The lawsuit, which seeks class-action status, alleges that Zell and others have breached their fiduciary duties to beneficiaries of the Tribune Employee Stock Ownership Plan.
One current and five former Tribune Co. employees, including former legal writer Henry Weinstein, accused the company and Chief Executive Sam Zell in the lawsuit of mismanaging the newspaper-and-television concern, the latest sign of worker protest against Mr. Zell's oversight.
The suit was filed by Joseph Cotchett of Cotchett Pitre & McCarthy in Burlingame, Calif.
The lawsuit, filed in a Los Angeles federal court, alleges Tribune and Mr. Zell have failed to uphold their fiduciary duty to the company's employee stock-ownership plan, Tribune's majority owner. The lawsuit also claims Mr. Zell and other Tribune officials have improperly raided worker pension funds.
"Zell and his accessories threaten to destroy the Tribune Company and its assets," the lawsuit says.
The suit targets the $8.2 billion buyout that made the employee stock plan the majority owner of the company. Zell invested only about $315 million in exchange for a promissory note and the right to buy 40 percent of the company, the Wall Street Journal story says. The suit also says pension assets have been tapped to fund severance payments to employees.
"After engineering the transaction which essentially let someone buy an $8 billion house without making down payment, Zell redirected the company's operations from running newspapers to servicing the new debt," the complaint says.
The suit also contends Zell has destroyed the integrity of the Tribune brand by blurring the line between editorial and advertising.
Mr. Zell, the chairman and chief executive of Tribune, took control in December in an $8.2 billion deal that took the company private but tripled its debt at a time of falling revenue. Since then, the company has eliminated more than 1,000 jobs, and sold assets to raise capital and meet debt payments. Its credit has been downgraded.
Last month, Tribune reported a 15 percent drop in advertising revenue and appointed former DirecTV chief executive officer Eddy Hartenstein to run the LA Times.
The unusual takeover turned Tribune’s stock over to an employee stock ownership plan, or ESOP, so the employees technically became the owners. But those employees were given no say on the deal, no seats on the board and no ability to sell shares for years to come.
“By orchestrating what was clearly an imprudent transaction,” the lawsuit states, Mr. Zell and the former Tribune management “breached their fiduciary duties to the employee-owners.”
It adds that Mr. Zell and his aides have compounded that breach in the way they have run the company, and by using money from the employees’ pension fund to pay for buyouts and severance. The complaint seeks unspecific monetary damages and the removal of Mr. Zell and other board members.
The complaint was filed in Federal District Court in Los Angeles and seeks class-action status to represent employees across the company. The plaintiffs include some of the best-known Times writers of the last generation, including Dan Neil, a Pulitzer Prize-winning automotive writer; Jack Nelson, a former Washington bureau chief; and Henry Weinstein, a longtime legal affairs reporter.
In addition to Mr. Zell, the suit named as defendants the company as well as current and former board members. It accused the former management of profiting from a deal that it knew would cripple the company.
And the suit claims that contrary to public statements, Mr. Zell planned all along to sell Tribune assets and has acted without regard to the long-term health of the company or the interests of its owners, the employees.
“His statements have not matched his actions,” Mr. Neil said.
In March, 2007, Tribune announced the deal with Mr. Zell, who would eventually put up $315 million of his own money to take control of a company that owns, along with The Times, The Chicago Tribune, The Baltimore Sun and a dozen other papers, 23 broadcast television stations and other assets.
Several analysts have said the price paid for Tribune was too high, and it left the company too heavily leveraged.
Asked why the employees did not sue last year, before the deal was completed, Mr. Neil said: “It was purposely obtuse, leaving people bewildered as to what was going on. It was very difficult to know who to sue or what to claim.”
A spokesman for Tribune, Gary Weitman, said, “We have not read the lawsuit and will decline comment.”
The Summary, from the release:
...since completing his takeover of the Tribune Company in December 2007, Sam Zell’s illegal and irresponsible actions and public statements have damaged the reputation and business of the company he purports to want to preserve. According to the filed complaint, through both the structure of his takeover and his subsequent conduct, Zell and his accessories have diminished the value of the employee-owned company to benefit himself and his fellow board members. It alleges further that through their destructive management and self-dealings at the expense of employees, Zell and his co-fiduciaries have repeatedly breached their fiduciary duties to beneficiaries of the Tribune Employee Stock Ownership Plan (ESOP).
Full Release Text:
LOS ANGELES, Sept. 16, 2008 -- Today current and former employees of the Los Angeles Times and the Tribune Company filed a class-action lawsuit in federal court against Sam Zell, a Chicago billionaire real-estate speculator who in December 2007 took control of the Tribune Company in a controversial deal that has mired the company in more than $13 billion of debt. The lawsuit was filed by Joseph Cotchett and Philip Gregory of the law firm of Cotchett, Pitre & McCarthy.
As current and former members of the Employee Stock Option Plan that owns 100% of the Tribune Company and participants in various Tribune retirement plans, the plaintiffs filed this action alleging it is time to call the Zell-orchestrated acquisition what it really is: A scam. The lawsuit contends that, since the inception of the deal, it appears that Zell and his accessories have planned to enrich themselves, tax-free, by perverting laws passed by Congress intended to benefit rank and file American workers.
