Former Levitz execs sued
Bond buyer says they overstated asset value
By Clint Engel -- Furniture Today, April 16, 2006
New York — A former bondholder of Levitz Home Furnishings Inc. is suing the retailer's former executives and its accountant, charging they committed fraud by pumping up a troubled Levitz during a 2004 bond offering when the company actually was "on the verge of implosion."
Bay Harbour Management LLC, which held $19 million of $130 million in bonds Levitz had issued, claimed in that at the time of the November 2004 bond offering, the defendants "engaged in a scheme to artificially inflate and misreport the value of LHFI's assets," and omitted material information about the company's health.
The complaint, filed March 30 in U.S. District Court in New York, named as defendants Jay Carothers, former LHFI Chairman and CEO, who resigned shortly after the debt offering; Mark Scott, former president and chief operating officer; Coleen Colreavy, former chief financial officer; Robert Webber, former senior vice president and general counsel; Norman Matthews, former non-executive chairman; and Michael Carleton, who was vice president of customer service and store operations and chief information and services officer.
Carleton, who still works at the surviving Levitz Furniture, declined to comment. Other LHFI defendants could not be reached for comment.
Also named as a defendant is LHFI's accounting firm, Deloitte & Touche USA. Deb Harrington, a spokeswoman for the firm in New York, said the company had no comment because it has not had time to review the complaint.
Prentice Capital Management and Great American Group acquired LHFI's primary assets out of bankruptcy protection late last year.
The suit said that despite the "illusion created by defendants," Levitz was in financial distress in 2004.
"Less than one month after the closing of the debt offering, and even before it had paid the first coupon on the bonds, LHFI announced that it was deeply insolvent and had a shortfall of approximately $40 million," the lawsuit contends.
LHFI filed for Chapter 11 bankruptcy protection last October, less that a year after the offering.
Bay Harbour said the defendants engineered a scheme to hide the company's dire financial shape in part to ensure the continuation of rich pay packages that were ballooning even as the company was failing.
According to the suit, Carothers' base compensation was $429,231 in 2004 and $511,538 in 2005, when he also received a $200,000 bonus. It said Scott had a base salary of $511,538 and a $150,000 bonus in 2005.
The suit also charged that LHFI inflated the equity value of its leasehold interests, then, without explanation, reduced the valuation after the debt offering to $48 million from the previous $73 million estimate.
In an offering circular distributed to potential debt investors, Levitz highlighted several "inherent strengths," including its strong vendor relationships, according to the suit. Executives reinforced the point during a road show for the debt offering, Bay Harbour said.
The suit said that, "unbeknownst to (Bay Harbour) at the time of the debt offering, not only were LHFI's vendor relationships not strong ... but in fact ... LHFI was actually on the verge of losing three of its top vendors due to (its) failure to make timely payment. This made it impossible for LHFI to fill orders and resulted in substantial backorders and cancellations. None of this was disclosed to investors," the suit said.
LHFI was dependent on a limited number of vendors and "had poor relationships with all of them," the lawsuit added. It said the retailer "was unable to obtain preferential pricing and actually paid more for furniture than its competitors," and that its spotty inventory led to undeliverable sales and drove customers away.
"Despite defendants painting a grossly misleading and inflated picture of LHFI's finances and future prospects in the (offering circular) and during the road show, the actual condition of its balance sheet and future prospects were less than bleak — LHFI was on the verge of implosion," the suit said.
As part of its acquisition of LHFI, Prentice offered to buy the outstanding bonds for $50 per $1,000 of their face amount. Additional terms pushed the payout to bondholders to as much as $100 per $1,000.
Bay Harbour said it accepted the offer of $1.9 million for its $19 million in bonds, mitigating some of the damages, but said it got only a fraction of what it would have received if not for the conduct of the defendants.
It is seeking a jury trial and damages of not less than $19 million.
Jennifer Saffer, an attorney representing Bay Harbour, declined to comment further.
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Lawsuit accuses former Levitz execs of lying
Apr 13, 2006
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