The Tribune Company’s already-murky bankruptcy case just got murkier.
Kenneth Klee, an independent examiner appointed by the U.S. Bankruptcy Court to investigate claims of “fraudulent conveyance” against the company, submitted a 600-page report late Monday.
In it, Klee said that there appears to have been “dishonesty” in Sam Zell’s $8.2 billion 2007 buyout of the Tribune Co., and that it is “somewhat likely that a court would conclude” that fraud had occurred in the deal’s later stages.
"It is somewhat likely that a court would conclude that the Step Two Transactions constituted intentional fraudulent transfers and fraudulently incurred obligations," Klee wrote  in the report. "Other aspects of management's projections, while aggressive, do not support the conclusion that the senior financial management at Tribune prepared them in bad faith."
Klee did find not evidence fraud by Zell, the Tribune’s chairman, or outside investors, but said “one or more of Tribune’s officers breached their fiduciary duties.” (Klee didn’t name names, but the report noted that Klee interviewed Zell, former Tribune Co. chairman Dennis FitzSimons, ex-finance SVP Donald Grenesko and current EVP Nils Larsen.)
The report said that “Tribune used Morgan Stanley’s imprimatur to … push [the deal] over the goal line, without authorization from Morgan Stanley.”
According to the Chicago Tribune rival Sun-Times, Klee’s report could “could throw the company’s 20-month-old bankruptcy case into turmoil .” Rival or no rival, I'd have to agree.
"We have reviewed the summary conclusions contained in the report and from what we know now, we agree with some of his assessments and disagree with others," Tribune CEO Randy Michaels and COO Gerry Spector wrote in a memo to employees urging them to continue to stay focused during the proceedings . "Since much of the more than 700-page document remains redacted, including the analysis on which the examiner bases many of his conclusions, we think it is premature to comment further about the report."
What the long-term implications of Klee’s findings are is unclear. In the short term, however, there is a chance the next hearing in the case, scheduled for August 30, could be delayed again.
The original deadline for Klee’s report was July 12, but Klee asked for an extension to July 27, which pushed the hearing, originally slated for August 16, back two weeks.
In April, it looked as if the company was close to its exit from Chapter 11. But Oaktree Capital, which owns roughly 25 percent of Tribune's debt, "mounted the legal challenge that could keep Tribune in bankruptcy court well past the summer ."
The Tribune Co., which owns the Los Angeles Times, Chicago Tribune and several other media properties, is hoping the court approves its reorganization plan so it can emerge from bankruptcy this fall.
That outcome -- and timeline -- seems even less likely now.