Wednesday, November 10, 2010

L.A. Times Employees Suing Zell Score Court Victory

By Paresh Dave

Former and current L.A. Times employees suing Tribune's embattled chief Sam Zell scored another victory in court Tuesday.

A federal judge in Chicago ruled that the financial company that oversaw the sale of the media giant violated its duty to properly manage money when it allowed a pension fund for Tribune employees to illegally purchase Tribune stock.

When he announced plans to take over the company in April 2007, Zell developed an employee stock ownership plan to purchase a controlling share of Tribune stocks. The plan was meant to benefit the retirement of employees, but nearly 10,000 of them may have lost money as Tribune's rising debt caused the stocks' value to tank.

Judge Rebecca Pallmeyer issued a summary judgment Tuesday, saying the original stock trade creating the plan violated the Employee Retirement Income Security Act of 1974, commonly known as ERISA. GreatBanc acted as the plan's trustee.

“Because GreatBanc knew the details of the transaction,” Pallmeyer wrote in her decision, “it knew or should have known that it was prohibited by ERISA.”

Real estate magnate Sam Zell took control in December 2007 of Tribune, which owns an array of television channels and publishes several newspapers including the the L.A. Times, Chicago Tribune and Baltimore Sun. But so much money was borrowed for Zell to make the $8.3 billion purchase that the company had to file for bankruptcy a year later. Tribune creditors announced a separate but similar lawsuit earlier this month, alleging that Zell and his consultants defrauded them.

Tuesday's judgment in the employees' lawsuit means one part of a complex, multi-step financial transaction was done illegally. Pallmeyer ruled in August that the employees won't be able to recover the stock value losses because the money originated with Tribune and Tribune isn't being sued.

Pallmeyer refused to throw out key parts of the lawsuit last December, shifting momentum in the case toward the employees.

The plaintiffs in the lawsuit, including former L.A. Times reporters Dan Neil, Corie Brown, Henry Weinstein, Walter Roche, Myron Levin and Julie Makinen, are also alleging that Zell broke his fiduciary duty, creating the financial mess Tribune has been left in. Hundreds of employees have been fired since Zell took over.

The plaintiffs filed a motion in October seeking to turn the lawsuit into a class-action.

They say the deals putting Zell in charge were destined to drive the company into insolvency and could have been and should have been stopped by one of several entities during the span of several months.

The five-part purchase of Tribune began in April 2007. The initial move, which Pallmeyer ruled was illegal, involved the employee stock ownership plan's purchase of about 9,000,000 new shares of Tribune common stock for $28 share. The plan incurred a $250 million debt to be paid back over 30 years and was prohibited from re-selling the shares.

Next, Zell's investment company, EGI-TRB, bought for $50 million about 1.5 million shares of newly issued common Tribune stock. EGI-TRB also loaned $200 million to Tribune.

Zell was appointed to the board of directors of both the plan and Tribune, which subsequently added $4 billion in debt by buying back 126 million shares of its publicly traded stock.

Finally, Tribune merged with the plan, retired 118 million shares and paid back EGI-TRB's loan. All of the maneuvering tripled the company's debt to $12.8 billion.

See the court documents by clicking the link below.


In other Tribune news:

No Bonus Checks For 5 Tribune Execs Being Sued Over Bankruptcy

From FishbowlLA: Today a bankruptcy judge gave the green light on a multimillion-dollar bonus plan for over 600 Tribune Co. managers — but only after the company removed the names of five employees currently being sued from the list. Harry Amsden, Chandler Bigelow, Robert Gremillion, Daniel G. Kazan, and David D. Williams are top Tribune executives who are defendants in a lawsuit filed by creditors due to their roles in the company’s 2007 leveraged buyout.

From Tribune's original 2010 incentive plan for the brass elicited howls from creditors and also workers at Tribune newspapers and TV stations, who moved to block them. Any of you kids remember the days when journalists got bonuses? Anyone?

From Bloomberg: Brian J. Gold, a Tribune attorney, today disclosed the decision to deny the payments to the executives after objections were lodged by creditors and the Office of the U.S. Trustee, an arm of the Justice Department that monitors bankruptcies.

“I would have sustained those objections for reasons that are obvious,” Judge Kevin J. Carey said. “It is wise that the debtor came to that decision.”

The new plan spreads out the bonuses to 640 people and caps the total payout at no more than $42.9 million - partly for sticking around, during a very difficult period in Chapter 11 re-organization.

From the Wall Street Journal: Tribune has denied allegations that Mr. Bigelow and others allowed the use of incorrect financial projections to obtain a solvency opinion that was essential to the closing of the 2007 leveraged buyout. However, the company withdrew its chief financial officer and four other executives from a 2010 bonus package that was up for court review Wednesday, so as not to jeopardize bonus payments for the other employees.

Creditors and federal bankruptcy watchdogs had protested the plan to pay bonuses to Mr. Bigelow and the four other excluded executives, all of whom were named defendants in a creditor lawsuit against company leaders who played key roles in the LBO. The creditors and bankruptcy watchdogs objected, asking that the five executives who have been sued be left out of the bonus pool.

The creditor lawsuit grew out of the work of court-appointed investigator Kenneth Klee, who examined the LBO. He found evidence that Mr. Bigelow and other top financial executives "were not honest or candid" as they pushed to get the deal across. Others dropped from the bonus list Wednesday were suspected of wrongdoing because they allegedly pledged assets of operating subsidiaries to guarantee the LBO debt, without checking into the deal.

A year after the LBO added more than $8 billion to Tribune's debt load, the company filed for bankruptcy-court protection.

Court documents put Tribune's value at $6.75 billion. Its debts top $12 billion.

"We're doing terrific," said Eddy Hartenstein, publisher of the Los Angeles Times, a Tribune newspaper. Mr. Hartenstein recently was named to Tribune's new four-person executive council after former Chief Executive Randy Michaels resigned last month amid unflattering reports about the company's corporate culture.

Mr. Hartenstein took the witness stand Wednesday to testify that Tribune's operations are doing well and its bonuses are justified, in spite of continuing strife in the bankruptcy-court case, which is approaching its two-year anniversary.

Tribune lost the sole right to control the outcome of its Chapter 11 proceeding months ago, and faces competition on three fronts. The company's original plan would have quieted all questions about the LBO, in exchange for concessions of value from lenders that financed the LBO.

Company leaders would have been shielded from lawsuits under the previous Chapter 11 plan. Findings from Mr. Klee, of Klee Tuchin Bogdanoff & Stern, forced Tribune to revise its plan and agree to one that means legal jeopardy for some existing executives and former leaders.

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