The Zenith case:
LG Electronics (LGE), a Korean based corporation and part of the LG choebel, allegedly, conducted a fraudulent scheme, conceived against 12,000 US-based Zenith shareholders, 4000 US-based Zenith employees and all citizens of the United States.
Motives of the alleged fraudulent scheme, conceived by LGE executives in Seoul,
* acquire 54.9% of Zenith Electronics, Inc. in a stock purchase completed on November 8, 1995, under false identity.
* decimate the book value of Zenith, beginning on the date of stock purchase
* assume sole creditor status
* use the US courts to obtain the remaining 45% of the equity, reduce bondholder obligations and release LGE from any other obligations and responsibilities of Zenith including the employment of over 4, 000 US employees. In May 21,1998, Zenith's LGE-controlled board of directors, in a prepackaged bankruptcy move, requested that all Zenith common stock be eliminated and that LGE assume 100% ownership.
* Once 100% of ownership status is obtained, Zenith will be part of the Korean choebel LG and will be free from US laws of corporate accountability and transparency.
Objectives of LGE's alleged, fraudulent scheme are to obtain 100% ownership of :
* Zenith's Flat Tension Mask (FTM) technology and production equipment.
* Zenith's digital TV, HDTV and digital set-top box technology and production equipment.
* Zenith's intellectual assets (several thousand active patents, worldwide, estimated to be worth well over $1 billion).
* one of the top ten trade name's in the world. Fortune rated Zenith as the top CE brand name, in the US.
* the world's finest television-related, engineering talent.
* Zenith's valuable worldwide distribution channels.
* Zenith's considerable material assets in the US and Mexico.
* billions of dollars of contracts that are only beginning in late 1998.
* the last major US manufacturer of TVs opening the door for LGE and other foreign manufacturers, including LGE of China, to dump their TVs on the US market.
National security implications of this alleged fraud behavior that will adversely affect our future economic/social base. These implications allegedly include:
* the loss of America's finest FTM technology (a high priority technology of DOD and partially funded by DOD).
* the loss of the world's finest HDTV, SDTV, digital set-top box and TV/PC technology.
* setting an example to other foreign companies that all they need to acquire 100% control of a US-based company is to purchase 50.0001% of the shares of that company, assume control, run the company into the ground, assume sole debtor status and go to the courts with a prepackaged Chapter 11 to obliterate the equity interests of the remaining 49.999% shareholders.
* the transference of US technology to LGE owned plants in Korea, China, Brazil and elsewhere in the world.
* the total disregard for binding US labor-union contracts.
* the weakening of the US securities markets by allowing large multinational corporations to freely conspire against the small shareholder.
LGE situation:
* Due to TV dumping on the US market by Daewoo, LGE and other Asian manufacturers, the terms of NAFTA called for stiff tariffs to be imposed on TV picture tubes larger than 18", produced outside the US, Mexico and Canada
* LGE had a difficult time entering the US TV market and was able to obtain only a little more than 1% market share, while Zenith had a 12% market share.
* LGE and LG Semicon purchased 54.9% of Zenith's common shares at a purchase price of $10 per share. We allege that LGE obtained the necessary funds to complete the 54.9% purchase through collusive banking activities provided by special arrangements between LGE and Korean government-controlled banking institutions.
* LGE was well aware that the industry forecast for huge profits for digital TV, digital cable modems and digital set-top boxes would not begin until late 1998 and that the transition from analog to digital consumer electronics would involve a substantial investment of capital resources by Zenith, prior to late 1998. From LGE web site: * "With the eminent launch of digital TV broadcasts in the United States and the expected take off of global markets for digital equipment, LG Electronics considers 1998 the launching point for its digital multimedia businesses and is embarking on a mission to strengthen its operations in these fields. LGE will secure a leading position in this segment by bringing together LG key vestigial sideband (VSB) technology used in the American DTV standard for terrestrial broadcasting with digital cable and satellite broadcasting technology. Backed by innovative technology in the DTV and HPC fields, the company will use an aggressive business strategy to enhance its market leadership..." No mention that all LGE's digital technology, including VSB, originated from Zenith's engineers/Zenith patents.
* From 1995 through 1997, LGE directed Zenith to make huge capital investments in readiness for the digital era. These included the development of of a $100 million manufacturing facility for digital set-top boxes and IRDs and the completion of the FTM, HDTV and SDTV manufacturing equipment and production models, also, in excess of $100 million.
