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Salomon Agrees To Pay $29.75 Million in Revco Class-Action Case

October 30, 1991

NEW YORK (AP) _ Salomon Brothers Inc. said Wednesday it agreed to pay $29.75 million to settle a class-action lawsuit accusing the firm of fraud in the 1986 leveraged buyout of Revco D.S. Inc.

The settlement is the latest bad news for Salomon, which is under federal investigation for violating bond-market auction rules. Salomon said it had accounted for the Revco settlment in its latest quarterly earnings.

The lawsuit, filed in April 1989 in U.S. District Court in Cleveland, alleged that Salomon defrauded a group of investors who bought more than $800 million in junk bonds and preferred stock to finance Revco’s $1.5 billion buyout.

Revco filed for bankruptcy protection in 1988 after failing to make an interest payment on $700 million in junk bonds used to finance the deal in which management took the Twinsburg, Ohio-based drugstore chain private.

Salomon was the main investment banker and underwriter of the Revco securities. Investors who bought into the deal alleged that Salomon knew the transaction was flawed and that Revco’s finances and management were far weaker than described.

″The company was completely misportrayed,″ said Merrill Davidoff, a lawyer with the Philadelphia firm Berger & Montague, which represented the plaintiffs. ″The leveraged buyout we contend was doomed or had a high risk of being doomed from the outset.″

About 1,000 plaintiffs, predominantly institutions that bought the Revco debt, were represented in the lawsuit. The complaint remains pending against eight other defendants, including another Revco financial adviser, Golenberg & Co., and former Revco chairman Sidney Dworkin.

Salomon said in a statement it continues to deny the allegations made in the class-action lawsuit, and ″is settling at this time to avoid the expense and uncertainty of further litigation.″

Many such lawsuits have been filed around the country by investors who lost money in failed leveraged buyouts from the mid-1980s. In such deals, companies are purchased by management or investor groups, who then typically sell assets to meet enormous interest payments on debt issued to pay for the purchase.

Last month, Salomon agreed to pay $9.5 million in cash plus some securities it would otherwise would have owned to settle claims against it in the Revco bankruptcy. That settlement requires bankruptcy court approval.

Salomon said separate actions that aren’t covered by the two Revco settlements should not have a negative financial impact on the firm.

Salomon is under federal criminal and civil investigation relating to admissions that it repeatedly violated rules governing Treasury auctions. Top management has resigned from the firm because of the scandal.

The firm on Tuesday said it set aside $200 million to pay for fines and lawsuits resulting from the investigations. Salomon faces 38 civil lawsuits so far related to the Treasury violations.

Revco is operating under Chapter 11 protection of federal bankruptcy laws. The company, which operates 1,150 stores in 10 eastern states, is seeking to emerge from bankruptcy and creditors are pursuing their own reorganization plan.

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