Barbie and Ruth: The Story of the World's Most Famous Doll and the Woman Who Created Her

by Robin Gerber

  Rosenberg was focusing less on acquisitions than on legal matters, finance, administration, corporate development, and long-range planning. He had overseen a hundred acquisitions at Litton but only eight at Mattel. His goal was to relieve the “stigma for seasonality,” and use Mattel’s people and facilities year-round. Mattel’s workforce, which shrank from thirty to forty thousand employees to as few as twenty thousand during the slow season, dragged on profits. Production workers could be laid off, but not executives and engineers drawing full-time salaries. Plus, by creating divisions, Mattel had driven up its year-round operating costs.

  Rosenberg argued that the acquisitions were all profitable and that they would even out yearly revenue. He planned to move from 12 percent of the domestic toy market to 15 percent, and from 3 percent to 5 percent of the foreign market by the end of 1972. Rosenberg did not see the low growl of the emerging bear market as a problem.

  After she returned to work, Ruth was more alone than ever. Elliot confined himself to research and design, having little interest in the business of Mattel. Ruth clashed personally with Art Spear, a rigid executive who had come to Mattel from Revlon in 1964 and been made executive vice president at the same time as Rosenberg. A lanky man with a long face and a high, balding forehead, he opposed Ruth’s move to divisions and was growing more and more frustrated with the company’s management. Sensing that she was “unable to grab back the reins effectively,” Ruth began to feel as though she was on the outside looking in. No one in top management tried to make her feel differently.

  Trouble began to emerge during the summer of 1970. One acquisition, Turco Manufacturing, was a poster child for the problems with the “world of the young” companies that had been added to Mattel. Many of these companies had been sold because, beneath their rosy projections, they were deeply troubled. With Turco, Elliot had been drawn to the idea of designing playground equipment, thinking of his grandchildren and what they enjoyed. But Turco’s biggest and nearly only client was Sears. Turco management swore that the retail giant was loyal. But as soon as the sale went through, Sears abandoned the project and found another manufacturer. Buying a company with only one customer was foolish, as Ruth later admitted. “In fact,” she wrote, “most of our acquisitions proved to be mistakes.” She was right. Only Ringling Bros. and Monogram would consistently make money.

  Meanwhile, projections for the Christmas season had grown exponentially. While Ruth hated to underproduce and miss out on possible sales, she knew that inventory losses were much more costly. If you shipped too many pieces to customers, they would make deep reductions in their orders the next year. “The product would be dead and you’d spend all the next year cleaning up inventory, both yours and your customers’,” Ruth often explained. That was why everyone had been taught that the numbers counted above all. Executives came to meetings spouting sales figures that they had memorized for particular toys. Orders, forecasting, sales, reorders, production, timing of advertising—everything moved so fast in the toy business that only the most nimble and aggressive companies and executives survived. But in the months after her mastectomy, Ruth lost much of the spirit that she had used to lead her troops for so many years. After she returned from surgery she discovered that sales forecasts were running much higher than before she left. Even though she had told her division heads that forecasts were too high, they were competing and did not want to listen. Ruth felt that she could not get them under control, even as orders began to slow.

  Mattel still produced Sizzlers on a fast track. The company projected big Christmas sales, but orders were slow. The first signal that Christmas might not be joyous for Mattel came in the fall. Like many companies, Mattel had built a factory just south of the border in Mexicali to take advantage of Mexico’s lower wages. For the first time in a quarter century of production, a raging fire broke out that destroyed the plant and its entire inventory. Millions of dollars in Christmas orders went unfilled.

  On the heels of the bleak news from Mexico, Hot Wheels sales began to slow. Topper Corporation introduced Johnny Lightning racers, a strong competitor. Hot Wheels buyers clamored for more variety and more styles, but that took time and money to produce. Designing and tooling could take months and months. There was a “giant backed-up wave” of cars, according to Josh Denham, that needed testing. Meanwhile, to keep his buyers happy, Loomis came up with a scheme to sell boxed sets of Hot Wheels. He promised buyers that the set would have a majority of new-style Hot Wheels and a few of the old ones, but the opposite was true. Between overordering in the first couple of years of Hot Wheels sales, and Loomis’s pushing old cars in the boxed sets, buyers had too much inventory of old cars. They did not want or need to order more. Thirty million or more of unsold cars sat in Mattel warehouses, eventually sold at rock-bottom prices.

