Past Columns

Clockwise from top left: Bob McCamant, Bob Roth, Tom Rehwaldt, and Tom Yoder back in the day

Eric Futran (Yoder, Rehwaldt)

The Suit Behind the Sale

The old owners of the Reader weren't just out of ideas. They were facing an ugly lawsuit from one of their own.

August 24, 2007

By Michael Miner

The former owners of the Reader explained when they sold this paper last month that it was facing financial challenges they felt too old and spent to tackle. One of the most exhausting of those challenges was personal: the owners who spoke for the Reader were being sued (see a PDF of the suit here) by a founder they’d stripped of operational authority some 20 years earlier. This was Tom Rehwaldt, a frequent minority of one at board meetings of Chicago Reader, Inc., who nevertheless owned 19.1 percent of the stock.

Rehwaldt was one of four principal founders who’d become friends at Carleton College before launching the Reader in 1971. Rehwaldt was the one in a suit. Deeper differences slowly emerged. The others were nonconfrontational, possibly to a fault: they tried to make decisions on the basis of deference and consensus. But they recall that when Rehwaldt thought he was right he was inflexible. Over the years Rehwaldt became so estranged from his partners that in 1988 they took the traumatic step of firing him from his Reader job as operations director. In response Rehwaldt sued, alleging oppression, waste, and mismanagement. The eventual settlement in 1991 offered him protections he believed he needed to guarantee what he considered his share of the company’s considerable profits. One measure obligated the company to divvy up at least 80 percent of the annual profits among the shareholders. Another capped the salaries of the partners who still worked at the paper.

I’m told that as the fat years rolled on, Rehwaldt found other interests and was for the most part the silent partner they all wanted him to be. They might wish in retrospect that they’d bought him out then, but his stock was worth a lot of money and no one was interested in paying him off out of their own pockets. A few years ago profits began to dip, and Rehwaldt began speaking loud and long at board meetings. In late December he filed another suit, this time accusing the officers of Chicago Reader, Inc., of acting against him in a way that was “illegal, oppressive or fraudulent.”

The suit contended that the Reader’s net income, “typically approximately 30% of revenues” in the late 80s, had declined to a small operating loss in 2006, while profits of the Washington Free Weekly, Inc., which published the Washington City Paper and was controlled by the same officers and investors, dropped from about 15 percent of revenues to 6.7 percent. (Because classified revenues were never as important to City Paper as they were to the Reader, the Washington paper was less affected by the free classifieds introduced by Craigslist.)

Rehwaldt’s new suit accused the controlling partners of dealing irresponsibly with the new circumstances: “The Individual Defendants have stated their preference to sell the Reader to an investor with whom they have personal financial relationships (the Preferred Investor) and have shared with that investor a low-ball purchase offer from another potential buyer, thus providing to the Preferred Investor confidential information which could be used to reduce any further purchase offer made by the Preferred Investor.”

The Individual Defendants were Bob Roth, president of the company; Jane Levine, executive vice president; Bob McCamant, vice president; and Tom Yoder, secretary and treasurer. Roth, McCamant, and Yoder collectively owned over 70 percent of the Reader. Then there was Rehwaldt’s share, and Levine and a few other small investors owned the balance.

The “preferred investor” was Fred Eychaner, the media-mogul owner of Newsweb, the local press that has printed the Reader since its inception. The other “potential buyer” was New Times, Inc., which is far and away the nation’s largest chain of alternative weeklies and had a long-standing interest in adding the Reader to its roster.

Rehwaldt’s suit went on, “Instead of pursuing expressions of interest from third-parties, the Individual Defendants have proposed a plan to merge the Reader and [City Paper] with another similar paper in Seattle, and to sell some percentage of the Companies’ interest in the merged company to the Preferred Investor at a price and value . . . less than the true value of the stock.”

In short, the defendants “have taken steps to depress the value of the stock of the Companies in anticipation of a sale or merger in 2007 for less than the fair value of the shares in order to squeeze out Rehwaldt and deprive him of participation in the Companies and the values of shares.”

The Reader’s other owners were outraged and anguished by Rehwaldt’s charges. They call absurd the idea that they’d depress the value of their own stock to punish him. Every former owner I’ve talked to dismisses the suit as, in the words of one, “completely bogus.” (None of the owners would speak for attribution, primarily to avoid more litigation.)

The idea of involving Eychaner had been Yoder’s—the Reader reckoned years ago that it was paying far more to Newsweb than other printers with newer equipment would charge, and Yoder thought making Eychaner an owner might ease that burden. The paper in Seattle is the Stranger, in which the former Reader owners have a considerable minority stake. Again, it was Yoder who suggested that a merger of Chicago Reader, Inc., and Index Publishing, which owns the Stranger and the Portland Mercury, might be in everyone’s interests.

