Court-appointed examiner says fraud ’somewhat likely’ during 2007 buyout of Tribune Co.

Examiner sees signs of misconduct in Tribune deal

SAN FRANCISCO — The behind-the-scenes maneuvering that culminated in the 2007 leveraged buyout of Tribune Co. bordered on fraud, according to a report filed by an examiner appointed in the media company’s bankruptcy case.

Independent examiner Kenneth Klee denounced the behavior of Tribune’s management, board and some of its lenders after a two-month investigation into allegations of misconduct raised by bondholders seeking to get more of their money back.

Although he didn’t validate all the allegations, Klee wrote that he believes it’s “somewhat likely” a court would conclude some fraudulent behavior occurred in the final stages of real estate mogul Sam Zell’s buyout of Tribune.

That deal piled on debt that hobbled Tribune, which owns 20 TV stations and newspapers that include the Chicago Tribune and Los Angeles Times. As the recession deepened in December 2008, the Tribune filed for Chapter 11 bankruptcy protection, where it remains.

Klee’s findings could complicate Tribune’s efforts to win court approval of its reorganization plan in a hearing next month. The plan would turn over ownership of Tribune Co. to a group of its debtholders.

Tribune spokesman Gary Weitman declined to comment late Monday, saying the company needed more time to review Klee’s report.

Most of the report is being kept under seal until a judge can rule on the validity of confidentiality concerns raised by Tribune and some of the lenders involved in financing the buyout. Branding some of the confidentiality claims as “absurd,” Klee hopes to persuade a judge to unseal his entire report during a hearing scheduled for Aug. 9.

Klee issued his unflattering critique of the behavior leading up to the buyout in his summary.

Although he raised numerous red flags, Klee said he believed it was “somewhat unlikely” that a court would disallow any of the debt claims stemming from the 2007 buyout or find Tribune’s board liable for “failing to perform their responsibilities.”

But Klee doubted a court would let Tribune’s management off the hook, writing it’s “reasonably likely” one or more company executives would be found to have breached their responsibilities. The report didn’t identify which executives might face legal trouble.

Klee’s misgivings about the buyout center on the so-called “second step” of the buyout financing that ushered in another $3.6 billion in debt.

By the time that the deal had reached that stage, Klee wrote, it was becoming clearer that the company would have trouble repaying the debt.

Klee described Tribune’s decision to shoulder the additional debt as irresponsible and also chastised the deal’s main lenders, a group including JPMorgan and Bank of America. Klee wrote that he found evidence the lenders suspected or even believed the additional debt might destroy Tribune, but he concluded they probably didn’t engage in professional malpractice.

The findings were based on a review of thousands of pages of documents, as well as 38 interviews with some of the key players in the deal. The list of people interviewed included Jamie Dimon, CEO of JPMorgan Chase & Co. and former Tribune CEO Dennis FitzSimons. Zell wasn’t on the interview list.

While Klee’s report may raise new problems, Tribune resolved another potentially thorny issue by cutting nearly $20 million from a proposed management bonus plan.

The concessions were spurred by complaints from Tribune creditors and labor leaders representing some of the workers at the company’s newspapers.

Tribune’s new management bonus plan sets higher financial goals and lowers the amounts that would be paid out if the company’s operating cash flow for this year doesn’t reach the top financial target.

If cash flow hits the $500 million threshold, the bonus pool would be $16.5 million. Management previously would have been paid $30.8 million in the lowest tier of the bonus plan.

If Tribune’s cash flow reaches $550 million, the bonus pool will be $33 million. That’s down from the $38.1 million that could have been paid out under the original middle tier.

The top bonus payout remains unchanged at a maximum of $42.9 million, but Tribune will have to reach $685 million in cash flow for executives and managers to get the awards.

(This version CORRECTS amount that previously would have been paid in lower tier of incentive plan to $30.1 million)