L.A. Times Employees Suing Zell Score Court Victory
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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 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.
GreatBanc-Zell-Tribune-L.A. Times-Pallmeyer Order Nov. 9, 2010
Reach executive producer Paresh Dave here. Follow him on Twitter: @peard33.
