Complaint takes aim at actions since buyout
In the latest in a long line of poisonous developments between the blustery Sam Zell and Tribune employees, a group of current and former Los Angeles Times staffers has gone to court seeking to oust Zell from ownership of the Tribune Co., alleging that the mogul’s leveraged buyout of the media giant is a scam.
The plaintiffs, including Pulitzer Prize winner and auto critic Dan Neil, are effectively suing themselves, since they technically share ownership under the terms of Zell’s complex deal. And in their capacity as owners, the plaintiffs are crying foul at the way Tribune, and more specifically the Times, is being managed.
The complaint, filed Tuesday in Los Angeles federal court, alleges the structure of the buyout — executed through an Employee Stock Ownership Plan — and Zell’s conduct have diminished the value of Tribune Co. in order to benefit himself and fellow board members.
“Sam Zell’s plan could not be clearer,” the suit said. “He took the Tribune Co. 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 at a bargain price with a minimal outlay of his own money.”
The suit noted that of the $8.2 billion he used to take Tribune private, Zell put up $315 million of his own funds and used the ESOP (without the consent of employees) to finance the rest — leaving the new entity with nearly $13 billion in debt. As a result, the plaintiffs allege, Zell’s redirected Tribune’s operations from running newspapers to servicing the new debt.
They also noted that Zell’s deal entitles him to 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 graft, played out under the cover of legal technicalities,” the plaintiffs said. “The real losers in this deal, however, are Americans who rely on news and information collected and disseminated by the respected Tribune news organizations.”
Neil told Daily Variety that the event that precipitated the filing of the suit came following July’s announcement that the Times would slash 150 editorial jobs, or more than 15% of the staff.
Plaintiffs also include former Times staffers Corie Brown, Henry Weinstein, Myron Levin and Walter Roche Jr. along with Jack Nelson, the former Washington, D.C., bureau chief. Defendants also include Greatbanc Trust Co., EGI-TRB and eight members of the Tribune Co. Employee Benefits Committee.
Tribune Co. spokesman Gary Weitman said, “We have not seen the lawsuit and will decline comment.”
The plaintiffs are seeking class-action status. In the suit they allege that through “destructive management and self-dealings,” Zell and his co-fiduciaries have breached their fiduciary duties to the ESOP beneficiaries. It also alleges that Zell has defunded employees’ retirement packages, raided the employee pension fund for more than $400 million and eliminated more than 1,000 jobs at the Times, Baltimore Sun and Chicago Tribune.
Neil said the plaintiffs opted to file the suit partly out of frustration with the lack of access to details about the administration of the pension and trust funds. He also said the Times would be profitable were it not for the debt load, adding that last year’s operating profit topped $90 million.
The plaintiffs said in their announcement that they do not seek to enrich themselves. “Rather, their announced intentions are to protect Tribune Co.’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 Co.’s board in order to save what is left of a still great news gathering operation,” the group said.
Carl Tobias, a professor at the U. of Richmond School of Law, said the major hurdle the plaintiffs face will be obtaining a class certification from the judge. “They will have a lot more leverage if they go into settlement discussions,” he added.
Tobias said it’s not clear to him whether the suit has merit but added, “These are certainly serious allegations.”