A federal appeals court on Tuesday backed a lower court’s dismissal of a securities lawsuit against Sears Holdings Corp., its chairman Edward Lampert and former Kmart chief executive officer Julian Day.
The fraud suit, filed by former Kmart investors in 2006, alleged the executives intentionally undervalued Kmart’s real estate holdings during the company’s reorganization from its 2002 bankruptcy. Kmart merged with Sears Roebuck & Co. in 2005 to become Sears Holdings Corp. Lampert’s hedge fund, ESL Investments, is the company’s majority shareholder.
The suit’s plaintiffs, who included individual investor Fred Campo as well as the Mississippi Public Employees’ Retirement System and the Plumbers and Pipefitters National Pension Fund, alleged Lampert and Day misrepresented the real estate’s value in public statements and filings in order to drive its stock price down. The suit alleged the executives then bought up shares of the retailer at a below-market rate.
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Judge Lewis Kaplan dismissed the suit in U.S. District Court in Manhattan in July. Among other reasons, Kaplan wrote that the plaintiffs’ own valuations of the holdings were “too speculative.”
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A three-judge panel of the U.S. Second Circuit Court of Appeals in Manhattan affirmed Kaplan’s dismissal in an opinion Tuesday. The panel wrote the plaintiffs hadn’t shown adequate evidence that Lampert and Day had motive to misrepresent the real estate’s value. Even if they had, the judges wrote, the pair could not logically have been motivated to do so by a desired stock grab because the options they exercised had been negotiated months in advance.
“To the contrary…Lampert and Day’s only economically rational motive would have been to disclose any information that might increase the company’s stock prices,” the judges reasoned.
A representative for the lead plaintiffs’ counsel could not be reached for comment.
Sears spokeswoman Kim Freely said the company was pleased with the Second Circuit’s decision.
Separately on Tuesday, Sears, in filing its definitive proxy with the Securities and Exchange Commission, reported the compensation of W. Bruce Johnson, interim president and ceo of the firm, dropped 20.6 percent last year to $1.5 million from $1.9 million in fiscal 2008.
Johnson, who’s now served more than two years as interim ceo, voluntarily reduced his salary to $850,000 from $900,000 last year. He earned more than $896,000 in salary the prior year, when he took over the ceo role for Aylwin Lewis.
Johnson’s stock awards fell 33.7 percent to $663,000 from $1 million in 2008, Sears’ proxy said. Stock awards are filed with the SEC but, because of fluctuating stock prices and vesting schedules, aren’t necessarily realized.
Including more than $2.6 million in stock awards, John Goodman, who joined Sears as executive vice president of apparel and home last November, earned $3.1 million.
The proxy showed that, through ESL, Lampert owns 56.9 percent of Sears’ common stock, up from 54.1 percent in the 2008 proxy.