The Latest Falling Shoe at J.C. Penney

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I can't say I'm surprised that class action lawsuits are starting to filter in against troubled department store chain J.C. Penney .

Last month, CEO Myron Ullman was reportedly out calming investor nerves after Goldman Sachs speculated the retailer was in real trouble and might even go bankrupt. Penney's shares sank 15%, but Ullman said he didn't see "conditions for the rest of the year that would warrant raising liquidity," and the company's stock shot back up 18%. Mere hours later, Penney filed a prospectus with the SEC saying it would in fact issue nearly 97 million shares for liquidity, underwritten by none other than Goldman Sachs.

While I wondered aloud if there wasn't some sort of SEC rule that prohibited such disingenuousness, it looks as though we'll test whether such statements can stand up to scrutiny in the courts.

The retailer has had to tamp down a spate of speculation recently, including reports in the New York Post that suggested commercial lending company CIT Group was no longer financing deliveries to JCPenney stores by small vendors. Although Ullman also apparently quashed that report, saying vendors were supportive and understanding of the company's turnaround efforts, Warren Buffett's quote on reputation comes to mind: "It takes 20 years to build a reputation and five minutes to ruin it." Let's hope Ullman, who has a stellar reputation as a smart executive who helped revive Macy's, hasn't completely tarnished his credibility.

Two more rumors surfaced last week that Penney was in bankruptcy talks and may have financing cut off, both of which had to be stamped out, and the stock is now subject to the vagaries of the rumor mill. Management will need to respond to every little outbreak to quell fears that it could turn into a wildfire if left unchecked.

I want to believe in the turnaround and think the Goldman report on bankruptcy was misguided, but I also agree that J.C. Penney's credibility is in the tank. Management shouldn't be permitted to speak out of both sides of its mouth, and as much as I take trial lawyers to task for frivolous attacks on business, there are times when there is justification for slapping the corporate hand. 

Penney's has yet to respond to the reports about Ullman's initial reassuring comments, which suggests they're true and management would like them to go away. As the class action lawsuits build up, that's not bound to happen, and it will be one more millstone hanging about the retailer's neck.

The department store chain suggests sales have been turning in recent weeks, and even independent sites report that online traffic for Penney's has been high. It would be a lot more comforting if we could take management at its word and not have to worry about the next utterance leading to yet another lawsuit.

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The article The Latest Falling Shoe at J.C. Penney originally appeared on

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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