The Deal from Hell (28 page)
Read The Deal from Hell Online
Authors: James O'Shea
The lawsuit got people's attention in Chicago. Fuller, who ran the publishing division of the company, told Knight they needed to get some answersâfast. Tribune had strong corporate and newspaper ethics policies that threatened employees with termination if the rules weren't followed. Tribune executives soon showed up at
Newsday
's offices in Melville to help investigate the situation, along with lawyers from Sidley Austin, Tribune's outside lawyer, and auditors from ABC. Across the country, newspapers with dubious circulation practices watched the events at
Newsday
closely.
Newsday
's offices in Melville to help investigate the situation, along with lawyers from Sidley Austin, Tribune's outside lawyer, and auditors from ABC. Across the country, newspapers with dubious circulation practices watched the events at
Newsday
closely.
Knight didn't quite know what to make of the call from one
Newsday
readerâElaine Banar, a hard-nosed federal prosecutor at the Eastern District of New York's office in Brooklyn. Banar recalled: “He [Knight] laughed at why we would even be investigating this. He said it was not that significant and why would we be wasting our time with subpoenas.” By then, Sito had been promoted to head Tribune's Hispanic media efforts by Fuller, who faced diversity problems in his management ranks. Knight soon confronted Sito's handpicked successor at
Newsday
, Bob Brennan, about the allegations in Giaimo's lawsuit: “He said this was just a problem in one office in the boroughs. I hadn't seen enough data to form an opinion. And, you know, . . . you could argue that the lawyer [Giaimo] . . . was just trying to shake us down.” As the internal investigation gathered steam, trouble surfaced in Chicago.
Newsday
readerâElaine Banar, a hard-nosed federal prosecutor at the Eastern District of New York's office in Brooklyn. Banar recalled: “He [Knight] laughed at why we would even be investigating this. He said it was not that significant and why would we be wasting our time with subpoenas.” By then, Sito had been promoted to head Tribune's Hispanic media efforts by Fuller, who faced diversity problems in his management ranks. Knight soon confronted Sito's handpicked successor at
Newsday
, Bob Brennan, about the allegations in Giaimo's lawsuit: “He said this was just a problem in one office in the boroughs. I hadn't seen enough data to form an opinion. And, you know, . . . you could argue that the lawyer [Giaimo] . . . was just trying to shake us down.” As the internal investigation gathered steam, trouble surfaced in Chicago.
A Chicago edition of
Hoy
had been launched to replace
Exito
, the
Chicago Tribune
's Spanish language paper, and Fuller had selected Digby Solomon to launch it. Solomon recalled:
Hoy
had been launched to replace
Exito
, the
Chicago Tribune
's Spanish language paper, and Fuller had selected Digby Solomon to launch it. Solomon recalled:
I think it was a couple of weeks before the launch, and Louie stepped in with a bunch of people from New York, and they said they would take over distribution. He brought in Bob Brennan and Richie Czack. . . . As soon as Richie started, we couldn't get any numbers. We had sold [ads in
Hoy
] to national advertisers, but nobody could get any numbers [on how many papers had been sold]. I finally confronted Louie and asked why we couldn't get any numbers. He said
the
number is 10,000 but
our
number is 17,000. He put his finger up to his lips and said, âdon't tell anybody.' . . . Now if I'm going to accuse anybody of fudging numbers, I needed some evidence.
Hoy
] to national advertisers, but nobody could get any numbers [on how many papers had been sold]. I finally confronted Louie and asked why we couldn't get any numbers. He said
the
number is 10,000 but
our
number is 17,000. He put his finger up to his lips and said, âdon't tell anybody.' . . . Now if I'm going to accuse anybody of fudging numbers, I needed some evidence.
Solomon, also a Cuban native, headed out to the
Hoy
distribution warehouse the next afternoon:
Hoy
distribution warehouse the next afternoon:
I got there and counted three skids full of papers, almost a full day's run of the paper that should have been delivered that morning, sitting on the loading dock. So I say to Richie, âWhat's that?' Richie says, âWhat's what?' And I said those skids, and he says, âWhat skids?' and I say, âThose skids.' That was enough. So I went in the next day figuring I may get canned, but this is wrong.” Solomon reported his findings to his boss, David Hiller.
