Posted on 04/18/2019 11:14:04 AM PDT by Red Badger
NEW YORK – Sears Holdings Corp sued longtime former chairman Eddie Lampert, his hedge fund ESL Investments and others like Treasury Secretary Steven Mnuchin, claiming they illegally siphoned billions of dollars of assets from the retailer before it went bankrupt.
The lawsuit, made public on Thursday, was filed by the restructuring team winding down Sears’ bankruptcy estate and suing on behalf of creditors, many of whom blame Lampert for the retailer’s downfall.
It followed the billionaire’s $5.2 billion purchase in February of most Sears assets, including the DieHard and Kenmore brands, after a bankruptcy auction.
The complaint seeks the repayment of “billions of dollars of value looted from Sears,” including while it was in what Lampert would later call a “death spiral” where it sold core assets to meet daily expenses with no real plan for becoming profitable.
“Had defendants not taken these improper and illegal actions, Sears would have had billions of dollars more to pay its third-party creditors today and would not have endured the amount of disruption, expense, and job losses resulting from its recent bankruptcy filing,” the complaint said.
Sears filed for Chapter 11 protection in October after a prolonged decline under Lampert marked by large losses, scant investment and lost market share to retailers such as Walmart Inc, Home Depot Inc and Amazon.com Inc.
Others sued include ESL President Kunal Kamlani; Bruce Berkowitz and his Fairholme Capital Management, which was a large Sears shareholder; and Seritage Growth Properties, which took over 266 of Sears’ best stores in a 2015 spinoff.
Mnuchin, a college roommate of Lampert’s at Yale University, had been a director at Sears and ESL, and previously worked with Lampert at Goldman Sachs.
In a statement on behalf of ESL, Lampert and Kalmani, ESL said it vigorously disputed the lawsuit, calling the allegations “misleading or just flat wrong,” and saying all transactions were done in good faith and for shareholders’ benefit.
Fairholme said it was reviewing the complaint. Seritage and the Treasury Department did not immediately respond to requests for comment.
‘DEATH SPIRAL’
Lampert created Sears Holdings through the 2005 merger of Sears, Roebuck & Co and Kmart Holdings Corp.
According to the complaint, Lampert and other insiders had by 2011 begun hatching a plan to “strip” Sears of assets, as the Hoffman Estates, Illinois-based retailer’s performance fell short and more ESL investors were demanding their money back.
The complaint said Lampert ordered the creation of bogus financial plans projecting a Sears turnaround, and used them to help transfer five major assets worth more than $2 billion, including Land’s End and Sears Hometown Outlet.
Sears’ bankruptcy estate in particular faulted the conduct of Lampert and others in the $2.58 billion Seritage spinoff.
It said that transaction undervalued the real estate by at least $649 million, stuck Sears with hundreds of millions of dollars of rent and fees from leasing most of the 266 stores back, and was structured to benefit favored shareholders like Lampert, in part through Seritage’s payment of dividends.
Seritage reported $24.1 million of funds from operations in 2018, a measure of cash flow, and last July obtained a $2 billion loan package from Warren Buffett’s Berkshire Hathaway Inc. Berkshire is not a defendant.
Thursday’s lawsuit was filed with the U.S. bankruptcy court in White Plains, New York.
It seeks a declaration that the alleged looting constituted “fraudulent transfers” that should be undone or, more likely, justified damages.
The reorganized Sears was expected to have about 425 Sears and Kmart stores, down from roughly 3,500 at the time of the 2005 merger.
The case is Sears Holdings Corp et al v Lampert et al, U.S. Bankruptcy Court, Southern District of New York, No. 19-ap-08250. The main bankruptcy case is In re Sears Holdings Corp in the same court, No. 18-bk-23538.
(Reporting by Jonathan Stempel in New York; editing by Steve Orlofsky and Marguerita Choy)
Loss mitigation executives are tasked with mitigating only certain losses for certain people or groups. Sort of like a bankruptcy judge for hire on a recon mission. They would sell off any asset they quietly can for reasons never truly disclosed. It’s what they were brought on to do.
Can you imagine, in the 1990s when Amazon was just an idea, had Sears gone online, it would have been the modern day version of the Sears Catalog that spread commerce through out the United States.
Sears today would be the largest company in the world.
...
Sears partnered with IBM to create Prodigy, so they had a leg up.
Prodigy is also where FR was started, IIRC.
Just another Romney style hedge fund looting and raiding of a company. Nothing to see here.
It's rather an interesting case study. Sears started as the first "on-line" shopper (if you will) with catalog sales. I remember when they decided to do away with their catalog. They abandoned the business model that made them a success. Had they expanded catalog, there might never have been an Amazon.
Lampert never had any intensions of K-Mart surviving....keep in Mind it was K-Mart that bought Sears.
So, what was illegal about stripping and selling assets for the benefit of stockholders?
One wonders if bankrupt Sears has the cash to fund the lawsuit?
So many bad business decisions were made. Corporate kept looking for reasons to cut costs at every store. Fewer workers and rundown stores - how is that a good business model?
I always liked their Kenmore appliances but in the last 20 years, their prices were no longer competitive so this consumer went elsewhere.
Sears...a day late and a dollar short.
I hate it. Sears was an American icon.
So, that makes it doubly the result of very very poor management.
I suspect, an outsider was brought in by the BODs that put the company on a different trajectory. These managers were fat dumb and happy with the status quo.
I seem to recall that wasn’t Sears at one time selling Allstate Insurance?
They had absolutely terrible fashions, and the displays of new clothing was horrendous.
The employees were still loyal, but without direction and the morale low, as they hired a lot of retirees.
Terrible terrible.
BTW, what happened to IBM? Maybe there’s the problem there. They partnered with another company that lost its way.
Had they gone online to sell their products, an outreach of the old catalog, the network of stores would have the products to the person’s door within hours.
I recall visiting my grandparents in Idaho as a kid. They’d get this huge Sears Catalog seasonally, I mean huuuuuuuuuuge, and they’d go threw it an order things.
Somehow they would find a way to get there to their farm.
They really had a monopoly on things with that catalog.
too bad, and very sad that their management and BODs were clueless as to what their core business was.
Other than Craftsman and Kenmore their products were sub-par.
You can get cheap clothes for cheaper at the W store.
I believe Dewalt/Black & Decker owns the brand now - Lowes is apparently their chosen showroom at this time. I think the new owners have mentioned a plan to return some of the Craftsman manufacturing to the U.S., but for now it looks like the old Sears suppliers (wherever) are shipping to the new owner.
If they can bring quality up a bit without sending prices through the roof, I think the brand will do pretty well - it still has far better name recognition than the newer "big box" brands like Kobalt.
They should have done something about that years ago, while the looting was in progress, rather than wait until the inevitable result.
It’s sad, Sears, Monkey Ward’s & Jacques Pennet were staples of life in the Podunk Midwest. Now, pretty much just fading memories.
(But I’d still like one of the train sets from the Christmas catalog, with the scenery and all the stuff. Those looked cool.)
Black and Decker/Stanley bought the brand, no? Ace Hardware sells Craftsman also (deceptive advertising by Lowe’s).
[Other than Craftsman and Kenmore their products were sub-par.
You can get cheap clothes for cheaper at the W store.]
They did have online shopping, with stores shipping out packages or holding them for pickup. Not sure when they introduced their online shopping, but they must not have been competitive, plus the rundown stores were a problem.
If true it looks like Lampert did a number of questionable deals in disposing of assets to benefit himself and others.
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