Your Media: Toronto Star article

September 1, 2004

Shareholders the losers, report charges

Black, Radler arranged deals for own benefit, report says
Claims false documents filed with U.S. securities agency

By STUART LAIDLAW

When Hollinger International bosses Conrad Black and David Radler were selling the company's Canadian newspapers — including the National Post — four years ago, they put more effort into lining their own pockets than getting a good price for the papers, a report commissioned by the company charges.

"Nobody was negotiating on behalf of the Hollinger shareholders," the 513-page report says.

CanWest Global Communciations Corp. bought the National Post and several other newspapers from Hollinger in the summer of 2000 for $3.2 billion (Canadian). That price would have been $39 million more had CanWest not agree to pay Black and Radler $3.9 million (U.S.) a year "in perpetuity" in management fees.

"CanWest did not care whether it paid Hollinger on the one hand, or Black and Radler personally on the other. Black and Radler obviously cared a great deal which of those outcomes occurred," the report says.

The CanWest deal is just one of dozens of transactions outlined in a report commissioned by Hollinger International after such fees came to light, along with dozens of other payments totalling $400 million — half of which are management fees.

"This story is about how Hollinger was systematically manipulated and used by its controlling shareholders for their sole benefit, and in a manner that violated every concept of fiduciary duty," the report says.

"Not once or twice, but on dozens of occasions Hollinger was victimized by its controlling shareholders as they transferred to themselves and their affiliates more than $400 million (U.S.) in the last seven years."

The report, whose allegations have not been proven in a court of law, details schemes and deals by Black and Radler — Hollinger International's controlling shareholders — to transfer the company's wealth to their own pockets. Taken as a whole, they are a conscious scheme to loot the company, the report says.

"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," the report says.

The report says the payments to Black, Radler and associates were "deliberate acts to take cash or assets out of Hollinger." Some of the deals include:

$9.5 million in corporate cash allegedly taken in 2000 with the help of falsified documents and without notifying Hollinger's board. The company lawyer who facilitated the deal received a $100,000 special bonus at Radler's direction.
$5.5 million transferred "by creating fictitious agreements not to compete with one of Hollinger's wholly owned subsidiaries." The "phony payments" were backdated to the previous year so they could be hidden through accounting offsets.
$200 million in excessive and unjustifiable management fees.
$90 million in non-compete agreements for top Hollinger executives after a number of the company's newspapers were sold. Black and Radler each got $11.9 million from a sale to CanWest alone.
False documents filed with the U.S. Securities and Exchange Commission that make no mention of $226 million in management fees paid to Black and Radler.
Income-generating Hollinger assets were transferred to entities controlled by Black and Radler for free, or at prices known to be below market value.
$80 million in Hollinger cash was taken as "loans" at below-market interest rates and using Hollinger's own cash to repay the debt, or simply not repaying it at all.
$9 million paid over five years to buy papers and memorabilia of former U.S. president Franklin D. Roosevelt, some of which decorated Black's homes.

Through these deals and others, the report says, Black, Radler and others "appear to have schemed behind the scenes to minimize proceeds to Hollinger and to maximize the amount diverted to themselves." The report says a memo to the company's audit committee by Mark Kipnis, then a Hollinger lawyer, failed to properly detail the money paid to Black and Radler as part of the deal with CanWest, leaving the impression Hollinger would benefit from the payments.

"The Kipnis memo steers well clear of the facts," the report says. "What actually took place was almost exactly the opposite of what Kipnis told the audit committee."

Kipnis could not be reached for comment.

The report found there was no evidence that Ravelston provided much in the way of management services to CanWest to justify the fees.

But because CanWest executives refused to be interviewed by the committee, it could not "determine whether there was any collusion on the part of (former CanWest chairman Izzy) Asper and CanWest to create the façade of management services to justify the $39 million reduction for CanWest."

In a May, 2001, shareholders meeting, the report says, Black continued the misrepresentation of the non-compete and management fees, saying that CanWest had demanded them and that the fees did not hurt the price Hollinger received.

It was much the same story when Hollinger sold community papers in two deals with Osprey Media Group later that year, the report says. Similar non-compete payments were made to Black, Radler and other executives, totalling $5.2 million, and with even lighter scrutiny by the board of directors.

Again, the payments were presented to the board as being at the buyer's insistence, when they were not, the report says.

When Black and Radler were not benefiting from non-compete fees paid when other companies were buying Hollinger papers, they were finding ways to profit from buying the papers themselves, the report says.

"The prices paid to Hollinger were in all cases less than the properties were worth, and in several cases, less than an unaffiliated third-party would have paid," the report says.

"Black and Radler did not make any serious effort to seek out independent purchasers, and on various occasions they took steps to prevent independent parties from bidding."

The report said the board of Hollinger was "misled" by Black and Radler about six transactions between 1999 and 2001 that transferred some papers to firms controlled by the pair.

"In each of these transactions, they avoided through deception meaningful independent director scrutiny of their self-dealing," the report says. It says the board's audit committee ratified the deals "without any meaningful (let alone independent) analysis, and based on false and misleading representations."

This conclusion is borne out in a letter Black wrote to a potential investor in Horizon, one of the companies used to buy Hollinger papers on the cheap, the report quotes.

"We have bought and sold hundreds of these little American newspapers in public companies and have never failed to make handsome profits on them. We sold them a few years ago to clear the debt out of our public company and are buying them back now for our own account, knowing their profit potential intimately."

For example, as part of a $43.7 million deal in 1999, Horizon bought the Naugatuck Daily News in Naugatuck, Conn., for $73,000. Before the deal closed, Radler boasted to Horizon investors he could get $400,000 for the paper.

Within months, he had flipped it for $673,314, the report says.