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The lost years of Albert Dunlap

For the young executive, it must have appeared that his world was falling apart. He had landed a job running a company despite being fired by his previous employer. But then he was fired again, with the company's board accusing him of overseeing a huge accounting fraud.

Twenty years later, that executive, Albert Dunlap, was famous. As the chief executive of a major consumer products company, Sunbeam, he was firing thousands of workers and wowing Wall Street. His memoir became a bestseller.

Along the way, Dunlap erased both jobs from his employment history. No one who checked his background discovered the omissions.

But his soaring career soon crashed. He was fired by Sunbeam in 1998 and confronted with fraud allegations, accusations remarkably similar to the ones he had faced two decades before. In both cases, amazingly high profits were reported and used to justify big payouts to Dunlap, only to have auditors later conclude the profits were fictitious.

Neither Sunbeam nor the Securities and Exchange Commission, both of which claim he acted fraudulently, knew until now that Dunlap had faced similar allegations a quarter century ago. Those allegations are detailed in court records that the New York Times obtained from the National Archives, where they had been stored for years.

Dunlap declined to comment on whether he had misled employers about his employment history, said his lawyer, Frank Rizzano. The first fraud accusations, which Dunlap denied when they were made, were never proved, and Rizzano described them as "old and stale" and of no interest now.

Jerry Levin, who succeeded Dunlap at Sunbeam, disagreed. "We were shocked when we heard about this," he said. "I find it most unusual that anyone could be hired as a chief executive of a major company without having their background thoroughly checked," he added. "This seems to have escaped everyone's attention."

The similarities between Dunlap's early troubles and those he faces today are striking. At both the Nitec Paper Corp., a paper mill he ran during the 1970s, and Sunbeam, high reported profits led to lucrative deals for Dunlap. At Nitec, his bosses agreed to pay him $1.2-million. At Sunbeam, they agreed to double his base pay to $2-million a year.

"It is remarkably analogous to our situation," Levin said.

Like virtually all major companies seeking a senior executive, Sunbeam relied on an executive search firm to find a candidate. Daniel Margolis, a spokesman for Korn/Ferry International, said his firm "conducted an exhaustive search that resulted in the Sunbeam board's selection of Dunlap."

When asked how the firm had missed the holes in Dunlap's employment history, he said, "It is our policy not to comment on our clients' business issues."

Dunlap, 63, has denied any wrongdoing at Sunbeam and has taken the company to arbitration to force it to honor the contract he was given in 1998, months before he was fired. He also is preparing to defend himself in two court cases, one filed by Sunbeam shareholders and one by the SEC. Now living in Boca Raton, he has not taken a job since leaving Sunbeam.

Sunbeam has filed a bankruptcy reorganization plan that would hand the company over to its bank creditors, leaving nothing for shareholders or bondholders.

Early successes

Dunlap was 36 in May 1974 when he became president of Nitec, which operated a paper mill in Niagara Falls, N.Y. Six months earlier, he had been fired by Max Phillips & Son of Eau Claire, Wis., after just seven weeks. Phillips said Dunlap had neglected his duties and spoken so disparagingly of his boss that he hurt the company's business, court papers show.

At first, all went well at Nitec. Not only did the company report small profits in 1974 and 1975, but Dunlap shared Christmas dinner in both years at the home of Nitec's chief executive, George Petty.

Profits surged in 1976, and Dunlap was given credit. But his management style was grating, and on Aug. 30, 1976, he was fired by Petty, the company's principal owner.

Although he was fired, Dunlap left Nitec on excellent terms. The fiscal year that was to end a month later was expected to produce profits of almost $5-million. Petty agreed to have another company he controlled pay $1.2-million for Dunlap's stake in Nitec, a stake that had cost him a nominal sum.

But weeks after Dunlap departed, the audit team from Arthur Young concluded that there were no profits. Instead, a loss of $5.5-million was posted.

The auditors found evidence of expenses that were left off the books, of overstated inventory and non-existent sales. Nitec's books had overstated its cash by $201,700. Petty canceled the agreement to buy Dunlap's stock, and Dunlap responded by suing in federal court in New York. Nitec countersued, alleging fraud.

That case dragged on for years, as did a related case in which Nitec sought to force an insurance company to pay $2-million on policies it had issued, for $1-million each, to protect the company from misconduct by Dunlap and Nitec's former financial vice president, Albert Edwards.

Edwards at first denied wrongdoing, but later became the chief witness against his former boss.

Edwards testified that the books had been falsified on orders from Dunlap, who sometimes would tell him what false entries to make and sometimes would simply tell him how much profits had to increase in a month and leave Edwards to accomplish it.

