Top executives at the Marriott Corp. devised a plan to spin off the hotel giant's debt-ridden real estate holdings in early 1992, but that plan was nothing like the later spinoff that cut the value of the bonds issued by the company, a former manager testified yesterday.
David N. Chichester, former assistant treasurer of Marriott, told the jury in a federal securities fraud trial in Baltimore's U.S. District Court that he came up with a spinoff idea in January 1992.
And for the next four months, he and several other Marriott officials, as well as financial analysts from the First Boston investment banking firm, worked on the proposal, dubbed "Code Red."
It called for spinning off much of Bethesda-based Marriott's real estate into a new corporation.
But by mid-April, Marriott managers decided that the plan wouldn't work because investors were frowning on almost all real estate holdings at the time, he said.
A few days after the executives nixed "Code Red," Marriott Corp. sold $400 million of bonds to investors -- without telling them about any spinoff plans.
In early May, five days after the last bonds were sold, Mr. Chichester's boss, Marriott Chief Financial Officer Stephen Bollenbach, proposed another spinoff, this time dubbed "Project Chariot," which was eventually adopted.
Mr. Bollenbach is now chief executive officer of Host Marriott Corp., the successor to Marriott Corp.
Mr. Chichester left Marriott Corp. in the fall of 1992 to join Integrated Health Services, based in Owings Mills.
The investors' attorney sought to point out the similarities between Code Red and Project Chariot, but under questioning by Marriott's at torney, Mr. Chichester said the two plans were very different.
Project Chariot was "just the opposite" of Code Red, because it spun off the hotel management services, not the real estate, the former assistant treasurer said.
The division in October 1993 that resulted from Project Chariot kept about $3 billion in debt, troubled real estate and airport concessions in the original company, which was renamed Host Marriott. A new company called Marriott International Inc., consisting primarily of profitable hotel management contracts, was spun off to Marriott's stockholders.
Eleven bondholders have sued Marriott for $18 million they say they lost because Marriott, the plaintiffs charge, improperly kept secret its spinoff plans when it sold the bonds.
As soon as Marriott Corp. announced the division in October 1992, the bonds plunged in price from 110 percent of face value to 80 percent.
Mr. Chichester spoke on the fourth day of testimony in what is expected to be a three-week trial.
In the first three days, bondholders testified that they had researched Marriott extensively, but had never received any indication that Marriott might split itself in two.