The hits just keep coming for Apollo Management, which is now being sued for allegedly concealing problems at Linens ‘n Things. The plaintiff is fellow private equity firm Levine Leichtman Capital Partners, which operates a leveraged loan fund that held around $43.5 million of senior secured notes in the now-bankrupt retailer.
In the complaint filed March 20, LLCP accuses Apollo of making materially false statements about Linens ‘n Things’ fiscal health. For example, Apollo allegedly neglected to reveal that some of its credit agreements were in default:
Defendants were negligent in that they should have known that the financial condition was materially overstated and net loss understated for failure to record impairment charges for assets that were securing the Notes, i.e., fixed and intangible assets. Because impairment charges were not being taken timely and recorded in accordance with GAAP, theNotes were in default. As the Credit Facility contained cross-default covenants, the Credit Facility itself also was in default.
Thus, defendants had no good faith or reasonable basis to state that “So we’re comfortable with the credit facility today, and we’re excited about the support we received on a go-forward basis with the addition of $100 million by the end of the second quarter,” and failed to disclose to Mr. Kim, when he asked about “additional covenants,” the fact that the Notes were in default as was the Credit Facility.
LLCP also argues that Apollo was asleep at the wheel when it came to closing underperforming stores, in part because the relevant analyses were not conducted until it was too late. This was a particularly egregious error, LLCP says, because part of the original investment thesis was to increase EBITDA and net sales per average square foot via: (a) Increasing sales, and (b) Decreasing square footage.
Moreover, LLCP alleges that when Apollo did finally bring in outside advisors, it denied having done so. The final charges are about supposed violations of SEC rules and GAAP (generally accepted accounting principles).
LLCP is seeking unspecified compensatory damages from Apollo, two Apollo partners (Peter Copses and Andrew Jhakar), Linens executives Robert DiNicola and Francis Rowan, and Apollo co-investors NRDC Real Estate and Silver Point Capital. Here is a copy of the complaint: