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The Shadow Across L'oreal


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THE SHADOW ACROSS L'OREAL

It's a rainy afternoon in an old-fashioned Paris apartment. The Eiffel Tower is in view from the tall windows adorned with heavy brocade drapes. Jean Frydman, a French businessman, is holding forth on his favorite subject, his protracted battle with L'Oreal, France's prestigious cosmetics giant. "I cannot stand the idea that they will win," says Frydman, spitting out his words in English. "After what they did to us. Hiding Nazis. Doing the [Arab] boycott. And finally, that nothing will happen to them. It is impossible to accept."

The bitter feud erupted in 1989, when Frydman left a joint venture that he, his brother David, and L'Oreal established the previous year. According to Frydman, he was ousted by L'Oreal as part of an elaborate effort by the company to get itself removed from the Arab boycott blacklist. The list consists of companies prohibited from doing business with Arab countries because of their business ties to Israel. L'Oreal was put on the blacklist because it had owned a Helena Rubinstein plant in Israel. Frydman, who is a citizen of Israel as well as France, says he was dismissed to appease the Arab boycott office in Damascus. He says L'Oreal owes him $31 million for his stake in Paravision International, the joint venture. Frydman says he wants to use the money to bring down the boycott.

"BETTER TERRAIN." But that's only his side of a complex, shadowy story, with roots deep in French politics and Mideast intrigue. Many sources--including some in Israel--call the 68-year-old businessman a bogus crusader who is using a fight for the Israeli cause to help his own cause: getting a big settlement. Still, many of his charges have been corroborated by documents and a French commission's findings.

And even if he is acting from self-interest, Frydman is raising far-reaching and potentially embarrassing questions about the practices of a corporation that is a preeminent symbol of France's postwar business success. Combining acute market savvy with biotechnological prowess, L'Oreal is one of France's most successful international players. Yet Frydman's allegations suggest a darker image, for L'Oreal's predicament is an unpleasant reminder of France's collaborationist past in World War II.

Now Frydman is bringing his dispute with L'Oreal to the U.S. On Feb. 2, he filed a lawsuit against the company in New York State Supreme Court alleging conspiracy, fraudulent misrepresentation, and bribery. His suit asks for $100 million, which includes damages. He has hired Stanley S. Arkin, an aggressive lawyer, to pursue the litigation and Kekst & Co., the public-relations firm, to stir up media interest. "In France, we are fighting a Goliath. In America, we feel we have better terrain," says Frydman.

He is also pushing the U.S. Commerce Dept. to launch a probe, which could mobilize American Jews and others to shun L'Oreal's skin creams and shampoos. His campaign has the potential to become the most damaging Arab boycott case since Baxter International suffered a customer backlash and a $6.5 million fine in 1993. It could be especially harmful to L'Oreal because the cosmetics giant--whose brands include Lanc me and Ralph Lauren Safari--is launching an all-out assault on the American market, to retain its title as the world's biggest cosmetics company, with $1.2 billion in U.S. sales in 1993. (BW--Jan. 17). Frydman's campaign could also hurt Swiss food giant Nestl , one of L'Oreal's biggest shareholders--and a target of consumer boycotts.

L'Oreal declined to respond to questions from BUSINESS WEEK. According to attorney Stanley J. Marcuss, a partner with Bryan Cave in Washington, D.C., who represents L'Oreal, the company does not want to try the case in the press. He would comment only on a few points. "L'Oreal believes strongly any effort to dress up this case in the guise of discrimination or Arab boycott compliance is totally wrong," he says. "This case is an ordinary commercial dispute about the value of Frydman's investment in Paravision."

"L'Oreal has said many times that it has not complied with the Arab boycott against Israel," says Marcuss. "I am aware of no evidence to support any such charge." Further, Marcuss provided court documents showing that a French judge in November, 1992, dismissed charges Frydman had brought against L'Oreal involving his departure from Paravision. Says Marcuss: "The judge concluded, based on an exhaustive investigation, that there were no charges to be brought." L'Oreal has filed slander charges against Frydman.

Of all the troubles Frydman is stirring up, the most serious would be a U.S. Commerce Dept. action. In May, 1993, Frydman's son Gilles gave Commerce exchanges of letters between L'Oreal and the Arab boycott office. Commerce enforces laws prohibiting U.S. firms from cooperating with the Arab boycott. While Commerce doesn't have jurisdiction over L'Oreal, it could launch an investigation into Cosmair Inc., L'Oreal's U.S. distributor, 70% owned by Nestl . Frydman says Cosmair led L'Oreal's efforts to get off the blacklist. "If the allegations raised against Cosmair by the Frydman suit are true, they would warrant criminal proceedings under the Export Administration Act's antiboycott provisions," says Joseph Kamalick, editor of the Houston-based Boycott Law Review and an Arab boycott expert.

