Describing Hollinger International Inc. as a "corporate kleptocracy," independent investigators accused the company's top two former executives of looting the firm and lambasted its high-profile board of directors for allowing unparalleled business abuses.
The investigators' 513-page report, filed Tuesday with the U.S. Securities and Exchange Commission, painted former Chief Executive Conrad Black and his top deputy, David Radler, as self-serving schemers constantly on the take during their reign at Hollinger, the company that owns the Chicago Sun-Times.
Before news of the payment scandal forced Black and Radler, the former Sun-Times publisher, to resign last fall, the two had pocketed more than $400 million in Hollinger money over seven years--95 percent of the company's profits in the period, the report said.
But equally disturbing, investigators said, many of the payments were rubber-stamped by Hollinger's passive board of directors, which included former U.S. Secretary of State Henry Kissinger and former Illinois Gov. James R. Thompson.
"Hollinger wasn't a company where isolated improper and abusive acts took place," the report said. "Rather, Hollinger was a company where abusive practices were inextricably linked to every major development or action."
The report, whose language was at times biting, concludes a 14-month investigation led by former Securities and Exchange Commission Chairman Richard Breeden. Last spring, Hollinger's board hired Breeden after a major outside investor demanded an investigation into hundreds of millions of dollars in so-called management fees to a Toronto company called Ravelston Inc.
Black and Radler own Ravelston. That company controls another Toronto-based firm, Hollinger Inc., which is the largest investor in Chicago-based Hollinger International.
Breeden and three members of a special board committee concluded that Black and Radler "made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise."
Their report was culled from interviews with 60 witnesses and a review of 750,000 pages of documents.
The bulk of the special committee's report focuses on Black and Radler. It says the two paid themselves tens of millions of dollars in unauthorized fees connected to the sale of company assets and manipulated the valuations of newspapers so private companies they owned could buy Hollinger papers at prices as low as $1.
At times, the investigators seemed to draw inspiration from New York gossip columns. One passage recounts a "Happy Birthday Barbara" party for Black's wife, Barbara Amiel Black. Hollinger paid $42,870 toward the party, the report said. The 80 guests, including Oscar de la Renta, Peter Jennings, Charlie Rose, Barbara Walters and Ron Perelman "enjoyed dinner at $212 a plate" at a fancy New York restaurant.
"At least Black's choice of venue for his wife's birthday was less expensive than Dennis Kozlowski's party for his wife on Sardinia that was charged in part to Tyco," the report said.
But for the first time since it began its inquiry, the special committee bluntly criticized Hollinger's board of directors. It singled out former Assistant U.S. Defense Secretary Richard Perle and the board's audit committee, led by Thompson.
Perle, a member of the company's executive committee, merited his own chapter in the report, which depicted a number of alleged offenses and conflicts of interest. In one instance, the report accuses Perle of serving as an "independent" member of the board of directors even though he also was drawing a salary as a Hollinger executive.
The conflict of interest prevented Perle from carrying out his duties to represent Hollinger's outside shareholders and now "subjects him to personal liability," the report said. It described his board performance as falling "squarely into the head-in-the-sand behavior that breaches a director's duty of good faith and renders him liable for damages."
Calling Perle a "faithless fiduciary," the report said Hollinger's board and new management team will try to recoup $5.4 million in bonuses and compensation that he received from the company. Perle didn't return phone or e-mail messages Tuesday seeking comment.
But Ravelston, the company owned by Black and Radler, issued a statement lashing out at the report's findings. The statement accused Hollinger of squandering $25 million on the investigation simply to repeat "the same exaggerated claims laced with outright lies that have been peddled in leaks to the media and over-reaching lawsuits since Richard Breeden first began his campaign against the founders of Hollinger International."
Ravelston, as it has done before, blamed Hollinger's board for any problems.
"As fiduciaries, they were deeply involved in and knowledgeable about the company's most important activities and projects," Ravelston said.
A spokesman for Radler declined to comment.
Hollinger shareholders, meanwhile, described the report as a step in the right direction. The special committee said it is in mediation talks with directors but didn't lay out its next move.
"I think they are trying to figure out how to come to a resolution with the directors," said Laura Jereski, a partner with Tweedy, Browne Co., the New York investment firm that owns 18 percent of Hollinger and initiated the investigation. "They're in a different place than they are with Conrad."
She added: "We want to see money come back into the company, and the special committee has to figure out by what mechanism that's going to happen."
Thompson said he agreed with most of the report's conclusions but disagreed with some of its findings in regard to the audit committee that he chaired. He declined to be more specific, citing ongoing litigation.
But Thompson defended his record at Hollinger, saying that since the scandal broke, the special committee, which includes interim Chairman and Chief Executive Gordon Paris, has asked him to expand his board duties.
