Private Equity Firms Need New Rules for Managing Companies They Own

The $166 million settlement reached in October by creditors against private equity companies Cerberus Capital, Sun Capital Partners, and Lubert-Adler/Klaff was among the largest against private equity firms accused of stripping assets from a company they owned and driving it into bankruptcy. The complaint against the private equity owners of Mervyn's, a major mid-tier department store chain with 30,000 employees and 257 stores when it was carved out of retailer Target in 2004, alleged that illegal actions by the private equity owners undermined Mervyn's viability as a going business.

The private equity firms were accused of engaging in a fraudulent transaction when they split off Mervyn's valuable real estate assets and later sold them without compensating Mervyn's for the loss of its property.  The private equity owners were also accused of breaching their fiduciary duties to Mervyn's and its creditors by requiring Mervyn's to pay them a dividend at a time when the department store chain was essentially insolvent.  All of this despite the fact that it is illegal for owners to strip a company they own of assets and resources and drive it into bankruptcy. <Read more>