KK V. DaimlerChrysler Trial Halts on 61 Pages of New Evidence

WILMINGTON, Del. December 16, 2003; Peg Brickley writing for Dow Jones reported that the judge presiding over the trial of billionaire investor Kirk Kerkorian's lawsuit against DaimlerChrysler AG Tuesday called a halt to the proceedings while a special master investigates new evidence that his lawyers say could tip the trial Mr. Kerkorian's way.

U.S. District Judge Joseph Farnan ordered the trial stopped after two weeks, with only two witnesses left to go. It will resume after Judge Farnan determines what to do about 61 pages of notes DaimlerChrysler handed Mr. Kerkorian's lawyers between 11:30 p.m. EST and 11:45 p.m. EST Monday.

The notes come from the files of former Chrysler Corp. Chief Financial Officer Gary Valade, who was scheduled to testify Tuesday morning in the trial. They cover a period early in the negotiations between the companies and appear to reflect internal thinking of the Michigan company's executives as the deal was taking shape.

The notes run from the first meeting between Chrysler Chief Executive Robert J. Eaton and Daimler-Benz Chief Executive Juergen Schrempp in early 1998 through the end of April that year, just before the agreement was made public.

Terry Christensen, attorney for Mr. Kerkorian, said the last-minute revelation of such important material should cost the company the trial. He asked Judge Farnan to strike the company's answer to Mr. Kerkorian's complaint, a move that would trigger a default judgment against the auto maker.

In the alternative, Mr. Christensen asked Judge Farnan to keep Mr. Valade from taking the stand, and allow Mr. Kerkorian to use the notes as evidence of how Chrysler's top executives viewed the deal that Mr. Schrempp was pressing on them in the spring of 1998.

"Page one says de facto, no merger, takeover," Mr. Christensen told the judge. "Those notes were valuable."

Michael Schell, attorney for DaimlerChrysler, said Judge Farnan "clearly was inviting a less drastic suggestion" than a default judgment.

He said the omission of the 61 pages of notes was inadvertent, a slip-up that shouldn't bring a harsh penalty down on the company.

"These documents came as a complete surprise to everybody," Mr. Schell said.

Until the trial was halted, Mr. Valade was expected to join a parade of former Chrysler executives and directors who have taken the stand to defend DaimlerChrysler against Mr. Kerkorian's charges. The lawsuit says that the combination of Daimler-Benz AG of Stuttgart and Chrysler of Auburn Hills, Mich., was a takeover, not a merger of equals, a deal that allowed new German owners to strip out Chrysler management within a few years.

Mr. Valade was a key player in the negotiations, a member of the board as well as CFO. He is now one of two former Chrysler executives on the DaimlerChrysler board of management. Mr. Valade is scheduled to retire at the end of the year.

Instead of listening to Mr. Valade testify, however, the last-minute revelation of the handwritten notes from Mr. Valade's files had the judge pondering from the bench what light the new evidence cast on testimony that he had already heard.

The judge singled out a notation that says " 'almost' a takeover" on a document that carried the initials "RJE"

"I would like to know if that (the reference to a takeover) was his (Mr. Valade's) thinking or Mr. Eaton's thinking," Judge Farnan said Tuesday.

Mr. Eaton, Chrysler's CEO at the time of the combination, testified at trial that the deal was a merger of equals, not a takeover.

The late-discovered evidence also includes notes that may be from Thomas Stallkamp, the former Chrysler president, who was the first head of the post- merger American component of DaimlerChrysler.

Like Mr. Eaton, he testified at trial that Chrysler and Daimler joined forces as equal partners in a merger that aroused cultural conflicts, but no power struggle or nationalist sentiments.

Bulleted points on Mr. Stallkamp's letterhead, however, tell a different story: "Loss of independence," "American image and character," "Underscored, sell out for profit," "Labor," "Job & career uncertain," "Why didn't we buy?" and "Senior management sold out."

The list, Mr. Christensen said, was telling from a man who had testified that, in spite of being ousted by Mr. Schrempp after months of pitched battles, "he is a happy guy."

After reviewing the notes, Judge Farnan ordered the 61 pages of new evidence sealed "based on my finding that within these documents is material relevant to what has been testified to at the trial to date."

The judge also said the notes were "clear as to issues that have been presented in the trial so far" and relevant to "very substantial testimony."

The impression of equivocating executives is not the one DaimlerChrysler wanted to leave with the judge, who has taken the opportunity to question many of them directly at the conclusion of their testimony. Judge Farnan alone will decide whether the auto maker owes Mr. Kerkorian more than $1 billion, the amount the investor says the alleged merger of equals charade cost him.

The 86-year-old billionaire, who tried to buy Chrysler out in the mid-1990's, owned roughly 13.4% of the Chrysler at the time of the merger.

DaimlerChrysler has agreed to pay $300 million to settle a shareholder class action that raised allegations similar to Mr. Kerkorian's.

At the conclusion of his own testimony in the first week of trial, Mr. Kerkorian told reporters he wouldn't settle with the company.

Among the issues the special master is to review is how much blame DaimlerChrysler should bear for the late production of the notes.

Attorneys for the company said Mr. Valade, who is one of only two remaining former Chrysler executives on the DaimlerChrysler board of management, handed over all his notes, but something went wrong in the discovery process.

Over the years the case was in the works, DaimlerChrysler produced about half- a-million pages of documents, Mr. Schell said.

Ironically, it was Mr. Valade himself who triggered the probe that led DaimlerChrysler to discover it had failed to hand over 61 pages of relevant notes to Mr. Kerkorian's attorneys.

The DaimlerChrysler executive was on an airplane with DaimlerChrysler associate general counsel William O'Brien, on his way to the trial, Mr. Schell explained. He pulled out a page of notes favorable to DaimlerChrysler's case and asked Mr. O'Brien if he would be questioned on it.

Mr. O'Brien, unaware of what documents had been produced, showed the favorable page to Thomas Allingham, an attorney with Skadden Arps Slate Meagher & Flom LLP, which represents DaimlerChrysler at trial.

Late in the afternoon Monday, Mr. Allingham said, he looked at the single page of Mr. Valade's handwritten notes and began an investigation, since he didn't recall having seen it in discovery.

A team was sent out to the "inviolate warehouse" where DaimlerChrysler housed copies of all documents produced in the trial. That effort, Mr. Allingham said, turned up the 61 pages handed over to Mr. Kerkorian's attorneys near midnight Monday, evidence that is headed to a special master for a Dec. 22 hearing.

"My own view is that it's improbable the trial could be reconvened before the end of the year," Mr. Schell said.