BCG files lawsuit against GameStop for $30 million in unpaid fees
Boston Consulting Group (BCG) has filed a lawsuit against GameStop seeking $30 million in damages, alleging the US retailer refused to pay agreed-upon fees for turnaround consulting work.
BCG, a top strategic advisor to corporations globally, said in the complaint filed in US federal court on Tuesday that it was hired by GameStop in 2019 to help the video game and electronics retailer develop a turnaround strategy. BCG in the filing says GameStop was “hemorrhaging customers” and on “life support,” with net operating losses of nearly $800 million in 2018 and with share prices dipping to $3.32 by August 2019 from a previous high of approximately $55.
BCG’s agreed-on fee structure was based on projected profit improvements resulting from its work: “(i.e., the best possible estimate of each initiative’s expected impact at the time the decision to launch such initiative was made).” According to the filing, BCG’s fees were not tied to actual, real-world results.
As such, there is no mention in BCG’s lawsuit of GameStop’s massive turnaround in January 2021 when it became a “meme” stock. Retail traders, driven in large part by a collective effort in the subreddit “Wall Street Bets,” pushed up GameStop’s stock by more than 1,000% in a punitive action on hedge funds that were shorting the company. The huge valuation increase allowed GameStop to sell more shares and raise $1 billion in capital.
BCG says it spent tens of thousands of hours working on the GameStop engagement. The firms says it had a “healthy working relationship, grounded in good faith” with Daniel Kaufman, GameStop’s general counsel and chief transformation office, who was the primary point of contact until his departure on June 1, 2020.
After Kaufman left, (former) CFO Jim Bell took over the transformation project and the relationship deteriorated, according to BCG’s filing. “Specifically, under Mr. Bell’s management and since his departure in March 2021, GameStop has refused to pay significant amounts of BCG’s fees, despite there being no legitimate dispute over BCG’s full performance and the fees coming due. GameStop has also taken unreasonable positions, unilaterally demanding discounts on certain workstream fees with no justification, and refusing to continue contractually-obligated meetings to confirm profit improvement estimates and BCG’s resulting fees,” the filing noted.
Ryan Cohen, an activist investor who ascended to the chairman role at GameStop in 2021, has been a vocal critic of the retailer’s previous turnaround plan and management consultants generally. In a statement on Bed, Bath & Beyond, another retail firm where he is an activist investor, Cohen said: “From our vantage point, Bed Bath's strategy looks far better in a PowerPoint deck than it does in practice. It is full of 'principles' and 'pillars' that high-priced management consultants probably thought would placate information-hungry analysts and satisfy shareholders."
In a statement to the Financial Times, GameStop said, “We do not believe it is in our stockholders’ best interests to pay the tens of millions of dollars sought by BCG, especially given their seemingly meagre impact on the company’s bottom line. We will fight this suit and are proud that GameStop no longer utilises the likes of BCG for any services.”
GameStop stock has seen another rally in prices this week, with shares up to $142.39 at Thursday close, up from $94.20 on Monday – the largest price jump since March 2021. Shares rose 30% on Tuesday with no apparent catalyst, and then another 14.5% on Wednesday after Cohen disclosed his investment firm bought an additional 100,000 shares of the retailer.