  But the Wheels division was not the only problem. Optigan also was not being embraced by adult buyers. Its sound quality was poor and it was prone to break, resulting in high returns on the $300 novelty and a $6.5 million loss. Pat Schauer, who worked for the head of the project, thought the quasi-instrument needed more time to be perfected. Sears put in large orders but insisted that Mattel be responsible for repairs, which turned out to be the main problem. But Ruth had a different take that placed the blame not on her oversight or Elliot’s design but on her manager. “Mattel had a big ‘who did it?’ complex,” Josh Denham remembered, and it seemed to be in play more than ever.

  Ruth felt that in the case of Optigan she was shielded from the truth. She had wondered about the size of the Sears orders and had asked whether they were firm. She had asked if they were cancelable and was told that they were not. She said that it would have been inappropriate, under the division structure, for her to check the orders herself. Optigan was a major project for Mattel, not just another toy. “It was like starting a whole new business,” Ruth said, “and it went to hell. Obviously, our manager was incompetent. He had big fat dreams and delusions of grandeur that did not happen, and we got stuck with it and that was a total write-off.”

  As Barbie doll sales slowed in Europe, new problems arose at home. The Federal Trade Commission declared the television advertising for Hot Wheels and Dancerina “misleading.” The commission claimed that the ads falsely portrayed the toys’ appearance and performance. Hot Wheels cars were not self-propelled, and Dancerina could not stand up on her own, as the ads showed.

  Despite the setbacks at the end of 1970, Mattel traded at thirty-four times the previous year’s per-share earnings. Just before Christmas, the deal with Ringling Bros. was announced in the press. There were reservations on the circus board, especially from Richard Blum, who opposed the deal. As a young man he had briefly run a toy company. Taking the time to talk to some of his old contacts and some San Francisco toy retailers, he heard that Mattel was not doing as well as it seemed. “I made it clear I was against the deal,” he remembered, but the circus’s small, privately held board went forward. For Ruth, it was a bright spot. She told Josh Denham how thrilling it was to see all eyes in the audience turn to Irvin Feld when she sat with him in the big top, watching the show. “Now,” Ruth said, “everyone will be focused on me.”

  During final negotiations, she and Elliot stayed at a hotel with a group of circus people in Venice, Florida. They were there to see firsthand how the business operated. One night she got into a poker game with eight or nine of the workers. The stakes were not high and Ruth did not want to take money off the circus hands, but she could not seem to lose. “I was playing the dumbest poker a person can play,” she wrote later. “When the game was over, I’d won about eighty dollars.” She saw her winnings as a good omen.

  The deal stipulated that circus shareholders would receive 1.25 million shares of Mattel common stock in exchange for the 3.46 million outstanding shares of Ringling Bros. stock. The exchange was valued at just over forty-seven million dollars. Ruth saw Ringling as a “virtual money machine.” Mattel, nearly twenty times the size of Irvin Feld’s circ
us, had just reported more than seventeen million dollars’ profit. Wall Street still held Mattel up as a glamour stock. Only certain top company executives knew that the good news was a mirage.

  By January 1971, even as Mattel’s stock hit an historic high of $52.25 per share, the Sizzlers line was in big trouble. Buyers had too much inventory. They were clamoring for Mattel to help them unload it. They did not want to buy into new lines of toys until they could be sure they would get relief. With orders down, inventory was backing up in Mattel warehouses, and revenue was not coming in to offset expenses.

