If the CEO of a bankrupt company buys shares in a spinoff company, is that evidence of sabotage, or just that they’re trying to make the best of a bad situation?
Edward Lampert, who was chairman and CEO of Sears Holding Corp. when it went bankrupt, is now being sued by the company for allegedly orchestrating shady dealings between himself, his hedge fund company (ESL) and Sears’ finances.
Having taken the reigns of the company when it was already in a financial downward spiral, Lampert allegedly made promises he couldn’t keep about turning the company’s finances around. Instead, he and his investors bought some of Sears’ largest and most valuable assets, then invested in the companies that spun off from Sears using those assets, essentially profiting off Sears’ bankruptcy.
Shareholders who received stock in the home improvement branch of Sears, known as Orchard Supply Hardware Stores Corp. allegedly received millions of dollars’ worth of stock, but without properly compensating Sears. Three of the shareholders who were on the board of Sears owned stock in the home improvement store that was collectively worth more than $100 million, according to the lawsuit.
When Sears Hometown and Outlet Stores was spun off into another company, those who owned stock in Sears were given the opportunity to buy shares of the new company.
The partial spinoff of Sears Canada came after that, followed by Lands’ End. Despite the fact that multiple investors were interested in purchasing Lands’ End, Lampert declined the deal, allegedly because the sale would have left fewer available shares for Sears shareholders (himself included) to buy.
The result, according to the lawsuit, was that Sears was left without the funds to buy its way out of debt, much less to invest in new opportunities, leaving it to continue its financial downward spiral until it was finally forced into bankruptcy. The lawsuit, therefore, alleges Lampert and his investors defrauded and cheated Sears’ third-party creditors, as well as the business itself and the workers who depended on the company for their livelihood.
ESL has released a statement saying Sears was financially solvent at the time the transactions took place and that the company received more than $3 billion in exchange for the companies and shares sold. ESL claims the funds Sears received from those transactions were, in fact, used to pay off debt and fund the operations of the business. ESL also maintains that all shareholders were treated equally in the course of the transactions in question.
Sears, on the other hand, alleges the assets sold were grossly underrepresented, cheating the company out of millions of dollars.
Unfortunately, it’s hard to say for sure whether Sears received a fair price for the assets it sold since the transactions were conducted privately. In many cases, that can mean a higher price for the seller, but it also means the transactions are conducted without the benefit of the open market, making it difficult to determine if the assets were sold at a price that is at, below, or higher than their market value.
When a company goes bankrupt after one person held so much power over its finances, it’s common for that person’s dealings to come into question in the form of a business lawsuit, although it’s not common when the company is as large as Sears.