A Commerce official won't confirm or deny whether it is investigating Cosmair or L'Oreal. Yet Commerce is interested in the matter, says Will Maslow, general counsel of the American Jewish Congress, who has spoken to Commerce officials on behalf of the Frydmans.

The L'Oreal-Syria correspondence, which was ordered seized by a French judge from L'Oreal headquarters, was given to BUSINESS WEEK by the Frydmans. Cooperation with the Arab boycott is not uncommon in Europe. But the letters and internal memos appear to reveal in unusually overt detail the lengths to which L'Oreal went to comply with Arab demands to get off the blacklist. The Arabs' central demands were that the company shut down its Helena Rubinstein manufacturing operations in Israel, remove the Helena Rubinstein name from all subsidiaries worldwide, and replace their boards of directors. The documents indicate that L'Oreal carried out the demands, and manufacturing of Helena Rubinstein products in Israel was halted in 1988. L'Oreal declined to comment on the documents received by BUSINESS WEEK.

In November, 1993, a French commission concluded that L'Oreal had cooperated with the Arab boycott, findings that L'Oreal disputes. Ehud Kaufman, director of the international division of the Israeli Finance Ministry who has studied the matter, agrees that L'Oreal "reached an arrangement to get itself off the [Arab boycott] list."

L'Oreal confirms that Helena Rubinstein products are no longer made in Israel. However, the company insists that ending production was part of a broad strategy to consolidate production worldwide and close small plants, which it has done in 14 other countries. And L'Oreal says it's company policy not to allow a distributor or subsidiary to name itself after a brand.

NEW RELATIONSHIP. L'Oreal now imports L'Oreal products into Israel through Interbeauty, its prime distributor that was once Helena Rubinstein Israel, confirms Gad Propper, Interbeauty's president. "The change from a production relationship to a distribution relationship occurred for reasons that had nothing to do with the boycott," says Marcuss. "There wasn't any diminution of L'Oreal's relationship with Israel."

The L'Oreal-Syria documents are not clear about Cosmair's involvement in the boycott. Frydman claims Jacques H. Corr ze, chairman of Cosmair and Helena Rubinstein, masterminded L'Oreal's efforts to get off the Arab blacklist. Corr ze was a former Nazi sympathizer and war criminal who was in a French prison from 1945-1950. L'Oreal hired Corr ze in 1950, and in 1954, he set up Cosmair. He died in 1991. Kaufman says his research shows that it was Cosmair that ended Helena Rubinstein production in Israel to comply with the boycott.

Frydman's case and his documents on L'Oreal's alleged boycott cooperation have caught the interest of American Jewish groups. Jesse N. Hordes, Washington representative of the Anti-Defamation League, says if L'Oreal complied with the Arab boycott, "its image in this country will suffer, and there might be a consumer backlash." Rabbi Abraham Cooper, associate dean of the Simon Wiesenthal Center adds that if true: "Lots of angry, articulate activists in Hadassah and temple sisterhoods who love their [L'Oreal] products will deluge them with complaints."

On Feb. 2, L'Oreal said it is "actively considering investment opportunities" in Israel. Hordes and Cooper say that could change consumer sentiments toward L'Oreal. And one cosmetics consultant says: "It certainly should not impact the way the public views their products."

Frydman's clear interest in publicity makes some observers suspicious of his ulterior motives. One Israeli source with detailed knowledge of the matter is convinced that Frydman is using the boycott issue to get publicity in order to pressure L'Oreal to agree to a big settlement. Frydman concedes that he is pursuing L'Oreal to get money. But he insists he needs money to attack the Arab boycott by attacking L'Oreal. "If we have no money, we are finished," he says. "We have no fight."

MORAL OUTRAGE. Yet he has not always valued principle over business. Frydman says he was morally outraged to be partners with L'Oreal once he found out about Corr ze's background in June, 1989. But that didn't stop him from obtaining L'Oreal's help to make a distribution deal and buy a film library between July and September the same year.

