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Group of LA Times employees sues Sam Zell for ’self-dealings’

By Carol Eisenberg

September 17, 2008 at 4:43pm

Several current and former Los Angeles Times staffers have sued Chicago billionaire Sam Zell and the Tribune Company for misusing employees’ stock to purchase the media conglomerate last December.

The complaint, filed Tuesday in federal court in Los Angeles, alleges that Zell structured the deal in such a way as to enrich himself and his associates to the detriment of employees - among other things, by leveraging the Employee Stock Ownership Plan to borrow billions of dollars for the deal. The stock plan is now Tribune’s majority owner.

The suit also contends that Zell’s decisions as chief executive have diminished the company’s value.

Tribune Company spokesman Gary Weitman declined comment, saying the company had not seen the lawsuit.

The suit, which seek class-action status on behalf of an estimated 18,000 Tribune employees, alleges that through “destructive management and self-dealings,” Zell and his directors have breached their fiduciary responsibilities to the beneficiaries of the Employee Stock Ownership Plan.

It also alleges that Zell, who contribued only $315 million of his own money in the $8.2 billion purchase price of the Tribune, has de-funded employees’ retirement packages, raided employee pension fund for more than $400 million, and eliminated more than a thousand jobs at the Los Angeles Times, Baltimore Sun, and Chicago Tribune. (Newsday, which also underwent downsizing, was sold in May to Long Island-based Cablevision.)

“Using a structure allegedly designed to benefit employees (the Tribune Employee Stock Ownership Plan), Zell took over a highly valuable company, imposed on it the most encumbered balance sheet in the newspaper industry, and avoided any real personal risk or responsibility, all while enjoying benefits of a tremendously valuable tax structure and letting employee ‘owners’ bear the damaging consequences going forward,” the complaint says.

Even though employees are nominally the owners of the company on paper, they have no voice on the company’s board and no say in its management, the suit says.

In a news release yesterday, the plaintiffs said their purpose is “to protect Tribune Company’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 Company’s board in order to save what is left of a still great news-gathering operation.”

Since taking Tribune private in December, Zell has cut hundreds of jobs, as well as news pages, to reduce expenses. The company’s annual debt payments are close to $1 billion, according to the Los Angeles Times.

In August, Tribune posted a second-quarter net loss of $4.53 billion after writing down the value of its publications.

The plaintiffs will have an uphill battle persuading a judge to grant them class-action status representing all of Tribune’s employees. They are Pulitzer-Prize winning auto critic Dan Neil, former food-and-wine critic Corie Brown, former legal affairs writer Henry Weinstein, former consumer affairs writer Myron Levin, former staff writer Walter Roche Jr. and former Washington D.C. bureau chief Jack Nelson.

Neil is the only one who still writes for the paper.

Note: Carol Eisenberg is a former employee of Newsday, which was part of the Tribune Company until several months ago.

Update: Zell responds

Here is the text of an email sent to Tribune employees at 4:53 Wednesday

Partners,

We are about to release a statement on the lawsuit filed yesterday by a staffer at the LA Times and several former Times employees. I want to share it with you first, but I also want to stress that as we work to fix our company, we are all in this together.

As newspaper advertising revenues have declined severely over the last several months, we’ve had to take some tough steps. We’re not alone, of course — the entire publishing industry is trying to deal with the challenges posed by a tough advertising environment and an economy in turmoil. At Tribune, we’re making tremendous progress — reinventing our newspapers, expanding television news, growing WGN America, and developing a new Internet platform. We’re being watched and imitated.

The overwhelming majority of our employees have risen to the occasion — they are working extremely hard, innovating as never before, trying new things, pushing the envelope. They are using their own best judgment and questioning authority when they need to –something employees at this company rarely did in the past.

But there is a difference between questioning authority or challenging the “business as usual attitude,” and maligning the company in public. That’s just bad judgment and does no one any good. It’s a distraction that’s unnecessary.

We are partners. We need to act like it.

Sam

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