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Former Workers Press Beef About Toys ‘R’ Us Creditor with State Pension Council

Idled workers say a hedge fund that holds $300 million in state pension assets is not participating in a vital severance relief package

State Investment Council
Louann Crawford, who worked at Toys ‘R’ Us in Freehold, asked the State Investment Council to use its influence to get workers their severance pay.

Former employees of Toys ‘R’ Us are pressing New Jersey officials to go to bat for them, by intervening with a hedge fund that state pension dollars are invested in. The fund has also been involved in the failed retail chain’s liquidation.

A $20 million hardship account for the former Toys ‘R’ Us workers was recently set up by two private equity funds that owned the company, but so far Solus Alternative Asset Management, a Toys ‘R’ Us creditor, is not participating in that effort, the employees say.

The former Toys ‘R’ Us employees — who include 1,500 New Jersey residents — contend they are owed more than $70 million in unpaid severance and are criticizing Solus for not following the lead of the private equity funds. The workers, who also blame the hedge fund for pushing the company toward liquidation instead of working harder to find a buyer, aired their concerns yesterday during a public meeting of the New Jersey State Investment Council, a panel that sets policy for the state’s $79.4 billion public-employee pension system.

“They continue to squeeze every penny from the company that I helped build and a lot of other people helped (build) by refusing to pay what they owe us,” said Louann Crawford, who worked at a Toys ‘R’ Us store in Freehold.

“Solus chose to make their profits at my expense — and it’s wrong,” she said.

Retailer hit by online competition

In response, leaders of the investment council said they have been in touch with Solus and are encouraging them to talk with groups working on the employees’ behalf. Solus officials did not respond to a request for comment yesterday.

Based in Wayne, Toys ‘R’ Us was once one of the most popular retail chains in America. Founded in 1996, the company was purchased in 2005 by a group that included the two private equity funds, KKR and Bain Capital. In more recent years, the company faced steep financial problems in the wake of growing competition from online retailers and other pressures, and officials announced in March that they were shutting down stores and laying off an estimated 33,000 workers. Employees were also told that severance agreements would not be honored.

The treatment of the laid-off employees by the owners and creditors drew the attention of several members of Congress, including Sens. Cory Booker and Robert Menendez and U.S. Rep. Bill Pascrell, all Democrats from New Jersey.

Earlier this month, KKR and Bain announced that they were establishing the $20 million hardship account, with each firm pitching in $10 million. In a statement, the firms said the funding would be distributed to employees based on their historic earnings, hours worked, and length of tenure with the company, among other factors.

But so far, Solus, a creditor that reportedly held an important share of the Toys ‘R’ Us debt, has not indicated that it will participate in the hardship fund. The former workers noted their severance agreements called for far more than the contributions the two firms are making.

Employees: We’re owed $75 million

“We believe that we’re owed closer to $75 million and there still are firms that have profited from bankruptcy that refuse to contribute,” said Joseph Ryan, who worked at the Toys ‘R’ Us store in Mays Landing.

“I’m here today for myself and my coworkers, many of whom are facing a terrible crisis in their lives,” Ryan said. “Many of my former coworkers are on unemployment.”

The state pension system took on a $300 million stake in Solus in 2014 as part of a broader diversification strategy launched more than a decade ago to protect against major losses that can occur during a stock-market crash. The strategy relies in part on so-called alternative investments like hedge funds, venture capital, and private equity. But those types of investments can also give state pension officials far less control compared to some of the more conventional investments that are managed in-house by the Division of Investment, an agency within the Department of Treasury.

For example, in 2015, the investment council faced pressure to get rid of a stake in the JLL Partners private-equity firm. That came when its ties to a Texas-based payday lending company that was fined after being accused of heavy-handed lending practices were brought to the panel’s attention. The practice of high-interest payday lending is prohibited in New Jersey, and the council ultimately decided to unwind the investment.

More recently, concerns have been raised about ties the pension system has to funds pursuing mortgage foreclosures on homes in Puerto Rico during Hurricane Maria last year.

State’s sway limited?

After again hearing from the former Toys ‘R’ Us workers, who have previously urged the council to cut its ties with Solus, chairman Adam Liebtag suggested a group that is representing the workers, the Private Equity Stakeholder Project, would soon be hearing from Solus officials.

“That’s all that I can say at this point,” Liebtag said. “I think the next level of dialogue has to take place between your group and Solus directly.”

Speaking to reporters after the meeting ended, Liebtag said the investment council has limitations as an investor even if members are concerned about the appearance that the pension system could be profiting off of the hardship of the laid-off workers.

“The issue of whether Solus contributes to a hardship fund has to be a decision made by Solus,” he said. “We cannot direct that contribution to a hardship fund.”

“Obviously this is a very heated and tense situation. I think that’s an understatement,” he went on to say. “What we want is for Solus and the Toys ‘R’ Us group to engage directly, and we think that there’s the possibility for them to come to some solutions if they are directly engaging with each other.”

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