The Frydman-L'Oreal saga began as a partnership between two old friends. Fran ois Dalle, who was stepping down as L'Oreal's chief executive, and Frydman, president of Europe 1, a large radio network, had known each other for 20 years. Frydman, through his company Anahold, and his brother David's company, CDG, owned the non-U.S. movie rights to a library of RKO classic films. In 1988, L'Oreal decided to diversify into media, and Paravision was formed with 75% owned by L'Oreal and 25% by the Frydmans. With $160 million of L'Oreal's money to spend, says Frydman, Paravision began buying up media properties. By 1989, Paravision was even negotiating a deal to buy Columbia Pictures.

Frydman says his first inkling of trouble came on Apr. 4, 1989, at L'Oreal headquarters in Clichy, a quiet Paris suburb. According to Frydman, Dalle asked Frydman to temporarily resign because of Frydman's Israeli citizenship, which he said could jeopardize L'Oreal's efforts at the time to get off the Arab blacklist. Frydman says he refused to step down.

On June 20, Frydman says, he was asked for a copy of his letter of resignation. Surprised, since he says he never resigned, Frydman called Michael Pietrini, Paravision's chairman, to find out what was going gn. Frydman says Pietrini told him that he was pressured by Corr ze to forge his resignation and mentioned Corr ze's pro-Nazi past.

Frydman then called Paris-based Nazi hunter Serge Klarsfeld to ask if he had heard of Corr ze. Klarsfeld confirmed Corr ze's background. Frydman was infuriated. He and his family had been victims of Nazi persecution. While fighting for the French Resistance, Frydman was captured by the Germans and escaped from a train bound for Buchenwald; his mother is a survivor of Auschwitz. "It was like a nightmare," says Frydman.

Dalle and Pietrini in 1991 depositions tell a somewhat different story. Dalle, then a Paravision vice-chairman, said Frydman offered to resign when Dalle mentioned that Frydman's Israeli connection might derail L'Oreal's efforts to get off the blacklist. "You know, we are in the middle of a de-boycotting procedure and it cannot be ruled out that the men in Damascus should make the connection between Helena Rubinstein and Paravision," Dalle said. "If the Arab League...had asked Frydman to resign, I never would have accepted." He added the boycott is "intolerable" and "we have in our company a number of important Jews, who would have been scandalized." Pietrini contends that he, too, understood that Frydman agreed to resign. Further, even Frydman agrees that the resignation would have been temporary.

The battle escalated in December, 1990, when Frydman filed criminal charges against L'Oreal, alleging that the company had forged his letter of resignation and discriminated against him. The following March, the judge on the case ordered gendarmes to seize documents from L'Oreal headquarters. Dalle and Pietrini were indicted for forgery and racial discrimination.

By spring, 1991, Klarsfeld documented that Corr ze had personally led raids on homes and businesses of Jews in March, 1941, for a French pro-Nazi group. The information was picked up by the French press. Until then, Corr ze had denied taking part in anti-Jewish activity. Corr ze had been charged after the war for fabrication of explosives, possession of weaponry, and inciting civil war--and served in prison for five years. "Corr ze was a notorious activist of La Cagoule, which was a sworn enemy of Jews before and after the war and responsible for the bombing of several Paris synagogues," says Klarsfeld.

Corr ze died suddenly in France on June 27, only hours after resigning from Cosmair. Just before he died, Corr ze signed a document that said he had been granted amnesty by the French government in 1959 and that he had nothing to do with Paravision. Representatives of Corr ze's estate did not respond to requests for comment.

Soon after, says Frydman, Charles Salzmann, on behalf of his former boss, President Fran ois Mitterrand, asked Frydman to drop his case to stop L'Oreal's and Dalle's public embarrassment. While L'Oreal's business in France was never hurt by the scandal, Dalle was a close friend of Mitterrand's. Frydman says he agreed--if a commission were set up to look into whether L'Oreal participated in the Arab boycott.

"MISUNDERSTANDING." Salzmann, though, responds that he did not "intervene in that affair." And L'Oreal's lawyers insist that Frydman's charges were dismissed by the judge due to lack of evidence. "Frydman acknowledged in a letter to the judge that his complaint was based on a misunderstanding," says Stanley Marcuss. "He acknowledged he was wrong. The judge concluded there was no basis for pursuing L'Oreal." Frydman disputes that interpretation.

Frydman fared better in November, 1993, when the commission released a report by David Ruzi , a professor of international law at the University of Paris. Using documents seized in the criminal case, Ruzi , an expert on France's Arab boycott law, determined that L'Oreal had cooperated with the boycott and had broken French law. "In my opinion, the Frydman's should have taken the [boycott issue] to court," says Ruzi . "Normally, we should have been able to convict L'Oreal. The documents are, in my view, irrefutable. Even L'Oreal has never called their authenticity into question." Ruzi also says Lindsay Owen-Jones, L'Oreal's chairman, had nothing to do with the boycott.

