For Retail Chain, a $32 Million Bummer

Blue Holdings has been part of a career comeback for Guez, whose Sasson Jeans Inc. landed in bankruptcy in the 1980s. He overcame a series of legal problems, including charges that he assaulted federal marshals and threatened to kill the judge overseeing Sasson's bankruptcy reorganization. After spending time in jail and going into drug rehab, he was acquitted of those charges in 1988, according to news reports.

The merger collapsed while Long Rap was in court trading accusations with its former controller, Michael R. Rosella, who was fired in April.

In May, an attorney for Rosella sent Long Rap a letter alleging that Rosella was fired for refusing to go along with financial improprieties at the company. The letter, which threatened legal action, spelled out conditions for a settlement, including $210,000, which represented two years' salary, "and a representation by Long Rap to all inquiries that Mr. Rosella works for Long Rap, until he finds comparable employment."

On June 1, Rosella's attorney, Lynne Bernabei, sent attorneys for Long Rap a draft of a potential lawsuit.

Several days later, Long Rap sued Rosella for more than $1 million in D.C. Superior Court, alleging that he "failed to adequately perform his duties." The suit claimed that, as of his firing in April, Rosella had not provided a package of financial information to Long Rap's outside accountants for the fiscal year that ended Jan. 28 -- an accusation Rosella denied in an interview.

Rosella countered in July with a lawsuit against Long Rap, Rendelman and Ezrailson. He alleged that the company fired him "because he refused to manipulate Long Rap's financial statements to make Long Rap's finances look better than they actually were" and "repeatedly insisted that Long Rap and Messrs. Rendelman and Ezrailson comply with federal tax and criminal laws."

Rosella subpoenaed records from a subsidiary of Blue Holdings. In a court filing, a subsidiary -- represented by lawyer Dale Cooter, who also represents Long Rap -- a lawyer representing both Long Rap and the subsidiary called the subpoena "a transparent attempt by Plaintiff to interfere with the proposed" merger.

"As far as I'm concerned, Mr. Rosella's complaint is frivolous and a transparent attempt to shake down the principals of Up Against the Wall," said Dale Cooter, an attorney for Long Rap.

"As far as I was concerned, the threat of this lawsuit was the legal equivalent of an act of terrorism, and we don't negotiate with terrorists. We shoot them," Cooter said.

In a court filing, Long Rap confirmed that Rosella expressed concerns to Ezrailson about the postdating of checks and that he protested directions to make personal income tax payments for Rendelman and Ezrailson out of the company payroll. The company denied that Rosella was directed to do anything illegal.

Long Rap's financial records were in such a "shambles" that the company had to spend time and money putting them in order for an audit associated with the planned merger, Cooter said.

"Our inability to produce records . . . may well have caused the due diligence to take so long the contract expired" for the merger, Cooter said. The audit was "clean," Cooter said, citing a draft opinion from the auditor.

Andrew Greenebaum, a spokesman for Blue Holdings, said the merger was called off because "the timing was not ideal." He said that as far as he knew the litigation was not a factor.