Friday, December 17, 2010
Media / News Bites $180 Million Is Not Chump Change If You've Got to Give It Back
Posted by Michael Miner on 12.17.10 at 08:30 AM
In the past few days I've twice been forwarded a document that my Tribune sources find pretty astonishing. It's a list of 209 Tribune Company managers and former managers who came into quite a bit of money when Sam Zell took the company private back in December of 2007. Most of the checks were written because these managers had, over the years, been rewarded with Tribune Company stock that they could finally cash in. Other moneys were "deferred bonuses" from the company's management incentive program — bonuses those managers had earned but chose to leave with the company for the time being in order to put off having to pay taxes on them.
Then there were the "success bonuses," paid to executives whose role in taking the company private had gone above and beyond their regular duties. And some executives would get what was called "phantom equity," that is, stock in the new private company that they could cash in when they left it, as many did. And some payments were labeled "executive transition," a fancy way of saying a type of severance. A few were "excise tax Gross Ups," which is described here as compensation for the taxes high-flying execs sometimes have to pay on their golden parachutes.
All told, the Tribune Company payments came to about $180 million. That's a serious piece of change — especially to someone who worked there for years and didn't share in a penny of it; and most definitely to someone whose humble role in the privatization process was to get laid off.
Here's the PDF I was forwarded — it shows what everyone got. A few high-fliers, as the expression goes, made out like bandits. For instance David Hiller, CEO of the Los Angeles Times before he left the company in July of 2008, got $3,972,558 in a deferred bonus, $2,328,067 for his stock, $2,083,333 in phantom equity, a total of $3,050,523 in excise tax gross ups, and $3,960,000 in executive transition. That comes to nearly $15.4 million. Then again, it's a trifle compared to what Dennis FitzSimons, CEO of the entire company, walked away with — $28.7 million.
Only if you are afflicted with schadenfreude — that is, if you yield to the temptation to take pleasure in the troubles of others — will you be pleased to know that every penny of that $180 million is now in jeopardy. The Tribune Company has been mired in bankruptcy court since December 2008, and earlier this month a faction calling itself the Official Committee of Unsecured Creditors filed a series of individual complaints against all 209 managers who shared in that pot. They need to give the money back, the complaints argue: it belongs in the pot of corporate assets that will be divided among the creditors.
The creditors are making a case that many of the Trib 209 did not see coming. As the Tribune's Ameet Sachdev observed in his excellent recent coverage of this development, many of the 209 "had nothing to do with [Zell's] leveraged buyout" and did not get rich, or richer, from it, and may have been paid out as little as $10,000. And it's money that in many cases was long since spent — on tuitions, cars, enclosed side porches, on whatever one gets in exchange for tidy but very finite sums.
Sachdev reports that the 209 suits could be a tactical maneuver to force the bankruptcy litigation to a settlement. But the reason why it's a serious tactic is that the case for recovering the money is a strong one. Someone experienced in bankruptcy law put the Trib 209's chances of prevailing this way: "I would think it is an uphill battle but not wholly Sisyphean."
Here's why:
Bankruptcy law assumes that even before corporations file for bankruptcy, it's clear to some people where they're headed. Corporate insiders certainly know, and alert creditors might too. To keep either creditors or insiders from getting their money out while the getting's good — at the likely expense of everyone else — the U.S. Bankruptcy Code allows a trustee overseeing a bankrupt company to recover payments made even before the corporation files for bankruptcy.
The Code says the trustee can act if the payment was made "on or within 90 days before the date of the filing of the [bankruptcy] petition." However, that window expands from 90 days to an entire year "if such creditor at the time of such transfer [of funds] was an insider."
An insider, under the Code, is, among many other things, "an officer of the debtor" corporation.
The Trib 209 are all being sued as insiders.
And here's what really rubs it in. Zell's buyout of the Tribune Company closed on December 20, 2007. Of that $180 million in payouts, about $120 million was distributed in checks cut that December 27.
The Tribune Company filed for bankruptcy on December 8, 2008.
Obviously the top executives were preoccupied at the time with the $13 billion in debt the company could no longer service. But did they even notice that if they could put off the filing for just three more weeks, they'd be guaranteeing 209 past and present employees their $120 million?
The Tribune article cited above quotes the current publisher of the Los Angeles Times, Eddy Hartenstein, as saying the Trib 209 "are people who did absolutely nothing wrong." But that has always been beside the point in the travesty of the Zell buyout. I have posted long lists of former employees who did nothing wrong, and were even told by Zell they were his "partners" in forging the company's bright new future, and soon found themselves out on the street.
Those creditors who claim the buyout was a "fraudulent conveyance" — that is, could not possibly have succeeded — are supported by the logic of the Bankruptcy Code. As I've explained, in the eyes of the Code everything that corporate insiders do in the year that immediately precedes bankruptcy is considered suspect Any payout to an insider might be recovered, under the theory that even a full year earlier insiders presumably knew where the company was headed.
If the law presumes that, the law must presume that insiders knew the Tribune Company was headed for bankruptcy even before Sam Zell took it over.
Comments (19)
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All quite interesting. Of course, it leaves aside the more salient question as to whether any of these grandees were worth spit in a rational universe.
Clearly they weren't.
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"[If] they could put off the filing for just three more weeks, they'd be guaranteeing 209 past and present employees their $120 million."
How perfectly emblematic of the thoughtless way that the Tribune and its employees have been treated throughout the entire Zell debacle.
Give something to them with one hand --and with the other hand, use it to beat the living shit out of 'em.
