Court Throws Out Chicago Tribune Fiduciary Breach Case

October 5, 2006 ( - Because the effect of an advertising scandal on the Tribune Company's bottom line was minimal, those running two of its 401(k) plans did not breach their fiduciary duties by not dropping a company stock plan investment option, a judge has ruled.

Senior US District Judge William Hart of the US District Court for the Northern District of Illinois made the ruling in a suit filed under the Employee Retirement Income Security Act (ERISA) against the Chicago-based media company and its officers and directors.

The suit alleged that the fiduciary breach came about when officials kept a company stock fund as an investment option in the two plans even though the corporation was coping with a scandal over misstating circulation figures at two Tribune Company newspapers.

The lawsuit, which was later consolidated with a separate securities class action, alleged that theLong Island, New York-based Newsday and the Hispanic newspaper Hoy, puffed up their paid circulation figures for at least three years. The artificially inflated numbers allowed the papers to charge higher advertising rates than would have been the case normally.

Participants alleged that the company stock dropped after the Tribune took a $90-million charge against earnings to fund its refunds to advertisers – a decline made more damaging by the fact that the artificially high circulation numbers had driven share prices up before the scandal broke.

Even though Hart eventually ruled against the participants, he did side with the participants on a technical legal issue – whether the suit could even proceed because only a subset of employees in the two plans stood to benefit from any court recovery.

Noting that the 7 th  US Circuit Court of Appeals – the appellate court covering Illinois – had not yet ruled on the issue, Hart said the suit could more forward.

However, Hart rebuffed the argument that the fiduciaries should have been aware of the advertising scandal. According to Hart, because Tribune has $5 billion in annual revenues, it would have been difficult for the defendants to have known of the inflated circulation numbers.The court went on to find that even if the defendants had full knowledge of the overestimates of circulation, prudence did not require that they sell off the plans’ Tribune stock and close the Tribune Stock Fund.

“[T]he Tribune’s annual revenues exceeded $5 billion. The charge to income, which represents refunds of credits to advertisers from at least three different years, represents less than 2 [percent] of Tribune’s revenues for a single year. While such a loss of revenue could be expected to affect dividends and/or the value of the company’s stock, it would not be expected to put the company at risk of going out of business,” the court said.

Hart also dismissed the related securities suit against the Tribune defendants.

The case is Hill v. Tribune Co., N.D.Ill., No. 05 C 2602, 9/29/06.