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Wall Street History
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09/10/2004
The Looting of Hollinger
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.
---
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.
---
[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]
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Wall Street History will return 9/17.
Brian Trumbore
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