Tribune faces Labor Dept. probe

Feds scrutinizing employee ownership plan

By CYNTHIA LITTLETON

Zell

Tribune Co. is facing more scrutiny from the feds, this time for the complex employee stock ownership plan that was the key to financing Sam Zell’s 2007 takeover of the newspaper and TV station owner.

Tribune disclosed on Thursday that it received a subpoena for “an extensive range of documents” as part of a Labor Dept. investigation of the employee stock ownership plan (ESOP) that facilitated Zell’s $8.2 billion buyout of the Chicago-based media company.

Tribune disclosed the investigation as part of a routine motion filed in connection with the $13 billion Chapter 11 bankruptcy proceeding that it initiated in December. In asking the bankruptcy judge to approve additional payments to a law firm in connection with the Labor Dept. investigation, Tribune disclosed in the Thursday filing that it received the subpoena on March 2 and delivered a raft of documents to the feds on March 31.

“We view this as a routine inquiry and are responding by producing the requested documents concerning the ESOP,” Tribune spokesman Gary Weitman said.

The fate of the ESOP has been one of the primary questions hanging over Tribune as it struggles to reorganize its considerable debt at a highly inopportune moment, given the seizure of the credit markets during the past nine months. Zell’s buyout of Chicago’s stalwart media firm was predicated on the ESOP structure allowing the company to save as much as $1 billion a year in tax payments, as employee-owned firms are largely exempt from federal tax obligations.

But from the start, media biz observers said the ESOP structure put an inordinate share of risk about the company’s future profitability on the backs of its roughly 20,000 employees. Zell put only $315 million of his own coin into the deal, which earned him warrants to acquire as much as 40% of the company within 11 years. Some bankruptcy experts have speculated that the ESOP’s equity could be wiped out as part of the Chapter 11 reorg. Tribune is already facing a lawsuit related to the ESOP filed by current and former employees.

According to Tribune’s filing, the firm handling the Labor Dept. case, Jenner and Block, is also repping the company in another matter pending with the feds, the Justice Dept.’s investigation of former Illinois Gov. Rod Blagojevich.

Tribune and Zell have been ensnared in that case through the ex-governor’s alleged effort to pressure Tribune for political favors (seeking the ouster of at least one Chicago Tribune editorial writer who has been critical of Blagojevich) in connection with a proposed deal for the state to purchase the Wrigley Field baseball stadium, which Tribune has been trying to sell along with the Chicago Cubs franchise. Tribune and Zell have maintained that there were never any improper discussions with the governor’s office regarding the possible Wrigley deal.