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Michael Sitrick could use some crisis-management advice

The king of damage control faces the embarrassment of a very public legal dispute with former employees who claim they've been cheated.

June 02, 2010|Michael Hiltzik

Given Michael Sitrick's renown as a prince of PR, it's unsurprising that the big question being asked about him just now isn't whether it's true that he ripped off his employees for roughly $8 million, as two ex-workers are alleging in federal court.

It's how could he ever have let this thing get to the stage of a public, and very embarrassing, lawsuit?

In the worlds of Hollywood and corporate public relations, the spectacle of Sitrick locked in courtroom battle with his former employees has overshadowed the hard-core legal issue in the case: How employee stock ownership plans, or ESOPs, often fail to deliver the riches the employees expect. (Employers get a tax break for setting up ESOPs.)

Sitrick, 62, may not exactly be a household name, but he's an undisputed leader in crisis PR, with reported billings in 2008 of more than $20 million and more than 50 employees. His profession is spin, which might be defined as making your client look as good as possible in the face of potentially devastating facts or rumors.

Before I go further, a disclosure: Like other Southland journalists, I've known Mike Sitrick for years. He has hired lots of former journalists, including friends of mine. I've visited his beach house on a social occasion. Sometimes his interests as a PR man and mine as a writer coincide, in which case he can be a big help; sometimes they clash, and he's a pain. But presumably that's what he's hired to do.

Over the years his roster of scandal-ridden clients has included the Archdiocese of Los Angeles (priest sex scandal), former Hewlett-Packard Chairwoman Patricia Dunn (corporate spying scandal), the Getty (mismanagement scandal) and Paris Hilton (oh, nobody cares anymore).

Some are innocent and some not so much. He's served some clients whose stories haven't needed all that much spin, some who've required every ounce of spin he can muster, and some who couldn't be helped by all the spin in the universe.

In the process he has won his share of admirers and ticked off his share of ill-wishers, which might explain why the lawsuit was greeted in some quarters with a sort of salacious glee.

The case was filed by Richard Wool, who worked for Sitrick from 2001 to 2004. It concerns the Sitrick & Co. ESOP, which Sitrick formed in 1999 as an employee retirement fund holding about 25% of the firm, and liquidated for a fraction of its original value in 2008 — months before he sold the firm to a public corporation, Irvine-based Resources Connection, for nearly $40 million.

The lawsuit asserts that the ESOP members got mulcted in the deal.

According to the complaint, the ESOP's one-fourth holding was originally valued at about $15 million. But the ESOP's stake then went into a slump, losing appraised value almost every year. By the end of 2008, the ESOP was valued at only about $1.7 million, according to a financial statement filed last year in connection with the Resources deal.

At that point, Sitrick bought it out. The lawsuit alleges, in effect, that he repurchased for $1.9 million a stake he had granted the ESOP a decade earlier for $15 million. (Two departed employees had earlier received $220,000.)

Simple math suggests that had the ESOP still existed at the time of the Resources deal, its 25% holding would have been worth close to $10 million. The lawsuit says that only after Sitrick & Co. financial statements were made public in the buyout did the scale of the purported swindle become clear.

Shortly after it was filed, the lawsuit was joined by Allan Mayer, who helped Sitrick develop his entertainment practice before leaving in 2006. Mayer says he joined the case because "what he did to his employees was so reprehensible that I felt I had no choice but to call him to account."

Sitrick's representatives note that Mayer is now a Sitrick competitor, but it hasn't escaped notice in the PR community that his name may make it harder for Sitrick to dismiss the lawsuit as merely the complaint of a single disgruntled ex-employee.

Wool and Mayer ask if it's plausible that the firm lost close to 90% of its value from 1999 through 2008, since Sitrick consistently trumpeted his success and fielded buyout offers from big companies. Last October he told Resources shareholders: "I like to say that in a good economy, our company does well, and in a bad economy, it does better." Former insiders say he encouraged employees to think the ESOP would someday make them rich.

The solution to the mystery of the vanishing value, the lawsuit suggests, might lie in Sitrick's assertion prior to the buyout that his personal name and reputation, which belong to him and not the firm, account for roughly 90% of the firm's value.

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