Black Shadow Over Big Jim

Anton Cermak Kerner has been reading the papers lately and remembering. In 1973 his father, Otto Kerner, a federal appeals judge who’d been governor of Illinois, was sent to prison in disgrace. Anton Kerner will never forget or forgive.

Four years ago a new book deepened his certainty that an injustice had been done. Kerner: The Conflict of Intangible Rights, by Tribune financial writer Bill Barnhart and former Illinois legislator Gene Schlickman, describes petty lies and venalities that contributed to Otto Kerner’s fall, but its larger argument supports an acquittal. “In the crude lingo of politicians and journalists,” they wrote, “it was not a system but rather a game that sent Kerner and [codefendent Theodore] Isaacs to federal prison. They played poorly and lost. U.S. Attorney James Thompson played well and won. He was elected Illinois governor four times and retired from public life to a lucrative law career.”

The card Thompson played to win the game was a recently minted legal theory known as “intangible rights.” The trial turned on profitable racetrack stock that Kerner, while governor in the 60s, had been given via an intermediary by Marjorie Everett, who controlled Washington Park and Arlington Park. Unseemly, yes, and Everett’s racing interests flourished while Kerner was governor. But no evidence ever turned up that the governor had extorted her and little to suggest that Kerner took the stock as a bribe. In other words, Barnhart and Schlickman explained, there was no crime obvious or large enough to justify a federal indictment of a judge with Kerner’s stature. The Justice Department’s solution was to accuse Kerner of violating the people’s “intangible rights” to honest and honorable service from their public officials–a theory that had recently been teased out of the federal mail-fraud statute.

“Without it,” Anton Kerner insists, “there was no federal case. My father was wrongfully tried for conspiracy, income-tax evasion, false statements, and perjury entirely by Thompson’s ‘intangible rights’ mail-fraud invention.”

Thompson, a gifted young lawyer with political ambitions, “held no enmity toward Kerner, or any regard at all,” wrote Barnhart and Schlickman, “except as an athlete might feel toward a competitor or a hunter toward prey.” But an expression of indifference is as rare in a courtroom as an expression of indignation is familiar. After Kerner was convicted, Thompson told the judge about to sentence him that Kerner had built a reputation as “a rare breed of public servant.” But, Thompson continued, “that building contained the fatal flaws or defects of corruption, arrogance, cynicism…and so it came crashing down.”

Thompson has swept through life from honor to honor. If Otto Kerner gave his name to the famous Kerner Commission Report–which in 1968 warned that America was becoming two separate and unequal societies–Thompson gave his to the State of Illinois Building he commissioned from Helmut Jahn. He’s now chairman of Winston & Strawn and sits on the National Commission on Terrorist Attacks Upon the United States and on a half dozen or more corporate boards. Among them is the board of directors of Hollinger International, where he’s sat alongside luminaries such as Henry Kissinger and Richard Perle. Last November scandal thrust Hollinger into the headlines, and Anton Kerner felt stirrings of poetic justice.

Thompson didn’t simply grace Hollinger with his name in absentia. He diligently attended board meetings and chaired the audit committee. And now the conduct of the audit committee preoccupies a suit filed last month in Delaware by a Hollinger International shareholder, Cardinal Value Equity Partners. Cardinal Value accuses Black and other executives of “a stunning abuse of authority” and the board of permitting them “an unfettered license to line their pockets at shareholder expense.

“In all,” the suit continues, “plaintiff estimates that Black and the Hollinger Executives have looted as much as $300,000,000 or more from Hollinger. [And as] the Hollinger executives were treating Hollinger like their private piggy bank, Hollinger’s Board, including ostensibly blue ribbon independent directors and Hollinger’s Audit Committee were totally quiescent. Despite being presented with numerous self-dealing transactions, the Board without question or investigation repeatedly approved the actions of Hollinger Executives (often after the fact) and permitted their unfettered raid on Hollinger’s finances.”

The Cardinal Value suit sifts through the minutes of past audit committee and full board meetings and calls the corporate history they relate a “saga of greed and deliberate indifference to fiduciary duties.”