* To create the perception of a Zenith negative book value, justifying a bankruptcy application, LGE allegedly conspired with Zenith directors and officers.
* LGE demonstrated total disregard (disdain) for the interests of Zenith shareholders during its entire majority control. Only one of the five LGE employees designated to Zenith's board was in attendance at the May 22, 1997 Stockholders Meeting.
* LGE has a debt to equity ratio of more than 400%, making it a very financially unsound corporation, (much worse than Zenith) including with numerous cross-guarantee loans that may total in the billions of dollars in additional debt obligations. It is very difficult, if not impossible, to determine the exact financial status of LGE since Korean laws have not required full financial transparency/accountability, as normal business practice in the industrialized world.
* LGE, during its entire stock control of Zenith, may have fraudulently misappropriated the use of Zenith funds for travel; Korean-based, LGE employee training at Zenith's US and Mexican sites; consultant expenses of primary benefit to LGE; and millions of dollars of other Zenith's funds to the benefit of LGE, not Zenith.
* LGE decimated Zenith's distribution system and sales department within the US and overseas, allegedly, to further weaken Zenith's financial strength.
* The US taxpayer, through the US Government and IMF, recently is obligated to to tens of billions of US tax dollars to salvage the financial structure of Korean choebels, including LGE. It's outrageous that US taxpayers are paying a large portion of the funds that LGE will use to control Zenith Electronics Corporation.
Conspiracy: Evidence may prove that it was essential for the ability of LGE to carry out these alleged acts of fraud that Zenith directors and officers conspired with LGE against Zenith employees and shareholders. We believe these directors and officers may have been provided financial inducements and other guarantees by LGE to implement LGE acts of fraud upon Zenith's shareholders and employees.
LGE may have hastened (or forced) the resignations of Peter Willmott, former Zenith CEO and President, and Roger Craig, former Zenith CFO and many other officers and other key Zenith employees since they would not follow the LGE plan of fraud or were, simply, considered expendable in the LGE grand scheme. (Proof through subpoena power).
It is possible that Jeff Gannon, Zenith new CEO, was "muzzled" by LGE during his first four months of employment at Zenith (no public statements) and was "blackmailed" into signing off on the prepackaged Chapter 11 application. According to his employment contract, Gannon could have been dismissed if the Zenith board did not elect him on the board at their Annual Meeting to be held by May 28, 1998. During Gannon's entire tenure at Zenith, he failed to carry out his fiduciary responsibilities to all Zenith shareholders and employees.
It is recommended that the press contact and subpoenas be issued to all Zenith Directors, officers and other key personnel whom have been connected with Zenith during the past five years and that an information contact be established for other Zenith employees to be able to provide information on a confidential basis.
Based on these allegations, violations of Sections 10(b) 20(a) and other provisions of the Securities Exchange Act of 1934, and Rule 10b-5 may be promulgated thereunder which may preclude the SEC from granting Zenith and LGE the ability to offer the present prepackaged Chapter 11 plan to the courts and to submit these charges to the Attorney General for full investigation into the possibility of RICO actions of criminal fraud.
We also recommend that this matter be turned over to the US Department of Defense and US department of Commerce for investigation into possible breaches of national security concerning the FTM technology transfer (largely funded by DOD) and other high-tech digital technology critical to our national interests.
If LGE is successful in receiving SEC sanction to proceed to District Court for bankruptcy proceedings, we will request to the court that LGE, Zenith directors and officers are tried under U.S.C. TITLE 18 - CRIMES AND CRIMINAL PROCEDURE, PART I - CRIMES, CHAPTER 9 - BANKRUPTCY 157. Bankruptcy fraud
"A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so - (1) files a petition under title 11; (2) files a document in a proceeding under title 11; or (3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both."
Shareholder objectives:
* SEC disallowance of LGE's conceived prepackaged, Zenith Chapter 11 application.
* the US Attorney General and the Illinois Attorney General initiate immediate investigations of the instances of fraud provided herein
* the Department of Defense and the Department of Commerce initiate investigations into the possible national security implications of this theft of US high technology and the high likelihood of LGE licensing of this technology to countries such as China.
* encourage the "fifth estate" (the financial press) to fulfill it's first responsibility- seek out the truth in order to help inform and protect the individual investor.