Index’s president, Tim Keck, told me, “I think those guys were just brainstorming, thinking of different ideas. I’ve always loved working with those guys, and for a time we thought about how we could work more together. Nothing came of it. It was talk and only that, with no details or money.”

As for New Times, its latest offer, made several months earlier, was, according to one former owner, “laughable.” And there was no follow-up.

But even if the machinations Rehwaldt darkly alluded to in his suit were simply brainstorms Yoder was tossing out in hopes that one would fly, the fact is none did. “We did not have a unified vision of the future the last two years,” a founder told me ruefully, and added, “Even if we did have a unified vision I’m not sure we had the energy to carry it out.”

A week before Rehwaldt filed his suit, the Reader owners heard for the first time from Ben Eason, CEO of Creative Loafing in Tampa, Florida. The other owners barely knew Eason from the man in the moon, but Rehwaldt had served a few years on an advisory board Eason put together in the mid-90s. More to the point, perhaps, investment broker Bryan Crino of Skyway Capital Partners in Tampa, who would help structure the Reader deal and himself owns a small share of Creative Loafing, is a transplanted Chicagoan who was friendly with Rehwaldt. “From Rehwaldt talking to Bryan I knew there was a little bit of crying the blues there,” Eason told me. “And Crino said it’s time to make a call.”

Rehwaldt’s suit had confronted the other owners with the prospect of paying a small fortune in legal fees to defend themselves and the Reader. Nobody had the stomach for that.

“It wasn’t the straw that broke the camel’s back. It was the three-pound bag of manure that broke the camel’s back,” says one of the former owners. Another: “It would be overstating it to say [the suit] forced the sale, but it certainly encouraged it. It was one of the things that made the future look bleak—fighting a lawsuit, all of this bad news coming out about the company. At a time when we were supposed to be turning the company around, we’d be spending our money on legal fees. And also, the idea that Rehwaldt would fight us at every turn. The sale was one of the things that would make it all go away and get him out of our lives forever.”

And a third view: “If the paper had been doing well, we wouldn’t have sold even if Rehwaldt sued. If the paper was doing poorly, we probably would’ve sold even if Rehwaldt hadn’t sued. So in some scientific way, [the suit] didn’t impact it all that much.”

Rehwaldt got his share and he’s out of their lives forever. The other former owners have reorganized as Quarterfold, Inc., a name that’s a sentimental joke—the Reader is one of the rare alternative weeklies with a quarter-folded format, though that won’t be the case much longer. (The Reader will soon be printed as a single-section tabloid by a different printer, moves that are expected to save the company as much as $3 million a year and which were in the works long before Eason showed up.) Quarterfold retains significant minority interests in the Stranger, the Portland Mercury, and an alternative paper in Amsterdam, and, for the time being, half ownership of the building in Washington that houses City Paper. (The Reader’s home on East Illinois was bought by a third party, and the Reader will move by November of next year.)

Despite several invitations, Rehwaldt failed to make himself available to me for an interview. The other former owners acknowledge that he was by no means always wrong about the Reader; for instance, when Craigslist decimated the classifieds section, the managing partners decided to go with the flow and give away ads for owner-occupied two-flats and three-flats, which had long been a workhorse of the section. Rehwaldt thought this was nuts: he could see from his local weekly, the Evanston Review, that there were plenty of landlords willing to pay to advertise. Jane Levine did a study that showed he was right, and the Reader began charging again.

But Rehwaldt, according to one of the founders, wanted to “slash and burn” to improve the bottom line. The managing partners were not only temperamentally unsuited to this sort of wholesale cost cutting, they didn’t believe in it as a long-term solution. The problem was they didn’t have a coherent Plan B.

“I think we all had serious doubts that we had enough brains to figure this stuff out,” said one former owner. “Personally, I had no interest in the fight, the competitive fight to continue.”

To the relief of the other owners, who kept it to themselves (I knew nothing about it until after the sale), Rehwaldt’s suit went unnoticed. No reporter ever asked about the dwindling profits it described, so no reporter saw the statement the owners composed for Roth to issue in response. It began: “We’re a privately held company and have always made it our policy not to discuss or disclose profits publicly. But yes our profits are down. Just like every other newspaper in the country. The question is what do we do about it, and that’s what this suit is about. Rehwaldt wants to collect the big dividend that he’s become accustomed to. The board majority on the other hand thinks that the long-term health of the company is more important.”

The statement concluded, “The other directors—all of whom will sacrifice their dividends this year—prefer to endure a little pain, invest in the future, and take steps to improve the financial picture at the paper and to transition to the new multimedia world.”

If those things are accomplished, they’ll be accomplished by Ben Eason.

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