Consider the events of September 10, 2001. According to the complaint, the day began with a 20-minute meeting of Thompson’s audit committee, with Radler sitting in. The committee ratified millions of dollars in payments to senior executives that the executive committee–Black, Radler, and director Richard Perle–had approved two months earlier in connection with the sale of some Canadian papers controlled by Hollinger. The purchasers supposedly wanted the executives to personally receive this money to guarantee they would not go into competition with their old papers. The Cardinal Value suit asserts that the audit committee approved the payments with no questions asked, not even why Black and Radler “had, apparently, dispensed with the formalities of presenting such payments prospectively for rubber stamp approval.” (The suit challenges many such “noncompetition” payments to Black, Radler, and other executives and complains that the board “made not the slightest inquiry” into their legitimacy.)

The audit committee also approved the sale the month before of a small Hollinger newspaper, the Monmouth Times, for one dollar to Horizon Publications, a firm controlled by Black and Radler. Again, the suit charges, there was no discussion. “There is not even any question about why the matter is being brought to the Committee only after the fact,” it says. “Prior to being informed that management had sold the publication to themselves, the minutes are devoid of any indication that the Board ever considered selling that publication.” Furthermore, the committee seemed incurious about the fact that Black and Radler, Hollinger’s top two executives, wanted the company to unload a property that the two of them, wearing other hats, intended to buy.

A meeting of the full board followed. The complaint calls it “an identical ex poste facto ratification of the matters presented to the Audit Committee….No questions were raised. No independent investigation was undertaken. No challenge to or even any inquiry of defendants Black and Radler was made in any regard. It is clear by now the Board had comfortably settled into its role as rubber stamping the self-dealing transactions conceived by defendants Black and Radler and other Hollinger executives to the point where they did not even mind being relegated to providing their approval after the fact.”

The Cardinal Value complaint is a methodical 52-page recitation of such occasions.

A February 22, 2000, meeting of the audit committee at which a proposal to turn three Hollinger publications over to Horizon was approved. “No one apparently questioned Radler or Black as to why they would recommend Hollinger get out of these businesses when yet, at the same time, Radler and Black were personally purchasing these businesses.” In addition, Radler proposed an increase in his and Black’s compensation, and the audit committee approved it without “independent review….The minutes reflect no apparent justification offered by Radler.”

A May 11, 2000, meeting of the audit committee at which yet another deal between Hollinger and Horizon was approved. “The Hollinger Executives were buying a newspaper from Hollinger at a non-negotiated price, which was not subject to any independent review or fairness opinion. Also negotiated with themselves was a $6 million interest-free ten-year loan from Hollinger to finance their purchase.”

A February 26, 2001, meeting at which the audit committee was given a plan to sell two Hollinger publications to Horizon for one dollar. “The proposal was accepted as presented.”

And on and on.

Eventually minority stockholders and then the board itself rose against Black and Radler and last November toppled them from executive control of Hollinger International. In mid-January Hollinger International filed a suit of its own. On the basis of an ongoing investigation by a “special committee” of independent directors, it sued to recover more than $200 million that Black, Radler, and three management firms controlled by Black allegedly took from Hollinger “through various improper means.” A Hollinger press release explained that more than $90 million had allegedly flowed to the defendants in the form of noncompetition payments, some of them “sham transactions,” others never authorized by the board. In addition, the company allegedly paid out “tens or hundreds of millions of dollars in excessive, unreasonable and unjustifiable” management fees.

An “attitude of proprietor entitlement permeated Defendants’ dealings with the company,” the suit declares.

Up to a point, the suit echoes what Cardinal Value had to say about the board. It was a board that didn’t “meaningfully negotiate” management fees or adequately review those “sham” noncompetition payments. The audit committee had allowed Black and Radler to operate their Horizon sideline “without adequate fairness analysis.”

