Settled: March 09, 2017
On February 10, 2017, Labaton Sucharow, as co-lead counsel, announced it has reached a $40 million settlement in a derivative action against Sears Holdings (Sears).
The case alleges breaches of fiduciary duty by certain Sears directors and officers and their related entities, including Edward Lampert, the billionaire hedge fund manager who also serves as Sears’ CEO and chairman of its board of directors. The case arises out of a series of self-dealing transactions culminating in Sears’ selling off a substantial portion of its valuable real estate assets to an entity controlled by Lampert.
Since Lampert took over as CEO in 2013, Sears’ revenues have dropped dramatically, sustaining net losses of $8.6 billion in the past two fiscal years alone. Along with these financial struggles, Lampert—who owns a majority of Sears’ common stock—with the support of a board stacked with his insiders—orchestrated several deals that hurt the company and its stockholders but financially benefitted Lampert and his affiliates, including his hedge fund, ESL. For instance, under Lampert’s direction, Sears has sold off most of its core assets, including its most valuable real estate assets, to entities controlled by Lampert. As a result of these real estate sales, Lampert now has the conflicted incentive to increase Sears’ rents or to evict Sears as a tenant, all to Lampert’s financial benefit. Sears has also dramatically increased its debt obligations to companies controlled by Lampert.
As one analyst put it, “[l]ike a neutron bomb that leaves just buildings standing in the wake of its blast, Eddie Lampert has blown through Sears Holdings and left an empty hull of a business.” The action raises interesting issues of when and to what extent controlling stockholders may put their own interests above those of the company they control.
Labaton Sucharow filed a consolidated derivative complaint on September 30, 2015.
The case is In re Sears Holdings Corporation Stockholder and Derivative Litigation, C.A. No. 11081-VCL. The plaintiff is Jacob Rossof. The defendants are certain Sears directors and officers and their related entities, including Edward Lampert.