Michael Sitrick could use some crisis-management advice

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.

That's an audacious claim — not even Steve Jobs accounts for 90% of Apple's value. Sitrick's lawyer, James J. Brosnahan, says the figure comes from an independent appraiser hired in connection with the buyout. "It's not as though Mike is walking around saying this; it's an independent valuation firm," he told me.

Until Sitrick files a formal answer to the lawsuit it's hard to fairly assess the seriousness of the allegations. Brosnahan disputes the plaintiffs' numbers, but the core of the defense plainly is that Sitrick played by the rules. The ESOP was regularly appraised at arm's length by independent experts, Brosnahan says, adding that at the points when the plan was created and liquidated, the ESOP members' interests also were protected by an independent trustee. But he acknowledges that during the intervening period the trustee was Mike Sitrick.

There lies the rub. ESOP experts say you should always separate the roles of owner and trustee. "Even if your heart is truly pure, the appearance of a conflict will make it very hard to prevail in court," says Corey Rosen, head of the Oakland-based National Center for Employee Ownership.

Rosen says that if the case makes it to court the judge will want to examine how the valuations were calculated — did the appraisers have all the relevant information, including buyout offers and sale negotiations? One might ask, further, how much of the data the appraisers worked with came directly or indirectly from Sitrick himself.

Sitrick has a lot at stake in this case. The feds don't take kindly to signs of manipulation in retirement plans. I hear that some of the firm's employees are furious at the alleged chicanery, though loyalists have come forward to attest to Sitrick's generosity as a boss and point out that the employees didn't put their own money into the ESOP — it was a retirement bonus.

One long-term employee, Lew Phelps, told me he thought "the amount we got [in the ESOP] was fair and appropriate," and called Sitrick "an extremely generous, caring individual."

Brosnahan insists that the allegations have no merit and Sitrick will go to the mat to fight them. But one wonders whether, were a client to come to Sitrick in the same position and ask for his advice, the answer wouldn't be: Figure out what a settlement will cost to make this case go away, and pay it.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at http://www.latimes.com/hiltzik, check out http://www.facebook.com/hiltzik, and follow @latimeshiltzik on Twitter.

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