Mera Chung had known for weeks that her 30-year career in
retail was coming to an end. But Chung, a vice president of design for
Crazy 8, a division of Gymboree Group Inc., wasn’t prepared for what CEO
Shaz Kahng and human resources chief Bridget Schickedanz would tell her
late on a Wednesday afternoon in mid-January.
They had called Chung in to inform her of an imminent bankruptcy
filing, Gymboree’s second in two years, which would accompany the
liquidation of two of the company’s three brands, including Crazy 8,
which caters to lower-income parents. Chung was ready for that; the
closure of Crazy 8 was announced in December, and the bankruptcy was
long rumored. But then Schickedanz dropped the bomb.
“She said, ‘We had to make some other decisions and you’ve been
impacted,’” Chung explains. “‘We had to terminate the severance plan.’”
The severance plan, according to Chung and two of her close friends,
was a key reason why she decided to move to Gymboree from Old Navy five
years earlier. The retail sector’s volatility has boiled over recently,
with rapid-fire bankruptcies and store closures emptying malls across
the country, much of it driven by private-equity firms busting out
otherwise profitable companies. But Chung, a single parent caring for an
elderly father, came to Gymboree because she knew she’d be due a year’s
worth of salary if the company ever went belly-up.
Instead, on the same day as the bankruptcy filing, Gymboree’s board
triggered Article VII of the severance plan, a self-destruct button that
enabled the company to terminate the plan “at any time in any respect”
via a majority vote from the board of directors. As a result, none of
the roughly 400 staff members at Gymboree headquarters in San Francisco
would receive severance, to say nothing of the nearly 10,000 clerks at
800 Gymboree and Crazy 8 locations, who would now be managing
going-out-of-business sales without the promise of assistance in the
aftermath.
Kahng told Chung that there just wasn’t enough cash available to pay
severance. But Chung said she had information, which she would later
share with the U.S. bankruptcy trustee overseeing the case, that at
least a few executives would leave Gymboree with golden parachutes.
A few weeks earlier, she had learned about a confidential deal
between the board and eight members of Gymboree’s executive leadership
team. According to Chung, those executives received paper checks with a
“retention bonus” equal in value to their severance payouts. The board,
which includes representatives from hedge funds and private equity
firms, told the executives to deposit the checks immediately. Bankruptcy
experts often call this type of payment a “disguised severance.”
Chung heard this firsthand from one of the bonus recipients. Chung
had an equivalent title to most of the members who she was told received
the bonuses, but she was left out. She would later tell the bankruptcy
trustee in a letter that she watched as four of those bonus recipients
jetted off to the Sundance Film Festival, just days after Gymboree
declared bankruptcy.
In the meeting, Chung had asked, “What about the retention bonuses
the others have, including you?” referring to Schickedanz, a member of
the executive leadership team. Kahng would only reply, “That is not an
appropriate question and I will not comment on it.”
Chung said she had replied, “The answer is what’s not appropriate.”
Gymboree, founded in 1976, is on its way to history.
Children’s Place, a rival retailer, paid $76 million for the rights to
the Gymboree and Crazy 8 brands, and the Gap is purchasing Gymboree’s
139-store luxury chain, Janie and Jack. But the disguised severance
maneuver Chung has alleged reveals how in corporate America, the winners
at the top can win even in failure. And nobody else is safe — certainly
not the line-level workers, but not even vice presidents like Mera
Chung.
The Intercept has reviewed documents confirming the termination of
the severance plan on the day of the bankruptcy. Chung made her
allegations about the disguised severance to friends, attorneys, and
bankruptcy officials in the weeks after Gymboree’s filing, according to
interviews and documents. And Julie Thompson, a vice president of
product integrity and compliance for Gymboree, also said in a separate
interview that bonus payouts were made to the executive leadership team.
Moreover, Chung alleged to the trustee that Gymboree underreported
the extent of the retention bonus payments in a filing with the
bankruptcy court. In that filing, Gymboree acknowledges “discretionary
bonus payments of $270,000 to two employees,” but Chung asserts that
eight executives received bonuses totaling an estimated $2.1 million.