Meanwhile, back at
Newsday
, Knight and his investigative team got some disturbing news from Brennan, who had downplayed the seriousness of the problem months before. According to Knight:
Newsday
, Knight and his investigative team got some disturbing news from Brennan, who had downplayed the seriousness of the problem months before. According to Knight:
He comes in and tells me that the story he told me is untrue.... I was shocked because he had essentially lied to my face a number of times. He never said why he did it. When I suspended him and told him you're off for the rest of the week, he thought I was overreacting.... We called the U.S. Attorney that night, and I called ABC because we had been putting forth a defense that had relied on Brennan and crew. We went to them as promptly as possible to say we are looking into it, but what we had told you clearly wasn't true.... It was probably one of the low points of my life because the guy lies to you and before then I was trying to support him, you know, let's get the facts before you convict somebody. . . . Ray [Jansen] was up at the U.S. Open in the Hamptons, and I called him and told him. . . . Okay, I've got a guy who has lied to me, our circulation director, his circulation director long before I was here. The story is breaking in the paper. You need to figure out what is going on with the government; they are trying to figure out what's going on, and what we'd told them is obviously not 100 percent correct because we had relied on Brennan and . . . they are not sympathetic, they are pissed. And the big issue is that Ray doesn't come back.... He stays in the Hamptons.
Although Knight felt that Tribune was doing everything it could to unearth the story, Banar and the feds didn't see things that way:
We were getting the same story from lower-level folks who told us about the pressure to deliver higher numbers.... We started to get a sense of a scheme. . . . The
Newsday
people will say that they convinced Brennan [to go to the Feds and] give it up, come forward. But Brennan had a different story and I tend to believe him. He said the pressure got to him. . . . The lawyer for
Newsday
also said the
fraud was limited; that it was just one small department. He said they did an internal investigation and came back to us and said it was just one department.”
Newsday
people will say that they convinced Brennan [to go to the Feds and] give it up, come forward. But Brennan had a different story and I tend to believe him. He said the pressure got to him. . . . The lawyer for
Newsday
also said the
fraud was limited; that it was just one small department. He said they did an internal investigation and came back to us and said it was just one department.”
She decided to expand her investigation to determine just who knew what in the upper reaches of the Tribune's corporate hierarchy. She wasn't alone.
As news of his lawsuit spread, Giaimo received a call from the U.S. Securities and Exchange Commission (SEC), and from a former agent and employee of
Newsday
who offered him an inside account of circulation fraud at the paper. He flew to Florida to meet with the insider and an SEC attorney from the agency's Miami office when his office called and told him to get in touch with Banar: “I called Banar from the airport to tell her I planned to travel to Miami to meet with the SEC. She immediately stopped me cold and told me that if there was a criminal investigation of the allegations in my complaint, it would be conducted through her office with the participation of the SEC and the Internal Revenue Service.” Ditto for the calls from the U.S. Postal Service and the Nassau County Sheriff's Office. In other words, Banar pulled rank and took control of the investigation.
Newsday
who offered him an inside account of circulation fraud at the paper. He flew to Florida to meet with the insider and an SEC attorney from the agency's Miami office when his office called and told him to get in touch with Banar: “I called Banar from the airport to tell her I planned to travel to Miami to meet with the SEC. She immediately stopped me cold and told me that if there was a criminal investigation of the allegations in my complaint, it would be conducted through her office with the participation of the SEC and the Internal Revenue Service.” Ditto for the calls from the U.S. Postal Service and the Nassau County Sheriff's Office. In other words, Banar pulled rank and took control of the investigation.
In mid-2004, Jansen stepped aside, and Fuller made Knight publisher, even though he had virtually no experience running a newspaper. Knight immediately hit the road trying to mollify advertisers angry at the circulation fraud revelations:
In a perverse way, it was a great way to start off as publisher because I had to go speak to all of our advertisers. It was a bit of a mea culpa, and I discovered that
Newsday
had been extremely arrogant in dealing with advertisers. Over the past twenty years, we had pushed through rate increases not being customer service focused and not just treating people well with the viewpoint of, âWell, where else are these guys going to advertise?' . . . It was good for me to hear it and set up a path on how we were going
to treat advertisers better. . . . The advertisers were angry but it was anger based upon twenty years of compounded bad behavior.
Newsday
had been extremely arrogant in dealing with advertisers. Over the past twenty years, we had pushed through rate increases not being customer service focused and not just treating people well with the viewpoint of, âWell, where else are these guys going to advertise?' . . . It was good for me to hear it and set up a path on how we were going
to treat advertisers better. . . . The advertisers were angry but it was anger based upon twenty years of compounded bad behavior.
