For Zell, more Tribune hell

LOS ANGELES (Fortune) -- Real estate tycoon Sam Zell is renowned for putting together deals with head-scratching financial structures that result in him getting his way, getting his pay and giving as little as possible to the government.

But as if the newspaper industry's plummeting fortunes weren't enough to sour his 2007 buyout of the Tribune Co., Zell this week got hit with a lawsuit from his own employees that holds out the promise of an inside look at one of his more Byzantine acts of commerce: the transaction that took one of the country's biggest media groups private in December 2007 for close to $13 billion.

One of the questions the suit aims to explore is the propriety and legality of how Zell, through use of an Employee Stock Ownership Plan, gained control of assets that include the Los Angeles Times, Chicago Tribune, Baltimore Sun, 23 TV stations and the Chicago Cubs for a personal outlay of a mere $315 million.

The suit, filed this week in the form of a class action by a half dozen current and recent Los Angeles Times writers against Zell and the Tribune Co., alleges dissipation of the value of the plaintiffs' company stock and pension plan rights by means of a wide range of mismanagement.

The suit may well prove to be, as Zell responded in a memo, "a distraction that's unnecessary." And some of the allegations are not exactly news: layoffs of experienced talent; the manning of key operational posts by people with little or no experience in print media; demoralizing, integrity-sapping incursions of the metaphorical wall between church and state (most notably, the transference of editorial control of the L.A. Times magazine to its business staff).

But the notion that these might constitute actionable wrongs is fresh, as is the idea that Zell is a villain for wildly overpaying for the company and saddling it with an additional $8.3 billion in debt.

In a more interesting vein, the suit also alleges that the Tribune's board was seduced into approving the deal in April 2007 by the allure of $25 million in incentive payments to top management and that it therefore overlooked more attractive alternatives and the fact that Zell's plan would foreseeably gut employees'pension benefits.

Zell's personal investment was just $315 million it's actually in a form of debt, not equity-yet he received warrants that will allow him to buy 40% the company for $500 million to $590 million within the next 15 years. In classic Zell fashion, he put together the deal in a way that exempted the company from paying corporate income tax. He also received a series of blocking rights that put him in effective control of the company, where he was soon named CEO.

As the newspaper advertising market has deteriorated more quickly than Zell has said he expected, the company has divested businesses including Newsday and put other assets, including newspaper headquarters and the Chicago Cubs, up for sale.

One of the more colorful accusations in the 64-page complaint is that Zell had a conflict of interest when he leased out the 23rd floor of the Tribune Tower in Chicago-its former executive suite-to an investment firm run by his sister, Leah Zell Wagner. The suit also alleges that buyout packages for laid off workers have been improperly funded from employee pension plans.

Representing the writers are big-time class-action lawyers Joseph Cotchett and Philip Gregory, of Burlingame, Cal. Back in the 1990s, Cotchett won a $3.5 billion jury verdict for shareholders and bondholders suing Charles Keating Jr. and the parent company of his failed thrift, Lincoln Savings & Loan.

The plaintiffs are Dan Neil, a Pulitzer-prize winning auto critic who is still employed at the Times, while former writers Corie Brown (a food-and-wine critic), Henry Weinstein (legal affairs), Walter Roche, Jr. (a Baltimore Sun as well as L.A. Times veteran), Myron Levin (consumer affairs), and Jack Nelson (once a Pulitzer-prize winning D.C. bureau chief) are the other proposed class representatives.

They've sued in federal court in Los Angeles under the Employee Retirement Income Security Act of 1974 (ERISA). Among other things, they are asking the court to kick Zell and his appointees out of Tribune and oversight of the ESOP and give the plan -- which owns 100% of the company's equity some say over its future.

On Wednesday, Zell issued a statement calling the suit "frivolous and unfounded", and added that he hoped "every partner in this company is as outraged as I am at having to spend time and money required to defend ourselves against it."

As you'd expect from a lawsuit brought by a group of fired-up scribes, the suit has some literary touches, first quoting Thomas Jefferson in 1823 -- "the only security of all is in a free press" and then Zell himself, from 1976: "Grave dancing is an art that has many potential benefits. But one must be careful while prancing around not to fall into the open pit and join the cadaver."

One of the suit's exhibits is a Tribune employee newsletter distributed after the deal closed that highlights Zell's informal and iconoclastic style: on its cover is an image of a sculpture of a pig with wings, and the following caption: "Real pigs are seldom seen aloft. But the porcelain porker shown here, symbolic of the Tribune ESOP, has good flight potential if the company steps up performance."

If nothing else, the lawsuit reveals how deep in the muck the pig is now.