Marriott Fraud Trial Set

September 24, 1994|By Kim Clark | Kim Clark,Sun Staff Writer

Jury selection is scheduled to begin in federal court here on Monday in the two-year fight between Marriott Corp. and its bondholders, which include some of the world's richest investing companies.

The bondholders charge Marriott committed securities fraud when it restructured in 1992, splitting the nation's biggest hotel company into two companies and slashing the value of bonds they held.

It is a case that has already changed the way American companies borrow, and stained the reputation, among some investors, of a hotel company that prides itself on its progressive and ethical management.

"This is an important case," said Mark Sargent, who teaches securities law at the University of Maryland School of Law.

Already, he said, Securities and Exchange Commission staffers have informally tightened scrutiny of stock and bond registration statements to make sure companies fully disclose risks associated with the investments.

But the outcome of the federal lawsuit by 11 large investors, which charges Bethesda-based Marriott intentionally misled them about the value of bonds it sold in 1992, could determine just how much companies have to reveal about restructuring plans, as well as redeem -- or smirch -- Marriott's reputation.

The investors charge Marriott committed securities fraud when it sold $400 million worth of investment grade bonds in April 1992, without informing the buyers that company managers were already discussing project "Code Red," a plan to boost the stock price.

In the fall of 1992, Marriott announced it would split into Host Marriott Inc., which would assume about $3 billion in debt and hold depressed real estate and troubled airport concessions, and spin off a healthy new company, Marriott International Inc., which kept all the low-risk, high-yield hotel management contracts.

The bonds, which were apportioned to the successor company, Host Marriott, were downgraded to "junk" ratings and fell as much as 30 percent in value within days.

Led by PPM America Inc. -- an investment subsidiary of British insurer Prudential Corp. PLC, with $100 billion in assets -- the investors are suing for $20 million they say they lost because of the restructuring.

Marriott denies the investors' charges.

The company says former chief financial officer Stephen F. Bollenbach only thought of the idea of splitting in two in late May 1992 -- several weeks after the bonds were sold -- and hired consultants to explore the idea in June.

Mr. Bollenbach is now chief executive officer of Host Marriott.

Marriott has settled several other bondholder suits over the division by improving the balance sheet of Host, paying some legal fees and redeeming some of the bonds.

But Host spokesman Robert Terry Souers said the investor group led by PPM "seems to want to take a very hard line in this. . . . They are choosing to bring it to trial."

And, he predicted, the investors will lose.

"They are contending something that just isn't true," Mr. Souers said.

Besides, he noted, since the division was finalized in October 1993, the two companies' stocks have soared, and the bonds have bounced back to 100 percent of their face value.

The division was good for all investors, and "the things we said all along were going to happen are happening," Mr. Souers said.

Tough to win in court

Even some of PPM's biggest fans say the investors will have a tough time proving that Marriott committed fraud.

I. Walton Bader, an attorney for a Florida pension fund that had bought some Marriott bonds, said he agreed to settle his lawsuit against Marriott last year because he thought it would be tough to win in court.

"There's no smoking gun" proving the company was contemplating the division as early as April 1992, he said.

One of the reason there isn't any evidence: Marriott reported it lost a box of documents that had been requested by attorneys.

Mr. Bader says he and many others find suspicious the company's explanation that the box fell off a courier's truck that successfully delivered several other boxes.

But U.S. District Judge Alexander Harvey III, who will preside at the trial, ruled that while the company was "negligent" in losing the box, it did not appear to be intentional destruction of evidence, so the missing evidence will not be brought up in the trial. In May, Judge Harvey denied a Marriott request to dismiss the case, ruling that there was enough evidence to justify sending the case to a jury.

Lawrence Kill, a New York attorney representing PPM and the other investors, said he's confident he can win over a jury despite the missing box of evidence.

"We have very strong evidence" that Marriott was secretly planning a restructuring that would hurt bondholders in the spring of 1992, said Mr. Kill, of the firm Anderson Kill Olick & Oshinsky.

"We bought bonds [issued by] the whole Marriott. We didn't know they were going to do this kind of segregation. To me it was a blatant dishonesty in the practice of business," Mr. Kill said.

Win could set precedent

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