Investor Relations 101

[Tina]

Issue Date: IR Alert - July 28, 2009

Shareholder Class-Action Suit Dismissed: Charges that Two Kmart Execs Drove Stock Value Down Post-Bankruptcy are Unsupported

A federal judge has dismissed a shareholder suit alleging two top Kmart officials tried to drive down the price of the company's stock by toying with asset values during and just after its bankruptcy reorganization. Southern District of New York Judge Lewis A. Kaplan threw out a putative class action that claimed former Kmart board chairman Edward S. Lampert and Julian Day, the company's former president, chief operating officer and chief executive officer, intentionally undervalued billions in real estate assets, the New York Law Journal reports.

The plaintiffs in Campo v. Sears Holdings Corp. bought shares in Kmart between May 6, 2003 — the day Kmart emerged from Chapter 11 bankruptcy — through Sept. 29, 2004. Lampert headed the board from May 6, 2003, until March 2005. Day held his positions from March 2002 until October 2004. The plaintiffs alleged both executives undervalued the real estate so Lampert could win control of the company at a low price and both Lampert and Day could acquire Kmart shares for a low price, reports Journal writer Mark Hamblett.

Kaplan explained that Sears was sued because Kmart acquired Sears, Roebuck & Co. in 2005 and Sears allegedly succeeded to Kmart's liabilities.

In filings with the Securities and Exchange Commission, the plaintiffs charged, Kmart stated that its plant property and equipment were worth $4.623 billion but the value was reduced to just $10 million "to adjust assets and liabilities to fair market value ('FMV'), and reflect the write-off of Predecessor Company's equity and application of negative goodwill to long-lived assets."

In reality, the plaintiffs claimed, the value of the real estate was between $9 billion and $18 billion.

But Kaplan disagreed with that argument. "This rather dramatic assertion is not borne out by plaintiffs' well pleaded factual allegations," he said. "First, defendants never represented that the fair market value of Kmart's real estate was $10 million. In each of the statements in question, Kmart disclosed that it had accounted for its assets as required by fresh start accounting."

The judge said that after reading the disclosures "no rational investor reasonably could have concluded that $10 million represented the fair market value of the company's real estate. To the contrary, any literate person would have understood that Kmart had stated that the fair market value of its [plant, property and equipment], as of April 30, 2003, was $4.623 billion."