Yalies Lampert and Freidheim Square Off in Bankruptcy Court

(Bloomberg) -- They were Steve and Eddie at Yale. Now they’re Cyrus Capital Partners versus Sears Holdings Corp. in U.S. bankruptcy court.

Cyrus founder Stephen C. Freidheim shares a Yale University education with Sears Chairman Eddie Lampert. He’s also the brother of a former Sears executive, Scott Freidheim. Cyrus is raising legal objections to Sears’s plan to auction as much as $900 million of notes that are essentially loans from one Sears unit to another.

New York-based Cyrus is more accustomed to buddying up with Sears. The hedge fund held long positions in both the debt and equity of the retailer in the months before its October bankruptcy, and backed a letter-of-credit facility in April that helped guarantee vendor shipments as Sears struggled.

Around the same time, Cyrus tripled down on its bullish Sears wager by selling credit-default swaps, betting that the retailer would keep paying off its debt, according to people with knowledge of the sales.

Soon after, things got rocky.

Sure Winner

Cyrus wouldn’t say, but it’s believed by market participants to have been a big CDS seller, and it had reason to believe the trade was a sure winner. Because of a quirk familiar to derivatives traders, it’s difficult to collect on some credit insurance due to a shortage of the underlying securities. In those circumstances, the swaps buyers see the value of their holdings collapse.

As it happens, the Sears unit that Cyrus was selling insurance on no longer had much debt.

The hedge fund’s status changed with Sears’s plan to sell the $900 million of debt. The retailer wanted to use the proceeds to stay open during the holiday shopping season. But because the debt could be deliverable to CDS holders, Cyrus might now be on the hook for millions.

Cyrus declined to comment, as did Sears and Lampert’s hedge fund, ESL Investments Inc.

Lampert, Yale ’84, and Freidheim, Yale ’86, both graduated with economics degrees. Lampert knows Freidheim’s younger brother, Scott. Scott was at Lehman Brothers Holdings Inc. when Lampert was a client there.

Lehman Client

Scott Freidheim worked for Lehman from 1991 until its collapse in 2008, becoming part of Chief Executive Officer Dick Fuld’s inner circle. Scott Freidheim became friendly enough with Lampert for the Sears owner to attend his 2008 wedding to the French equestrian Isabelle Dufour, according to reports from that time.

Stephen, 54, and Scott, 53, are the sons of Cyrus Freidheim, the onetime Booz Allen Hamilton Inc. vice chairman and former CEO of Chiquita Brands International Inc.

After Lehman folded, Scott Freidheim found a temporary home at Lampert’s company, becoming executive vice president of operations at Sears. He stepped down after seven months for a job as CEO for Europe of Investcorp International Ltd., a firm that invests on behalf of institutional and private Middle Eastern investors. After another stop that ended in 2016, he now manages his own firm, Freidheim Capital.

Meanwhile, Stephen Freidheim was becoming an expert in distressed debt, most notably by creating a credit arm at the investing giant Och-Ziff Capital Management Group. The $34 billion asset manager has its own connection to Lampert. It’s co-founded by Dan Och, a colleague of Lampert’s at Goldman Sachs Group Inc. in the 1990s, and the Ziff Brothers, who were longtime investors in Lampert’s hedge fund, ESL Investments, during the fund’s winning years.

Stephen, whose middle name is Cyrus after his father, eventually spun off his Och-Ziff credit unit into his own entity, Och-Ziff Freidheim, in 1999. In 2004, that firm became Cyrus Capital Partners.

According to people with knowledge of the matter, Och-Ziff is on the other side of the Sears CDS trade. The firm declined to comment.

To contact the reporters on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net;Katherine Burton in New York at kburton@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Bob Ivry

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