Lampert's investors got more bad news on Dec. 27, when Sears said its same-store sales fell 5.2 percent during the holiday season and that management would shutter as many as 120 locations. The stock dropped 27 percent that day to $33.38, and declined to $29.20, the lowest closing in more than three years, on Jan. 6, a day after Standard & Poor's cut the company's credit ratings two notches into deeper junk territory.
On the following Monday, Lampert bought 4.46 million Sears shares from ESL Investors at the $29.20 price for about $130 million, according to a Form 4 with the SEC on Jan. 11. The Ziff partnership also paid Lampert's management fee on Jan. 11 by transferring an additional 573,184 Sears shares, with a market value of about $18.9 million, to his firm in lieu of cash, the filing showed.
Since then, Sears has soared amid speculation Lampert might take the company private and yesterday's announcement that the retailer would raise as much as $770 million by selling real estate and separating some smaller-format businesses. The 5 million shares that Lampert and his management unit received from the Ziffs are now valued at about $309 million.
Previous Transfer
A precedent for this type of internal transaction occurred five years ago. After peaking on April 17, 2007, Sears shares began to slip and then plunged 10 percent on July 10, the largest decline in more than four years, as the company said profit for the second fiscal quarter would fall as much as 46 percent from the same period in 2006.
Three weeks later, on Aug. 1, Lampert transferred 3.41 million shares held by the Ziff partnership to his main hedge fund, according to a Form 4 filed with the SEC. In return, the hedge fund sent $466.7 million to the partnership, or $136.79 a share. The fund has an unrealized loss of almost $256 million on the stock received from the Ziffs
ESL said in its Form 4 filing that the 2007 transfers were made "in connection with a portfolio rebalancing," a term money managers use when they shift securities between funds to balance their respective holdings in a particular company, industry or asset class. With Lampert's main fund about to receive a $3.5 billion investment from Goldman Sachs Group Inc. clients, the transfer of Sears shares helped Lampert balance the stakes that ESL Partners and ESL Investors held in the retailer, according to a person familiar with the situation who requested anonymity because the transactions were private.
When an adviser has one of his funds sell assets to another in what is known as a "cross trade," such as the 2007 transfer between ESL Partners and ESL Investors, securities rules generally mandate advance disclosure and consent, unless approval is given on a blanket basis when clients sign up. The rules also say managers should ensure the price is fair for both the buyer and the seller.
Greenlight Capital Inc., the firm run by David Einhorn, may rebalance portfolios when its hedge funds have accepted new "material" contributions or experienced net withdrawals or other capital changes, according to a Jan. 25 brochure on file with the SEC. Greenlight "generally will not rebalance any security or position," the firm said, if it is affiliated with the company that issued the security or any of its funds own more than 10 percent of that company "for passive positions."
Disclosure to Clients
ESL Investments disclosed the 2007 transfer between the main hedge fund and the Ziff partnership to its clients ahead of time and received their approval, according to the person familiar with the transaction. The firm also said the transfer would lead to a temporarily high concentration of Sears stock in the hedge fund, exceeding 30 percent of net assets, until the cash from Goldman Sachs clients came in.
Lampert's purchase of Sears shares from the Ziff partnership in January was carried out within the framework of an existing agreement between the money manager and his client, said two people with knowledge of the transaction. That purchase helped Lampert maintain a balance between his personal stake in Sears and his hedge fund's holding in the retailer, one of these people said.
Open-market sales could have hurt the share price for two reasons. An average of only about 714,000 Sears shares traded on a daily basis last year, less than one-tenth of Target Corp.'s volume, according to data compiled by Bloomberg. Securities rules would require Lampert to report sales by ESL Investors under his own name as well, potentially making it appear as if the company's chairman was bailing out.
"He controls so much that any transparent trading activity will move the market," said Jay Gould, head of the investment funds practice in the San Francisco office of the law firm Pillsbury Winthrop Shaw Pittman LLP. "You could make a pretty good case to say that doing it in a private transaction is the most fair way" to sell the Ziffs' shares.
Before starting his hedge fund in April 1988, Lampert worked under former U.S. Treasury Secretary Robert Rubin in the risk arbitrage department of Goldman Sachs, as did Daniel Och, the chief executive officer of Och-Ziff Capital Management Group LLC, and Richard Perry, the head of Perry Corp. Dirk Ziff, the oldest of the three brothers, was an intern at Goldman Sachs and later provided capital to all three managers through the family investment firm.
Spreading the Wealth
In December 1997, Institutional Investor magazine reported that Ziff Brothers Investments had combined stakes of $2.8 billion with 15 different money managers, including Kynikos Associates Ltd., the short-selling firm set up by Chanos, and Gotham Partners, the real estate partnership that Ackman once ran with David Berkowitz. The Ziffs committed $100 million to ESL after Dirk read about a proxy fight that Lampert waged on behalf of Richard Rainwater at Honeywell Inc. in 1989, according to the article.
ZAM Holdings LP was the parent of ESL Investors, according to a Dec. 15, 2008, lawsuit by the U.S. Justice Department and Federal Trade Commission accusing Lampert's hedge fund as well as ZAM of violating technical reporting provisions of U.S. antitrust laws. ZAM is an investment fund managed by Ziff Brothers Investments, according to an April 2005 SEC filing by Asia Pacific Resources Ltd.
The Ziff firm's ownership of ESL Investors was confirmed by a person familiar with the situation, who requested anonymity because the family's investment activities are private.