Sam Zell calls allegations frivolous and unfounded.
Tribune Co. Chief Executive Sam Zell on Wednesday said he was "outraged" by a lawsuit filed this week that alleges his management of the business that owns the Los Angeles Times, Chicago Tribune and other media properties is destroying the value of the company.
Zell also said " I hope every partner in this company is as outraged as I am at having to spend the time and money required to defend ourselves against it."
Buzzmachine's Jeff Jarvis took the suit's plaintiffs to task, contending that Zell is being made a scapegoat for wider institutional problems in the newspaper business. Jarvis: " The Times veterans should not be suing Zell. They should be suing themselves."
But over at Portfolio, Jeff Bercovici defends the suit: "doesn't that still leave you with the central question of whether Zell made improper use of the ESOP structure, raided employee pensions, and all that? Are Tribune employees supposed to surrender their legal rights because their bosses?or predecessors' bosses?showed a lack of vision?"
The suit, filed in U.S. District Court in Los Angeles, alleges Zell and former Tribune CEO Dennis FitzSimons devised a plan to take the company private to enrich themselves to the detriment of workers. It seeks class-action status on behalf of Tribune Co. employees.
He acquired control of Tribune Co. in December in a deal that left the company with $12.5 billion in debt.
Tribune Co. has cut about 10 percent of its workforce since Zell arrived. Plaintiffs want to recover losses to the employee stock ownership plan, formed after the takeover. They also want to replace Zell, Tribune's board and the ESOP trustee.
Sam Zell sent staffers the following e-mail this afternoon:
We are about to release a statement on the lawsuit filed yesterday by a staffer at the LA Times and several former Times employees. I want to share it with you first, but I also want to stress that as we work to fix our company, we are all in this together.
As newspaper advertising revenues have declined severely over the last several months, we've had to take some tough steps. We're not alone, of course -- the entire publishing industry is trying to deal with the challenges posed by a tough advertising environment and an economy in turmoil. At Tribune, we're making tremendous progress-reinventing our newspapers, expanding television news, growing WGN America, and developing a new Internet platform. We're being watched and imitated.
The overwhelming majority of our employees have risen to the occasion -- they are working extremely hard, innovating as never before, trying new things, pushing the envelope. They are using their own best judgment and questioning authority when they need to -- something employees at this company rarely did in the past.
But there is a difference between questioning authority or challenging the "business as usual attitude," and maligning the company in public. That's just bad judgment and does no one any good. It's a distraction that's unnecessary.
We are partners. We need to act like it.
Official Tribune statement about the staffers' lawsuit follows:
TRIBUNE STATEMENT ON CLASS ACTION LAWSUIT
CHICAGO, Sept. 17, 2008 -- Tribune Company today issued the following statement from Chairman and Chief Executive Officer Sam Zell:
"The lawsuit filed yesterday is filled with frivolous and unfounded allegations, and I hope every partner in this company is as outraged as I am at having to spend the time and money required to defend ourselves against it. The media industry is in crisis, the advertising environment is extremely difficult and the economy is in turmoil.
The overwhelming majority of our employees have taken up the challenge --they are working hard, leading by example, and devoting themselves to re-inventing our businesses by developing new and innovative products for our readers, viewers and advertisers. As a company we are attacking our problems and revolutionizing the media industry.
"This lawsuit is a mere distraction, and we will work quickly to see that it is dismissed. It will not deter us from completing the work ahead."
As a newspaper friend in Los Angeles writes, "I've been waiting for this shoe to drop."
This week the bitching about Sam Zell moved out of the blogosphere and into the courtroom. A Pulitzer-winning columnist for the LA Times and four former Times writers filed a class-action suit against Zell and the Tribune Company he runs. "Rather than acquire and operate the Tribune Company in the best interests of its employee-owners," the suit begins, "Sam Zell exacted severe, long-lasting damage to an institution that citizens in a democracy rely on and require to effectively speak truth to power."
The suit accuses Zell and "his accessories" on the Tribune Company board of threatening to destroy the company and the newspapers it own, "doing so illegally, without consideration for the employee-owners, without respect for the institution, and with a focus on liquidating company assets to line their own pockets." And according to plan -- for the suit says Zell took the company private "with the intention of breaking up and selling the assets because he saw a collection of assets worth billions of dollars that he could purchase . . . with a minimal outlay of his own money."
The ingeniously structured deal by which Zell took over the company last year made its employees, in the guise of a Tribune ESOP (Employee Stock Ownership Plan), its nominal owners. "The deal included borrowing billions against the assets -- the Tribune Company's debt went from less than $4 billion to nearly $13 billion overnight," says the suit. "Zell took over a highly valuable Company, imposed on it the most encumbered balance sheet in the newspaper industry, and avoided any real personal risk or responsibility, all while enjoying the benefits of a tremendously valuable tax structure and letting employee 'owners' bear the damaging consequences going forward."
The immediate consequences, according to a news release from the plaintiffs, are that "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," the Times and the Chicago Tribune among them."Without the staggering debt load from the Zell deal, the Los Angeles Times would be solidly profitable today -- without eviscerating news gathering operations."
The suit alleges that Zell breached his fiduciary duty to administer the Tribune ESOP "solely in the interests of the employee-owners" by orchestrating an "imprudent purchase" of the company at an extravagant price. As a consequence, "Zell redirected the Company's operations from running newspapers to servicing the new debt." (The emphasis is the suit's.)
As the news release puts it, "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."
The named plaintiffs are Dan Neil, who's won a Pulitzer writing his auto column for the Times; and former Times writers Corie Brown, Walter Roche Jr., Myron Levin, Henry Weinstein (a former legal affairs writer who now teaches law), and Jack Nelson (who used to be the paper's Washington bureau chief). They say their only goals are to protect the company's pension and retirement funds, remove Zell and all other members from the Tribune Company board, and put a representative of the employees on that board.
It's no surprise that this suit originated at the Los Angeles Times and focuses on the perceived degradation of the Times. That city and that paper have always found Chicago and Zell hard to swallow. If his hometown has cut Zell some slack as possibly the Tribune's last hope, to LA he's simply a rich outsider contemptuous of the business he bought entry to.