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The
Looting of Hollinger
Brian
Trumbore
President/Editor, StocksandNews.com
The story of Hollinger International
and the pillaging of the company by its top executives,
particularly former CEO Conrad Black and former COO
David Radler, is one of the worst stories of its kind
to emerge in the history of Wall Street. Thanks to
a special internal report by former SEC Chairman Richard
Breeden, the misdeeds perpetrated by Black, Radler
and others is being defined. What follows are a few
of the principal findings of the investigation, part
of a 513-page report that Breeden oversaw.
What
you discover is that Black is now without question
in the same league as Dennis Kozlowski, Bernie Ebbers
and the other corporate dirtballs of this era. Additionally,
a key board member, Richard Perle, is culpable in
various abuses of the system. Perle is the ultimate
Washington insider who was an adviser to the Pentagon's
Defense Policy Board, the entity that played a key
role in developing the case for taking out Saddam.
All
parties named in the following profess their innocence.
You, though, should draw a different conclusion after
reading it.
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Findings
of the Special Committee of the Board of Directors
of Hollinger International Inc.
Management
fees and other compensation paid to Black and his
affiliates and associates were excessive and irrational
by any reasonable measure. For example, over the 1997-2003
period, total management fee and other payments made
to or for the benefit of Hollinger's senior executives
totaled more than $400 million. This represented more
than 95% of Hollinger's aggregate adjusted net income
for the period. The Special Committee found that Hollinger's
relative stock price and operating performance during
the years in question were among the worst of its
peer group of publicly traded publishing companies.
---
Knowing
that the Audit Committee was not meaningfully reviewing
or negotiating their demands, Black and Radler sharply
increased their annual fee from $8.5 million in 1996
to more than $40 million in 1999.
Black
caused Hollinger to pay Moffat [Management, a Barbados
company] and Black-Amiel [Management, a Barbados company
?Barbara Amiel-Black is Conrad's wife] approximately
$7 million in management fees between 1998 and 2003.
Black caused Hollinger to make these payments even
though Moffat and Black-Amiel had no known employees
and performed no known services for Hollinger. In
addition to these fees, Moffat received a $900,000
payment from Hollinger in August 1999 that was described
by a Radler subordinate as "broker fees CNH1." This
payment was unauthorized and had no supportable economic
basis.
---
There
was no supportable economic rationale for the secret
payments to HLG?.
Black
and Radler caused Hollinger to make $15.6 million
in "non-competition" styled payments in 2000 and 2001
to themselves and two associates without any review
by or approval from the Audit Committee or the Board.
These payments did not have any supportable corporate
economic purpose, and like the $16.55 million in "non-competition"
payments to HLG, were made as purported consideration
for non-competition agreements that were never sought
by any of the purchasers.
These
$15.6 million in payments to Hollinger's officers
and directors were made through alterations of Company
records, including (i) reducing inapplicable transaction
reserves and payables; (ii) reducing gains on sales
of U.S. community newspaper properties; (iii) altering
closing documents to provide a purported basis for
diverting transaction proceeds; (iv) creating and
then backdating sham "non-competition" agreements
with APC (which never employed the payment recipients
and, at the time of the agreements, had disposed of
virtually all of its assets); and (v) backdating $5.5
million in checks. The Special Committee has concluded
that the use of sham transactions, the deliberate
backdating of checks and concealment of the unauthorized
payments through alteration of Hollinger's books,
and other conduct, reflects an intent by the recipients
to take money they knew was not authorized.
---
The
Hollinger Audit committee approved $52 million in
non- compete payments to [investment vehicle] Ravelston,
Black Radler, [former Hollinger Executive Vice President
John "Jack" A.] Boultbee and [former Hollinger Executive
Vice President Peter Y.] Atkinson in connection with
the CanWest transaction but did so on the basis of
false and misleading information knowingly provided
to the Audit Committee by Radler, Kipnis and Atkinson.
Moreover, three of the four officers who received
the payments were present at the Board meeting at
which the non-compete payments were approved on the
basis of the same false and misleading characterizations,
yet none of them corrected the record.
---
Black,
Radler, Colson, [Richard] Perle and other Hollinger
executives crafted an incentive compensation plan
for Digital, Hollinger's new media / internet investment
subsidiary, through which they were paid 22% of profits
on successful investments, without any offset for
investments on which Digital lost money. In other
words, the incentive plan participants would share
excessively in investment gains, and Hollinger's shareholders
would bear all losses?.
Black,
Radler, Colson, Atkinson, Boultbee and Perle received
a total of $8.3 million in Digital Incentive Plan
payments, even though Digital's investments, in aggregate,
have generated $68 million in losses as of December
31, 2003, for a total negative return of 33% to Hollinger?.
Black
and Perle caused Hollinger to make a $2.5 million
investment in Trireme, an investment fund in which
each of them held a financial interest. They did not
seek Audit Committee approval of this self-interested
transaction, even though Atkinson expressly reminded
Black that he had an obligation to do so. The Trireme
investment is now worth approximately $1.5 million,
representing an unrealized loss to Hollinger shareholders
of $1.0 million.
