Mattress Firm, a national retailer with more than 3,400 locations, recently filed a lawsuit in Texas alleging that its own internal real estate team and its outside brokers organized an elaborate and brazen scheme to defraud the company out of millions of dollars.  This lawsuit illustrates the critical importance of a growing retailer to build and maintain the right real estate team, both internally and with its third-party business partners.

In Mattress Firm, Inc. v. Levy et al. (District Court, Harris County, Texas), Mattress Firm accused two of its internal real estate executives and its external real estate broker and brokerage firm of, among other things, steering the development of the company’s new retail locations to properties owned either by the broker (through shell corporations) or by the broker’s developer partners in exchange for substantial bribes and kickbacks to the company’s internal real estate executives.

The lawsuit claims four main types of wrongful conduct:  (i) Mattress Firm’s broker paid kickbacks and bribes to Mattress Firm’s real estate team to select and approve deals owned or to be owned by the broker and various other developers associated with the broker; (ii) the real estate team approved deals at these locations at above-market rents and for terms longer than that permitted under Mattress Firm’s corporate policy based on false comparables and falsely optimistic sales forecasts; (iii) Mattress Firm’s broker charged landlords secret “development fees” on top of the brokerage commission, which fees were then incorporated into the rent to be paid by Mattress Firm at each particular location; and (iv) third party developers paid bribes, including offers of unrelated lucrative business opportunities, to the real estate team and broker in exchange for new leases, relocations or term extensions on unfavorable terms.

For example, in connection with Mattress Firm’s development of a new retail location in Colorado Springs, Colorado, Mattress Firm alleges that its broker, using a shell corporation, purchased a property that Mattress Firm was interested in leasing.  The broker then entered into a partnership agreement with a developer to obscure the broker’s ownership interest in the property.  Six months after Mattress Firm’s internal real estate team caused Mattress Firm to enter into a new 10-year lease at above-market rents, the property was flipped by the broker and the developer at a substantial profit.  An example of the “development fee” scheme arose in connection with Mattress Firm’s development of a new store in Gaffney, South Carolina.  There, the broker allegedly arranged to have the landlord pay $50,000 to one of the broker’s shell corporations as a “development fee” that was in addition to the standard commission payment.  The landlord then recovered the payment in the form of higher rent under the lease, a cost that was allegedly hidden from Mattress Firm.

In exchange for their participation in these schemes, Mattress Firm’s real estate executives are alleged to have received substantial bribes and kickbacks, including trips to London, Mexico, the Dominican Republic, Costa Rica and other destinations, luxury cars, Rolex and Dubois watches, tens of thousands of dollars in cash for shopping and gambling junkets, diamond earrings and a necklace for the wife of one of the executives, bottles of wine, and trips on private jets and yachts.

While the lawsuit is in its preliminary stages and Mattress Firm’s allegations remain unproven, the case nonetheless illustrates the potential pitfalls a retailer faces when it hires or retains the wrong real estate professionals, or when it fails to implement an effective checks and balances system to ensure that approved deals are properly vetted.