Sears Holding Corp. is suing its former chairman, Eddie Lampert, as well as former board members including Treasury Secretary Steven Mnuchin, for allegedly stripping the retailer of billions of dollars as it collapsed into bankruptcy.
The lawsuit, filed this week, accuses Lampert of a “multiyear and multifaceted scheme” to siphon more than $2 billion of the company’s assets to himself, his hedge fund ESL Investments, and other insiders. It also names Mnuchin, who served on the board of both Sears and ESL, as approving some of the deals -- including spin-offs of Orchard Supply Hardware and Lands’ End -- that the lawsuit says ultimately benefited Lampert and his hedge fund.
"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 lawsuit states.
Sears filed for Chapter 11 bankruptcy in October following years of losses and store closures. In February, Lampert bought most of the retailer's assets in bankruptcy court for $5.2 billion. In recent years, Lampert and his hedge fund have loaned millions of dollars to Sears, making him the retailer's largest shareholder as well as its largest creditor.
A spokesman for ESL Investments said the hedge fund “vigorously disputes” the lawsuit’s accusations, calling them “baseless allegations and fanciful claims.” “As we have previously said, the debtors’ allegations are misleading or just flat wrong,” spokesperson Jon Brienza wrote in an email.
The ties between Sears and Lampert’s businesses -- which also include Seritage Growth Properties, a real estate investment trust that in some cases has effectively become Sears’ landlord -- have long raised concerns among shareholders. In 2017, Lampert and Sears’ board paid $40 million to settle a lawsuit alleging that Lampert had tried to sell off the company’s best real estate to Seritage. Sears shareholders argued that the “highly conflicted transaction” would “plunge the company into insolvency.”
The most recent lawsuit, filed in U.S. Bankruptcy Court in New York, accuses Lampert of directing employees to create misleading documents that suggested Sears was on the verge of posting "huge profits" even as it reported billions of dollars in annual losses.
“At Lampert’s personal direction, Sears employees repeatedly produced financial plans reflecting fanciful, bad-faith predictions that the company would experience an immediate and dramatic turnaround from deep and mounting losses to sudden profitability,” the lawsuit said.
Lampert stepped down as chairman of the Sears board in February after 14 years; he was also chief executive of the retailer from 2013 to 2018.
"Lampert ran the company like it was a private company owned by him," said Mark Cohen, director of retail studies at Columbia Business School and the former chief executive of Sears Canada. "But it wasn't private. It was very much a public company."
It was unclear, ethics experts and lawyers said, exactly what role Mnuchin had played on the Sears board. But, they said, the question at hand is whether its board members acted independently in approving spin-off deals and other financial arrangements that may have benefited Lampert. Representatives for the Treasury department did not respond to requests for comment.
“For all of the directors, there will be an assessment of independence and whether they exercised appropriate fiduciary duty in making their decisions,” said Jordan Thomas, a partner at Labaton Sucharow and former Justice Department trial lawyer. “As a member of that board, Mnuchin -- just like everybody else on that board -- is in the hot seat.”
Mnuchin and Lampert were roommates at Yale University and worked together at Goldman Sachs in the 1980s. Mnuchin was an investor in Lampert's hedge fund and briefly served as its vice chairman, from 2002 to 2003.
“You generally don’t like your Treasury secretary to be showing up as a defendant in civil litigation,” said Richard Painter, chief White House ethics lawyer under President George W. Bush. “It’s just one more mess to deal with.”
Other defendants named in the lawsuit include Bruce Berkowitz, founder of Fairholme Capital Management; Kunal Kamlani, president of ESL; and Thomas J. Tisch, managing partner of the investment firm Four Partners.
Sears, founded in 1893 as a mail-order business, was for decades one of the nation's leading retailers. But in recent years, the company -- which merged with Kmart to create Sears Holding Corp. in 2005 -- has struggled to stay afloat. It hasn't turned a profit in nearly a decade and has closed nearly 1,000 stores since Lampert took over as chief executive six years ago.
“Lampert has from day one been making promises that have no basis in fact,” Cohen said. “It’s nasty and it’s complicated. But at the end of the day, this is a company that is going away.”