But Cardinal Value saw a board of irresponsible enablers. The Hollinger suit posits the directors as the shareholders’ fellow victims. To demonstrate Black’s alleged “contempt for the public shareholder majority,” it quotes from e-mail from Black to other executives in 2002 remarking that Hollinger’s only reason to be a public company was “relatively cheap use of other peoples’ capital.” Black seemed to be wondering whether incorporation was worth it: “We now have an unsatisfactory situation where a number of the shareholders think we are deliberately suppressing the stock price, some others think we are running a gravy train and a gerrymandered share structure, and we think they are a bunch of self-righteous hypocrites and ingrates.”

The suit continues: “That contempt extended further to Defendants’ perception of the Company’s independent directors [such as Thompson], who had the unenviable task of protecting [Hollinger’s] public shareholders from the Defendants’ repeated and systematic schemes to divert corporate assets and opportunities to themselves. The job of the independent directors was made more difficult by Defendants’ repeated failures to seek prior authorization for self-dealing transactions, and to then seek after-the-fact ‘ratification’ based on rationalizations such as inadvertent error or oversight. On various occasions, one or more of the Defendants made misrepresentations and misleading statements to the Audit Committee and Board, and failed to provide directors with material and complete information.” The italics are Hot Type’s; they point out managerial conduct the most somnolent board should have noticed.

A Hollinger spokesperson tells me that Black’s “contempt” for the shareholders was revealed to the board only when the special committee began turning up evidence of it. But what about his “contempt” for outside board members like Thompson? How could Black have somehow managed to deceive these subtle, worldly men into thinking he respected them when he didn’t? The proof he didn’t was the blatantly slapdash way he and Radler presented important issues to the board.

Thompson rejects the implicit suggestion by Cardinal Value that the directors were too busy dozing or spreading cream cheese on bagels or being chummy with Black and Radler to care about the fast ones those two allegedly were putting over. But as for Black’s “contempt”–that’s a literary conceit of the Hollinger suit’s authors. “I certainly never felt any personal contempt,” Thompson tells me.

Year after year Black addressed Hollinger shareholders in high style. In the 1998 annual report he promised: “The controlling stockholder [Black] will do whatever is appropriate and necessary to achieve realistic value for the interests of all persevering stockholders.” In 1999 he cajoled: “Last year was successful in most respects, except in the performance of the stock price.” But he feared not. “Neurotic concern about the future of even well-managed companies in this industry will subside eventually.” In 2000 Black rejoiced that “last year was an unprecedentedly successful one in the Company’s operations and in its tortuous struggle to fulfill the legitimate ambitions of the shareholders.”

A year later the picture had darkened. “This is the last time,” Black wrote in 2001, “we will have to inflict upon our persevering shareholders (including ourselves in management) financial results that are apparently absurdly unsatisfactory. Fortunately, the semblance of a grievous financial setback in 2001 is only an appearance….As large shareholders, we identify altogether with the shareholders who have placed their confidence and savings with us and we are more determined than ever that their patience and trust will be rewarded.”

In reality, the Hollinger suit against Black and the others alleges, Black and Radler were allowing those long-suffering shareholders to unknowingly “finance their own lifestyles and to support [their] independent pursuits.” An August 2002 Black memo to another executive is quoted: “There has not been an occasion for many months when I got on our [company] plane without wondering whether it was really affordable. But I’m not prepared to reenact the French Revolutionary renunciation of the rights of nobility.”

Thompson joined the board in 1994. Can we suppose that for nine years he and the other directors had no idea that Black was capable of such a thought? Did the board never suspect that a man who chose to be identified in the annual report as “the Hon. Conrad M. Black, P.C., O.C.” (though after he entered Britain’s House of Lords he became “The Lord Black of Crossharbour, PC (Can), OC, KCSG”) might not hold the shareholder uppermost in his concerns?

The editor of Britain’s Sunday Telegraph, a Hollinger paper, came to Black’s defense last week by laughing at his accusers. “What I have found truly disgusting,” wrote Dominic Lawson, “is the way in which in recent weeks many of those who enjoyed the Blacks’ extraordinary hospitality have been cackling with glee and scorn at the revelations of corporate excess which have brought about their downfall. They are the very same people who drank the shareholders’ champagne and swallowed the shareholders’ caviar at the Blacks’ Kensington home. Still, Conrad has a profoundly realistic appreciation of human nature. I don’t think he will be surprised.

