Reference no: EM13480138

Merry -Go -Around (MGR) a clothing retailer located primarily in shopping malls, was founded in 1968. By the early 1990s, the company had gone public and had expended to approximately 1,500 stores, 15,000 employees, and 1 billion in annual sales. The company location in the malls targeted the youth and teen market. The company was listed by Forbes magazine as one of the 25 companies in the late 80s. However, in the early 90s, the company faced many challenges. One of its co-founders died and the other left to pursue unrelated business interests. The company faced stiff competition from other retailers ( eg, The gap, and banana republic), fashion trends changed and mall traffic declined. Sales fell, and experts speculated that MGR failed to anticipate key industry trends and lost sights of its customer markets. To try to regain and its strong position, the company acquired Chess King, inc. a struggling chain of men's clothing stores located in malls, in 1993.

The company's continued to fail, and later in 1993, it brought back one of its cofounders to manage the company and wrote down a significant amount of inventory. However, this inventory write down caused the company to violate loan covenants. Facing bankruptcy, the company, based on the advice of its newly hired law firm Swidler and Berlin, hired turnaround specialists from Ernest and Young (and Berlin, hired turnaround specialists from Ernest and Young and Berlin, hired turnaround specialists from Ernest and Young (E & Y) to help overcome the financial crisis and develop a long term business plan. However, the company declined continued, and it filed for reorganization in 1994. In 1996, the remaining assets were sold for pennies for a dollar.

Subsequently, a group of 9,000 creditors (including former employees and stockholders) began litigation against parties it deemed responsible for their loses. These parties included E & Y, which the creditors sued for $4 billion in punitive and compensatory damages (E & Y's fees from MGR totaled $4.5 million.

Merry Go Round additional charges made against E&Y included the following (recall that MGR hired E&Y for turnaround consulting services);

· A. E&Y had a close relationship with Rouse co. one of MGR's primary landlords (E&Y was soliciting business from Rouse and provided significant tax services).

· B. Swidler ( the law firm that recommended E&Y to MGR) and E&Y had participated in at least 12 different business arrangements some of which resulted in Swidler receiving significant fees from E&Y

· C. E&Y did not disclose either of these relationships to MGR.

REQUIRED:

A. 1. Do you think that E&Y acted unethically given that it had these relationships?

B. 2. How could these relationships have affected E&Y's advice to MGR? in other words, refer to the charges above and speculate as to whether any of these charges against E&Y may have stemmed from the relationships described above.