Thursday, March 18, 2010

L.A.Times, Writers to Court Over Tribune Retirement Fund Meltdown

By Steven Mikulan, L.A. Noir

As if plunging circulation, vanishing ad revenues and job losses weren't tormenting the Los Angeles Times enough, an employee lawsuit that opens in Chicago on Thursday accuses Tribune Co. chairman Sam Zell and others of forcing thousands of newspaper workers' retirement accounts into a financially ruinous company-stock plan.

Lawyers representing six L.A. Times current and former writers will face off against attorneys defending Zell and the executive team who together created an Employee Stock Ownership Plan that allegedly saddled employees with nearly $13 billion in Zell-acquired debt.

It does this even while posing as the employees’ chief source of retirement income.

Tribune Company -- the owner of the Chicago Tribune, the L.A. Times and a constellation of other print and electronic media outlets (and, until recently, the Chicago Cubs baseball team) -- was originally included as a defendant but was dropped once the corporation filed for bankruptcy.

The plaintiffs include former staffers Dan Neil, Henry Weinstein, Corie Brown, Walter Roche Jr., Myron Levin and Julie Makinen.

At the heart of the federal suit lies a stock ownership plan that Zell, a Chicago real-estate tycoon, first proposed in early 2007, prior to his buyout of the company, and which was accepted by Tribune that April.

Turning Tribune into a stock ownership plan-owned entity allowed the company to become an S-Corporation with a hugely reduced tax burden. GreatBanc, an Illinois-headquartered trust company, acted as the plan’s trustee and is now a co-defendant in the suit.

The stock ownership plan was imposed upon L.A. Times and other Tribune Co. employees, taking precedence over their 401(k) plans -- which ceased receiving company contributions -- and other company retirement programs.

But while it technically made employees stockholder-owners of their company, it hardly made them masters of their destiny. In reality, the suit alleges, it made them slaves to a debt generated by Zell and others.

(The Tribune Co. declined to comment on the lawsuit, while Jenner & Block, the law firm representing the defendants, did not respond to requests for interviews.)

The amended complaint is a dense, 109-page document that delves into the esoteric world of pension-fund law and taxation. It boils down to two charges.

The first is that Zell, along with the GreatBanc Trust Co. and 22 individuals, in moving Tribune from a publicly traded company to a private corporation solely owned by its stock ownership plan, so recklessly leveraged its purchase that it made bankruptcy inevitable and amounted to fiduciary negligence under the Employee Retirement and Income Security Act.

The second charge involves violations of the security act;s rules -- including one that was broken when the ownership plan purchased unregistered Tribune stock when higher-grade, marketable Tribune stock was available.

The very short version of this financial arabesque says that before its sale to Zell was completed in December 2007, Tribune held a relatively manageable $4.3 billion debt.

Once Zell and company got through buying up millions of allegedly overvalued shares, it had grown into a $13 billion sinkhole that forced the chain into bankruptcy court one year later and the sacking of hundreds of employees – a bloodletting that continues to this day. (Despite the enormous debt incurred during the Tribune buyout, Zell himself invested comparatively little of his own money.)

The lawsuit, which will be tried as a no-jury bench trial, does not seek damages for the six plaintiffs but restitution for the corporation’s roughly 17,000 affected employees, by compelling Zell and his co-defendants to put cash back into the stock ownership plan – replacing worthless Tribune stocks with very real money, although plaintiff attorneys haven’t yet pled specific dollar-and-cent amounts.

Daniel Feinberg, a lawyer with Lewis, Feinberg, Lee, Renaker & Jackson P.C., one of three law firms representing the Times plaintiffs, sees the writers’ lawsuit as running on separate but parallel tracks with the Tribune’s current bankruptcy proceedings.

“The facts that give rise to both cases are essentially the same,” Feinberg told The Wrap.

On Dec. 17, U.S. District Judge Rebecca Pallmeyer issued a suitably long and thoughtful opinion that denied the plaintiffs’ ancillary claims (Pallmeyer did not agree that Zell could be held liable as a fiduciary), but kept Zell, the chief architect of the scheme, in the proceeding as a defendant.

Essentially Pallmeyer was saying that Employee Retirement and Income Security Act rules don’t simply govern a retirement plan’s fiduciaries, or managers, but apply to all knowing parties connected to the stock ownership plan.

Although Pallmeyer’s decision to keep Zell as a defendant went unreported by the Chicago Tribune (the L.A. Times gave it a 60-word squib), Feinberg took heart from it, seeing in the ruling a sympathetic judge who was very attentive to the case’s minutiae. Feinberg said Pallmeyer “indicated she is leaning our way.”

The plaintiffs are also asking Pallmeyer to grant the suit class-action status, which would, among other things, allow their lawyers to include all affected Tribune employees in communications about the case.

Jack Barcal, an associate professor at USC’s Marshall School of Business, says that the kind of suit filed by the Times employees is a frequent and common result of stock ownership plans imploding through the over-valuation of their stock portfolios.

“The people who set up ESOPs,” Barcal told The Wrap, “know this and hire consultants at great expense – millions of dollars – to accurately evaluate the stocks” that fund the plans.

Court documents filed by the defense show that Tribune used the Chicago office of Duff & Phelps to evaluate its ESOP, and produced three letters from the firm, dated April 1 and 2, 2007, and Feb. 29, 2008, attesting to the plan’s soundness. (Duff & Phelps is not a defendant in the suit.)

Still, Judge Pallmeyer ruled that even an expert financial opinion backing the ESOP’s viability would not be cause to dismiss the suit against Zell and his colleagues.

Barcal notes that "in 99 percent of the time these cases get settled" without going to trial.
Trial or no trial, the lawsuit has placed Zell and his closest collaborators at the center of a story that could become a fable for an era of financial hubris and ruin.