Gymboree, its executives, and board members have failed to respond to
numerous requests for comment through email, phone, and LinkedIn. Calls
to the company’s media relations department have gone directly to
voicemail. Three calls to personal cellphones of members of Gymboree’s
executive leadership team were answered, but the individuals refused to
comment.
The situation at Gymboree echoes other recent retail bankruptcies in
which executives got a king’s ransom while everyone else got a firm
handshake. Toys “R” Us and Sears were approved for millions in executive
bonuses, a fact that has enraged advocates for line-level workers.
“These are the same handful of people who couldn’t run our company
successfully, and they’re being rewarded while everyone’s severance is
taken away?” asked Lily Wang, deputy director for Organization United
for Respect’s Rise Up Retail campaign.
You can make a case for retention bonuses for top executives in some
bankruptcies. They are usually justified as a way to keep the leadership
from decamping to other jobs as soon as the bankruptcy is filed. “The
rationale is by giving good people retention bonuses so they will stay,
the company will have much greater likelihood of reorganizing and
getting back on its feet,” said Brett Weiss, a bankruptcy attorney in
Maryland.
But in this case, Gymboree was knowingly liquidating most of its
business before the bankruptcy was ever filed, making retention bonuses
less urgent. “This was a liquidation chapter 11, the executives are not
going to be in these positions a year from now,” Weiss said. “Maybe they
said, ‘How can we get more money out without having the trustee claw it
back? What’s the greatest number of people we can do this for without
raising red flags? How about the executive leadership team?’” Gymboree’s
lawyers in the bankruptcy case did not respond to a request for
comment.
Moreover, while some executives do need to be in place to wind down
operations, the alleged bonuses were not uniformly given to executives
who had that role. For example, the VP of marketing allegedly got a
bonus, even though marketing operations effectively ceased. Meanwhile,
Thompson’s job involved regulatory compliance, which any retailer still
selling products (even in a going-out-of-business sale) needs to
maintain. Yet she was denied a bonus and fired without severance.
The situation has left Chung devastated. “Me and this other woman
were the altar sacrifices for the others to get paid,” she says. “People
have to understand how vulnerable they are.”
Chung was recruited to Gymboree five years ago by her former
boss at Old Navy, where she was the vice president of kids and baby
clothing design. She was told that she would have the run of an entire
brand, the low-price Crazy 8. “It was their only brand that was
relevant,” Chung says. She took the job.
At the time, Gymboree was under the control of Bain Capital, Mitt
Romney’s old private-equity firm. The private-equity business model
involves engaging in buyouts with borrowed money and putting that
mountain of debt on the company it purchases, all the while extracting
profits from the company through management fees. Few companies,
particularly in the high-risk retail sector, can deal with such a debt
burden — it makes it difficult to invest in stores, personnel, or better
products.
Chung says this showed in how Gymboree ran the business. “Instead of
investing in creative talent, they promoted design and merchandising
from within,” she says. “Merchandisers became complacent with wanting
product they knew would sell from the year before. There were years upon
years of awful clothes with poodles and trucks on them.” She also
complains that Crazy 8 had no marketing budget, and her work to break
with standard fare was practically hidden.
By 2017, Gymboree couldn’t hold out any longer and went into
bankruptcy. The business was put in control of its largest creditors,
who were private equity and investment firms. The seven-member board
included then-CEO of Gymboree, Daniel Griesemer; Ron Beegle, CEO of
investment consultant Carriage House Capital Advisers; Matt Perkal, a
partner at hedge fund Brigade Capital Management; Brian Hickey from
mutual fund firm OppenheimerFunds; and Eric Sondag, a partner at
private-equity firm Searchlight Capital, who was made board chair. Other
members of the board were not disclosed, and since Gymboree is not a
public company, they have no requirement to do so. Apollo Global
Management, Marblegate, Nomura Securities, and Tricadia Capital
Management also had a share of the company.
Though Gymboree emerged from bankruptcy in decent financial shape,
Thompson described the new board as uninterested. “There was zero
involvement in what was going on day to day,” she says. “They just let
the CEO do whatever he wanted.”