* seek to maintain Zenith's as an independent entity, based in the US including and continuing to own all its intellectual property rights .
* maintain and increase the employment force of cost-effective, US-based, Zenith employees and provide them with a leadership team focused on serving the best interests of all Zenith employees and shareholders.
* return Zenith to sustainable profitability
* fully capitalize on Zenith's leading technology to become the world's number one consumer electronics company in this new digital age.
Zenith represents the finest in US, digital-electronics technology and personnel and that the, allegedly, fraudulent theft of Zenith by LGE is contrary to our national financial, welfare and defense interests.
Specific instances of LGE, Zenith directors' and Zenith officers' and other Zenith insiders alleged fraud:
1. LGE, allegedly, began its fraudulent behavior against plaintiffs as early as November 8, 1995 when it failed to disclose that LG Semicon was the largest shareholder of Zenith Electronics. In most LGE announcements concerning Zenith, LGE stated that Zenith was owned by LGE, not simply an approximately 18% share owner of Zenith. LG Semicon owned approximately 38% of Zenith, as disclosed in March 1998. (Fraud Exhibit 1 and 1997 10-K)
2. LGE, through its controlling position of Zenith, acted to defraud Zenith investors by failing to disclose, in 10-K annual reports or other documentation, the tremendous value of Zenith's VSB and other DTV patents, even though FCC DTV standards were approved in late 1996.
During the past decade, Zenith has obtained over 1,600 US patents and has hundreds of more patents in the pipeline. In addition, Zenith holds similar patents in Japan and in Europe. Based on input from Zenith employees, the DTV-related patents, alone, are estimated to exceed $2 billion in royalties, during the next 10-14 years.
The present ceo, Jeff Gannon, claims that Zenith has a negative net worth. This is believed to be a fraudulent assertion, designed to justify the prepackaged Chapter 11.
A SEC, DOJ or court-appointed valuation of all Zenith's intellectual and material properties is required to determine the true asset value of Zenith. (Fraud Exhibits 2)
3. LGE caused massive shortages of large-screen, picture tubes due to its failure to allocate Zenith resources to the planned construction of a large-screen, picture-tube plant in Woodbridge, Illinois.
In March 1995, Zenith's CEO stated, " "The strategic relationship with LGE also has given us the financial flexibility to pursue our plan to build, rather than purchase, 32- and 35-inch picture tubes and wide-screen tubes for future HDTV sets. Large-screen sets represent the fastest growing segment of the US TV market, and this strategic move will take on added importance as the home theater category continues to expand and as wide-screen TV enters the market over the next two years."
The plans were put on hold and subsequently canceled in August 1997. Reason given by CEO, "Tube prices have been declining making it more attractive to purchase large-screen tubes from others."
Zenith, subsequently, claimed that the majority of its losses in 1997 were due to the unavailability of large-screen tubes. Thus, all evidence indicates that LGE fraudulently directed the limited capital resources of Zenith for its own benefit at the expense of Zenith's shareholders and employees. This further indicates that LGE fraudulently conducted business with Zenith to receive preferential shareholder treatment and to weaken Zenith for bankruptcy control.
Kevin Brindley, Zenith Treasurer, stated that Zenith receives 75% of its TV profits from tube production and that Zenith loses money on every small TV produced. This indicates that LGE made a calculated decision to weaken Zenith's financial base. (Fraud Exhibits 3)
4. LGE forced Zenith to divert huge capital expenditures in 1997 and 1998, allegedly, to fraudulently benefit LGE, improving its capital base for later acquisition through prepackaged bankruptcy, and to further weaken the financial structure of Zenith.
LGE discontinued Zenith's Flat Tension Mask monitor implementation set for mid-1997. This technology was developed by Zenith's engineers at the expense of well over $50 million and an additional $50 million plus in machinery/production equipment.
Zenith's large screen FTM development program was bolstered in 1992 when Zenith signed a $5 million contract with DOD for defense applications. (source 1991 Annual Report)
Shortly after LGE assumed majority control of Zenith stock, Zenith announced it would spend $45.6 million to install a new production line to produce "high-margin" 17" FTM computer monitors and stated that LGE would be an expected customer for the CRTs. Subsequently, no 17" tubes have ever been produced by Zenith, only low-margin smaller tubes. LGE is allegedly attempting to take control of the technology (and over $50 worth of Zenith paid tools, machinery and FTM equipment) without due compensation to Zenith and to have the ability to license this DOD partially-funded technology to nations such as China and Russia.