The employee-owners of Tribune Company have everything, including their retirement plans, at great risk and little to gain in this deal, while Zell has everything to gain and little at risk. Among the deal's outrages outlined in the complaint: Zell has set up a mechanism to buy 40% of the company – valued at more than $8 billion at the time the ESOP took ownership – for as little as $500 million. It’s a classic grift, played out under the cover of legal technicalities. The real losers in this deal, however, are Americans who rely on news and information collected and disseminated by the respected Tribune news organizations.
The plaintiff-employees in this suit do not seek to enrich themselves. Rather, their announced intentions are: to protect Tribune Company’s pension and retirement funds; to give the employee-owners a place at the table with regard to management of their assets; and to remove Zell and his cronies from the Tribune Company’s board in order to save what is left of a still great news gathering operation.
In the 1970s and later in the 1980s when Senators Bob Dole (R-Kansas), Russell Long (D-Louisiana) and others in Congress spearheaded efforts to promote ESOPs with generous tax benefits, the intent was to empower employees eager to own and manage the companies where they work. When it comes to Tribune Company’s ESOP, nothing could be further from the truth. Employees were never asked if they wanted to own Tribune Company. They had no opportunity to question the wisdom of saddling a media company with $13 billion in debt at a time when the industry faces serious challenges. Even though they are nominally the owners, they have no voice on the company’s board and no say in its management.
When Zell hung “You own this place now” banners at the Los Angeles Times, employees could not know the high price they would pay for this “privilege.” According to the complaint, Zell has de-funded employees retirement packages, raided the employee pension fund for more than $400 million, and eliminated more than a thousand Tribune Co. jobs.
Meanwhile, Zell and his band of publishing rookies are wrecking the company’s marquee properties – including the Los Angeles Times, the Baltimore Sun, and the Chicago Tribune – alienating readers by launching aimless redesigns while dramatically cutting coverage. Seemingly ignorant of journalistic ethics, they have, for instance, turned control of the Los Angeles Times Magazine over to the advertising staff, with no indication to the reader that this product is now a “pay-to-play” advertorial. All the while, revenues have continued to decline.
The saga of the Los Angeles Times follows a familiar path in American media. Los Angeles’ Chandler family controlled the newspaper for generations, making it the flagship of the powerful Times-Mirror Company. In 2000, the Chandler heirs merged the family-controlled company with the Chicago-based Tribune Company. Even considering the debt to finance the merger, the company maintained profit margins in excess of 20%.
Despite a slowing economy, a precipitous drop in ad revenue in the real estate, classified, and automotive sectors along with the de-monetizing of content put on the web and the spiraling cost of newsprint – the Tribune Company continued to be profitable throughout this decade. Without the staggering debt load from the Zell deal, the Los Angeles Times would be solidly profitable today – without eviscerating news gathering operations.
It is flat wrong to regard the Tribune Company's troubles as the death throes of the newspaper industry. Americans are not rejecting the industry’s editorial product. The Los Angeles Times has millions more readers than it did a few years ago – over 20 million discrete readers at latimes.com in August 2008. In that month alone, the paper chalked up more than 120 million page views. Its besieged editorial staff continues to produce some of America’s finest journalism.
The media landscape is changing and, yes, newspapers are just learning how to navigate this new world. Unfortunately, current management is making things worse, led by Zell and his Chicago gang who can't shoot straight. Zell does not consider himself a publisher and has shown nothing but contempt for journalism. He notoriously said “F… you” to an employee-photographer who dared question his leadership. Speaking to the Washington bureau of the Los Angeles Times, Zell referred to the staff as “overhead, not producing any revenue.” Zell’s history is specializing in profiting from the purchase and sale of distressed properties. He has said he expects to make a fortune for himself during his tenure at the Tribune Company. And, as it stands, he can do that while leaving the coffers of the Tribune ESOP empty and the readers of the Los Angeles Times, the Chicago Tribune and Tribune Company’s other news outlets without an authoritative local source for news and information.
Should these institutions, vitally important to the life of the nation – indeed, never more so – be allowed to fall victim to ruthless corporate raiding and the pump-and-dump machinations of predatory “investors”? News organizations are both businesses and public trusts. A free press is the only business stipulated by the Constitution. No other entity – no website, no blogger – is on the horizon to replace the boots on the ground around the world providing Americans with the information we need to function in a global economy. The Los Angeles Times, alone, spends $2 million a month to support its Baghdad bureau, making its war coverage among the finest in the world. If Zell and his cronies continue to cut the staffs of these news organizations, it means inevitably that they will give their readers less content that is valuable to them. As these newspapers become less valuable to readers, they become less valuable to advertisers as well.
To that point, Zell and his cronies say they plan to close the Los Angeles Times’ Baghdad bureau.
-- Dan Neil, Corie Brown, Henry Weinstein, Walter Roche, Myron Levin & Jack Nelson
For more information contact:
Attorney for the Plaintiffs Plaintiffs’ spokesman
Joseph W. Cotchett Dan Neil
Philip L. Gregory (818) 508-1000
Cotchett, Pitre & McCarthy
San Francisco Airport Office Center
840 Malcolm Road, Suite 200
Burlingame, CA 94010
Release. The full 115-page complaint.
Carl Tobias, a professor at the University of Richmond School of Law said of the complaint. "I can't tell you they're going to win, but from what little I've seen, I think they have a credible claim, at least," he said.
For now, the main hurdle will be convincing the judge to grant the plaintiffs class certification. To do that, they'll have to show the issues are common to all the plaintiffs and there's efficiency in hearing all their complaints together. "I think they'll be able to satisfy it," says Tobias.