The many roles that Sears Holding Corp.s chief Eddie Lampert has filled at the iconic retailer may spur lawsuits now that it has filed for bankruptcy, according to experts.
As part of the chapter 11 filing, Lampert has stepped down as CEO, but will continue as chairman. The hedge-fund manager is also a major shareholder, lender, and landlord on some of the company’s real estate, as MarketWatch has reported.
On its face, it’s not that strange for a company’s CEO to also be involved with the company in other ways, said Marc Hamroff, managing partner at the law firm of Moritt Hock & Hamroff. However it’s unusual for that to be the case with a large, publicly traded company like Sears
“It’s unique in a company of this size and can certainly promote some conflicts of interest,” Hamroff told MarketWatch. “Are you protecting your interest as creditor or as CEO? Which hat are you wearing?”
Lampert took control of Sears in 2005 when he merged it with Kmart. Since then, the company has lost billions and shuttered hundreds of stores. The company’s market value has shrunk to $33.8 million, according to FactSet, and its shares closed Monday at 31 cents.
Lampert has taken steps to position himself to benefit from the moves required to keep the company in business through years of decline, while shielding himself from potential downside. For example, the real-estate investment trust Seritage, which was launched in 2015 by a group that includes Sears shareholders and Lampert’s hedge fund ESL, acquired 266 properties from Sears and leased many of them back to the retailer.
Eric Snyder, bankruptcy attorney at Wilk Auslander, said Lampert has opened himself to the risk of lawsuits over conflict of interests.
“The fees and dividends on loans as well as rental costs on stores sold can be reviewed in the bankruptcy as potential fraudulent conveyances,” he said. A fraudulent conveyance happens when a buyer is found not to be paying a reasonable value for an asset that’s part of a bankruptcy.
“Lampert, through ESL, controls much of that entity (Seritage) and stands to benefit as those properties generate higher rent, while also collecting dividends, lending fees and interest payments,” Snyder said.
In June, Lampert offered to buy the Kenmore brand for $400 million in cash, and pushed for a restructuring plan that included the sale of assets, including real estate and Kenmore, to avert a bankruptcy filing.
Now that the filing has come, Lampert still stands to come out on top.
“I believe that the only person or entity that will have any beneficial results from the Sears bankruptcy will be Eddie Lampert and the entities with whom he is affiliated that have provided mortgage lending and other financing to Sears,” said Chuck Tatelbaum, director at the law firm Tripp Scott.
“Now that Sears will, in all probability close most if not all of its retail locations, the entity will not be able to pay the mortgages that were taken out in favor of Lampert’s entities in order to provide cash for the continued and ongoing hemorrhaging of Sears.”
In the days leading up to the bankruptcy filing, lenders including Bank of America Corp.
Wells Fargo & Co.
and Citigroup Inc.
were pushing for liquidation, according to a Wall Street Journal report.
Tatelbaum said there may be suits filed over whether the board acted in a manner that was sufficiently independent of Lampert.
“Published reports indicate that many of the board members are other hedge fund executives, and I understand that the current Secretary of the Treasury (Steven Mnuchin) was a board member as well,” Tatelbaum said. Lampert and Mnuchin were college roommates at Yale.
“These are high net worth individuals, and I expect that Sears and its parent company had substantial directors and officers insurance. I think litigation may be on the horizon,” said Tatelbaum.
Experts blame Lampert and the management team for the slow demise of a company that, at one point, was pretty much Amazon.com Inc.
“In our view there are a multitude of factors that have contributed to Sears’ demise, but foremost among them is management’s failure to understand retail and evolve Sears in a way that would have given the chain a fair chance of survival,” said Neil Saunders, managing director of GlobalData Retail, who acknowledges that there were also missteps before Lampert came on board.
“Chapter 11 means that Sears will continue on, at least for the foreseeable future, as it tries to find a solution to its financial woes and attempts to carve out a place for itself in the retail market. In our view, too much rot has set in at Sears to make it viable business,” Saunders said.
According to a CNBC report, Lampert held a town hall meeting with 1,000 employees on Tuesday, warning that the company would need to show “material progress” in the coming months to avoid liquidation.
Sears shares have lost about 93% of their value in the past year, while the S&P 500 index
has gained about 10%, the SPDR S&P Retail ETF
is up 21.8% and the Amplify Online Retail ETF
has gained about nearly 26%.
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