5 Reported earnings for the fourth quarter of 1997 and the first quarter of 1998 and the 1997 Consolidated Balance Sheet allegedly are alleged to be fraudulently manipulated, at the direction of LGE, and in violation of GAAP in order to falsely paint the picture of a company in dire need of bankruptcy protection.
A. SG&A expenses were exorbitant in 1996 and, especially, in 1997 compared to industry norm. Exorbitant expenses indicate possible fraud where LGE spent ZE funds for travel, entertainment, communications, consultants and other expenses not directly related to Zenith or primarily benefiting LGE. Source: 1997 10-K
........1991 1992 1993 1994 1995 1996 1997
Sales: 1321 1243 1228 1469 1287 1288 1173
SG&A 101 94 92 117 117 168 178
Total assets 687 579 559 654 700 765 528
Long-term debt 149 149 170 182 169 153 133
Equity 309 210 152 228 317 162 -89
B. LGE is alleged to have made a calculated attempt to drop Zenith's book value from positive $317 million, as of month of takeover of 55% of Zenith stock, to a presently listed negative$126 million.
(1.) LGE-directed, Zenith capital expenditures of $126 million in 1996 and $83 million in 1997 were either allocated to non-productive Zenith manufacturing facilities or to facilities such as the Chihuahua, Mexico plant which only will become highly productive in late 1998. The approximately $100 million Chihuahua plant will manufacture STBs and IRDs for contracts in the billions of dollars in future years with large-scale production only beginning at this time.
(2.) LGE-directed, Zenith property, plant and equipment impairments of $298 million were expensed in 1996 and another $53 million in 1997. These are highly irregular accounting measures only designed to drop the book value of Zenith.
(3.) LGE-directed, Zenith valuation allowances were charged to costs in 1996 for a $122 million charge and in 1997 for a $156 million charge. These, also, are highly irregular accounting measures only designed to drop the book value of Zenith.
(4.) LGE, allegedly, fraudulently directed Zenith to pay off its senior subordinated convertible debentures, not payable for several more years, resulting in increasing the fourth quarter, 1997, loss by an additional $23.75 million to allegedly defraud Zenith investors.
(5.) While not required by SEC reporting to be accurately included in the balance sheet, Zenith could value its brand name and future patent royalties at well over $2 billion, according to data provided by Zenith employees and LGE demand estimates. This very important information was fraudulently omitted from the "Patents" section of the 1997 10-K.
(6.) As of December 31, 1996, Zenith had $697 million invested into machinery and equipment and as of December 31, 1997 had only $641 million invested in machinery and equipment. Investigation needs to be performed as to who purchased the $56 million in machinery and equipment missing from the balance sheet and whether or not Zenith was compensated for the missing machinery and equipment. Need court appointed valuator to determine actual worth of Zenith land, machinery and equipment and facilities. (source 1997 10-K)
C. Fourth Quarter 1997 and First Quarter 1998 sales were strong in the consumer electronics industry per data released by the Consumer Electronics Manufacturers Association and from RCA. This further indicates the high likelihood of a LGE-conceived plan to weaken Zenith's balance sheet, prior to announcing the prepackaged Chapter 11.
D. When a majority shareholder loans money to a majority owned company, the transaction can be viewed as an equity infusion rather than a loan. In that view, most of what ZE "owes" to LG can be eliminated and ZE is left with significant equity on its balance sheet.
6. LGE, allegedly, fraudulently decimated Zenith's distribution system and sales department within the US and overseas. Sales personnel and distribution channels are fraudulently absent from Zenith directly resulting in major sales decreases in all areas during LGE's management control. LGE directed Zenith to eliminate its entire distribution channels and cut the sales department by more than 70%. (Fraud Exhibits 6)
7. LGE, allegedly, fraudulently failed to compensate Zenith for taking over Zenith's sales and distribution network in Mexico, Canada and Brazil and, in many instances, for replacing Zenith branding with LGE branding. Also, Zenith has never publicly disclosed that it has turned over a significant proportion of its product branding and its entire product distribution to LGE for Mexico, Canada and Brazil.
