It has been nearly three years since the King Kong of leveraged buyouts, but lawsuits spawned by the takeover of RJR Nabisco Inc. keep piling up. In the latest, filed in Charlotte in early August, the president of the 16-campus University of North Carolina system claims he personally lost $19.7 million because he sold RJR stock even as former RJR Chairman F. Ross Johnson was fraudulently hiding his LBO plans.
The court filing by Clemmie Dixon Spangler Jr. so far has drawn scant notice from RJR watchers on Wall Street. So has a $2 billion class action nearing resolution in New York that makes similar claims. Analysts have spent more time worrying about product liability claims related to the cigarette sales of RJR's R. J. Reynolds Tobacco Co. unit.
BIG NUMBERS. Such inattention might result in a nasty surprise. If the class action clears an important procedural hurdle in the next few weeks, RJR one day may be forced to pay an unexpectedly large settlement to avoid a jury trial. Moreover, Arthur N. Abbey, the lead attorney in a separate class action in Delaware over how the final auction for RJR was conducted, says he's within days of a settlement that will reach "tens of millions of dollars."
RJR disputes the charges in all of these suits. And given the size of RJR, it's hard to envision any bad news from its lawyers crippling the company. Sales this year should top $15 billion, and a recent debt-for-equity swap will reduce its annual interest tab by about $1 billion. Yet managers installed by the buyout firm of Kohlberg Kravis Roberts & Co., which won RJR in the $25 billion bidding war, want to get the litigation behind them. "Plaintiffs' lawyers love to throw around big numbers that bear no relation to the merits of their cases," says Lawrence R. Ricciardi, executive vice-president and general counsel of RJR. "I haven't lost any sleep."
So far, Ricciardi has had little cause for insomnia. In the most widely followed case, RJR finessed a challenge by Metropolitan Life Insurance Co. With a 1988 lawsuit, the insurer vowed to strike a blow for bondholders whose securities often were devalued by LBOs. But instead of a big cash settlement, MetLife quietly agreed to a deal in January that permitted it to swap $30 million in pre-buyout debt for RJR equity.
But the issues raised in the Spangler case could prove more troubling--and offer sweet revenge to the North Carolinian. In the best-selling account of the buyout, Barbarians at the Gate, Johnson's recollections painted Spangler, then a big RJR shareholder, as a buffoon. But in his lawsuit, Spangler makes a case that far from being an off-the-wall proposal, the LBO idea he first brought to Johnson in early 1988 by that February had won a tentative funding commitment from Citibank. Spangler, who made a fortune in the construction business, bought 1.1 million shares of RJR stock in 1985 after selling a chain of motels. His family also is the largest single shareholder at NCNB Corp., with a stake in the bank valued at more than $300 million.
After Johnson spurned his proposal, Spangler dumped nearly a third of his RJR holdings at an average price of $54 a share in September and October, 1988, for a total of $19.5 million. But Johnson and his top advisers decided to pursue an LBO in mid-May, 1988, or earlier, Spangler alleges. Johnson's initial $75-a-share buyout plan was announced on Oct. 20 of that year, and six weeks later, KKR won the bidding at $109 a share.
Spangler maintains he wouldn't have sold the shares if Johnson had properly disclosed his pending buyout plan. He wants RJR and Johnson to make up to him the $19.7 million difference. Johnson, who now operates a boutique consulting and investment company in Atlanta, RJM Group Inc., left word with his secretary that he has no comment on the litigation.
The larger class action offers even more allegations about Johnson's LBO plans. It claims that long before KKR's Henry Kravis broached the idea at a September, 1987, dinner, Frank A. Benevento II, a onetime Lehman Brothers investment banker who was retained by Johnson for strategic planning, had been working on various LBO scenarios. And the lawsuit claims that Spangler's approach was spurned because Johnson did not want it to interfere with his own plans to lead an LBO with Shearson Lehman Brothers Inc.
'VERY NERVOUS.' A judge in New York granted class action status to the larger case in March. He's expected to rule soon on a motion by RJR that the entire case be thrown out. If the judge allows it to proceed, securities law experts predict settlement talks would soon get serious. "Defendants get very nervous having jurors, who are naturally suspicious of corporations, deciding the matter," says Columbia University law school professor John C. Coffee.
Spangler, who's not talking about RJR, could have stayed quietly in the background and taken a chance on the larger class action. But by filing his own suit, the man Ross Johnson made out to be a buffoon hopes to get the last laugh.