extended credit terms, and ‘bill-and-hold’ transactions inflated fourth-quarter sales by $50 million. Instead of reporting revenues that were up 26%, to $338.1 million, Sunbeam sales would have increased by only 7%.”

The two men insist they did nothing wrong. “They did not engage in any accounting or other improprieties,” says Zakarin, a partner at New York-based Pryor Cashman Sherman & Flynn.

“We believe that the original financial statements of Sunbeam were materially correct, and that if there were any errors of any kind in any of the financial statements, they were predicated upon information that both Dunlap and Kersh were entitled to and did reasonably rely upon,” the lawyer adds.

Zakarin goes on to suggest that the SEC simply went through the motions of an investigation with a particular outcome in mind. “Our view is that the SEC investigation was preordained. It reached a result that was prejudged, and [the SEC] proceeded in that fashion. I think that what they did was they proceeded to seek to confirm what they believed to begin with.”

The lawyer also believes the SEC’s evidence is flimsy at best: “They relied upon hearsay, rumor, and innuendo. I think they have evidence from people who don’t have any information,” which will ultimately be inadmissible. Dunlap and Kersh, in fact, “welcome the opportunity to vindicate their reputations,” he says.

Yet regardless of a courtroom win or loss, it will be difficult to vindicate the reputations of two men whose tactics are by now legendary. That’s thanks in large part to Chainsaw, for which Byrne compiled more than 250 interviews with Sunbeam and Wall Street insiders.

In addition to detailing the company’s financial troubles, even as Wall Street rewarded it with a climbing stock price, the writer chronicles the “trench warfare” of working for Dunlap, whose regime included ruthless firings and the imposition of nearly-impossible business goals. Others familiar with the Sunbeam situation, including the company’s general counsel of the time, David Fannin, declined to comment for this story. It seems the tie to his former CFO is the only one Dunlap didn’t sever.