Justice Dept. opens alt-weekly inquiry

The U.S. Department of Justice has begun what some legal experts believe is a serious investigation into whether the country’s two largest alternative newspaper chains violated federal antitrust laws when they closed competing weeklies in Los Angeles and Cleveland, thereby dividing the markets between them.

If federal prosecutors find sufficient evidence to pursue a case, it would be a novel moment on at least two counts: One would be the spectacle of the nation’s leading alternative weeklies, with their roots in the insurgent journalism of the 1960s counterculture, being treated like a 19th century cartel. The other would be the very strait-laced John Ashcroft’s Justice Department entering the legal lists to uphold the commercial rights of massage parlor operators, escort services and phone sex operators, which provide the bulk of the chains’ classified advertising.

In a deal executed last month, Phoenix-based New Times Media agreed to shut down its 6-year-old Los Angeles paper in exchange for more than $8 million, ceding its Southern California niche to the L.A. Weekly, which is owned by New York-based Village Voice Media. The latter also agreed to close its Cleveland Free Times in return for a much smaller cash payment from New Times, which continues to publish its Cleveland Scene.

The closures left Voice Media with seven alternative papers -- the largest of which are the L.A. Weekly and New York’s Village Voice. New Times has 11 weeklies in cities ranging from Palm Beach to San Francisco.

At the time, Voice CEO David Schneiderman told The Times that neither he nor his New Times counterpart, Jim Larkin, were concerned about their bargain’s antitrust implications, since both Los Angeles and Cleveland retain numerous other print and broadcast outlets.

Clearly, federal authorities are not so sure: On Nov. 8, the Department of Justice served both companies with a demand that they turn over all documents, correspondence, e-mails and telephone messages relating to the deal.

Neither Larkin nor Schneiderman returned phone calls requesting comment. However, a spokesman for Voice Media read a prepared statement confirming that “we are in receipt of an inquiry from the Department of Justice and the company will be responding to it fully and in due course.”

This week, federal prosecutors also began interviewing former L.A. Weekly and New Times Los Angeles employees, seeking information about the two papers’ competitive relationship.

Among those the government lawyers either have questioned or are seeking to interview are the Weekly’s former publisher Michael Sigman, ex-editor Sue Horton (who now edits The Times’ Opinion section), former classified advertising director Jim Kaplan, one-time City Hall columnist Marc Haefele and former New Times columnist Jill Stewart.

According to those already interviewed, the questioning -- all of which was done by telephone -- was conducted by attorneys Maurice E. Stucke and Carol Bell from the Department of Justice’s antitrust division.

Some of those interrogated say Stucke and Bell were joined by lawyers from the U.S. attorney’s offices in Los Angeles and Cleveland and by a representative of the California Department of Justice in sessions that lasted for as long as two hours.

All of those interviewed were asked whether they had memoranda or e-mails from or to Schneiderman. Those who said they did were asked to turn them over and were told the documents would be subpoenaed, if they declined.

Neither federal nor state prosecutors returned calls seeking comment.

However, if some of the questioners were deputy U.S. attorneys, according to Don T. Hibner Jr., an antitrust specialist in the Los Angeles law firm of Sheppard, Mullin, Richter & Hampton, “it means they’re thinking beyond civil penalties to criminal prosecution. Involving the U.S. attorneys means they’re looking toward grand juries and indictments. That’s not surprising, since what they’re investigating looks very unusual, a pure market division involving cartel-like activity.”

If Voice Media and New Times are found to have violated antitrust laws, according to Hibner, the executives involved could be liable for individual fines of up to $300,000 and the companies for as much as $10 million. If the chains’ actions affected interstate commerce, they could be held liable for fines many times that under a separate federal statute, he said.

Kaplan, who was fired as the L.A. Weekly’s classified advertising director Aug. 8 -- about a month after the chains began secretly negotiating their deal -- said he has told federal prosecutors that sexually oriented advertisers “have been really burned by this deal. Competition from New Times was all that kept us from raising our rates. With that gone, these guys are reeling with no place else to go. They’re beside themselves over this.”

Kaplan said that in the nine months before he was hired by the Weekly on Sept. 4, 2001, the paper -- acting on instructions from Voice Media -- had raised its adult advertising rates by 45%.

“Many of the adult advertisers wouldn’t pay and migrated to New Times,” he said. “That cost the Weekly about $20,000 a week in lost classified reve- nue.

“Then I was hired and told I had to get that money back. To do it, I had to offer rates lower than the adult advertisers had been paying before the increase. Even then, we never got some of them back.

“At the time, I was friendly with New Times’ classified advertising director, and he told me that after our increase, money just poured into his paper. Like I say, we got some of it back, but from then on the competition was fast and furious. It was something we were constantly concerned about.”

According to Kaplan, adult ads provide about 70% of the Weekly’s approximately $6 million in annual classified advertising. The paper’s total annual ad revenue, he said, is about $25 million. Other former Weekly executives confirmed Kaplan’s figures.

Kaplan also believes that national advertisers -- who conduct interstate commerce -- also have been victimized by the deal between Voice Media and New Times.

National advertisers purchase space in the L.A. Weekly through a consortium called the Assn. of Alternative Newspapers. Space in New Times’ papers is sold through a competing alliance called the Ruxton Group.

“We were absolutely going head-to-head for every national ad,” Kaplan said. “It was a huge competition.”

Others interviewed by federal prosecutors say the Justice Department also is interested in the deal’s impact on the variety of journalism in both cities. That does not surprise Hibner.

“Editorial content has been deemed a federal concern under the Newspaper Preservation Act,” he explained. “To the degree this deal removes editorial choice from consumers, it is bound to concern Justice.”

As one L.A. Weekly staff member, who asked not to be identified put it: “When one paper eliminates the voice of another paper -- no matter who or what they stand for -- it’s not good for the city and it’s not good for the democratic process. Nobody can argue that the problem with American journalism is that it has too many voices.”