  Using an annualized accounting method, which was perfectly legitimate, Mattel became more aggressive about pushing expenses to later business quarters. Surely the revenue would be made up as it had been in the past. Surely Mattel buyers would send orders flooding in for the great new toys coming out in 1971. Profit targets were set, but unlike the hard-nosed number crunching of Mattel’s earlier days, the targets were concocted based on what would keep Wall Street happy. Suddenly, “must-have” numbers appeared, and top management was pressured to figure out how to bring about the desired increase per share. The answer came in the form of bill and hold, a scheme for creating the appearance of continued company growth despite reality.

  Bill and hold had been used before by Mattel as a legitimate business strategy. But that was not the case starting as early, at least, as 1971. Rosenberg was desperate to keep the stock price from falling because of the deal with Ringling Bros. He told Denham and Loomis that under the terms of the circus merger, if Mattel’s stock price fell too sharply, Irvin Feld, who remained as Ringling’s CEO, would own the toy company.

  Rosenberg’s fears were justified. The merger agreement, signed January 5, 1971, warranted the truth and accuracy of Mattel’s financial condition. Rosenberg knew that the result of lying would mean a lawsuit brought by Ringling. Specifically, Mattel promised that nothing it had submitted contained untrue or misleading statements. To keep up the facade memorialized in the Ringling merger papers, the bill-and-hold system went into effect. Charges for future sales were recorded immediately. False invoices and bills were prepared, and a second set of books was created. Customer signatures were forged. Routing and delivery instructions were incorrect. New product costs were deferred or amortized over unusually long periods, so that costs were understated. Legitimate orders were made fully cancelable. “Do not mail” invoices were created. Receivables mounted as customers became delinquent on their bills, yet the books showed some customers buying more toys. Between 50 and 80 percent of billed sales would be canceled by customers prior to shipping. Even the insurance claim for the Mexicali fire was inflated, with $10 million posted as a credit on the January 31, 1971, earnings statement. Six years later, only $4.4 million was actually paid. According to a later Special Counsel’s report, Arthur Andersen, the company that conducted audits for Mattel, either turned a blind eye or was recklessly inept.

  Denham and Loomis were uneasy as they saw the implications of the strategy. They went into Ruth’s office and said, “We’re going to ruin the company for the first six months of this year,” explaining that there would not be any real sales. But Rosenberg saw them talking to Ruth and walked in. He told the two division heads to come to his office and he would “tell them what’s going on.” Ruth did not say anything.

  In a company that had been charmed for so many years—a company that was the darling of Wall Street, that had given double-digit returns to its shareholders for the entire decade of the 1960s, it is not hard to imagine executives feeling sanguine. Bill and hold was risky and wrong, but when Mattel performed poorly in the past it had always bounced back. As long as the numbers were made up with strong sales in later quarters, maybe no one would find out about the fraud. But Denham explained that they had no time to reason it through. “The problems that came with bill and hold came so fast that we did not have time to think. We just thought we’d have big problems for five months or so.” Instead, the economic recession deepened, and in the fall of 1971, a dockworkers’ strike on the West Coast promised ruin for Mattel’s second Christmas season in a row. There were years of problems ahead.

  Rosenberg likely masterminded the initial scheme. The evidence is strong that Ruth knew about it. The federal court would later rule, over her vehement denials, that she knew all along. She insisted that she relied too much on trusted hands, that she was not up to par after her surgery, that 1971 did look like a “turnaround” year with exciting products coming on line and overhead reduced. In twenty-seven handwritten pages, Ruth later explained her version of events.

  She said that she and Elliot were never aware of the magnitude of the bill-and-hold program or of the cancellation rights until much later. She thought her sales force was writing routine orders in the magnitude of two to four million dollars, which were non-cancelable but would be held in Mattel’s warehouse for later shipping instructions. She said, “I never, ever heard of phony invoices. We did not set ‘must-have’ numbers or profit ‘targets.’” Ruth claimed that she constantly questioned sales targets and that she received assurances about them. Privately, she thought that if the sales were not achieved, it would still be acceptable to make ten or twenty cents less per share.

