No Questions Asked

When push comes to shove, most of us would rather be thought dumb than dishonest. And sometimes dumb is what we are, despite what prosecutors insist in court.

At his trial on corruption charges in 1973, one count against federal appellate judge Otto Kerner was perjury–specifically, lying to a federal grand jury. Kerner said he hadn’t meant to deceive; he’d simply misunderstood the question Department of Justice attorney Vic Woerheide asked him.

In his closing statement to Kerner’s jury, U.S. attorney James Thompson ridiculed the idea. “A man who is a lawyer and a general and a district attorney and a county judge and a governor and a judge of the court of appeals, second highest court in the United States, that man was led down the primrose path in the grand jury by old Vic Woerheide?” he scoffed. “My lord, he must have been a babbling idiot in that grand jury if he could have been taken in so easily by Vic Woerheide. Do you believe that? That a man who could have been all those things, who was as smart as Otto Kerner would have had to be, who had as much experience in law enforcement, who had been inside a grand jury 100 times when he was United States attorney, even though he didn’t sit in the witness chair, who has tried cases–do you believe he can be led down the primrose path by a lawyer in the grand jury?”

Thompson might feel differently about primrose paths now that he’s traveled one of his own. Kerner and his pal Theodore Isaacs were accused of doing a secret deal that brought them racetrack stock worth more than $300,000. On Thompson’s watch–since 1998 he’s chaired the Hollinger International board’s three-person audit committee–Conrad Black and David Radler allegedly fleeced the company of more than $400 million. Thompson isn’t pleading stupidity, exactly.

“I don’t think you could serve on a corporate board–and I’ve served on over a dozen over the last 15 years,” the Tribune quoted him as saying last week, “I don’t think you could start out a service on a corporate board presuming that the CEO is a crook.” But during his ten years on the Hollinger board the $400 million disappeared, and Thompson, who rose to fame as a crook spotter, never reexamined his premise. The dailies have soft-pedaled Thompson’s role in the Hollinger scandal, but a September 5 editorial in the Tribune allowed that he “comes off as a do-nothing dupe.”

The Tribune was referring to Thompson’s treatment in a 513-page report on Hollinger International prepared by a “special committee” headed by Richard Breeden, former chairman of the Securities and Exchange Commission. Breeden didn’t accuse Thompson of doing anything illegal–no one’s done that except perhaps Otto Kerner’s son Anton–but he made Thompson look ridiculous. Thompson is–as Kerner was–a man of the world: U.S. attorney, governor, chairman of Winston & Strawn, member of the 9/11 Commission. How could he have been taken in so easily?

Posing that question, the Breeden report quickly exhausts its sympathy for the former governor. “The Audit Committee’s failure . . . was influenced by the trust they had in Black and Radler to be honest, and their belief that Black and Radler were capable executives,” it says. “Thompson in particular would never claim to be a businessman, or an expert in financial analytics. However, he is a highly experienced lawyer, and he understands the fiduciary duties that Black and Radler had as controlling shareholders. . . . Unfortunately, Thompson seems to have trusted Black and Radler to honor their fiduciary duties when it turned out that he was dealing with individuals who had long since ceased to pay attention to those concerns.”

Though the audit committee “was repeatedly and deliberately misled” by Black, Radler, “and other insiders,” that doesn’t begin to excuse its members. “On balance,” the report goes on, the audit committee’s “ineffectiveness is primarily a consequence of its inexplicable and nearly complete lack of initiative, diligence or independent thought. The Audit Committee simply did not make the effort to put itself in a sufficient position to recognize untruthful or misleading information, or even to make informed decisions on the issues before it. Black and Radler knew that the Audit Committee was relying exclusively on the information that they fed to the Committee, and they took advantage of the easy opportunity for self-dealing that these circumstances provided.”

According to the report, Black and Radler raked in their gains in two primary ways: in “management fees” paid to companies they controlled and in “noncompete” payments that purchasers of Hollinger properties supposedly insisted on paying so that Black and Radler wouldn’t launch new papers and go into business against them.

Ravelston was Black and Radler’s privately owned management company. It owned a majority of Hollinger Inc., the holding company that controlled Hollinger International, which published the newspapers and generated the revenues. The lavish management fees paid to Ravelston depressed the value of Hollinger International stock, but they lined the pockets of Black and Radler.

“The most egregious situation relates to the Audit Committee’s routine, unquestioning approval of Ravelston’s annual management fee proposal,” says the Breeden committee’s report. “The Audit Committee didn’t know (or even seem to care) how much total compensation Black, Radler and their Ravelston associates were receiving each year. . . . The Audit Committee never asked for (or seemed to think it worth knowing) any information about Ravelston’s overall costs, revenues or profits. They did not ask for a breakdown of indirect costs Ravelston was proposing to charge to Hollinger . . . or take any steps to verify that Hollinger’s fees were supporting only services for Hollinger. The Audit Committee never reviewed any data concerning levels of executive compensation at comparable firms, in order to determine whether Black and Radler were being compensated consistent with reasonable market levels. More fundamentally, the Audit Committee didn’t appear to understand exactly what services Ravelston actually provided for Hollinger. . . . It does not appear that the Audit Committee ever considered the threshold question of why Hollinger outsourced its senior management.”

The report marvels at the committee’s “passive” deference to whatever Black and Radler wanted. “The Audit Committee knew that the payments to Ravelston involved a direct and substantial conflict of interest for Black and Radler, with an incentive to shift cash from Hollinger to Ravelston.” Nonetheless, the payments were authorized at “a perfunctory meeting each year between Thompson and Radler. . . . In the time needed to consume a tuna sandwich, Radler would win as much as $40 million in Hollinger revenues for Ravelston, and Hollinger would be locked into this patently unfair and exploitative relationship for another year.”

