The former retailer filed a lawsuit last week claiming that, behind the scenes, Hudson Bay orchestrated the terms for a February 2023 offering so it could acquire a huge, cut-rate stake in Bed Bath without having to disclose the ownership under a little-known rule for corporate insiders. 

The law also requires executives — and outside investors with stakes of more than 10% — to surrender short-term gains.   

As a result, Hudson Bay was able to acquire almost all of the convertible preferred shares and warrants that Bed Bath issued through the sale, according to the lawsuit. These securities, in turn, allowed the hedge fund to buy hundreds of millions of shares from Bed Bath at a deep discount that Hudson Bay then traded to generate quick gains, the suit claims.

Bed Bath was desperate for cash at the time, as Wall Street bankers were threatening to push the home-goods company into bankruptcy to salvage some of their investments. 

While some investors saw the Hudson Bay backing as a potential path for Bed Bath to reverse its fortunes, the lawsuit alleges the hedge fund aimed to make a quick buck by capitalizing on Bed Bath’s popularity as a so-called meme stock.

“When all was said and done in April 2023, BBBY was bankrupt, while the Hudson Bay defendants had reaped a short-swing profit of over $300 million,” Bed Bath said in the complaint.

Actions by a bankrupt company’s shell are the purview of the bankruptcy administrator, which acts on behalf of the estate to maximize its value and thus the recoveries of creditors. Michael Goldberg, an attorney for the law firm Akerman who’s serving as plan administrator for the bankruptcy, declined to comment through a spokesperson. Goldberg authorized the filing of the complaint, a person familiar with the situation said. 

Hudson Bay, which managed about $20 billion at year-end, said in a statement that Bed Bath creditors were behind the lawsuit, and that the hedge fund never owned more than 10% of the retailer’s shares. 

“It is sad that creditors seeking to distract from their significant financial losses have resorted to filing factually flawed and baseless claims in a desperate attempt to extract an undue payment,” a Hudson Bay spokesperson said in the statement.

Sixth Street Partners, which gave Bed Bath a $375 million rescue loan and is its highest-ranking creditor, declined to comment. 

Bed Bath once had more than 1,500 stores and roughly $12 billion in annual revenue. In April 2023, after several failed turnaround attempts, it sought Chapter 11 bankruptcy protection to wind down its operations.

Bed Bath & Beyond’s name lives on outside of bankruptcy court — the trademark was bought by the home goods retailer formerly known as Overstock.com, which now goes by Beyond and isn’t related to this lawsuit.

Short-Swing Profit

The former retailer filed the suit under the so-called short-swing profit rule, which governs transactions by executives in their company’s stock. The rule, designed to prevent executives from profiting on inside information, also applies to outside investors with an equity stake of more than 10%.

Those subject to the rule must give the company any profits from short-term trading, such as a purchase and matching sale inside of six months. If they fail to do so, the firm or its shareholders can sue to recover these profits. 

Hudson Bay approached Bed Bath in early 2023 as it was “weighing its options for survival,” according to the lawsuit. The hedge fund then proposed an “extraordinary” financing that would hand Hudson Bay the rights to “the vast majority” of Bed Bath’s stock on a fully diluted basis, the lawsuit alleges. 

Under the terms of the financing, Bed Bath would initially raise about $225 million to repay debt and could seek another $800 million over the next eight months. While the deal was portrayed as a registered offering to institutional investors, Hudson Bay secretly led the negotiation of the financing, and drafted many of the main deal documents to suit its own needs, the complaint alleges.

“The Hudson Bay defendants were the whale in the offering,” Bed Bath said in the complaint. 

The hedge fund ended up with almost 98% of the common stock underlying the preferred shares and warrants issued in the February offering, with the remaining 2.2% divided among 28 other investors, according to the lawsuit.

Hudson Bay had Bed Bath incorporate “blockers” into the documentation for some of the securities that theoretically precluded the hedge fund from owning more than 9.99% of the retailer, according to the complaint. But the lawsuit alleges that Bed Bath never enforced those blockers — in part because it had no incentive to do so, given the retailer’s desperate need for the cash generated by converting Hudson Bay’s preferred shares. The retailer also had no mechanism to enforce the blockers, the suit alleges.

“The sole purpose of the blockers was to help the Hudson Bay defendants sidestep the disclosure and disgorgement obligations” of federal securities laws, the complaint claims.

The hedge fund had included the blockers as a means of avoiding disclosure of its involvement in the financing, according to the lawsuit. Hudson Bay was allegedly concerned that it would become a target of meme stock traders who had ganged up on hedge funds such as Melvin Capital Management after the firm’s founder, Gabe Plotkin, bet against GameStop Corp., another meme stock.

The preferred stock and warrants enabled Hudson Bay to obtain Bed Bath common shares at a “significant discount,” the lawsuit alleges. At the time of the offering, the suit says, Hudson Bay paid $202.5 million for securities permitting it to acquire, at no additional cost, $445 million worth of common stock. 

Hudson Bay proceeded to submit 106 original or revised conversion requests to Bed Bath between the February 2023 offering and the bankruptcy three months later, the lawsuit alleges. 

“This shambolic crush of paper” along with “funny math” employed by Hudson Bay, the lawsuit claims, almost guaranteed that mistakes would be made and the 9.99% cap would be breached.

The case is 20230930-DK-Butterfly-1 Inc. v. HBC Investments LLC, 24-cv-3370, US District Court, Southern District of New York (Manhattan).