Editor's note: This story has been corrected to reflect that the ESOP was not funded by the Times' employee pension plan. TheWrap regrets the error.
L.A. Times employees who sued over the 2007 Sam Zell-led takeover of the company using employee ownership as a tax shelter have won a $32 million settlement.
According to the L.A. Times, the settlement was made with GreatBanc Trust, the trustee for Tribune Company's employee stock ownership plan.
It is the coda to a recklessly inventive plan dreamed up by Zell that placed all the risk for buying the Tribune Company on the employees, while it shared the ownership with the billionaire. (Technically, Zell was not an 'owner' of the company at the time of the deal; under the plan, he held a warrant to take 40% ownership in exchange for his $315 million investment.)
The plan created an employee stock ownership plan (ESOP) for the tax benefits it offered – and pushed Tribune's debt to $12.5 billion. Zell took the company private by investing alongside the ESOP, incurring the billions of dollars in debt and requiring the company to produce wildly optimistic revenues at a time of ongoing financial decline.
Bad surprise (though not a surprise to many observers): Tribune went bankrupt a year later.
Dan Neil, the paper’s former auto columnist, led the lawsuit accusing GreatBank (via Zell) of violating federal law with the leveraged buy-out.
The 2008 suit named the Tribune company and Zell, but litigation against them was dismissed.
According to an account in the Times:
“Last November, a federal district court in Chicago ruled that GreatBanc violated pension laws by purchasing unregistered shares in Tribune for the ESOP at a time when there were still company shares trading on the New York Stock Exchange.
“That ruling gave weight to the employee suit, providing the impetus for a settlement, said Daniel Feinberg, an Oakland attorney who represented the employees.”
But let's be honest: the whole thing stunk from the get-go. Lassoing in working journalists to wager their ownership on the survival of the company was folly to begin with. It never made sense, and it was hard to believe the employees would go along with it. It's also a sign of how desperate journalists felt at the time that they did.
What they got for their misplaced faith was bankruptcy and lots and lots of lay-offs.
About 13,000 current and former Tribune employees will divide the $32-million settlement, which will go into their retirement accounts after legal fees are deducted. The amount each employee receives will depend on their salary at the time.
Attorneys are expected to receive 25% of the settlement.
So no single employee will get much money, but at least they do get some satisfaction.
"Whatever money comes to the members of the class isn't much cash, but at least it was acknowledgment that they were wronged," Neil told the Times. "This was a horrible deal for the employees of Tribune."
Here's the memo with the company spin:
From: Tribune Communications
Sent: Friday, August 19, 2011 7:11 PM
Subject: Message from Don Liebentritt/Settlement of ERISA claims
Today Tribune is announcing a multi-party agreement to settle claims alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA) in connection with the company’s Employee Stock Ownership Plan (ESOP). The claims were initially brought in 2008 in a lawsuit against the ESOP Trustee, GreatBanc Trust, by former Tribune employees. The agreement also resolves claims asserted by the United States Department of Labor in connection with the ESOP and the DOL’s and GreatBanc’s objections to Tribune’s proposed plan of reorganization. (The details of the proposed agreement are contained in the attached press release.)
The agreement must still be approved by the Bankruptcy Court for the District of Delaware and by the United States District Court for the Northern District of Illinois. Under the terms of the agreement, the company will contribute $4.45 million of a $32 million payment for the benefit of Tribune ESOP participants and to cover expenses. If the settlement is consummated, this money will be allocated to your ESOP account and then transferred to your 401(k) account.
This is a good result for all parties and ensures a smoother exit from bankruptcy once we have a confirmed plan. We’ll keep you updated as we have additional information to share regarding the payment to your ESOP account.
Chief Restructuring Officer