April 23, 2007
Just for Feet Inc.
Posted by Gordon Smith

What do WorldCom, Enron, and Just for Feet Inc. have in common? Directors from all three companies paid millions to settle shareholders' lawsuits. Peter Lattman has a very interesting story in today's W$J about the payment of $41.5 million by five former outside directors of Just for Feet. In January 2005 directors of WorldCom and Enron agreed to pay $24.8 million and $13 million, respectively, to settle shareholders' lawsuits.

In the case of Just for Feet, the company is in bankruptcy, and the bankruptcy trustee has been incredibly successful in recouping funds for creditors. According to Peter's story:

The [bankruptcy ] trustee, Charles Goldstein of financial-consulting firm Protiviti Inc., filed suit in 2001 in Alabama state court against former directors and officers of the company, as well as its former auditor, Deloitte & Touche LLP.

The lawsuit charged the former directors with, among other things, conflicts of interest and misrepresentations. The lawsuit, for example, notes that one former outside director, Randall Haines, was president of Compass Bank in Birmingham, which was one of the company's primary lenders. The suit also accused former directors of breaching their fiduciary duty and acting in bad faith in delaying the bankruptcy filing despite the advice of experts.

In September 2006, four former outside directors paid a combined $40 million to settle the trustee's case against them. They are Michael Lazarus, a managing partner at Weston Presidio Capital Management, a venture-capital firm in San Francisco; John Berg, managing partner at Dorset Capital Management LLC, a private-equity firm in San Francisco; Warren Smith, a managing director at TH Lee Putnam Ventures, a Boston private-equity firm; and Edward Croft, a founder of Croft & Bender LLC, an investment-banking firm in Atlanta. Last month, Mr. Haines, the last remaining former outside director, paid $1.5 million to settle the trustee's claims.


Separately from the outside directors, the estate of Harold Ruttenberg, Just for Feet's founder and former chief executive, agreed in August to pay $15 million along with son Don-Allen Ruttenberg to settle the trustee's lawsuit. The elder Mr. Ruttenberg died in December 2005 at 63. His son pleaded guilty to criminal charges and was sentenced to a 20-month prison term.

As part of the trustee's lawsuit, Deloitte & Touche agreed to pay $24 million to settle the trustee's allegations. In all, the trustee recovered roughly $80 million for the company's creditors.

This is another important case of outside director liability, though it is a big story precisely because it is exceptional. Peter quotes Mike Klausner's description of the perfect storm for outside director liability: "when a company's insolvent, insurance is inadequate, the directors have access to considerable wealth, and the merits of the case are reasonable."

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