Salomon Bros. will pay nearly $30 million to settle a class-action lawsuit that accused the firm of defrauding investors in the 1986 leveraged buyout of drugstore giant Revco D. S. Inc., the New York investment firm said Wednesday.
The settlement is the second in as many months proposed by Salomon in connection with the buyout and later bankruptcy of Revco. Salomon said it had already accounted for the cost of the settlement in its third-quarter earnings--a report that included a $200-million reserve for possible fines and costs in connection with its admitted violations of federal bond auction rules.
The latest settlement sprang from a 1989 suit that accused Salomon of defrauding a group of investors who bought more than $800 million in junk bonds and preferred stock to finance Revco’s $1.5-billion leveraged buyout. Revco filed for bankruptcy protection in 1988--the biggest LBO to go belly up.
Salomon had been the main investment banker and underwriter of the Revco securities, and the suit claimed that Salomon knew that the transaction was flawed and that Revco’s finances and management were far weaker than described.
Salomon continues to deny wrongdoing but “is settling at this time to avoid the expense and uncertainty of further litigation,” it said in a statement.
The total of the two settlements is more than Salomon made in fees in the Revco deal, on which it also lost money, said Merrill G. Davidoff of the Philadelphia law firm of Berger & Montague, which represented the plaintiffs.
Davidoff added that, despite Salomon’s denial of liability, “we think their substantial payment of $30 million reflects their assessment that they had exposure in this case.”
Last month, Salomon proposed a $9.5-million settlement in a bankruptcy-related claim that accuses the Wall Street firm and others, under an arcane principle of law called fraudulent conveyance, with causing--and profiting from--the collapse of Revco by loading it up with so much debt that it could not survive.