NEWS ANALYSIS : No Clear Victor in Irvine Co. Case

A court-appointed referee accepted heiress Joan Irvine Smith’s accusation that billionaire developer Donald L. Bren misled shareholders of Irvine Co. when Bren purchased most of the stock in the giant Newport Beach development company seven years ago.

But his ruling Monday shows that the referee, Robert B. Webster, didn’t buy her main argument, that her shares were worth three times what Bren offered.

After years of legal wrangling, the referee awarded Smith $149 million for her stock, far less than the $330 million she’d asked for but a third more than the $114 million Bren had offered in 1983.

The case pitted two of the area’s wealthiest and most prominent citizens against each other: Bren, an intense, powerful billionaire who has changed the face of Orange County; and Smith, a combative, tough woman who traces her roots to one of the Southland’s largest ranches. At stake was the value of Irvine Co., a development firm that owns one-sixth of the county’s land.

The long-awaited decision left room for both sides to claim victory and to put the best spin on the outcome that they could. While Smith is walking away with $35 million more plus interest than previously offered, it’s also clear from the 90-page opinion that the company won many of the important points.

The referee, for instance, dismissed much of the testimony of Smith’s expert witnesses, saying that a prominent real estate consultant failed to “display an adequate understanding” of the big developer after he “spent only 76 hours on this engagement.”

Instead Webster relied mostly on the testimony of a consultant hired by Irvine Co.--Chicago’s Real Estate Research Corp.--in what was one of the largest such cases on record.

But the referee also said Bren hadn’t told shareholders that another prominent consultant they relied on to advise them on the value of their shares was actually working for him.

Irvine Co. tried to argue that the other shareholders in the company--some of them high-powered executives such as auto magnate Henry Ford II and billionaire developer A. Alfred Taubman--wouldn’t have underestimated the company’s worth by $2 billion. They sold their shares for $200,000 apiece based on Bren’s estimate that the company was worth $1 billion, the company said.

Smith insisted that it was worth $3 billion and wanted $600,000 a share for her 11% of the stock. In a scathing attack on Bren, she accused him of stirring up discontent among the other shareholders, scaring them unnecessarily with bleak forecasts about the company’s health and conniving to buy the company on the cheap. It was a key part of her argument.

The court found that Bren, indeed, had not told other shareholders that a prominent accounting firm they were relying on for an estimate of the company’s value was actually working for Bren and helping him to buy the company.

The firm, Kenneth Leventhal & Co. of Los Angeles and one of its managing partners, Stan Ross, “had been retained by Bren to assist him in acquiring control of (Irvine Co.),” the referee wrote in his opinion. “This was not disclosed to the selling shareholders.

“Had the selling shareholders been aware of Leventhal’s activities on Bren’s behalf, they may not have relied as heavily on Leventhal’s earlier computations.”

That “raises questions regarding the completeness and accuracy of the information relied upon by the selling shareholders,” the referee wrote. Ross was unavailable for comment Tuesday.

But it didn’t turn out to be a major victory for Smith. The referee said he agreed with her lawyers that he shouldn’t rely on the deal for guidance in setting a price for the company, but he wouldn’t ignore it either.

On the other hand, and more important, the judge rejected all three of Smith’s expert witnesses, whose estimate of the company’s value ranged from $2.6 billion to $3.3 billion.

One of the experts--Stephen Roulac of the Roulac Consulting Group, a prominent consultant and part of the San Francisco office of the Deloitte & Touche accounting firm--showed “a failure to display an adequate understanding of (Irvine Co.) or its assets,” the referee wrote.

That was “not surprising,” the referee wrote, “in light of his preparation. Roulac spent only 76 hours on this engagement prior to rendering his conclusion. “

Roulac responded Tuesday: “Clearly (the referee) didn’t follow or understand the testimony presented. What he did was take the approach of cutting the baby in half rather than making a reasoned assessment of the facts.”

Roulac said other members of his firm had put in “thousands” of hours on the case.

“If our work doesn’t make sense, why do we have the major clients we have?” he said.

In the end, the referee largely accepted the testimony of the company, whose experts appraised the company at $1.22 billion. The referee adjusted that amount upward to $1.36 billion. Using that figure, the referee determined that Smith should receive $35 million more than Bren offered her.

But, says Irvine Co., it has spent more than $15 million on the case and says Smith must have spent at least as much. Subtract that amount from the $35 million, the company says, and she’s only ahead $20 million. But the issue of who should pay the court costs--if anyone--has still to be resolved.

Another big issue to be resolved is interest on the $149 million: Smith says she should get as much as 18% based on the fact the company had the use of money it would otherwise have been required to pay her seven years ago. If that argument is accepted, the interest on her award could amount to tens of millions of dollars. The company says the interest figure should be much less.

No date has been set for a Michigan court to hear either issue. (Irvine Co. is incorporated in Michigan.) However, a lawyer for the company said Tuesday that a hearing could come before September.

Irvine Co. says it’s unlikely to appeal Monday’s opinion, which must still be certified--usually a formality--by the Michigan courts. A referee was appointed to hear the case so as not to tie up a courtroom with the trial, which ran 150 days from 1987 to 1989. Smith says she hasn’t decided whether to appeal yet.