Bed Bath & Beyond Sues Hudson Bay Capital for $300m in Alleged Profits from Discounted Stock Deal

Bed Bath & Beyond, the bankrupt home goods retailer, has filed a lawsuit against Hudson Bay Capital Management, the hedge fund that played a central role in a last-ditch rescue plan for the company, seeking over $300 million in trading profits it claims were wrongfully obtained. The lawsuit, reported by Fortune, was filed last week and centres around the so-called short-swing profit rule, which governs how executives and certain investors are allowed to profit from stock transactions in a company they have significant involvement with.

Bed Bath & Beyond alleges that Hudson Bay engineered the terms of a February 2023 offering in such a way that it was able to acquire a substantial stake in the business at a significant discount, all while avoiding the need to publicly disclose its ownership. The short-swing profit rule is designed to prevent investors from exploiting non-public information and applies to anyone who owns more than 10% of a company’s stock. The rule entitles a company to recover any profits made from short-term trading within a six-month period, such as when shares are bought and then sold at a profit.

According to Bed Bath’s claims, Hudson Bay used its position to acquire almost all of the company’s convertible preferred shares and warrants issued during the offering, which then enabled the hedge fund to acquire hundreds of millions of discounted shares, which it subsequently traded to generate substantial profits.

At the time, Bed Bath & Beyond was struggling to avoid bankruptcy, and the lawsuit argues that Hudson Bay's involvement was primarily motivated by the desire to profit from the company's status as a "meme stock." In its filing, Bed Bath stated, “By April 2023, BBBY was bankrupt, while the Hudson Bay defendants had reaped a short-swing profit of over $300 million.”

In response, Hudson Bay, which managed approximately $20 billion in assets at the end of 2023, denied any wrongdoing. The hedge fund contended that the lawsuit was instigated by Bed Bath’s creditors and asserted that it never owned more than 10% of the retailer's shares, disputing the claims made under the short-swing profit rule. As Bed Bath continues its efforts to raise funds for creditors amidst its bankruptcy proceedings, the outcome of this lawsuit may have significant implications for its ongoing financial recovery.