As some creditors have long alleged -- sellers may have known that the deal would result in insolvency. The findings of examiner Kenneth Klee, based on his review of thousands of pages of internal documents and interviews with dozens of leading players, could throw a monkey wrench into the company's planned reorganization.
One of the aspects of the deal identified by Klee as potentially suspicious was the failure of Tribune Co.'s previous management to provide detailed financial projections that would give an idea of the company's future solvency.
Although he didn't name any specific individuals, Klee said the management team "did not adequately discharge their duties" in providing information about the company's financial condition.
In particular, in October 2007 they failed to inform its board of directors and a special committee about certain assumptions in forecasts that allowed independent financial analysts (including the Valuation Research Corp.) to give the company a clean bill of health.
Although Klee didn't go into detail about these assumptions, it's worth noting that 2006-2007 was a turning point for the newspaper business, with growing revenue declines. In keeping with the broader trend, Tribune Co.'s fortunes started to worsen noticeably in this period.
Over the course of 2006, the company's total revenues slipped 1% in the first quarter, 1% in the second, 3% in the third and 3% in the fourth quarter. The decline accelerated in 2007, with revenues falling 4% in the first quarter, 7% in the second, 4% in the third and 12% in the fourth.
While this negative trend would discourage most investors, uncertain economic conditions prevailing at the time gave Tribune Co.'s previous and current management some leeway in interpreting these results.
Following the decline in the U.S. housing market (a key source of classified revenues) beginning in late 2006, many economists and officials were optimistic about a "soft landing," holding out hope that Tribune's revenue losses were transient, and the company would soon return to growth.
However, economic conditions began to deteriorate sharply in the fourth quarter of 2007, just as the final assessments of Tribune's financial well-being were being conducted. (The U.S. Bureau of Economic Advisors would later say the recession officially began at the end of 2007.)
Nonetheless, regarding Tribune's assumption of $3.6 billion in debt, Klee said: "It is somewhat likely that a court would conclude that the Step Two Transactions constituted intentional fraudulent transfers and fraudulently incurred obligation."
In essence, Klee said that the company's previous and current management -- and the lenders behind this debt, including JP Morgan and Bank of America -- proceeded with the deal even as it was becoming clear that changing market conditions meant the company probably wouldn't be able to repay the debt.
Some comments from Zell suggested he realized his team had not been given accurate information about Tribune's financial condition. In 2008, he told the newsroom of The Baltimore Sun that Tribune's previous management had overstated the company's operating cash flow by up to 20%.
Skeptics have questioned how Zell -- renowned as a savvy financial operator -- could allow himself to be hoodwinked this way. Klee said he did not find any evidence that Zell's team knew about the financial issues that increased the potential for insolvency.
Klee's findings put the ball back in bankruptcy court, leaving it up to the judge whether they merit further investigation. The court is sure to be urged to do so by bondholders who stand to recoup less money than other creditors from Tribune Co.'s current proposed bankruptcy reorganization plan.
These bondholders have emerged as the main opposition to the plan. Over the last year, they have argued that the entire buyout was insolvent from the start, and thus a "fraudulent conveyance." They demanded the appointment of the independent examiner to determine who among Tribune's previous and current management knew what specifics and when.