Creditors say RadioShack's bankruptcy doesn't add up

Is there something fishy about the way RadioShack (RSH) timed its bankruptcy?

In a new court filing, several of the chain's unsecured creditors claim that some of the company's decisions as it barreled into bankruptcy this year just don't add up. Specifically, they want more information about two hedge funds that loaned RadioShack large amounts of emergency funding to help get it through the crucial holiday season.

Just about everyone agrees that RadioShack had no choice but to see Chapter 11 protection. There was just no way the struggling chain -- purveyor of remote-controlled cars and overpriced cables -- could survive against the likes of Amazon.com (AMZN) and Best Buy (BBY).

There is growing suspicion, however, about when the company went bankrupt. Did RadioShack pick a date specifically timed to line the pockets of its hedge fund lenders? A date that ended up costing the company millions?

That's the working theory behind a court request for documents and access to files from a committee made up of companies that are owed money by RadioShack. That committee includes landlords, employees, bondholders and such suppliers as AT&T (T) and Simon Property Group (SPG), which say they are entitled to half a billion dollars in unpaid bills.

RadioShack filed for bankruptcy on Feb. 5 and plans to close about half of its 4,100 locations. The remaining stores are expected to reopen through a deal with wireless carrier Sprint.

The creditors' beef goes something like this: RadioShack has been in trouble for years and should have closed its doors much earlier. But two of its big lenders, hedge funds Standard General and LiteSpeed Management, stopped the company from liquidating its stores early on. Instead, those lenders threw RadioShack a lifeline, buying some of its debt in order to keep the chain hobbling along. Why? So those lenders could time the bankruptcy in order to avoid steep losses.

The issue centers around credit default swaps -- those pesky vehicles that helped trigger the financial crisis of 2008. Several hedge funds reportedly sold protection against a default, essentially betting that RadioShack would keep going at least through Dec. 20, 2014.

If RadioShack went bankrupt before Dec. 20, the hedge funds that sold that protection would be out a lot of money.

So the big question the creditors are wondering is if RadioShack's big lenders were in on this play. Did Standard General make these credit default bets as well? And if so, did it head off a bankruptcy filing until after Dec. 20?The creditors want to get a look at more financial documents to find out.

A Standard General spokesperson said the allegations lacked substance or merit. "Standard General has been a supportive investor of RadioShack and was deeply disappointed that the company had to file for bankruptcy," the spokesperson said in an emailed statement. "Our recent proposal to acquire approximately half of the store base is the best chance to preserve the business as a going concern, thereby preserving more than 10,000 jobs and resulting in creditor recoveries substantially above liquidation."

There's a problem with this fishing expedition, as Bloomberg News' Matt Levine points out. There's nothing explicitly illegal about lenders trying to make hay from credit derivatives that they bought or sold. The players are going to play, as the ubiquitous Taylor Swift song goes, and they're given wide leeway under the law to do so.

The one group here that stands to lose big money is the creditors that are raising the suspicions about the hedge fund lenders. That's because those creditors are unsecured, and will only get paid after the senior creditors get all the money they were owed.

Unsecured creditors can lose out big in bankruptcy filings, sometimes only recovering pennies to the dollar. The RadioShack creditors are worried, and are doing everything they can to try to get their investments back.

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.