"He would say, in substance, he wanted X dollars in profit, and go get it," Edwards testified in an account that strongly resembles the SEC allegations that Dunlap and his chief financial officer at Sunbeam falsified profits to meet Wall Street expectations.

"Did he tell you why it was necessary to show more profit than you were showing?" Edwards was asked in his deposition.

"Because we were not reflecting what we had forecast we would show," Edwards replied.

Dunlap testified he never told Edwards to do anything but report accurate numbers. The only time he asked that a number be changed, he said, was when he saw a profit figure that seemed too large and suggested it be checked. An error was discovered, Dunlap said, and the number was reduced.

Nitec management also claimed in court that the accounting fraud had masked serious operating problems. It claimed that a new production process, purchased from a company that had paid for a trip to Las Vegas for Dunlap, was responsible for a sharp decline in the quality of an important product, the toilet paper that Nitec made for the A&P grocery chain. A&P had canceled its purchases after complaining of poor quality.

Dunlap denied that process had lowered quality, and he said the Las Vegas trip had not influenced him.

Nitec said Dunlap's firing reflected conflicts with colleagues. "There were growing and increasing personal difficulties between Dunlap and the other senior members of Nitec's management," Petty said in papers filed in court. "These difficulties had become so serious that virtually all of Nitec's senior management below Dunlap threatened to resign en masse if Dunlap remained at Nitec."

Dunlap, in his deposition, said he had done nothing wrong. He never conceded that the profit numbers he had reported were incorrect, and disclaimed any responsibility if they were.

"I did not have a strong financial background," he said, adding that he received financial reports from Edwards and passed them on to Petty, sometimes without even reading them. How many did he read? "Maybe half, maybe a third," he said.

He dismissed Edwards' testimony as "outrageously false" and said he thought Petty was simply trying to depress earnings so he could buy Dunlap's stock for very little. Dunlap's lawyers suggested that the company had just taken an "accounting bath" by choosing to use different accounting methods.

The case dragged on for years, with Dunlap enduring 38 days of depositions. In 1982, Nitec filed for bankruptcy. The mill was seized by the city of Niagara Falls for non-payment of taxes and remained closed for years. It was reopened by Cascades Inc., a Canadian paper company, and now employs 140 people, a fraction of the 700 that worked there under Nitec.

Nitec's legal battles with Dunlap ended inconclusively. In July 1983, Nitec told the bankruptcy court that it would cost $600,000 to bring the case to trial, money the company did not have. The case was settled with Dunlap being paid $50,000, an amount far less than his lawyer's bills. The case seeking recovery from the insurance company was dropped.

Had the case gone to trial, Nitec would have faced some obstacles. Edwards testified that all the orders to alter the books had been oral and did not mention any documents directing alterations.

Dunlap had sued Max Phillips after he was fired, and that suit was more successful than his later one against Nitec. Phillips eventually agreed to pay him $55,000, which included $10,000 for breach of Dunlap's three-year contract, $30,000 for unspecified personal injuries and $15,000 for "all damages to Dunlap's reputation and good will in the industry." Max Phillips officials did not return phone calls seeking comment.

Growing reputation

By the time Nitec's bankruptcy case was closed in 1994, Dunlap had become CEO of Scott Paper, where he fired thousands of workers and gained a reputation as a determined cost-cutter.

After leaving Scott, he wrote his autobiography, Mean Business, which became a bestseller after he joined Sunbeam. "Most CEO's are ridiculously overpaid," he wrote in the book, "but I deserved the $100-million I took away when Scott merged with Kimberly-Clark."

The book discussed his time at Sterling Pulp and Paper, where he worked before Max Phillips, and at American Can, which he joined after being fired from Nitec. It did not mention Max Phillips or Nitec.

Scott retained Spencer Stuart, an executive search firm, to help it find a new chief executive. Like Korn/Ferry two years later, Spencer Stuart missed the omissions in Dunlap's employment history.

Asked about its work, Spencer Stuart issued a statement. "Mr. Dunlap made no reference to holding any jobs between working for Sterling Pulp and Paper and American Can," it said. "If, in fact, he was employed by others during that period, he concealed that information from us."

The firm added that it had talked to many people who had worked with Dunlap at previous jobs, but "did not believe that his record prior to American Can was relevant to the Scott Paper assignment." The firm continued, "We are confident that the portrait we developed and presented to Scott Paper reflected his pertinent experience and executive talents."

(text accompanying chart not provided for electronic library, see microfilm)

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