By Lillian Rizzo
Nov. 9, 2018 1:33 p.m. ET
Former Sears Chief Executive Edward Lampert’s ESL Investments Inc. has shot back at allegations made by unsecured creditors in their call for a deeper look at the debt transactions tied to the firm.
The response from ESL comes days after the retailer’s committee of unsecured creditors filed court papers requesting more documents to investigate the deals between Mr. Lampert’s hedge fund and Sears dating back to the retailer’s merger with Kmart in 2005.
The creditors say they are convinced there may be claims and causes of action against ESL. The committee says ESL and its affiliates may have used their insider status to obtain a larger position in Sears’s debt, allowing them to “siphon away value from the company” and “exert undue influence” in connection with the company’s bankruptcy filing.
ESL defended itself in court papers filed Thursday. Through ESL, Mr. Lampert is Sears’s largest creditor, holding multiple positions throughout the complex debt structure, which allows him to continue to play a significant role in determining the company’s fate.
The retailer owes its lenders and bondholders more than $5 billion.
The creditors’ committee was formed shortly after the Oct. 15 bankruptcy filing, and includes the Pension Benefit Guaranty Corp., landlords Simon Property Group and Brixmor Property Group , bondholders, and some vendors. Akin Gump Strauss Hauer & Feld LLP is representing the committee.
Mr. Lampert’s firm said the committee has existed for only a short amount of time and yet has already prejudged the hedge fund.
“Nothing could be further from reality,” the firm said in court papers regarding the allegations, adding that they are an “attempt to poison the well against ESL.”
An attorney for the creditors didn’t immediately respond to a request for comment.
At the outset of the bankruptcy process, Sears said ESL was in discussions to provide bankruptcy loan financing and to make a bid for the 400 most viable stores up for sale. Although ESL is no longer expected to take part in the financing, Mr. Lampert is instead focusing on making the bid, The Wall Street Journal previously reported.
The retailer has less than 700 Sears and Kmart stores, and said it would close 142 locations when it sought bankruptcy protection. On Thursday, the retailer said it would close an additional 40 stores.
While ESL said it would cooperate with an investigation as it has nothing to fear, the firm said it wouldn’t “leave unanswered baseless allegations levied against it by other creditors…that are completely divorced from the facts.”
Noting the widespread distress in the retail industry, especially for mall-based retailers, the hedge fund said its financial support for Sears through the years gave the company the ability to face these challenges and put in place a turnaround plan that didn’t “result in any ‘windfall’ for ESL.”
The firm paints a picture of considerable losses it has taken as an investor in Sears.
Namely, the equity investment ESL made in Sears in 2007 was worth more than $12 billion at the time, and closer to $5 billion about two years later. Now, the investment “has a market value of less than $20 million,” according to court papers.
ESL also rebutted the committee’s allegations regarding 2015 transactions with Seritage Growth Partners, a real-estate investment trust it controls, that saw the sale of more than 200 of Sears’s most valuable stores, calling them “meritless.”
ESL rebutted the committee’s allegations that the stores were sold at discounted prices and led to a sale lease-back on unfavorable terms that came at their expense.
The firm contends it “was not treated any better than other stockholders” and that it made concessions in the deal, saying it agreed to “exchange its rights” for so-called noneconomic shares and partnership units, which resulted in lower voting power at Seritage than ESL had at Sears at the time.
It is common in big retailer bankruptcy cases for creditors committees to investigate, and in some instances sue, a company’s owners over alleged fraudulent transfers and other prebankruptcy financing transactions. Those transfers, designed to move valuable assets of a struggling company out of the reach of creditors, can be challenged under bankruptcy law.
If the creditors’ probe shows any evidence of wrongdoing, it would likely give rise to litigation that could affect the hedge-fund manager’s ability to retain control of the retailer.
Write to Lillian Rizzo at Lillian.Rizzo@wsj.com