By  on February 15, 2002

NEW YORK -- A Fingerhut shareholder on Thursday filed a lawsuit for and against Federated Department Stores Inc. and its top management in an attempt to stop the retailer's liquidation of its Fingerhut catalog operation and force its sale.

The filing of the lawsuit was first reported in WWD on Monday. A Federated spokeswoman said, "We are dismayed at any action that could disrupt what now has been a year-long, good-faith process to sell Fingerhut. Allegations to the contrary are completely groundless and, given that the process is still ongoing, entirely irresponsible. This lawsuit is totally without merit and will be vigorously defended."

Nick Wesenberg, a shareholder and current Fingerhut employee, filed the derivative action in a Minnesota state court in Hennipan County. Since he is a shareholder, Wesenberg filed the suit both on his own and on Federated's behalf. A shareholder derivative action is filed to hold directors and executives accountable for decisions that are alleged to be contrary to the firm's best interests. Other shareholders could legally join the suit, but it currently is not seeking class-action status.

Named defendants in the suit include James Zimmerman, chairman and chief executive officer of Federated; Terry Lundgren, director, president and chief merchandising officer; Ronald Tysoe, director and vice chairman, finance and real estate, and eight other directors of the company.

Also named as co-defendants are three Fingerhut executives: Michael Sherman, president and ceo; Steven Lightman, vice president, operations, and Nils Ytterbo, senior vice president and chief financial officer. The lawsuit specifically alleged that the Fingerhut executives were promised substantial severance payments to help Federated officers and directors liquidate Fingerhut rather than sell it as an ongoing concern.

The lawsuit charged the defendants with breaching their fiduciary duties to stockholders because Fingerhut allegedly is worth much more to buyers intact. Federated executives and board members were charged with "gross mismanagement" that resulted in the deterioration of the company's value. The lawsuit also alleged that liquidating Fingerhut would enable the executives to hide losses and spread them out over four quarters.

Other allegations against the executives include a failure to take steps to determine if a better price was available for potential bidders to buy Fingerhut as an operational company and the failure to conduct an auction of Fingerhut to determine the highest possible price.William Lerach of Milberg Weiss Bershad Hynes & Lerach, lead counsel for the plaintiff, said in a statement: "By making plans to liquidate Fingerhut without even considering offers for the company, Federated executives acted irresponsibly and betrayed the best interests of their shareholders. Now that such offers have been made, shareholders will insist that all options are pursued that could keep the company alive."

WWD this week reported that several companies are expected to review the forthcoming prospectus detailing the Fingerhut sale, including Texas Pacific Group. Two Minnesota turnaround firms on Monday also confirmed their interest: Peter Lytle's Business Development Group and Thomas Petters's The Petters Companies. Lytle's firm said the company has signed a confidentiality agreement with Federated, while Petters's spokeswoman said he is "reviewing" the company.

A Federated spokeswoman said last week that at least one bid has been received, but declined to provide further details.

Others likely to step up include Ted Deikel, president of Fingerhut prior to its sale to Federated, and two other New York-based investment firms, according to financial sources.

Wesenberg, an employee for 17 years at Fingerhut's receivables department and a Federated shareholder, said in a statement: "I believed in the company enough to use my own money to buy Federated stock. As an employee at Fingerhut and a shareholder, I can't sit by and watch the executives liquidate a once profitable company instead of asking for a fair purchase price that would keep our doors open."

The plaintiff is requesting injunctive relief to stop the liquidation process and force the defendants to solicit buyers for Fingerhut. Thursday's lawsuit claims that a liquidation of Fingerhut would decrease its value by hundreds of millions of dollars because the majority of its worth is based on money owed to Fingerhut by current customers. The lawsuit also stated that those customers will have little incentive to pay their credit card debt once the company is discontinued.

As reported, Federated announced on Jan. 16 that it would pull the plug on its troubled Fingerhut subsidiary. Zimmerman said at the time that although Federated had not ruled out the sale of the Fingerhut catalog as an ongoing business, it was "unlikely that a buyer will be found, given the highly specialized nature of that business and the current economic environment. Therefore, Federated is preparing to manage the closing of the Fingerhut catalog operation and the wind down and collection of the Fingerhut receivables portfolio."Federated has been working for the past year with Credit Suisse First Boston to find a buyer for Fingerhut, according to financial sources. Nearly 70 percent of Fingerhut's 6,000 employees in Minnesota and Tennessee had received 60-day notices late last month. The Union of Needletrades, Industrial and Textile Employees has since demanded that Federated rescind the 60-day layoff notices that were sent and that the retailer order merchandise and publish catalogs while it searches for a buyer.

Federated said last month that it did expect to sell as ongoing businesses Arizona Mail Order, which issues catalogs under the names of Old Pueblo Traders, Lew Magram, Brownstone Studio and Bedford Fair; Figi's and Popular Club Plan. An investment banker told WWD on Thursday that the bulk of the value of Fingerhut was from these businesses.

As of last week, Federated was no longer opening new credit card accounts for Fingerhut, nor was it accepting orders. The other catalogs are still in operation and accepting new orders.

Fingerhut has been a sore point with investors ever since Federated bought the company for a pricey $1.7 billion in February 1999. When bought by Federated, Fingerhut was the third-largest U.S. catalog after J.C. Penney Co. and Spiegel, and had expanded aggressively on the Internet, including ownership in four e-commerce sites.

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