By now, though, the federal investigators were working their way up the corporate ladder, zeroing in on people in executive suites who had been applying all of the pressure for higher numbers. A federal subpoena from the SEC soon demanded “documents relating to or referring to communications concerning circulation figures or revenue or advertising fees or revenue between Dennis FitzSimons, Jack Fuller, Donald Grenesko, David Hiller, Raymond Jansen, Louis Sito, Robert Brennan, and Robert Garcia.” Banar began to think that people at the top of the corporation knew what was going on: “They didn't want to be connected with it, but they knew. The internal auditors tried to figure it out, but people at the top kept things from them, too.... None of the internal audits ever got to the right questions.”
As the
Newsday
investigation unfolded, two things became clear: the imagination of Sito's team worked overtime, and
Newsday
wasn't alone. When ABC auditors suspected that hawkers got copies of
Newsday
in preferential deals that allowed them to sell what they could and dump the rest in recycling bins, the auditors tried to clandestinely observe whether the sales actually occurred. But Sito's team got wind of the probe and dispatched
Newsday
employees to the hawker sites to buy up the papers.
Newsday
investigation unfolded, two things became clear: the imagination of Sito's team worked overtime, and
Newsday
wasn't alone. When ABC auditors suspected that hawkers got copies of
Newsday
in preferential deals that allowed them to sell what they could and dump the rest in recycling bins, the auditors tried to clandestinely observe whether the sales actually occurred. But Sito's team got wind of the probe and dispatched
Newsday
employees to the hawker sites to buy up the papers.
The entire U.S. newspaper industry was watching the evolving investigation with bated breath. There was more than a grain of truth to the “everybody does it” defense that
Newsday
employees articulated. “I don't think people were doing stuff that was criminal,” said Jack Klunder, the former director of circulation at the
Los Angeles Times
. “But a lot of people aggressively pushed the limits of the ABC rules.” Circulation directors would convince the local Ford dealer to buy 1,000 to 50,000 papers at a discount to be donated to schools. The newspaper would
publicly recognize the Ford dealer as a pillar of the community, school kids would get papers, and the newspaper got paid circulation because of the Newspaper In Education (NIE) program, which was permitted by ABC rules. What few knew was that the Ford dealer often got a discount on the ads purchased that was eerily similar to what he had paid for the papers: In effect, the papers often were free. As details leaked out of the secretive federal investigation on Long Island, other newspaper publishers looked within.
Newsday
employees articulated. “I don't think people were doing stuff that was criminal,” said Jack Klunder, the former director of circulation at the
Los Angeles Times
. “But a lot of people aggressively pushed the limits of the ABC rules.” Circulation directors would convince the local Ford dealer to buy 1,000 to 50,000 papers at a discount to be donated to schools. The newspaper would
publicly recognize the Ford dealer as a pillar of the community, school kids would get papers, and the newspaper got paid circulation because of the Newspaper In Education (NIE) program, which was permitted by ABC rules. What few knew was that the Ford dealer often got a discount on the ads purchased that was eerily similar to what he had paid for the papers: In effect, the papers often were free. As details leaked out of the secretive federal investigation on Long Island, other newspaper publishers looked within.
The potential scope of the problem the industry faced is buried in ABC audit reports, complex documents available to dues-paying members and full of granular data that newspaper publishers slice and dice to show advertisers how they can penetrate choice zip codes full of affluent readers. Even after
Newsday
cleaned up its act, its ABC audit for 2004, the year that Giaimo filed suit, reported that it sold an average of 482,182 papers a day. But if you add up the totals reported for home-delivery and single-copy sales, you get an average of only 354,215 papers sold each day, a gap of 127,967 papers that fall into a dubious category that includes bulk sales of papers provided at a discount to schools or hotels or parking lots for a balloon race. That's really “junk” circulation. Even if you assume that the ABC reports accurately on single-copy and home-delivery sales, 27 percent of the circulation that
Newsday
reported to the ABC fell into the junk category. And that's
after
the paper restated its circulation figures to remove bogus readership.
Newsday
cleaned up its act, its ABC audit for 2004, the year that Giaimo filed suit, reported that it sold an average of 482,182 papers a day. But if you add up the totals reported for home-delivery and single-copy sales, you get an average of only 354,215 papers sold each day, a gap of 127,967 papers that fall into a dubious category that includes bulk sales of papers provided at a discount to schools or hotels or parking lots for a balloon race. That's really “junk” circulation. Even if you assume that the ABC reports accurately on single-copy and home-delivery sales, 27 percent of the circulation that
Newsday
reported to the ABC fell into the junk category. And that's
after
the paper restated its circulation figures to remove bogus readership.
