RadioShack Creditors Sue Hedge Fund Standard General--2nd Update
August 31 2015 - 7:17PM
Dow Jones News
By Matt Wirz
RadioShack's junior creditors are suing hedge fund Standard
General LP, the company's largest prebankruptcy shareholder and
current owner, in a last-ditch effort to get repaid.
The lawsuit, filed Monday in U.S. District Court in Fort Worth,
Texas, by the committee representing RadioShack's unsecured
creditors, also names Wells Fargo & Co. and former Chief
Executive Officer Joseph Magnacca, alleging they helped Standard
General take over the company at creditors' expense.
The suit comes as the electronics retailer moves forward with a
number of settlements aimed at speeding its exit from chapter 11
protection. The bankruptcy sale of RadioShack's assets earlier this
year raised only enough to cover the company's top-ranking loans,
leaving litigation against RadioShack's owner and lender as the
unsecured creditors best hope of seeing a recovery.
"The allegations are without merit and the firm intends to
defend itself vigorously," a spokesman for Standard General said.
"Standard General was RadioShack's largest unsecured bondholder at
the time of the bankruptcy filing so it's not credible to think we
wouldn't be aligned with unsecured creditors." Mr. Magnacca and
Wells Fargo couldn't immediately be reached for comment.
RadioShack's unsecured creditors, including AT&T Inc.,
landlords of RadioShack stores, former employees and holders of
$330 million bonds, claim Standard General used Mr. Magnacca to
outflank the company's own financial advisers.
RadioShack lender Wells Fargo also helped Standard General by
arranging a new loan for RadioShack last October although analysts
at the bank knew the company was insolvent, according to the
lawsuit.
"Would it be risky for me to buy you a gift card from
[RadioShack] now for your Christmas present?" Wells Fargo analyst
David Eller joked with other analysts in an electronic message sent
Oct. 2, according to the suit. "I think you are good but you will
definitely need to use it before [March 15]," replied Grant Jordan,
a managing director in the bank's research department.
According to the suit, Standard General and Mr. Magnacca
maneuvered last year to block recommendations by RadioShack's
financial advisers to sell the company, possibly in bankruptcy
court. Liquidating the company in 2014, could have raised cash to
pay out unsecured creditors around 21 cents on the dollar, but left
shareholders like Standard General with nothing, the suit alleges.
The firm's bonds now trade for less than one cent on the dollar,
according to MarketAxess.
Standard General bought RadioShack's brand and leases for about
1,700 stores in May after a heated bankruptcy court battle. The
deal marked the culmination of a yearlong campaign by the hedge
fund to salvage its purchase of 9.8% of RadioShack's stock in early
2014.
In July 2014, Standard General gave Mr. Magnacca a position on
the board of directors of another company in which it owned the
largest stake, American Apparel Inc. The hedge fund's founder,
Soohyung Kim, counseled Mr. Magnacca that "frankly given what is
happening at [RadioShack] having something else going on might be
healthy," according to the creditor suit.
American Apparel warned in public statements this month that it
may file for bankruptcy court protection.
At the same time, Mr. Kim was pressuring Mr. Magnacca to fire
AlixPartners LLP, one of RadioShack's financial advisers.. In early
August Mr. Kim wrote to Mr. Magnacca that "Holly [Etlin of
AlixPartners] is a snake, you told me that you recognized that
early and we already know her...She should already be gone,"
according to the suit. Ms. Etlin declined to comment
Mr. Kim encouraged RadioShack's directors to work around the
same advisers the board had selected in 2013 to help the company
navigate a prolonged decline in sales. Mr. Magnacca wrote senior
managers instructing them concerning the advisers "not to share
information that they can use against us and our goals," according
to the suit.
Standard General wanted to bypass the advisers to enact a plan
that would ensure its continued control of the company after it
went bankrupt, according to the suit. The strategy hinged on
Standard General becoming a secured lender to RadioShack because
loan holders stand at the front of the line in corporate
bankruptcies, while shareholders come last, a person familiar with
the company said.
The creditors' suit, which also names Mr. Kim and RadioShack's
directors for breaches of their fiduciary duty, seeks to claw back
tens of millions in fees paid to Standard General and Wells Fargo
as so-called fraudulent transfers if the company was insolvent at
the time it took on new liabilities. Such lawsuits--seeking to
retrieve transfers a troubled company makes before collapsing--are
often unsecured creditors' best shot at seeing a recovery on their
losses.
The defunct retailer, which has officially changed its name, now
calls itself RS Legacy Corp.The remains of RadioShack are scheduled
to go before the U.S. Bankruptcy Court in Wilmington, Del., on
Sept. 16 to seek confirmation of the chapter 11 plan that divides
the remaining assets, including any proceeds from the lawsuit over
the company's failure.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
August 31, 2015 19:02 ET (23:02 GMT)
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