-- MrJM
'And some executives would get what was called "phantom equity," that is, stock in the new private company that they could cash in when they left it, as many did.'
http://bit.ly/PhantomEquityIs
-- MrJM
How many of these executives and managers said, "No thanks. I won't take anything until after all the freelancers, whose work we have all ready published, get paid?" I'm still waiting.
Too bad the PDF containing the names of Tribune executives, managers, flunkies and failures didn't also include individual mugshots, er, photo IDs, alongside their reportered plunder. Many of those named committed far greater crimes than those "presumed innocent" folks whose mugshots routinely appear in Tribune.com.
Speaking of which, when it comes to struggling newspapers, imitation usually is sincerest form of incompetency. The Smoking Gun has done the same thing with celebrity and/or funny mug shots, better, for years. Simply put, it's what TSG does. Newspapers should be about something more substantial.
I'm trying to remember the key details. Please correct me if I'm wrong.
Zell put up about $315M cash and then the company paid out $180M cash to the people who engineered this deal and took on debt to buy out the equity of the $handlers, the McCormick Foundation, the McCormick family and the public. That amounted to about $8.2B of debt if I remember correctly.
Within a year Zell decides to call it a bankruptcy. Since then the TribCo has been approved to pay bonuses equaling $97M.
The reasons for those bonuses paid from a bankrupt company: the people might leave! God knows that in a market seeing major cuts in newspaper employment and significant unemployment everywhere people who can engineer a deal like this are always in demand. So, to keep them aboard the company pays them bonuses.
Zell, who also famously told his "partners" if the deal fails he won't be harmed, considers lining up as a creditor to regain his money.
Now if we add the cost of filing bankruptcy ($138M by March, 2010 according to one Chicago Tribune article) and the interest cost of the $8.2B for about one year (let's guess about $500M.) We are looking at the fact that the people who enjoyed this bonus and the three bonuses after it managed to have the company lose $600M in assets just due to these factors. Plus the owner equity (i.e., the ESOP) is worthless.
I'm going to guess again on this one: That's about $1M each for these beautiful people.
"God knows that in a market seeing major cuts in newspaper employment and significant unemployment everywhere people who can engineer a deal like this are always in demand. So, to keep them aboard the company pays them bonuses."
I think you know very well that the overwhelming majority of people who received those bonuses had nothing whatsoever to do with engineering the deal. I'm not defending the bonuses. But enormous hyperbole like that is not helpful. It just misleads people.
"I think you know very well that the overwhelming majority of people who received those bonuses had nothing whatsoever to do with engineering the deal."
IAC, that's absolutely true. Of the 209 managers on this list, very few were directly (or even indirectly) involved with engineering the deal.
But check out the relative pocketful of players who pocketed the very largest and least defensible bonuses. Not talking about stock accrued over years and years via traditional channels of executive compensation -- I'm talking about bonuses directly linked to the flurry of financial deals that led to what we have today.
That's a very interesting list . . .
And see Steve Strahler's piece, "McCormick Foundation edges toward post-Tribune identity," in the December 13 Crain's about how Hiller keeps stuffing his pockets and those of his friends -- including FitzSimons, John Madigan, J. Dowdle, and now Don Wycliff, and a former TribCo investor relations exec, by paying board members of the "Gosh we really have nothing to do with the Tribune anymore except we all used to work there" McCormick Foundation.
"Last year, directors were paid between $55,450 and $59,500 for a job that requires an average *three or four hours a week*, according to IRS filings . . . " [my * * emphasis]
"'It's a sweet arrangement,' says Daniel Borochoff, president of Chicago-based charity watchdog American Institute of Philanthropy."
"Only 1% of public charities and 13% of foundations nationwide pay directors, according to BoardSource, a Washington, D.C., governance group for non-profits."
Hiller "says his annual salary as CEO is $375,000."
Screw these bastards. Well done in making this information public. Plenty of employees were shown the door by these same people within a year or two after they got these payoffs. I only hope the Bankruptcy Court has enough balls to allow the creditors to actually claw back some of this cash. I worked at Tribune for 10 years and only recognize about 25 or 30 names on this list. What the hell were these people doning anyway?
Screw these bastards. Well done in making this information public. Plenty of employees were shown the door by these same people within a year or two after they got these payoffs. I only hope the Bankruptcy Court has enough courage to allow the creditors to actually claw back some of this cash. I worked at Tribune for 10 years and only recognize about 25 or 30 names on this list. What were these people allegedly doing anyway?
JustTheTruth raises a good question: "What the hell were these people doing anyway?"
Think about it for a moment. What could anyone possibly do to earn that kind of comfort and compensation? It's not humanly possible. There must be some kind of inverse-proportion in the equation: Do virtually nothing while occupying a lot of office acreage, and you're obviously indispensable.
What does any executive do? Hang around in a suit till about 2:30, then make an uninformed decision and hit the links or the health club?
Uncanny.
not to split hairs, but…
john twohey got $50,554.22 ? … what the hell has twohey ever done for the trib worth 50K?
& owen youngman got $337,194.46 ? …why, try as he might, he wasn't even able to get the daily horoscope killed because it was the work of the devil !
IAC,
You are right. I wrote with anger about a subject that I am personally involved in. Since Michael posted this PDF I have discovered how angry I am at the treatment my employees and I received at the hands of these beneficiaries.
I won't drill into the details, but see amounts similar to savings I provided some of these people before I was sacked. So, where did the savings I fought to achieve go?
Now that I've exercised my full transparency, may I please get back to being angry?