8. LGE spokesperson projected bullish earnings for Zenith in 1998 and, in an apparent cover-up attempt, LGE retracted the statement, within a few days, acting to defraud Zenith investors. (Fraud Exhibits 8)
9. LGE, allegedly, acted to defraud Zenith investors by not disclosing many multi-million dollar contracts held by Zenith including the status of the $1 billion STB contract with Americast. (Fraud Exhibits 9)
10. Dispute with the Barley Group, Zenith's primary Brazilian customer, over substituting existing contracts for Zenith-labeled TVs and VCRs with LGE branded models resulted in adverse impact to Zenith by this allegedly fraudulent behavior by LGE. (1997 10-K, page 1) Bad debt charge of $21 million taken in 1997 to this Brazilian customer. No mention, in 1997 10-K, however, that $11 million will be repaid to Zenith in 1998, further indicating LGE's intent to defraud. (1997 10-K)
11. LGE, allegedly, fraudulently granted itself liens of the capital stock of Zenith's domestic subsidiaries and it's intellectual property (all patents other than its tuner patents) in return for guaranteeing $110 million in bank loans and received additional liens (unstated) for its $45 million loan in March 1998. These lien agreements were detrimental to the interests of Zenith shareholders and are further examples of how LGE demanded and fraudulently obtained preferential shareholder treatment. (page 14, 1997 10-K)
12. LGE ordered the issuance of 500,000 shares of Zenith to Jeffrey P. Gannon in February 1998 and options for 300,000 additional shares which, allegedly, fraudulently indicated that Gannon was hired to restructure Zenith to the benefit of all Zenith shareholders. Gannon was essential to the LGE fraud, serving as an American figurehead to help gain public support for LGE through the bankruptcy process. This was a diversionary tactic conceived by LGE to lead American investors and employees of Zenith to believe that a real restructuring plan was in progress and would be of benefit to all Zenith shareholders and employees.
13. LGE has a stated goal of capturing 25% of the US digital TV market and, allegedly, has fraudulently obtained hundreds of millions of dollars worth of Zenith patented, digital TV technology, through the fraudulent control of Zenith. Minority shareholders and Zenith's employees were not compensated for this LGE directed technology transfer to Korea and China. LG plans to spend a minimum $10 billion in China and plans to make use of Zenith's TV technology to ensure state-of-the-art products, targeting the US as the prime market. This may include Zenith's patented FTM technology (more than 100 patents) which was partially paid for by the Department of Defense in 1992 ($2 million) and 1993 ($3 million) as a "critical technology" for US defense purposes. (Fraud Exhibits 13 and 1991 Annual Report
14. LGE, allegedly, has made a conscious effort to destroy Zenith's management capabilities from the date of majority stock control until the hiring of Jeff Gannon. This helped to insure complete chaos within the management and employee ranks. While not wanting to get into specific cases, at this time, all evidence from within and outside of Zenith, will back up this charge of LGE-conducted fraud.
LGE can not claim this it is economically infeasible for Zenith to remain a US-based manufacturer of digital electronics products since LGE decimated Zenith's management ranks and only began its management restructuring with the hiring of Jeff Gannon, in January 1998, more than two years after taking control. For two years, Zenith was a ship without a captain, aimlessly set adrift.
Example: I attended the Annual CEMA show in Las Vegas, this January, where HDTV was being introduced to the nation's 50,000 consumer electronics dealers and was horrified to note that Zenith was virtually not present. Tucked away in an upper floor at the end of a hall, Zenith had two small rooms manned by very junior personnel. No top management in sight during the entire period of the show other than the Public affairs exec. All Zenith's competitors had huge exhibits with top management present to woo the dealers.
15. While US District bankruptcy courts, normally, provide great latitude for company's to make "stupid" mistakes and poor management decisions, LGE can not justify its, allegedly, fraudulent behavior on "stupidity" and gross ignorance of the situation. LGE, first became closely involved with Zenith in 1989, thus, was thoroughly aware of all Zenith's needs and future opportunities when it purchased majority control of Zenith stock.
LGE has one of the most impressive records of growth and claimed profits of any consumer electronics company in the world. LGE statement: "LGE's globalization strategy has stemmed from a concept of localization and is aimed at establishing local production systems by reinforcing capabilities of each regional base. As a result, regional industrial complexes are under construction in Britain, Brazil, Vietnam and India. LGE has 37 overseas production bases around the world, including the most recent additions - a color TV plant in Shenyang, China and a color TV tube plant in Jiangsha, China."
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