“I don’t even have much sympathy for the shareholder groups who launched the campaign to oust Conrad Black. When a man has a corporate structure like Conrad’s in which he controls around three quarters of the votes with barely a third of the equity, it can mean only one thing. He wants the pleasure of access to the equity markets but with the privileges of a private company. In other words, they had it coming to them.”

Anton Kerner thinks Thompson has it coming to him. He goes so far as to point out that the “intangible rights” theory isn’t limited to the prosecution of public officials. Since Otto Kerner’s trial this theory has led an interesting life. In 1987 it was found unconstitutional by the U.S. Supreme Court. The justices didn’t object to the idea in theory, but they couldn’t find it in the mail-fraud statute. “Had he lived, Kerner almost certainly would have seen his conviction overturned, as did former Maryland governor Marvin Mandell in a 1977 corruption case [heard by the same judge who tried Kerner],” wrote Barnhart and Schlickman. But Kerner died of lung cancer in 1976, little more than a year after he was paroled because of illness. Anton Kerner and his sister went to court anyway to expunge the record and were told they couldn’t act for their father.

In 1988 Congress added the specific phrase “intangible right of honest service” to the federal mail-fraud statute. The theory that had condemned Otto Kerner could again be invoked. It’s since been applied to private as well as public cases, and was recently used against Enron’s former CFO, Andrew Fastow, who was accused of conspiring “to deprive Enron and its shareholders of their right of honest services.” Fastow pleaded guilty this month and was sentenced to ten years in prison.

But the bar’s set high. In a 1997 opinion the federal Sixth Circuit Court in Chattanooga asserted that “enforcement of an intangible right to honest services in the private sector…has a much weaker justification [than in the public sector] because relationships in the private sector generally rest upon concerns and expectations less ethereal and more economic than the abstract satisfaction of receiving ‘honest services’ for their own sake.” Mere negligence isn’t criminal. Mere incompetence isn’t criminal. Mere indifference to shareholders isn’t criminal.

“That’s not a theory that’s been put forward by anybody I can see,” Thompson tells me when I ask if the theory of intangible rights could be applied to the mess at Hollinger. He doesn’t think it can be.

Even if he’s wrong, there’s a huge practical difference in the eyes of the law between a senior management official like Fastow–or Black and Radler–and an outsider who merely serves on a board.

But Anton Kerner can dream. “I seek not malicious satisfaction in the misfortune of others,” he e-mails me, “but only my father’s vindication in highlighting Thompson’s ironic troubles at Hollinger.”

Give ‘Em What They Want

When James Cuno accepted his new position in Chicago, the Tribune ran its story on page one January 22 and headlined it “Rising star chosen to lead Art Institute.” The Sun-Times ran its story on page four the same day and headlined it “Art Institute’s new leader says he’s no stuffy snob.” Presumably both papers know their readers.

The second paragraph of the Tribune story told us that Cuno was getting “a second chance at realizing a long-held vision.” The second paragraph of the Sun-Times story told us that Cuno is a “baseball nut.”

The Tribune story then explained that two years ago, when Cuno was director of Harvard’s art museums, plans to add a new building designed by Renzo Piano fell through. The Sun-Times story then explained that when Cuno left Harvard two years ago staffers printed up Jim “Bash” Cuno baseball cards that showed him wearing a Boston Red Sox uniform. “He ate it up,” said a colleague.

The Tribune story had more to say about the Piano building Cuno had been unable to put up along the Charles River and the Piano wing the Art Institute plans to begin building this fall. The Tribune story didn’t mention baseball. The Sun-Times story had more to say about the Red Sox and Cubs baseball games that Cuno plans to watch this summer. The Sun-Times story didn’t mention Renzo Piano.

The Tribune reported that Cuno has called the Art Institute “the greatest municipal art museum in America.” The Sun-Times reported that Cuno “has certainly hit the big leagues.”

Art accompanying story in printed newspaper (not available in this archive): photo/AP-Wide World Photos.