Lawyers clash on timing of Marriott's plan to split

September 27, 1994|By Kim Clark | Kim Clark,Sun Staff Writer

For the 10-person federal jury picked yesterday, the securities fraud lawsuit against hotel giant Marriott Corp. will hinge on one basic question:

Is a top Marriott executive telling the truth when he says he came up with the idea to split Marriott in two -- driving the price of its bonds down by almost 30 percent -- only after he helped sell $400 million worth of bonds to investors?

In opening statements for the $18 million federal lawsuit filed by 11 large bondholders against Marriott in Baltimore's U.S. District Court, attorney Lawrence Kill said yesterday he will present evidence that former Marriot Chief Financial Officer Stephen F. Bollenbach knew he wanted to divide the company weeks before he helped Marriott sell the bonds in April 1992.

But Arne Sorenson, attorney for Marriott, told the jurors that the company didn't violate laws requiring it to inform investors about important strategic changes because neither Mr. Bollenbach nor any other Marriott executive considered the division before the bond sale.

Mr. Kill said he will call several top Marriott officials to testify about a plan they considered, and rejected, in March and early April 1992, dubbed "Code Red." The plan would have split Marriott into a real estate company and a separate hotel company.

Five days after the sale of the last half of the $400 million bond offering, Mr. Kill said, Mr. Bollenbach presented a "new" plan that was very similar to Code Red.

The proposal, Mr. Kill said, was first code-named "Project Bhopal," "because it would have grave financial consequences." Bhopal, a city in India, was the site of one of the world's worst industrial accidents in 1984. Later, the project's name was upgraded to "Project Chariot," he said.

Mr. Kill said he will argue that the five-day delay in presenting the new plan to fellow executives was a ruse to enable Marriott to borrow money from unsuspecting investors under false pretenses.

Marriott had a responsibility to tell investors about the plan because it affected the company's ability to repay its debts, Mr. Kill said.

"The evidence will show they had it under consideration" but kept the division plan secret until Oct. 5, 1992, said Mr. Kill, who is representing PPM America Inc. and other large investors against Marriott.

Chicago-based PPM is a subsidiary of British insurer Prudential PLC, which has about $100 billion in assets.

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 a healthy spin-off company, Marriott International Inc., which kept all the low-risk, high-yield hotel management contracts.

Mr. Bollenbach is now chief executive officer of Host Marriott, successor of the old Marriott Corp.

As the successor, Host Marriott is now the defendant in the suit.

The bonds sold in 1992 were apportioned to Host. When first issued, the bonds were rated as safe or "investment grade" because of the strength of Marriott's hotel division.

But after the division, when the bonds were backed mostly by highly leveraged real estate, rating houses downgraded the bonds to "junk" status, and traders drove the bond prices down to 80 cents on the dollar, from their pre-announcement high of 110 cents on the dollar.

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.

Mr. Sorenson warned the six men and four women on the jury that the investors' attorneys "will try to cast Mr. Bollenbach," as well as Marriott family members who run the company, "as liars."

But, he said, Code Red was very different from Project Chariot. "No one even thought of this transaction in April 1992. It is that simple," he said.

The short time between the sale of the bonds and Mr. Bollenbach's presentation of the idea indicates that Mr. Bollenbach is telling the truth, he said.

"The timing is not suspicious. He would not have crafted a lie" that cuts the timing so close, Mr. Sorenson said.

In the end, he said, the investors are asking an unanswerable question.

"Have you ever had an idea and asked yourself: 'Why didn't I think of that before?' " Mr. Sorenson asked.

One can ask if it came from "the dream you had the night before . . . the cereal you ate for breakfast . . . But no matter how much you scratch your head, there is no way to know," he said.

The trial, before Senior Judge Alexander Harvey II, is expected to last three weeks and may help determine how much information corporations have to disclose to investors when they sell stocks or bonds.

Before the trial began yesterday, one of the key bondholders had reportedly settled its claim.

Wellington Management Co. settled its fraud claims with Marriott earlier this month for less than $5 million, Bloomberg Business News reported, citing an unnamed Marriott official. Other details weren't available. Officials at Wellington couldn't be reached for comment.

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