Business & Professional Ethics 7th Edition by Leonard Brooks,Paul Dunn

Exercise 118

On November 17, 2005, Conrad Black and three other executives1 of Hollinger International, Inc., were charged with eleven counts of fraud with regard to payments allegedly disguised as "non-compete fees," or in one case a "management agreement break-up fee," and the misuse of corporate perks. The payments were alleged to be a self-dealing "series of either secret or misleading transactions involving sales of a series of various newspaper publishing groups in the United States and Canada." The sales involved several hundred newspapers, and the alleged misdirection of over $80 million of the proceeds.
Hollinger International, Inc., (International), a U.S. holding company traded on the New York Stock Exchange, had been built up by Black over the years to own hundreds of newspapers, including the Chicago Sun-Times, the Daily Telegraph in London, the National Post in Toronto, and the Jerusalem Post in Israel. Partly in recognition of his business acumen, in 2000 Black was knighted by Britain's Queen Elizabeth and accorded the title of Lord Black of Cross harbour and the right to sit in the British House of Lords. Prevented from receiving the lordship by Jean Chrétien, then Prime Minister of Canada, Black resigned his Canadian citizenship to become a British citizen in order to accept the honor.
Black did not own the majority of Class A shares of International held by the public, but he (as CEO and principal owner) and his associates controlled it through their majority of ownership of the Class B shares that carried a 10-1 voting preference over the Class A shares. He and his associates owned 98.5 percent of Ravelston Corporation Limited, a private Canadian company with headquarters in Toronto, which in turn owned at least 70 percent of Hollinger, Inc., a Canadian holding company traded on the Toronto Stock Exchange. Hollinger, Inc., (Inc.) owned 30.3 percent of the equity (Class A and B) of International, which gave it, and Black, 72.8 percent of the voting power at International. 3 This type of arrangement, which allows the control of a corporation with the ownership of less than a majority of the corporation's equity, is known as "multiple-voting rights," or "super-voting rights."
The directors of International-who should have been standing up to Black on behalf of the investing public-were handpicked by Black, probably for reasons other than their business acumen. Henry Kissinger, former U.S. secretary of state and a "trophy director," was probably selected for his fame and knowledge of history, defense, and politics-all passions of Black. The same can be said about other directors, including Richard Perle, former assistant secretary of defense and chair of the Pentagon advisory board; Robert Strauss, former chairman of the Democratic National Committee and ambassador to the Soviet Union; Richard Burt, former ambassador to Germany; and James R. Thompson, a former governor of Illinois. These directors, who were "expected to act as corporate watchdogs," and particularly the Audit Committee "seemed to behave like an old basset hound."4 Cardinal Capital Management, which sued International's board in 2004, "described the directors … as 'supine' and 'quiescent' and accused them of 'rubber-stamping' tens of millions of dollars in pay-outs to company executives."
Black was no stranger to the public spotlight, or to public scrutiny. Earlier in his career, he had achieved notoriety for being spectacularly and arrogantly outspoken, for authoring acclaimed biographies of historically significant individuals, for pre-emptively engineering the recovery of employee surplus pension funds when their legal status was in doubt and, most recently, for running a corporate kleptocracy.6 The allegation of running a corporate kleptocracy was made when Black sued for peace from aggrieved minority shareholders who were blocking his ability to sell the Daily Telegraph to the Barclay brothers. On that occasion, Judge Strine of the Chancery Court of Delaware found that Black was not credible, saying: Black also vigorously defended his failure to inform the International board of his discussions with the Barclays. But then again, he could hardly deny these facts. On more debatable points, I found Black evasive and unreliable. His explanations of key events and of his own motivations do not have the ring of truth.
The evidence provided to Judge Strine was ultimately responsible for the fraud charges that are the subject of this case.
It is not unusual for a company selling a business unit to agree not to compete with that unit for a period of years. It is unusual, however, for an executive of the selling company to agree not to compete personally, and to be paid to do so. It is extremely unusual for that executive to decide how much of the selling price he should be paid-as Black did-and how much should be paid to the selling company. Making such a decision places the decision maker in the position of self-dealing-a conflict of interest that, at the very least, requires disclosure to the selling company and the receipt of its approval. In this case, Black should have disclosed his related-party, self-dealing to the board of International and obtained their approval. Black claimed he did, but the district attorney claimed he did not because he failed to provide sufficient information and/or misled the board on numerous occasions.
According to the indictment press release in one case-the sale of 50 percent interest in the National Post to CanWest Global Communications Corp. for approximately $2.1 billion:
Black negotiated the deal, … while Boultbee, Atkinson and Kipnis participated in reviewing and finalizing the transaction, which allocated approximately $51.8 million to noncompetition agreements. This was allegedly done as a mechanism to pay Boultbee and Atkinson a bonus to take advantage of tax benefits that legitimate non-competition payments receive under Canadian tax laws. Between May 2000 and May 2002, Black, Boultbee, and Atkinson allegedly fraudulently inserted Boultbee and Atkinson as promissors not to compete and fraudulently caused approximately $51.8 million of the sale proceeds to be allocated to the non-competition agreements. Black, Boultbee, Atkinson and Kipnis failed to disclose this self-dealing to International's Audit Committee, the indictment alleges, and caused false and misleading statements to be made to International's independent directors about the non-competition payments. Although International was the seller and signed a noncompetition agreement, all $51.8 million, plus interest, was diverted from International and, instead, was distributed to Black, Radler, Boultbee, Atkinson and Ravelston.