“Business goes in cycles,” said Feinberg. “There are bubbles, and people and valuations get out of hand. The problem is when you involve in these a pension plan -- which is supposed to be governed by a great deal of prudence, care and caution.”

Tribune’s Reorg Plan Deadline Set For March; Bondholders’ Suit Over LBO Structure Delayed

By David Kaplan, Reuters

The Tribune Company’s current leadership has been given a reprieve on two legal fronts as it attempts to work its way out of bankruptcy. At a hearing on Thursday, the company’s second request for additional time to come up with a reorg plan and the company has been approved, Reuters reported.

Although Tribune execs asked that their control of the company be extended until June, the Delaware bankruptcy court judge overseeing the case would only give them until June to submit its resolution. In another minor victory for the company, the judge told Tribune bondholders’ that their intention to sue the parties involved with the company’s $8.2 billion leveraged buyout would have to wait until April.

Bondholders contend that the bankers behind the buyout, which was engineered by Chicago real estate magnate Sam Zell, who became chairman and CEO upon completion of deal in Dec. 2007, should have been aware that the LBO would ultimately lead to the company’s insolvency. Zell relinquished the CEO post in December.

Related Stories
Tribune Reorg Faces More Hurdles; Creditors Go After Backers Of Original Buyout Plan
Tribune Claims It Ended ‘09 With $500 Million In Cash Flow
Randy Michaels Replaces Sam Zell As Tribune CEO; Zell Stays As Chairman
Tribune Creditors Continue To Challenge Reorg Plan

The Bedeviling Confidentiality Issues in the Tribune Bankruptcy

by Zach Lowe, AM Law Daily

The Tribune Company bankruptcy keeps producing juicy legal story lines: a bench smackdown of Sidley Austin's proposed $1100 per hour rates, a debate over expensive fee examiners, a cameo from Warren Beatty, and, most central to the case, a possible lawsuit against the banks who engineered the leveraged buyout that ruined Tribune.

Now, that last issue has produced a new twist: Possible sanctions against a bondholder after its law firm, Brown Rudnick, mistakenly included confidential papers in a public filing, court records show. Martin Siegel, a Brown Rudnick partner, says the mistake was "inadvertent," and that the firm has pulled the offending material from its filing.

But Siegel says his firm will challenge the motion, filed by JPMorgan Chase and its lawyers at Davis Polk & Wardwell, to sanction Brown Rudnick's client (a bondholder called Wilmington Trust Company). Possible sanctions include a ban on Brown Rudnick's client from accessing a trove of critical confidential documents, according to a source familiar with the matter.

What exactly did Brown Rudnick file that it shouldn't have filed? Lawyers in the case won't say, but court records indicate it is paperwork linked to the pursuit of claims against the banks, including JPMorgan and Merrill Lynch, who financed the 2007 leveraged buyout that left Tribune with $10 billion in fresh debt.

The creditors committee would normally be the entity to pursue such claims, but the committee's counsel in the Tribune case, Chadbourne & Parke, said from the beginning that it would not do so because of its relationships with JPMorgan and Merrill, according to court records and our prior reporting. The committee thus retained Zuckerman Spaeder as special counsel to conduct discovery and research possible litigation against the banks, Tribune chief Sam Zell, and others involved in the buyout.

The key parties, including JPMorgan and Merrill, agreed to turn over documents to Zuckerman's attorneys under a broad confidentiality agreement. Lawyers representing some Tribune bondholders have access to the depository of confidential documents provided they don't make them public or break a number of rules detailed in the agreement, court records show.

Brown Rudnick slipped up and included something from the depository in one of its filings, court records show. Siegel and Dennis Glazer, the Davis Polk partner representing JPMorgan in the matter, would not reveal what document Brown Rudnick mistakenly filed. Siegel declined to pinpoint who made the error.

But the Brown Rudnick mistake--and the possible repercussions for the firm's client--are only a small piece of a larger confidentiality battle looming in the Tribune bankruptcy, one that will help to determine how much the public eventually will learn about the disastrous Zell LBO. Last month, Zuckerman attorneys asked for the go-ahead to sue parties associated with the leveraged buyout, but the firm requested permission to file that complaint under seal, since it contains confidential information from the banks involved in the buyout, court records show.

In other words: The entity suing the banks wants to keep documents sealed in part out of respect for the banks it is suing. Not surprisingly, JPMorgan Chase likes the idea, according to papers it filed backing the request last month.

One problem: An asset management fund that is also a Tribune creditor wants the Zuckerman complaint made public, according to a filing last month by the fund's lawyers at Greenberg Traurig. (Those lawyers--partners Scott Cousins and Nancy Mitchell--did not return calls seeking comment.) Noting that "creditors committees most often advocate for transparency," the Greenberg team argues that allowing Zuckerman to file what could be a blockbuster complaint under seal "sets bad precedent, namely that important aspects of the litigation can be conducted behind closed doors."

The Greenberg team, representing Aurelius Capital, says Zuckerman hasn't shown that any of the documents are defamatory, scandalous, or otherwise too sensitive to be made public.

JPMorgan and Merrill Lynch want none of this. The former responded last month with a motion labeling any attempt to unseal a complaint against the buyout participants "a transparent attempt to interfere" with the bankruptcy case and something that would "undermine [Tribune's] efforts to broker a consensual resolution" to the Chapter 11 matter.

Merrill Lynch, represented by Kaye Scholer, joined JPMorgan's motion to keep the documents sealed. Madlyn Primoff and Jane Parver, the Kaye Scholer partners on the matter, did not return messages seeking comment.

So after a bunch of small fights, we've got a doozy on our hands.

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