Questions raised in Interco bankruptcy probe Actions of board criticized in report

November 16, 1991|By Kim Clark

A bankruptcy court probe into the failure of Interco Inc. has left open the possibility of further investigation into allegations that then-Interco director Mark Lieberman cost stockholders millions of dollars when he bought a company division that makes London Fog raincoats.

Mr. Lieberman, who is now president of Eldersburg-based Londontown Holdings Corp., did not return several messages this week asking for comments.

In the court-requested investigation, New York bankruptcy attorney Sandra E. Mayerson found evidence that many of Interco's top executives breached their fiduciary duties to protect stockholders when they borrowed billions of dollars to fight off a hostile takeover in 1988.

Though she said "excellent cases" could be made against many of the top managers, she did not include Mr. Lieberman in the charges.

In a telephone interview earlier this week, Ms. Mayerson said that she "couldn't really draw a conclusion on" the legality of Mr. Lieberman's behavior. Mr. Lieberman was head of the Londontown division for Interco and was one of Interco's directors in 1988.

"Lieberman appears to have been primarily involved in managing Londontown. . . . Further investigation would be necessary to determine whether he was motivated by self-interest, i.e. the opportunity to buy Londontown and earn a huge profit, which he did," Ms. Mayerson concluded in her report to the U.S. Bankruptcy Court in St. Louis.

Ms. Mayerson's 556-page report, a result of a four-month, $3 million investigation into the cause of Interco's bankruptcy, outlined a sad tale of Interco managers ruining a once-strong conglomerate in a battle for corporate control.

In the mid-1980s, Interco was a holding company that featured well-known businesses such as Converse Shoes, Ethan Allen furniture, Florsheim Shoes and Londontown.

But in 1988, Washington investors Stephen and Mitchell Rales ++ tried to take over the St. Louis-based company.

The Rales brothers are known locally for buying Hunt Valley-based Easco Hand Tools Inc. and absorbing it into their Danaher Corp. Through a Danaher employee, Stephen Rales said yesterday that he didn't want to comment on the report, saying only that the "the report speaks for itself."

To fend off the Rales brothers' bid of $74 a share, Interco's executives borrowed about $2 billion and tried to sell off another $1 billion worth of businesses in order to pay stockholders $76 worth of special dividends instead.

Mr. Lieberman and a group of Londontown executives bought the 3,000-worker raincoat company from Interco for $178 million in December of 1988. Ms. Mayerson found that the executives refused to consider the Raleses' offer for fear of losing their jobs. Instead of doing what was best for shareholders, the top Interco managers gave inflated estimates of Interco's value to financial advisers and burdened the company with too much debt. But Interco couldn't pay off all the debts, and it filed for bankruptcy Jan. 26.

Mr. Lieberman and his management team sold a majority share of Londontown to Merrill Lynch Capital Partners last June for $275 million, nearly $100 million more than they paid.

Ms. Mayerson said that many of those involved in the case asked her to look into the legality of the business sell-off, but she did not have the time or resources to do so. She looked only at causes of the bankruptcy, she said.

The report does cite complaints from Goldman Sachs & Co., which was hired by Interco to sell off divisions. Goldman Sachs said that insider bids cost Interco's stockholders millions of dollars.

Indeed, the report notes, the Interco board refused to consider a $190 million bid for Londontown by Burlington Coat Factory Warehouse Inc., instead selling Londontown to Mr. Lieberman for $12 million less.

Ms. Mayerson said her investigation left her with questions about Mr.Lieberman's role.

Did he know the company's valuation of its divisions was inflated and offer a fair price for Londontown? If so, his actions as an Interco board member may be suspect, she said.

Or did Mr. Lieberman believe the company's inflated valuations of its divisions? If so, his winning bid for Londontown may be suspect, she said.

In her report, Ms. Mayerson recommended the parties not pursue legal cases against the directors unless negotiations to settle the company's debts amicably fail.

Attorneys for both Interco and the people to whom it owes money said last week they hope to settle the case soon.

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