Sears, Lampert targeted in appeal of Kmart case

(Reuters) — Sears Holdings Corp. and its chairman, Edward Lampert, face an appeal of a federal lawsuit by former Kmart Holding Corp. shareholders accusing them of making false statements to drive down Kmart's share price.

According to a notice made public on Friday, the plaintiffs in the class-action lawsuit plan to appeal to the U.S. Second Circuit Court of Appeals a July 21 lower court ruling that they failed to show wrongdoing by Sears, Lampert and Julian Day, a former Kmart chief executive officer.

Lampert, a billionaire investor, got a controlling stake in Kmart and became its chairman when the retailer emerged from bankruptcy in 2003.

The plaintiffs allege that he and Day publicly undervalued Kmart's real estate assets to conceal that Lampert had gotten control of the company at a price far below fair market value, and to allow both men to buy more shares at bargain prices.

They said that when Kmart sold some of those assets to Home Depot Inc. and the former Sears Roebuck & Co, its shares rose more than 60 percent in fewer than four months, giving Kmart and Lampert the ammunition to merge with Sears.

The plaintiffs contend that they sold their Kmart shares at artificially low prices because of the misrepresentations, but U.S. District Judge Lewis Kaplan rejected the claims.

In his ruling, he said the plaintiffs failed to show that defendants represented that Kmart real estate was worth just $10 million when it was actually worth about 1,000 times that, or $9 billion to $18 billion. He said that this "rather dramatic" theory "piles one unsubstantiated assumption on another."

The judge also said the plaintiffs failed to demonstrate any intent to deceive. He added that because Lampert and Day were obligated to buy Kmart shares and exercise Kmart stock options at fixed prices under contracts made during the retailer's bankruptcy, "it defies logic and common sense" for them to want to drive the share price down.

The lead plaintiffs in the case are the Plumbers and Pipefitters National Pension Fund, the Mississippi Public Employees' Retirement System, and Fred Campo.

Sears posted a surprise quarterly loss on Thursday as falling sales overshadowed efforts to cut costs. The stock fell 11.9 percent on Thursday and is down by roughly two-thirds from its April 2007 peak.