Former Toys ‘R’ Us executives sued for fraud

A new lawsuit claims the retailer’s senior executives misrepresented the company’s financial state to vendors before paying themselves millions in bonuses.
March 13, 2020

The TRU Creditor Litigation Trust is suing former Toys “R” Us senior executives and corporate directors for fraud in the retail giant’s bankruptcy and liquidation. The lawsuit was filed yesterday in the New York Supreme Court, and calls for an award of money damages to compensate for losses resulting from the defendants’ allegedly wrongful conduct, as well as an award of punitive damages.

Toys “R” Us filed for bankruptcy protection in September 2017 and shuttered its US operations in March 2018. According to the lawsuit, Toys “R” Us CEO David Brandon developed a bonus program that saw the company pay US$16 million in bonuses to top executives, including a US$2.8-million bonus for Brandon himself. The TRU Trust alleges these bonuses were paid just before the company filed for bankruptcy to avoid scrutiny by the bankruptcy court.

The retailer’s bankruptcy reportedly resulted in US$1.76 billion in unpaid pre-bankruptcy claims, creditors holding more than US$800 million in administration claims, and 31,000 employees losing their jobs. The lawsuit asserts these losses were caused by the “breaches of fiduciary duty, fraudulent concealment, misrepresentation and negligence of a handful of senior executives and corporate directors acting in their own self-interest and against the best interests of the company, its creditors and its employees.”

The TRU Trust also alleges Brandon and other defendants, including former Toys “R” Us CFO Michael Short and former CMO Richard Barry, communicated to toymakers that the company would be able to pay for consumer products shipped on credit during the bankruptcy process, even after it became clear the retailer would not be able to pay for those goods. The lawsuit asserts that, as a result, toymakers lost more than US$600 million when the retailer liquidated in March 2018.

Companies listed in the lawsuit as having suffered losses include Funko, Funrise, Goliath Games, Hasbro, Jakks Pacific, Jazwares, Just Play, Mattel, MGA Entertainment, Moose Toys, Playmates Toys, Playmobil, PlayMonster, Ravensburger North America, Skyrocket Toys, Spin Master, The LEGO Group and Wicked Cool Toys.

“The defendants 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,” said the TRU Trust’s attorney Greg Dovel in a statement. “Some toymakers lost everything.”

Furthermore, the lawsuit claims private-equity firms KKR, Bain Capital and Vornado Realty Trust (which acquired TRU in 2005) took millions of dollars from the company in fees, leaving it unable to pay down its debt.

“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 the defendants’ lead counsel Bob Bodian in a statement to Kidscreen. “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.”

In February 2019, the New Jersey-based retail giant returned as a new company with new leadership. Tru Kids—doing business as Tru Kids Brands—is the parent of more than 20 toy and baby brands, including Toys “R” Us, Babies “R” Us and Geoffrey. Barry, previously TRU’s CMO and one of the defendants of the lawsuit, now serves as Tru Kids Brands’ president and CEO. In July 2019, Tru Kids Brands announced a joint-venture with experiential retailer B8ta to launch smaller-footprint stores in the US.

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