  In retrospect, she acknowledged that it seemed impossible for her and Elliot not to have known what was going on. They were, however, very busy people, preoccupied with many other things. Ruth had a giant corporation to manage and was also spending increasing amounts of time on consumer issues that required her to be away from Mattel. She also believed that because she was recovering from a mastectomy, her staff was protecting her from problems at work. Rosenberg and Spear had reassured her after her mastectomy that she could depend on them to run and control things. Rosenberg had also pushed her out of reviewing accounting and financial numbers in detail. Ruth accepted this because she was told that Mattel was too big a business for her to be involved in every aspect of corporate affairs. She should let her people have their autonomy, she was told. She needed to delegate. Unfortunately, she said, she followed their advice.

  Ruth’s version of events grows more bitter as her notes go on, placing blame on the management team she had trusted: Art Spear, Seymour Rosenberg, Ray Wagner, Josh Denham, Bernie Loomis, Yas Yoshida, and Vic Rado. It quickly turns into a detailed explanation of company operations that is more revealing of Ruth’s comprehensive grasp of company operations than of her innocence. She was president of Mattel and she sounds like it, but she stops short of admitting any knowledge of the fraudulent number crunching happening all around her. She still received weekly, sometimes daily, W reports. These would have shown that, for example, a hundred thousand units of a toy were sold, but only a dozen were in inventory ready to ship. It is unlikely that the woman who had caught the tiniest error in the past would miss the gross overstatements that bill and hold created. She admits to knowing about bill and hold, but only as a legitimate practice. She claimed to be shocked by the size of the overstatements, which totaled nearly eighteen million dollars.

  The bill-and-hold scam did work for a while. Although Mattel’s share price fell to 19 1/8 near the end of 1971, the fall was blamed on a reported four-million-dollar loss and the ongoing dock strike. Mattel remained a Wall Street darling, its stock kept artificially high based on the belief that it would continue to grow. The full extent of losses was still hidden and would remain that way for another year.

  The new layers of management were poorly organized. One hand frequently was slapping the other with memos that contradicted orders from different levels of the same department. In marketing, an employee complained that it was “impossible to get anything done on schedule…to get anything done, period.” Some executives burned out and left in a hurry. Others were hired without the strict and taxing interview process of the past. Meanwhile, Ruth pushed for overly optimistic sales forecasts, saying later that she based her exuberance on past experience. But later revelations of hidden revenue targets suggest that her efforts
were also tied to the bill-and-hold scheme.

  At the beginning of 1972, Ruth and Elliot were considering an entirely new direction. No doubt, it was made more tempting by the stress within Mattel. Rosenberg had told them in the summer of 1971 that Kinney Systems, which specialized in leisure time, real estate, and financial services, wanted to explore the idea of a merger with Mattel. Kinney had spun off part of its conglomerate after buying Warner Brothers and, in September 1971, changed its name to Warner Communications. Ruth could see the logic of joining with Kinney/Warner, which after its merger had more money and earnings than Mattel but was trading lower. Steve Ross, the aggressive deal maker who was running Kinney, wanted to merge under the Mattel name, believing it would greatly raise the value of the new entity’s stock.

  In May 1972 a meeting was set at Ruth’s Malibu beach house for the investment advisers, lawyers, and company executives, including Ruth, Elliot, and Seymour Rosenberg, who were planning to close the deal. Perhaps the roller coaster created by Wall Street increased Ruth’s desire to reduce the pressures in her working life. She liked and trusted Felix Rohatyn, who had negotiated the deal for Kinney. She and Elliot would continue as minority board members, and Ruth had agreed to run the toy division after the merger.

  As she sat with the group reviewing the final documents, Ruth was startled to see that Rohatyn, rather than being one of Kinney’s majority board members, was listed as a minority member. She liked Rohatyn, but she did not intend to have Kinney pick her representatives to the board. Making her feelings clear, Ruth examined the rest of the document with growing unease. Kinney was proposing that its eighty-year-old founder be made president of the conglomerate, but Ruth expected Steve Ross to act as president. It did not make sense to her to place this old man at the operational head of the company, unless something else was intended.