Byline: Vicki M. Young

NEW YORK — Three shareholders of Sears, Roebuck & Co. have filed suit against the retailer and three executives, charging them with violating federal securities laws by withholding information about an illegal business practice that allegedly caused an artificial inflation of Sears’ stock price.
The three executives named are Arthur Martinez, chairman and chief executive officer; Alan J. Lacy, chief financial officer, and James A. Blanda, vice president and controller.
The claims stem from an April 10 announcement by Sears that it failed to file reaffirmation agreements executed by bankrupt debtors with the U.S. Bankruptcy Court in Boston.
Consumers who file for personal bankruptcy can in some cases be relieved from obligations to pay credit-card debt, which blocks creditors from acting to collect those debts.
However, bankruptcy law allows debtors to voluntarily “reaffirm” any debt discharged in bankruptcy and become legally liable to repay it. The reaffirmation agreement must be filed with the bankruptcy court.
As reported, a class-action suit by two debtors who signed reaffirmation agreements with Sears was filed in Boston bankruptcy court. It charges Sears with “aggressively” seeking reaffirmation agreements and collecting payment on agreements that have no legal effect because of the failure to file. Sears admitted to “flawed legal judgment” in not filing reaffirmations and has agreed to repay all money collected from 1992 until April 31, 1997, with interest. A Sears spokeswoman said that the payments, “may have a material effect on 1997 earnings.” In Massachusetts alone, Sears has identified 2,733 debtors with unfiled reaffirmations for the two-year period of 1995-1996. Sears is conducting an audit to determine how many filings are involved.
The shareholders suit, filed in federal court in Chicago, covers purchasers of Sears stock from Oct. 4, 1996, through April 10, 1997. Because of the reaffirmation agreements, the executives are charged with participating in a “fraudulent scheme and course of business that operated as a fraud or deceit on purchasers” of Sears’ common stock and in concealing those facts.
The court papers said that the practice and concealment is significant to Sears’ operations because Sears reportedly derives “substantial revenue from finance charges and fees associated with its charge cards.”
Moreover, SEC filings addressing the rise in uncollected consumer debt touted Sears’ implementation of an “aggressive action plan designed to mitigate the increase in write-offs…including increases in collection staffing levels and additional investments in technology to improve productivity and increase capacity.” That information, court papers charged, was materially false and misleading because it failed to disclose that Sears was engaged in wrongful conduct.
The suit said that following Sears’ revelation of the reaffirmation problem, the price of Sears’ common stock dropped $3.875 per share, the largest single-day drop in Sears’ stock in over three years.
A spokeswoman for Sears declined comment because the company hasn’t seen the complaint.

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