Between
1996 and 2001, Black caused Hollinger to pay $8.9
million to acquire FDR papers and memorabilia without
seeking prior Audit Committee or Board approval. Most
of these papers were displayed or stored in Black's
private residences. When, in October 2002, Black finally
sought Executive Committee ratification of the largest
of these purchases, the January 2001 $8 million acquisition
of the Grace Tully Collection, the Committee was falsely
informed that the purchase had been negotiated by
Boultbee, when in fact Black had negotiated it. During
the period of these purchases, Black was writing a
biography of President Roosevelt, which was published
in November 2003. Hollinger has accepted an offer
of $2.4 million for the Grace Tully Collection, and
believes it to represent fair market value, representing
a 70% loss to Hollinger from the $8 million price
that Black caused Hollinger to pay.
---
At
the same time they were collecting exorbitant management
and other fees from Hollinger, Black, Amiel-Black,
Radler and other Hollinger executives caused Hollinger
to further subsidize their lifestyles by providing
a wide range of perquisites. Hollinger's non-controlling
shareholders were forced to pay for homes, private
jets, cars, house staff and chauffeurs, private club
memberships, and even contributions to Black's and
Radler's pet charities in their names. For example,
from 1997 to 2003, Hollinger paid $1.8 million to
improve, maintain and pay taxes on apartments for
Black and Radler that Hollinger purchased for their
use, and another $1.4 million for private staff in
Black's residences.
In
December 2000, Black caused Hollinger to swap with
him a Manhattan apartment that Hollinger had purchased
in 1994 for $3 million, for cash and another apartment
in the same building that Black had purchased in 1998
for $499,000. The value attributed to Hollinger's
apartment was its six-year-old $3 million cost, while
the value attributed to Black's apartment was $850,000,
a two-year appreciation of 70%. This transaction diverted
at least $2.5 million in value from Hollinger to Black.
Hollinger
leased a Gulfstream IV jet for Black's use, and purchased
a Challenger jet for Radler's use, and incurred financing,
operating and maintenance costs of approximately $23.7
million from 2000 through 2003. Black and Radler used
the jets extensively for personal purposes (including
commuting to and from vacation homes and, in one instance,
a round-trip vacation to Bora Bora for the Blacks),
and with the minor exception of Ravelston's partial
reimbursement for Black's Bora Bora trip, never reimbursed
Hollinger for any of these expenses.
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Between
1996 and 2003, Hollinger and its subsidiaries donated
at least $6.5 million to charities in the United States,
Canada, the U.K. and Israel. While the Special Committee
recognizes the value and importance of charitable
giving by public companies, many of Hollinger's donations
were made to organizations selected by Black, Amiel-Black
and Radler, and often were publicly attributed to
them, not to Hollinger.
The
Blacks and Radlers directed thousands of Hollinger's
dollars in contributions to pet charities of their
friends and other Hollinger directors, even in years
when Hollinger reported a net loss. In return, they
often served on charity boards or attended lavish
events, particularly in New York. Hollinger never
publicly disclosed its charitable donations, and Black
and Radler did not present donation requests for Hollinger
Audit Committee or Board consideration.
Black
directed Hollinger and its subsidiaries to donate
at least $445,000 to Toronto's Hospital for Sick Children,
to partly fund a pledge made by Black on behalf of
his private foundation and the National Post. In return
for the donation, the hospital named a major wing
of its building the "Black Family Foundation Wing."
At
Radler's direction, Hollinger donated $168,000 to
his alma mater, Queen's University in Toronto, which
named the "Radler Business Wing" in appreciation of
"his" contribution. The Jerusalem Post Charitable
Fund funded donations for the purchase of medical
equipment at Herzog Hospital in Jerusalem, which resulted
in the dedication of a "Rona and David Radler" trauma
recovery unit.
Radler
caused Hollinger and its subsidiaries to donate $110,000
to Haifa University, a university in Israel that bestowed
an honorary degree on Radler in May 2002.
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[Richard]
Perle repeatedly breached his fiduciary duties as
a member of the Executive Committee of the Board.
Perle repeatedly signed Unanimous Written Consents
without evaluating (or even reading) them, including
several that "authorized" many of the unfair related-party
transactions discussed in this Report in a manner
that enabled Black and Radler to evade full (or any)
disclosure to the Audit Committee or the Board?.
As
Perle knew, he was not an independent Board member,
but instead was beholden to Black and other insiders
for his compensation. During his tenure as an Executive
Committee member, Perle received more than $3 million
in bonuses under the Digital Incentive Plan, as well
as hundreds of thousands more in Digital and Hollinger
compensation. Perle therefore had a motive to abdicate
his fiduciary duties as an Executive Committee member
so as to accommodate Black and Radler, two of the
three members of the Digital compensation committee,
which administered the Digital Incentive Plan.
By
putting his own interests above those of Hollinger's
shareholders, Perle has violated his duties of good
faith and loyalty. As a faithless fiduciary, Perle
should be required to disgorge all compensation he
received from the Company.
[Sources:
Wall Street Journal, Richard Newman / U.S. News &
World Report, Louis Lavelle / Business Week]
---
Brian
Trumbore
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