The special committee, however, fired at the audit committee on several occasions.
The report portrays the audit committee as having been asleep at the wheel. For example, investigators said, neither Thompson nor the rest of the audit committee ever demanded data supporting requests by Ravelston to substantially raise Black's and Radler's management fees every year.
"In the time needed to consume a tuna sandwich, Radler would win as much as $40 million in Hollinger revenues for Ravelston," the report said.
And when it came time to approve the annual fee hikes to Black and Radler, the audit committee's two other members, former Ambassador to Germany Richard Burt and Marie-Josee Kravis, told the special committee that "they deferred entirely to Thompson's annual recommendation to approve management's fee request."
The investigators said Thompson "failed to apply the critical part of former President Reagan's famous dictum to `trust, but verify."'
Similarly, investigators found, when Hollinger sold newspapers to CanWest Global Communications Corp. in 2000, the audit committee never sought information on millions of dollars in non-compete fees taken by Black, Radler and other executives.
"Sadly, the audit committee remained entirely passive and didn't put itself in a position where it could do anything other than accept at face value all the lies it was told," the report said.
While the audit committee and Perle were taken to task, Breeden's investigators heaped the most criticism on Black and Radler, saying they systematically initiated intricate schemes to circumvent the board.
In some cases, Hollinger would trade more lucrative newspapers for less valuable ones owned by Horizon Publications, a private company controlled by Black and Radler, the report said.
In April 2000, Horizon bought a group of Chicago-area community newspapers from Lerner Communications Inc. and immediately exchanged them for Hollinger papers that Radler had handpicked for Horizon.
The report said Hollinger surrendered newspapers worth $6.6 million in exchange for publications that were losing money and were worth less than $4 million.
"The audit committee `ratified' this transaction without any meaningful (let alone independent) analysis, and based on false and misleading representations that Hollinger could not have bought these properties directly from Lerner, and that the exchange involved comparable assets," the report said.
The many questionable business dealings show that Black considered Hollinger as his personal company, the report concludes.
In one instance, an executive suggested that Black tell Thompson about certain information after Hollinger's 2002 annual meeting.
But Black, the report says, "hissed at him: `This is my company, I am the controlling shareholder, and I'll decide what the Governor needs to know and when."'
Other actions by Black and Radler similarly suggested that they believed they had carte blanche with corporate assets. Both executives, for example, used the company's private jets for personal benefit without reimbursing the company, the report said.
In 2002, 10 trips by Radler and his family--many of them charged to the Sun-Times--had no other purpose than to fly people to and from Radler's vacation home in Palm Springs, Calif., the report said. The trips represented 70.5 hours of flight time, or more than 20 percent of the airplane's overall 2002 usage, at a cost to the company of $830,000, the report said.
In addition, the London Daily Telegraph, recently sold by Hollinger, reimbursed Black $390,000 for expenses that mostly related to entertaining by Black and his wife, according to the report. Included in the expenses were a $7,605 flight to New York on the Concord, three dinners for Kissinger and his wife for $28,480; and "summer drinks" for $24,950.
Organizations near and dear to Black and Radler also got special treatment, but rarely in the name of Hollinger, according to the investigation. Among the beneficiaries was the Chicago Symphony Orchestra, which received a total of $436,164 from 1996 to 2003.
- - -
- Controlling stockholder
- Former chief executive
`To fully gauge the level of Black and Radler's disregard for
shareholder interests, one must step back from individual
transactions and note the myriad of schemes, fiduciary abuses and fraudulent acts that were used to transfer essentially the entire earnings output of Hollinger over a seven-year period to the controlling shareholders.'
- Black lieutenant/investing partner
- Former president
The report suggests Black and Radler worked in tandem in most endeavors:
`For years Black and Radler found excuses for transferring existing cash or assets to themselves, even if it required dismantling Hollinger for their own benefit.'
- Former U.S. assistant secretary of defense
- Only independent director on powerful executive committee
- CEO of Hollinger Digital, a Hollinger high-tech venture-capital subsidiary
Barbara Amiel Black
- Wife of Conrad M. Black
- Board member
- Former vice president, editorial, of Hollinger International The services Amiel Black performed in return for her salary and bonus consisted of `nothing more than euphemisms for ordinary activities such as reading the newspaper, having lunch and chatting with her husband about current events.'
- Attorney, former Illinois governor
- Independent director, head of board's audit committee
` . . . 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.'
- Former U.S. secretary of state
- Independent director
` . . . Kissinger [acted] reasonably in relying on the reports of the Audit Committee that it had reviewed the various related-party transactions and found them to be fair to Hollinger.'
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