Lawsuit Alleges Toys R Us Execs Bilked Company During Bankruptcy

A lawsuit filed in New York representing a trust of more than 100 creditors for Toys R Us claims that executives took bonuses they shouldn’t have and had inappropriate financial relationships with private equity owners, all while the company was crumbling due to increased competition from companies like Walmart and Amazon.

Retail Dive is reporting that the lawsuit alleges that bonuses were paid right before bankruptcy and that a failed plan to revive the company resulted in hundreds of millions in unpaid claims.

The lawsuit says that execs and private equity owners are guilty of “breaches of fiduciary duty, fraudulent concealment, misrepresentations, and negligence” that led to suppliers and creditors bilked out of hundreds of millions.

Co-Chairman of Bain Capital Josh Bekenstein, then Toys R Us CEO Dave Brandon, former Chief Financial Officer Michael Short and former Chief Merchant Richard Barry are all named in the lawsuit. Barry now runs TRU Kids, which handles the company’s intellectual property. Members of the company’s board are also named in the suit.

“At all times, the former directors and officers of Toys R Us and members of management acted in the best interests of the company and its stakeholders,” said Bob Bodian of Mintz, lead counsel for the defendants. “Because none of the named defendants has any financial exposure, this lawsuit is just a misguided effort to pressure insurance carriers to pay meritless claims. We will defend against this baseless lawsuit vigorously.”

Toys R Us was left with a debt load of over $5 billion after its leveraged buyout, and it paid tens of millions in fees to its private equity sponsors. The lawsuit states that the company’s directors were the ones who decided whether to renew the deal to pay the fees and whether to negotiate the amount.

“On its face, the agreement made no sense,” the complaint states. “TRU paid large fees each quarter to Bain, KKR, and Vornado — the equity owners of the company. But Bain, KKR, and Vornado were not required to provide any actual services in exchange for these fees. Moreover, TRU was already paying expensive outside consultants, such as McKinsey and AlixPartners, for business advice.”

The lawsuit says the fees are an “obvious conflict of interest.”