Griesemer decided to invest in a complete redesign of Gymboree’s
clothing line. It was a high-cost gamble off the bankruptcy, and it
failed; when the new clothes hit stores last summer, parents called them
“complete garbage.” Says Thompson: “I started paying attention to
sales, and I was like, ‘Oh my god, this is so bad.’ It was negative 20
to 30 percent [compared to the previous year] every single day.”
By November, Griesemer was fired, and Kahng, the new CEO, came in.
She had started her career as a food scientist at Kraft and was an
independent member of the board prior to being named CEO, according to
her LinkedIn page.
“She thought they were going to try to rehab the brand, that this was
her career-defining moment,” Chung says. She described one meeting in
which Kahng pronounced that Gymboree needed to be a “disruptor” like
Apple. “She said, ‘What does every parent experience?’” Chung recalls.
“‘Every parent in the world feeds their child strained carrots. When my
children were babies, there were carrot stains on everything. We could
do something so simple, an orange bib.’ She was 100 percent serious. I
barely got through the meeting.”
The disruption didn’t take. By early December, the company announced
that it would shutter all Crazy 8 stores after the holidays and
significantly reduce the Gymboree footprint. Chung says that in the
month after the announcement, Kahng never formally addressed Crazy 8
employees, leaving them confused about their roles. If the brand was
closing, there was no need to design or purchase product for the next
season. “My team of 20 said, what do we do?” Chung recalls. “They said
keep showing up until further notice. They didn’t want to let us go
because then they would have to pay severance.”
The Gymboree management severance plan was not a package negotiated
individually. It was an employee benefits plan, established under the
auspices of the Employee Retirement Income Security Act. This has become
popular, particularly with large companies, says Jim Keenley, an ERISA
attorney in Berkeley, California. The statute provides protections to
workers if they aren’t given what’s promised in the severance plan. It
offers no protection, however, if the plan is terminated.
“It’s an illusory contract,” says Keenley. “It’s very common for
severance plans to have language in them that say, here’s your severance
but we can take it away at any time for any reason.” No advance warning
is needed for termination, under current law. While retirement benefits
under ERISA are better protected, severance plans are considered a
welfare benefit, and the funds do not vest.
So employees have no recourse if a termination occurs. And most of
them don’t read the fine print allowing companies like Gymboree to pull
that trigger. “I didn’t have anyone look at it,” says Thompson. “I was
naïve.”
Both Thompson and Chung were told after the 2017 bankruptcy that the
severance plan remained active. And both sought further assurances after
it was clear that Gymboree would slide into bankruptcy again. Chung
says she had asked three colleagues — the general counsel, the VP of
human resources, and the general manager of her brand, Crazy 8 — whether
her severance would be honored. None gave a straight answer. But
Thompson said that when she approached the general counsel, Kimberly
MacMillan, in early January, MacMillan reassured her, “Don’t worry, we
will file it as a first-day motion.”
In bankruptcy-speak, MacMillan was saying that the severance plan
would be one of the payouts that Gymboree would seek to get approved
when it filed. Pending court approval, all employees eligible for the
severance plan would be compensated. The severance plan was approved in
the 2017 bankruptcy, so Thompson trusted MacMillan that the same would
happen the second time around. “I had good working relationship with
[MacMillan],” Thompson says. “She fucking lied to my face.”
MacMillan, in a short phone call with The Intercept, said that “we
[Gymboree employees] follow a strict no-comment policy” with the media,
and hung up.
Around the same time, Chris Lu, general manager of Crazy 8, was
commuting home with Chung. “She would always disclose things to me, she
would blab them to me,” Chung says. In her letter to the trustee, Chung
writes that Lu told her that members of the executive leadership team
were “paid their severance,” after demanding assurances from the board
of directors. The board arranged for a “retention bonus contract” in the
amount of the severance pay. “She said I couldn’t tell anyone about
it,” Chung recalls. “I said, ‘Why did you tell me that if I cannot say
anything?’”
In a brief phone conversation with The Intercept, Lu would only say, “I can’t talk to you. … I’m going to hang up now.”
