Directors from Bain Capital and KKR are among former Toys R Us executives being sued by a bankruptcy trust alleging they “siphoned desperately-needed funds” out of the business as it tumbled into bankruptcy.
KKR, Bain Capital and Vornado Realty Trust bought the struggling retailer in a $6.6bn leveraged buyout in 2005, loading the business with about $5bn in debt. The company filed for bankruptcy in 2017 after struggling to keep up with online competitors such as Amazon.
The case targets Bain Capital’s co-chairman Joshua Bekenstein and senior advisor Matt Lewin, and KKR’s Americas co-head Nate Taylor and member Paul Raether, as well as former Toys R Us chief exec David Brandon and a string of former senior execs from the company.
A laundry list of accusations from the TRU Creditor Litigation Trust includes the allegation that Brandon caused Toys R Us to pay $16m in bonuses to top executives, including $2.6m for himself, just days before the company filed for bankruptcy.
It also claims that directors employed by Bain Capital, KKR and Vornado had Toys R Us pay millions of dollars in advisory fees to their firms, even though the ailing retailer was strapped for cash and unable to pay its overwhelming debt.
The case filing with the New York Supreme Court alleges the defendants made “a foolish, ill-considered, and selfish gamble” by taking out a $3.1bn debtor-in-possession financing in 2017 to benefit themselves and the PE firms, after years of taking money out of the company and underinvestment in critical resources.
The Trust adds that Brandon and other defendants concealed the company’s financial woes to suppliers in the run-up to bankruptcy, making out the business could pay for goods shipped on credit thanks to the $3.1bn financing.
It said company directors and officers learned in mid-December 2017 that the financing would terminate, but alleges Brandon, ex-CFO Michael Short and former CMO Richard Barry misepresented the company’s financial condition to vendors for three more months to urge them to ship on credit.
The case filing says toymakers lost more than $600m when Toys R Us was liquidated in March 2018.
TRU Trust attorney Greg Dovel said, “Toys R Us is yet another unfortunate example of corporate greed resulting in executives and private equity firms benefiting at the expense of others.
“The defendants prioritized their own financial well-being, as well as the financial well-being of three private equity companies, ahead of the company that they were entrusted to run.
“They siphoned desperately-needed funds out of Toys R Us as it tumbled into bankruptcy and then misrepresented TRU’s financial situation to induce toymakers to provide goods on credit. Some toymakers lost almost everything.”
The case is TRU Creditor Litigation Trust v David A Brandon, Joshua Bekenstein, Matthew S Levin, Paul E Raether, Nathaniel H Taylor, Joseph Macnow, Wendy A Silverstein, Richard Goodman, Michael Short, Richard Barry in the New York Supreme Court, case number 651637/2020.
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