Andrews & Springer LLC, a fairly ‘active’ ‘law firm’, is investigating the Sears Holdings Corp (NASDAQ:SHLD)’s board of directors for possible violations of securities laws relating to Sears entering into a $400 million loan arrangement with CEO Edward Lampert. Earlier, the struggling retailer’s CEO provided unsecured short term loans by buying Sears’ commercial paper.
Sears borrows $400 million from Lampert
Earlier this week, Sears Holdings Corp (NASDAQ:SHLD) announced that it had agreed to borrow $400 million from its chairman and chief executive officer, Edward Lampert. The retailer’s spokesman indicated that the loan would facilitate the retailer by providing additional financial flexibility, particularly as it enters the holiday season.
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He added: “We want to be proactive in demonstrating to our vendors and other constituents that we will continue to generate liquidity needed to invest in our business and meet all of our financial obligations.”
As part of the loan arrangement, the loan will be secured by a first lien on 25 Sears locations and matures at the end of 2014. Sears Holdings Corp (NASDAQ:SHLD) does, however, have an additional two-month extension available if it deems it necessary. Lampert and ESL provided the loan at a base annual interest rate of 5%.
Conflict of interest
Yesterday the boutique securities class action law firm said the terms of the $400 million short-term loan are harmful to Sears’ shareholders and creates a significant conflict of interest. The law firm stressed that the loan is secured by 25 undisclosed Sears properties as collateral and gives its CEO the option to swap out less valuable stores.
Andrew & Springer LLC further highlighted that the short-term loan values each store at just $16 million, in contrast to the $20 million to $50 million that the retailer has been selling its stores to other retailers and investors. ESL Investments, of which Lampert is the sole stockholder, controls 24.8% of the retailer’s common stock, while Lampert individually controls an additional 23.7% of Sears’ common stock.
Interestingly, in a filing on Thursday, hedge fund investor Bruce Berkowitz said an affiliate is exploring participating in the loan with an investment of up to $100 million. The hedge fund investor and his funds own 24% of the retailer. According to Chris Brathwaite, a spokesman for Sears, the new loan was at favorable terms and offered a more predictable source of funding than commercial paper, through which Mr. Lampert’s ESL Investments Inc. has made short term loans in the past.