L'Oreal denies the findings of the Ruzi report. The company claims that Ruzi was already biased against L'Oreal and that he never interviewed anyone at L'Oreal for its side of the story. Ruzi denies he was biased and says L'Oreal had made clear the company didn't want to hear from him.

The documents portray a pattern of complicity. A May, 1984, document recorded L'Oreal's responses to an Arab boycott questionnaire that inquired about dealings with Israel. To avoid being put on the blacklist, L'Oreal responded. Possibly to prove that it had rooted out supporters of Israel from the boards of Helena Rubinstein subsidiaries, L'Oreal supplied the Arab boycott office with lists of names of the old directors and the new directors. A Nov. 17, 1986, letter from P. Castres Saint-Martin, L'Oreal's legal and financial director, says: "Our company modified the company name and replaced the directors of the companies it purchased from Helena Rubinstein Inc. in 1983 in Argentina, Brazil, Peru, Venezuela, and in Japan."

But in February, 1988, the Arabs put L'Oreal on the blacklist anyway. Zouheir Akil, the commissioner general of the boycott office, told L'Oreal that it had to change the name of Helena Rubinstein Israel and shut down its manufacturing, even though L'Oreal by that time had sold the plant to an Israeli company.

On July 4, 1988, a L'Oreal intermediary wrote to tell Akil it would take care of the problem and ask L'Oreal to "stop any manufacturing of Helena Rubinstein products by Dec. 31, 1988....We will also ask the company Helena Rubinstein Israel to change its name." A Feb. 1, 1989, letter from Castres Saint-Martin confirmed that the name had been changed to Interbeauty Ltd. and that it had agreed "never to use the name of Helena Rubinstein in the future." The intermediary couldn't be reached for comment.

The Ruzi report also says L'Oreal paid "substantial funds" to Arab intermediaries to help it get off the blacklist. A May 10, 1989, memo from L'Oreal's legal chief, G. Sanchez, to Corr ze and two other managers discusses an important Arab official who could help them win over the boycott office but will "by no means accept less than $1.5 million." It's not clear whether the payment was made. But In July, 1989, L'Oreal was taken off the blacklist.

Frydman says it was none other than Corr ze who went to Israel in 1988 to convince the company that owned Helena Rubinstein to shut down production and change its name. In a 1991 deposition, Corr ze confirmed he had gone to Israel, but only "to allow the Israelis to pursue their activities and not to stop it or limit it."

Though Frydman has been tireless in dredging up skeletons from L'Oreal's past and seeking to tarnish the company's name in the U.S., his New York suit is on tenuous jurisdictional grounds. It's still far from clear what Frydman wants most from his campaign: money, an undermining of the Arab boycott, or just plain revenge. There's a chance, though, that he could get all three.

L'OREAL VS. THE FRYDMANS

MAY, 1988 L'Or al and Jean and David Frydman launch Paravision joint venture.

APRIL, 1989 L'Or al exec Fran ois Dalle discusses Jean Frydman resignation from Paravision because of Frydman's Israeli connection. Dalle says that could hurt L'Or al's effort to get off Arab list. Frydman says he refused.

JUNE, 1989 Frydman says he discovers his ouster from Paravision.

APRIL, 1990 Frydmans and L'Or al begin arbitration to determine what L'Or al should pay them for their 25% stake in Paravision.

DECEMBER, 1990 Frydmans file criminal charges against L'Or al.

MAY, 1991 Judge orders police to raid L'Or al headquarters. Based on documents seized, Dalle and Paravision Chairman Michel Pietrini are indicted.

MAY, 1991 French press reports that Jacques Corr ze, chairman of Cosmair, L'Oreal's U.S. unit, had pro-Nazi past.

JUNE, 1991 Corr ze resigns as Cosmair chairman and suddenly dies.

NOVEMBER, 1992

Criminal charges against L'Or al are dropped, allegedly at the behest of French President Mitterrand, out of concern about bad publicity for L'Or al. In return, a commission is set up to study whether L'Or al participated in Arab boycott.

NOVEMBER, 1993

Commission concludes L'Or al did participate in boycott.

FEBRUARY, 1994

Frydmans file $100 million civil suit in New York State court against L'Or al, alleging conspiracy and bribery. Public-relations firm hired to stir up media interest.

DATA: BUSINESS WEEKLeah Nathans Spiro in Paris with Farah Nayeri, and Neal Sandler in Jerusalem


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