Examiner Finds Tribune Solvency Opinion in ESOP Transaction May Involve Fraud

Kenneth Klee, a special examiner for the Delaware bankruptcy court dealing with the Tribune Company's bankruptcy, has concluded that "it is highly likely that Tribune, and reasonably likely that the Guarantor Subsidiaries, were rendered insolvent and without adequate capital as a result of the closing of the Step Two Transactions. Based on the record adduced, the procurement of the solvency opinion was marred by dishonesty and lack of candor about the role played by Morgan Stanley in connection with VRC's [Valuation Research Corporation] solvency opinion and on the question of Tribune's solvency generally. Second, the Examiner found evidence indicating that Tribune's senior financial management failed to apprise the Tribune Board and Special Committee of relevant information underlying management's October 2007 projections on which VRC relied in giving its Step Two solvency opinion."

The Tribune Company was bought by Sam Zell and an ESOP in 2007 in a complex, two-step transaction. In step one, Zell put in equity and the ESOP bought newly issued shares. In step two, a self-tender was undertaken to buy out all the shares, including Zell's, with additional debt. The result was a 100% ESOP with Zell having warrants worth 40% of the company. In question here is step two. The board hired Valuation Research to give a solvency opinion. The examiner found that the opinion lacked credibility, that projections about solvency from management were unreasonably optimistic and poorly vetted, and that Morgan Stanley's imprimatur on the transaction was overstated. In addition, the examiner said in "effect, VRC was required to add to the value derived from its analysis the value conferred on the Tribune Entities from the S-Corporation/ESOP structure as a result of the Merger, even though inclusion of this value in the determination of 'fair market value' and 'fair saleable value' was improper."

The report said there was not credible evidence that other third parties, including Zell or, presumably, other players in the ESOP process, would be likely to have committed intentional fraud.

The issues presented here are as complex as the transaction, with multiple players and the added complexities of bankruptcy. At stake is who has claims to what in bankruptcy proceedings, but no doubt the report will also play into any litigation concerning the ESOP itself at Tribune.

The 1,000-page report is full of redacted material subject to confidentiality agreements. A detailed summary of the report can be found at this link (PDF format).