Thursday, December 9, 2010

Zell's Paper Caper, Sam Knew Trib Was Toast

Sam Zell intentionally crippled Tribune Co. and the media giant's banker, Morgan Stanley, unjustly profited from the caper, creditors of the crippled Chicago company charged in a no-holds-barred lawsuit. Zell, who put down just $315 million and had Tribune borrow more than $10 billion in the December 2007 buyout of the media giant, knew that the debt load would lead to the destruction of the company, the suit, filed late Tuesday in Wilmington, Del., alleges.

Indeed, Tribune defaulted 11 months later.
In addition to Zell, the lawsuit includes claims against LA Times founding family member Jeffrey Chandler, the Robert McCormick Foundation, Merrill Lynch, and 3,000 Tribune shareholders.

"[If Zell is found guilty] it could ruin his reputation," said Sandra Mayerson, a partner at the Squire Sanders firm and a bankruptcy expert not involved in the case.
Zell's lawyer, Jon Wasserman, disagreed with the charges, saying an independent special examiner found that Zell acted in good faith. "We intend to defend ourselves vigorously," he said. "We did nothing wrong."
The suit claims Morgan Stanley engaged in "professional malpractice" and "insider trading."

Morgan Stanley was Tribune's adviser in 2007 when Zell pursued the business and in 2008 when the deal was done -- making it a "temporary insider."

The creditors allege Morgan Stanley, "using material non-public information concerning the likelihood that Tribune would file for bankruptcy" purchased Tribune debt in April and November 2008, knowing it could reap seven times its investment if the company collapsed.

A Morgan Stanley spokeswoman said, "We strongly reject these claims, which we believe to be frivolous and completely without merit.."

Any money recovered from any lawsuit filed in the bankruptcy would be put in a litigation trust whose proceeds would be distributed to creditors.

The suit doesn't detail damages sought.

Mayerson said the bar is high to prove intentional fraud, as the creditors would need to prove that Zell, 69, was thinking that the company would likely collapse.

However, the examiner said a court could conclude that the last part of the transaction, which involved borrowing $3.6 billion, was an intentional fraudulent transfer.

Mayerson said claims of intentional transfer are usually dismissed but in light of the examiner's report probably will not be in this case.

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