Manhattan landlord Jeff Sutton filed a lawsuit claiming Steven Shore and Barry Prevor, co-founders of clothing and accessories chain Steve & Barry's, misallocated the $1 million Sutton paid them in May to install escalators and elevators in their store at Brooklyn's Fulton Street Mall. According to a report in the New York Post, Sutton claims that the company collected $122 million from landlords but only spent $59 million on building new stores. The balance of the money, he claims, was inappropriately used for operating expenses.
Sutton claims he forked over this cash, just 47 days before the chain filed for bankruptcy protection last July, because he relied on “false and misleading financial statements that overstated Steve & Barry's equity and assets.”
Sutton alleges the incident reflects a larger pattern of using tenant-improvement payments to prop up a failing business.
“Defendants engaged in a widespread scheme to use false financial information to induce landlords to make up-front tenant-improvement payments that defendants never intended to, and did not, use for store construction and improvements,” Sutton claims in his lawsuit.
The New York Post also noted that lawyers for the creditors' committee are investigating the inventory-accounting methods the company used, which auditing firm BDO Seidman signed off on. Court papers show the probe also focuses on a $320 million private-equity deal in 2006 in which Prevor and Shore pocketed $152 million in exchange for shares in the retailer, and whether the transaction left the company insolvent.
Steve & Barry's originally filed for bankruptcy protection in July and was sold in August for $168 million to investment firms Bay Harbour and Management and York Capital Management. The bargain retailer filed for bankruptcy protection again in November with a plan to liquidate its remaining 173 stores by early 2009.