Ravelston’s fee more than tripled in 1997, the report notes, and rose by more than 20 percent in 1998 even though Hollinger revenues declined. Revenues fell again in 1999, yet Ravelston’s fee jumped 26 percent. In 2000 Hollinger sold its string of Canadian newspapers to CanWest, but though the sale cut the size of Hollinger International in half, the 2001 management fee negotiated by Ravelston dropped by only 19 percent. What’s more, Ravelston continued to “manage” the papers sold to CanWest. “There is no record,” the Breeden committee reports, “of the Audit Committee members asking Black why Ravelston was charging Hollinger nearly eight times more than it was charging CanWest to manage the same amount of business. This was about as red a flag as one could find to identify a potentially abusive related-party transaction, yet the Audit Committee apparently didn’t even ask about the discrepancy.”

The Breeden report dwells on the CanWest transaction. Almost $52 million of the sale price was allocated to noncompete payments, with Black and Radler getting some $12 million apiece and Ravelston some $20 million. According to the report, the audit committee was falsely told–and believed–that these were terms CanWest had insisted on. Among the things the committee didn’t ask, says the report, was “the obvious question of why Black, Radler [and lesser Ravelston officials] were entitled to receive payments for doing something they were already obligated to do by virtue of their status as Hollinger officers (since Hollinger had also signed a non-compete agreement with CanWest).”

Otto Kerner was convicted of violating the people’s “intangible rights” to honest service from their elected officials. It was a new legal theory, teased out of the federal mail-fraud statute, and Thompson couldn’t have won the trial without it–there was no evidence that Kerner had extorted anyone for the racetrack stock and little evidence that he’d been bribed. In 1987, 11 years after Kerner died, the U.S. Supreme Court ruled that the intangible-rights theory had no basis in law. Had Kerner lived, his conviction would almost certainly have been overturned, which is why Anton Kerner can insist his father was ultimately vindicated.

But Congress wrote the “intangible right of honest service” into law in 1988, and it’s been applied since in private as well as public cases. Months ago Anton Kerner told me he’d like to see it applied to his father’s nemesis. That would be a stretch. The federal Sixth Circuit Court commented in 1997 that the “abstract satisfaction of receiving ‘honest services’ for their own sake” isn’t a significant expectation in the private sector. Besides, Thompson wasn’t an officer in the company. He just sat on the board. His compensation was modest–certainly by Black’s standards and perhaps by his own: $35,000 a year, plus $5,000 for each board or committee meeting attended. There were eight or so meetings a year.

Breeden was willing to salt his report with the language of criminal conduct whenever he thought it appropriate. Thompson escapes such treatment. That said, the report concludes with a blunt listing of the audit committee’s lapses over an 18-month period:

February 2001: “approved without analysis or significant deliberation” the Ravelston management fee that was only 19 percent smaller than the previous year’s, though half the company had been sold off.

May 2001: ratified “in a 20-minute telephone conversation” the CanWest noncompete payments even after finding out management had used inaccurate information to justify them.

September 2001: allowed Hollinger to sell a California weekly for $1 to a company Radler was operating on the side, even though another company had offered $1.25 million for it, and approved $4.4 million in noncompete payments to Black, Radler, and others in the sale of several Canadian papers for $144 million–without checking to make sure the buyer had requested them.

February 2002: approved a $24.9 million Ravelston management fee “in the absence of any analysis or serious deliberation,” ratified some $700,000 in noncompete payments, and filed a federal form attesting to its approval of $15.6 million in noncompete payments the committee had never even been informed of.

During this single 18-month period, says the report, the audit committee approved payments benefiting Black, Radler, and others that totaled $113.6 million.

“Delaware law (and Hollinger’s Articles of Incorporation) exculpate board members from personal liability for discharging their duties in a negligent, or carelessly inattentive manner,” the report concludes. “Moreover, directors are entitled under Delaware law to rely in good faith on reports and recommendations provided by board committees and by executive officers. . . . However, at some point a director’s failure to question even the most basic elements of a significant related-party transaction calls into question whether any decision made by that director was a decision at all but rather only a rubber stamping of a non-arm’s length transaction.”

The courts will decide if Thompson is personally liable for anything. The Breeden report leaves the question dangling.

News Bite

8 Midwest Suburban Publishing is a Hollinger International subsidiary that controls the Daily Southtown and the Star newspaper chain in the south suburbs. When Midwest Suburban cut its payroll in 2001, Southtown photographer Judy Fidkowski was one of several dozen employees who lost their jobs. Last week she e-mailed an AP story on the Breeden report to several colleagues who’d also been laid off, highlighting a paragraph that said: “The report concluded that the amount of money looted from Hollinger by Black and others over the period of 1997-2003 represented just over 95 percent of the company’s entire earnings during that time.”

“Hi to all,” Fidkowski wrote. “This AP piece finally tells us what happened to our jobs. . . . Gee, the layoffs at Midwest Suburban publishing were in the beginning of 2001. And they ‘looted 95% of the company’s entire earnings from 1997-2003.’

“And Hollinger began to lay off employees of the former Copley group papers soon after we were axed. I still remember asking [editor] Mike Waters ‘why is my position being eliminated?’ I remember Mike looking down at the table or the floor and saying ‘I can’t answer that.’

“We were robbed, folks–we were robbed. I thought that I had finally gotten over it, and then I read this. We were robbed of our dignity, our income, our self-esteem by a bunch of low life, greedy ‘robber barons.'”

Art accompanying story in printed newspaper (not available in this archive): photo/AP Photo–James A. Finley.