According to Chung’s trustee letter, members of the executive
leadership team who may have received retention bonuses included Lu,
MacMillan, Schickedanz, Chief Financial Officer Jon Kimmons, VP of
Information Technology David Sondergeld, VP of Logistics Dana Todorovic,
VP of Sourcing Patricia Lesser, and VP of Marketing Parnell Eagle.
Those in the “next level down” like Chung were left out, even though she
had the same VP title as several of the recipients. Chung and Thompson
were not formally part of the executive leadership team.
Thompson had also heard about the not-so-secret retention bonuses.
“Nobody officially told me, but I heard rumors,” she says. She talked it
over with Chung just before the bankruptcy. But when Thompson asked
MacMillan about the executive leadership team meeting with the board,
MacMillan told her that she couldn’t comment on it.
Both Thompson and Chung were told about the severance termination on
the same evening. That day, everyone in the office figured out who was
being let go, because human resources had cleared out the layoff
victims’ time-off balance from the payroll processing system. “Everyone
compared notes, mine’s not cleared out, mine is,” Thompson says.
“Everyone zeroed out is going to get let go. Mine was zeroed out at end
of Wednesday.”
Thompson was told by phone that she would be terminated without
severance. Kahng, who as CEO was also a member of the board, told her
that “it wasn’t our decision. Goldman Sachs is running the show now, we
couldn’t do anything about it.”
Goldman Sachs was the lead creditor on Gymboree’s remaining loans,
which it used for cash flow. The investment bank was the first in line
to get paid from the bankruptcy. “It’s like when you get on an airplane —
Goldman was group 1,” says Chung.
The next day, staff was packed into a tiny conference room. Chung
decided to wear a vintage Sex Pistols T-shirt to the meeting with the
words “No Future” scrawled on the front. Schickedanz, the human
resources chief, read a prepared statement through tears. Everyone had
to turn in their ID badges, laptops, and corporate credit cards, and
vacate the building by the end of the day. Employees would get their
last paycheck and paid time off, and that was it.
Schickedanz, in a phone call with The Intercept, said, “Oh, I thought
you were someone else calling. … I’m going to jump off [the phone],”
and hung up.
One employee, Katherine Pocrass, filed a class-action lawsuit against
Gymboree, alleging that the company did not provide 60 days’ advance
notice of the mass firing, as required under the Worker Adjustment and
Retraining Notification Act. Attorneys for that case did not respond to a
request for comment.
The WARN Act case is ongoing, and Chung would be eligible to be a
member in the class-action, which could yield up to 60 days of back pay.
But her severance was for a year.
Chung says she met with 17 different attorneys seeking legal
recourse for her full severance. Each of them said that while Gymboree’s
actions were unconscionable, they were technically legal; the severance
plan entitled the company to terminate at any time. Eugene Pak, a
business litigator in the Bay Area, said that the situation struck him
as “unethical.” Added Keenley, the ERISA attorney: “I think Mera felt
that it was unfair. … I’ve been looking for ways to find that it was not
lawful, but I have not found them.”
Ron Tyler, a friend of Chung’s and a law professor at Stanford, provided her with several legal contacts. “I think her devastation comes from the fact that she, after very carefully and persistently creating this extremely successful career, to have it end so dramatically and intentionally by her company,” Tyler says. “And she saw the writing on the wall. Had it not been for that [severance] agreement, she would have left before.” Shortly after the bankruptcy, Chung felt an even deeper sting. One of the lawyers she consulted asked how many employees worked at Gymboree headquarters, and so Chung put the question to Lu. “She was laughing and said, ‘I’ll call you when I land, I’m going to Sundance,’” Chung says. Chung wrote to the trustee that Lu and three other members of the executive leadership team — Tricia Lesser, Shelly Walsh, and Parnell Eagle — had decamped to the Sundance Film Festival, weeks after being given a retention bonus to stay on at Gymboree. Thompson corroborated that Gymboree executives were at Sundance, though she didn’t name names. READ MORE: https://theintercept.com/2019/03/25/gymboree-bankruptcy-severance-scam/
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