After an outside attorney for a bank discovered and questioned these payments during the course of a due diligence inquiry, Black, Boultbee, Atkinson and Kipnis returned to International's Audit Committee and sought ratification of the payments on different grounds, claiming that the information previously provided to the directors misdescribed the transaction in a number of "inadvertent" respects. In fact, the previous submission's falsehoods were not inadvertent, and the second submission was also false and misleading. After International's independent directors ratified these payments, Black then lied to International's shareholders about the payments at International's 2002 annual shareholder meeting, according to the indictment.
The information first submitted to the Audit Committee on Sept. 1, 2000, was allegedly false in that:
• only $32.4 million, not $51.8 million, was allocated to non-competition agreements;
• CanWest had requested Boultbee and Atkinson to sign non-competition agreements when it had not done so;
• International would be paid $2.6 million when it actually received nothing;
• it proposed that Ravelston be paid $19.4 million as a break-up fee to end a longterm management agreement with International. In fact, Ravelston had no right to any payment if International terminated its management agreement with Ravelston; and
• it failed to disclose that although approximately $647 million of the Can- West consideration would go to HCNLP, Black, Boultbee and Atkinson had unilaterally decided that International would pay 100 percent of the non-competition consideration. The first submission also failed to disclose that this decision was made to avoid having to raise the non-competition payments with the HCNLP (Hollinger Canadian Newspapers, Limited partnership) Audit Committee, which Black and the other two executives feared would ask more questions than the International Audit Committee. As a result, International bore 100 percent of the non-compete allocation attributable to the assets sold by HCNLP, rather than its 87 percent pro rata share, a difference of approximately $2.1 million.
When the CanWest transaction closed, and Ravelston, Black, Radler, Boultbee and Atkinson caused approximately $52.8 million to be disbursed to themselves-approximately $11.9 million each to Black and Radler, approximately $1.3 million each to Boultbee and Atkinson, and approximately $26.4 million to Ravelston. (The extra $1 million dollars was interest from July 30 to November 16, 2000.) Although the Audit Committee was told that International would receive $2.6 million for its non-competition agreement, in fact, International received nothing.8 In addition to allegations of fraud with regard to non-compete and other fee arrangements, Black has been charged with repeated breaches of fiduciary duty and abuse of power in the misuse of corporate assets between May 1998 and August 2002 at the expense of the corporation and its public majority shareholders, including the following:
• in the summer of 2001, Black fraudulently caused International to pay for his use of its corporate jet to fly himself and his wife on a personal vacation to Bora Bora in French Polynesia. The couple left Seattle for Bora Bora on July 30, 2001, and returned to Seattle on Aug. 8, 2001, logging a total of 23.1 hours in flight. There was little, if any, business purpose to this vacation. To lease and operate the jet for Black's personal vacation cost International tens of thousands of dollars. When International's accountants sought to have Black reimburse International for this cost, Black refused, stating in an e-mail to Atkinson that "[n]eedless to say, no such outcome is acceptable";
• in December 2000, Black fraudulently caused International to pay more than $40,000 for his wife's surprise birthday party on Dec. 4, 2000, at La Grenouille restaurant in New York City. The party cost approximately $62,000; related expenses included 80 dinners at $195 per person, and $13,935 for wine and champagne. The party was a social occasion with little, if any, business purpose. Yet Black, without any disclosure or consultation with International's Audit Committee, determined that International would pay approximately $42,000 for the party, and that he would pay only $20,000; and
• Black and Boultbee defrauded International of millions of dollars in connection with International's renovation of the ground floor apartment, and Black's purchase from International of the second floor apartment at 635 Park Ave., which Black used when he was in New York City and which provided proximate quarters for his servants. Last month, the government seized approximately $8.9 million in proceeds from Black's sale of the two apartments and the indictment alleges that those funds are now subject to criminal forfeiture.9
Time will tell if the court finds the case is as Lord Black has indicated:
Absolute nonsense, … There's no truth or substance whatsoever to these charges. This has been one massive smear job from A to Z, and it will have a surprise ending…. a complete vindication of the defendants, and exposure of their persecutors …
Or will it be as Patrick Fitzgerald, the U.S. District Attorney has said:
Officers and directors of publicly traded companies who steer shareholders' money into their pockets should not lie to the board of directors to get permission to do so, … The indictment charges that the insiders at Hollinger-all the way to the top of the corporate ladder-whose job it was to safeguard the shareholders, made it their job to steal and conceal.
Questions
Black controlled key companies through multiple voting rights attached to less than a majority of shares. Was this illegal and/or unethical?