By 2005, when the scandal was unfolding, ABC audits revealed that many American newspapers had junk circulation profiles similar to
Newsday
's, particularly large metro dailies where circulation decline was most acute. At the
Los Angeles Times
, junk accounted for 21 percent of its circulation; the
San Jose Mercury News
â23 percent; the
Houston Chronicle
â25 percent; the
Miami Herald
â23 percent; the
Atlanta Journal
â15 percent. A few papers like the
Chicago Tribune
showed only 5 percent, but many others had built up a sizable portfolio of junk circulation designed to inflate their numbers and support higher ad rates.
Newsday
's, particularly large metro dailies where circulation decline was most acute. At the
Los Angeles Times
, junk accounted for 21 percent of its circulation; the
San Jose Mercury News
â23 percent; the
Houston Chronicle
â25 percent; the
Miami Herald
â23 percent; the
Atlanta Journal
â15 percent. A few papers like the
Chicago Tribune
showed only 5 percent, but many others had built up a sizable portfolio of junk circulation designed to inflate their numbers and support higher ad rates.
Banar summoned the Tribune brass one by one to a cavernous room in the spacious marble halls of the U.S. District Courthouse in Brooklyn. FitzSimons had made Hiller publisher of the
Chicago Tribune
and he soon found himself at the U.S. Court House in Brooklyn, under scrutiny by Banar and her team. Even whistle blowers like Digby Solomon were under suspicion:
Chicago Tribune
and he soon found himself at the U.S. Court House in Brooklyn, under scrutiny by Banar and her team. Even whistle blowers like Digby Solomon were under suspicion:
I had written a memo about what I knew and gave it to Crane [Kenney, the Tribune's general counsel] and then I got a call from this guy with the IRS. We had one meeting at the [courthouse in Brooklyn]. I thought I was going in as a friendly witness. I walk into this big room and here are all these people. One guy has a freaking 38 strapped to his bicep. It became obvious to me that Louie has spun the story well. They started asking me stuff like, âWhy didn't I tell Dennis FitzSimons to fire Ray Jansen?' Then I gave them a statement that contradicted one of their witnesses. And this guy [a prosecutor] says to me, why don't we take a break and you go out into the hall and discuss with your attorney the penalties for perjury.
The investigation that Banar started would last for years and have a huge impact in newspaper offices across the country. Circulation directors couldn't figure out where Banar and the Feds drew the line between pushing the limits on ABC rules and circulation fraud. Advertisers too began to question readership totals that included junk circulation. Soon publishers began quietly pruning junk circulation from their totals, accelerating the circulation declines in the numbers they reported to the ABC, and making a bad situation look worse.
The credibility of journalists took a hit too, even though most had no idea what was going on in their own business offices, a perverse effect of the wall that separated them from the business of journalism. Bloggers, politicians, press critics, and academics already had started attacking the credibility of journalists for things like failing to expose
the Bush administration's faulty intelligence that led to the war in Iraq. Now they faced a more fundamental question: How can you trust news reports from people who don't even tell the truth about how many papers they've sold? Nowhere was the impact of the scandal felt more tangibly than at
Newsday
. Knight set up a huge room where the paper's employees began calculating the extent of the circulation fraud, and how much the paper owed advertisers who had paid ad rates based on the fake numbers. Knight concluded that
Newsday
had overstated its circulation by about 100,000 copies. When all was counted, the scandal cost
Newsday
$100 million in fines and ad rebates. And as for the man who started it all, Joseph O. Giaimo? His lawsuit is still pending.
the Bush administration's faulty intelligence that led to the war in Iraq. Now they faced a more fundamental question: How can you trust news reports from people who don't even tell the truth about how many papers they've sold? Nowhere was the impact of the scandal felt more tangibly than at
Newsday
. Knight set up a huge room where the paper's employees began calculating the extent of the circulation fraud, and how much the paper owed advertisers who had paid ad rates based on the fake numbers. Knight concluded that
Newsday
had overstated its circulation by about 100,000 copies. When all was counted, the scandal cost
Newsday
$100 million in fines and ad rebates. And as for the man who started it all, Joseph O. Giaimo? His lawsuit is still pending.
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