Heath Freeman and others may face subpoenas, depositions
By Julie Reynolds
The secretive business practices of Alden Global Capital, owner of the Digital First Media newspaper chain, will soon face scrutiny in a federal bankruptcy court, just weeks after Alden’s failed attempt to take over Gannett Co.
With little pushback, Alden’s self-appointed board members appear to have given themselves free rein to use the struggling companies they control as personal cash cows, court records and SEC filings show.
We’ve already reported that Alden has diverted hundreds of millions from what would have been Digital First’s cash reserves. But new documents show Alden executives are using similar tactics to personally profit from bankrupt Payless Shoesource and Fred’s pharmacy chain.
A case unfolding in the Federal Bankruptcy Court for the Eastern District of Missouri has become a battleground as Payless creditors’ alarm over Alden’s business dealings is expected to come to a head at a June 20 hearing.
Payless is in the process of shuttering all of its 2,500 stores in the US and Canada, and roughly 16,000 employees have lost their jobs. Alden took control after the company’s first bankruptcy in 2017.
Payless’ “surprising demise following (its) emergence from Chapter 11 less than two years ago appears to have been hastened by suspect transactions involving Alden and Alden affiliates,” the creditors said in a motion filed May 22.
The Alden Matters
According to court filings, the Payless creditors committee has begun investigating what it refers to as “The Alden Matters.”
Among the Alden actions under investigation are:
- Causing Payless’ Latin American arm, Payless CA Management Limited, to borrow $45.5 million from Alden. The loan, made in early October by the Alden Global Opportunities Master Fund, L.P., was secured by “substantially all” of Payless CA’s assets, putting that company in Alden’s hands if it defaults.
- Arranging for Payless to quietly lease office space owned by Alden’s founder Randall Smith, “purportedly in an attempt to move their headquarters” from Topeka, Kansas…. “It is unclear which — if any — of the (company’s) operations are run out of the Dallas office,” the motion states. But by Payless’ admission in court pleadings, its “corporate headquarters” is in Topeka, while its address “[w]ith respect to certain taxing authorities” is in Dallas.
- Entering into a “shared services contract with Aerosoles,” another Alden-controlled company.
- Replacing Payless’ “experienced” chief executive W. Paul Jones with “inexperienced Alden-appointed employees.” Jones, the motion states, was succeeded by Martin Wade III, “an Alden-affiliated individual, who… had no experience as an officer of a retail company.”
“All the while,” the filing states, Payless’ financial condition was “rapidly deteriorating.” In 2018, the company missed its projected earnings by nearly $150 million.
The federal court was concerned enough to set up a special committee to handle any decisions that involve Alden, “due to numerous issues on which Alden’s interests were and are in conflict” with those of Payless.
Now the creditors are asking the special committee to share any documents it has received from Alden and to sit in on depositions of Alden executives, suggesting that Alden president Heath Freeman could be among those answering questions under oath.
Alden is objecting to sharing certain documents, though, citing attorney-client privilege. Part of the hair-splitting involves whether the executives were acting as Payless or Alden employees, even though they used Alden email addresses.
The creditors claim that the U.S. Supreme Court has “explained that permitting a debtor to assert the attorney-client privilege to stymie an investigation of insiders would subvert bankruptcy policy.”
On May 31, Judge Kathy Surratt-States ruled that the creditors’ request to receive the withheld Alden documents would be heard in St. Louis at 11 a.m. on June 20.
Rewarding failure at Fred’s?
Meanwhile, new Securities and Exchange Commission filings show how Alden executives are profiting handsomely from the slow demise of the Fred’s pharmacy chain.
This week, a delayed annual report filed with the SEC shows that as Fred’s laid off workers, shuttered stores and its shares tanked to nearly worthless, the Alden-controlled board gave substantial pay raises to the company’s top executives — all while awarding themselves nearly a million dollars in stocks, cash and benefits.
Let’s not forget that Alden obtained its control of Fred’s on the backs of Digital First employees, secretly siphoning $158 million from the newspapers to buy Fred’s stock that has since lost 97 percent of its value.
Yet this past year, the Alden executives and associates who now control the Fred’s board managed to pay themselves $997,000 while the company flounders. It also owes lenders Cortland Products Corp. some $277 million, along with $195 million owed to Wells Fargo Bank.
Compensation to Alden-affiliated members of Fred’s board (June 3, 2019 SEC 10-K report)
It’s worth noting that these four executives were on the original slate Alden nominated when it tried unsuccessfully to take over the Gannett news chain last month. To purchase its Gannett shares, Alden used a fund — created from Digital First monies — called Strategic Investment Opportunities LLC, the same fund it used to buy Fred’s stock.
Another secret move to Dallas
The SEC filing as well as Fred’s own help-wanted ads indicate that Alden has also quietly moved Fred’s offices to Randall Smith’s Dallas office building, an address the ads refer to as Fred’s “corporate offices.”
Fred’s is still officially headquartered in Memphis, but the listing of that building for sale has fueled speculation that Alden secretly moved the headquarters to Dallas in an apparent act of “self-dealing.”
Like Payless, the Fred’s executive roster is under Alden’s grip. Its chief executive is Joe Anto, a mergers and acquisitions exec who crossed over from MediaNews Group, aka Digital First. Anto received a pay raise when he went from interim to permanent CEO in February, bringing his base pay to $675,000, up from $494,231, the SEC filing shows.
“Shortly after the base salary increases were enacted, the company’s board approved a discretionary incentive bonus pool in March for Anto and other ‘senior executives and employees,’” the Memphis Business Journal reported. “Anto received a cash payment equal to $190,000 and 124,579 shares of restricted stock.”
In February, the company operated 584 stores in 15 Southern US states, but since then, Fred’s announced the closure of nearly half of them — more than 260 total — in Alabama, Arkansas, Florida and Georgia.
Fred’s stock is now in danger of being delisted from the NASDAQ because, as of this writing, it was trading at only 47 cents a share.
In an ironic footnote that won’t be lost on the 16,000 Payless employees who’ve lost their jobs, Alden’s execs joined the board of Fred’s with the promise of turning the business around.
When Heath Freeman became Fred’s board chair in September 2017, then-CEO Michael Bloom commented that “Heath brings significant retail, turnaround, and financial expertise and we determined that as chairman, Heath will bring invaluable insights and experience as the company continues to execute its turnaround strategy.”