A federal judge yesterday refused to dismiss a civil lawsuit filed by bondholders against Host Marriott Corp. over the company's restructuring last year.
The ruling clears the way for a trial on $30 million to $35 million in damages sought by Marriott bondholders, who claim the company failed to disclose plans for the restructuring before selling two series of bonds in April and May 1992, an attorney representing the bondholders said.
The decision, according to the attorney, means the trial will consider evidence that Marriott officials had considered splitting off the company's profitable hotel management operations from its debt-laden real estate investments.
"The ruling is a rejection of Marriott's contention that there was insufficient evidence that Marriott considered splitting itself into two companies before selling the bonds to the bondholders," said Stephen Cooper, partner at Anderson, Kill, Olick & Oshinsky, the firm representing the bondholders. "It represents a victory for the plaintiffs."
Marriott in court filings has denied it had considered splitting up the company before selling its bonds.
Nick Hill, a Marriott spokesman, said the company still expects to be vindicated in a jury trial, holding that the decision to split the company was conceived and acted upon after the bonds were sold.
"We are fully prepared to proceed to a trial and we remain confident that we will prevail when this case goes before a jury," said Hill, director of corporate communications.
The Marriott bondholders filed suit against the company in October 1992, charging securities fraud resulting from a reorganization plan.
The suit, filed in federal district court in Maryland, alleges that Marriott failed to disclose its planned restructuring when it issued $400 million of senior notes in April and May 1992, and withheld the same information from the secondary market as late as September.
Marriott's restructuring included a proposal to split the company in two, saddling one entity, Host Marriott, with virtually all outstanding long-term debt, but only 40% of the cash flow.
The lawsuit also claims that the Marriott family profited substantially from the restructuring announcement, which pushed stock prices 9% higher on a day when the Dow Jones industrial average fell nearly 22 points. The rise resulted in a $47 million profit for the family, according to lawyers representing the bondholders.
In a March 6, 1992, memo, Marriott treasurer Matthew Hart said splitting up the company was one of three options available for improving its financial condition, according to yesterday's ruling from U.S. District Court Judge Alexander Harvey.
Citing evidence that to now had been subject to a gag order, Harvey said that as early as January 1992, Marriott had been formulating plans for splitting up the company.
At that time, four months before Marriott sold $400 million in bonds, the company was working with CS First Boston on Code Red, the project name for its spinoff plan, Harvey said.
According to evidence presented to Harvey in the suit, Hart and Marriott chief financial officer Stephen Bolenbach met with First Boston to discuss the plan on April 3, weeks before it closed on the bond offerings.
Following the meeting, the court documents say, Bollenbach and Marriott vice president David Chichester said the company opted not to pursue splitting the debt-laden real estate operations.
In court filings, Marriott said the idea to split the company in two actually came from Bollenbach in early May 1992, weeks after the bond offerings were completed.
In a memo written less than a week before the first bond offering, Bollenbach said the company needed to replace its long-standing strategy of developing hotels, selling them, and retaining contracts to run the properties, Harvey said.
In the memo, Bollenbach set a fall deadline for revising the "Marriott story" for shareholders and investors, he said.
That October, Marriott announced its plans to spin off the hotel management business, and bondholders and stockholders subsequently sued Marriott.
The shareholders ultimately settled their claims, but the litigation delayed Marriott from splitting Marriott International Inc. off from Marriott, which was renamed Host Marriott.
In other corporate bond news yesterday, spreads of investment grade issues narrowed by 1/8 of a point in the secondary market, while high-yield issues generally ended unchanged.
Treasury Market prices ended generally higher yesterday, supported by the competition of the week's auctions, lower commodities prices, and a bullish weekly jobless claims report.
The long end of the market lagged the rest of the yield curve as futures-related selling placed pressure on the benchmark 30-year bond, players said, reporting a few aggressive sellers of the June bond contract.
The long bond closed down 1/8 of a point, to yield 7.35%.
Relieved that the Treasury's monthly note auctions are out of the way, dealers bid up the short and intermediate sectors of the market. While bidding on the two-year note was less that spectacular, market players were encouraged by the success of the five-year sale.
Another positive development for bonds was a decline in commodities prices. For the third consecutive day, the Commodity Research Bureau's Futures Price Index slid lower. The CRB closed down almost 2 points, to 229.61. The drop in prices was a welcome development for bond investors, many of whom feared recent increases in commodities as an omen of upward price pressures in the national economy.
Players were cautiously optimistic about the market's near-term outlook. However, the absence of real retail interest for the five-year note made it a bittersweet victory for the Treasury market, players said. Participants generally agree that the lack of buy-side demand for government-backed paper both in the primary and secondary markets continues to weigh on the outlook for Treasuries.
Elsewhere, new claims for unemployment benefits fell just 1,000 to 366,000 in the week ended May 21, lower than economists' expectations for a much larger decline.
Market activity late yesterday was dominated by positioning ahead of the release of economic reports and scheduled testimony before Congress by Federal Reserve Chairman Alan Greenspan.
The market is approaching the first revision to first-quarter gross domestic product with caution. While most economists polled by The Bond Buyer expect the initially reported 2.6% increase in GDP to be revised slightly lower to 2.4%, bond investors are bracing for the possibility of an upside surprise.
In addition, players await testimony by Greenspan before the Senate Banking Committee on monetary policy, scheduled for 10 a.m. eastern standard time.
In futures, the June bond contract ended down 1/32 at 104.11.
In the cash markets, the 5 1/2% two-year note was quoted late Thursday unchanged at 99.29-99.30 to yield 5.90%. The 61/2% five-year note ended up 1/32 at 100.07-100.09 to yield 6.68%. The 71/4 10-year note was up 4/32 at 101.01-101.05 to yield 7.08%, and the 61/4% 30-year bond was down 1/8 at 86.21-86.25 to yield 7.35%.
The three-month Treasury bill was up one basis point at 4.25%, the six-month bill was up one basis point at 4.74%, and the year bill was down one basis point at 5.19%.