Hollinger Files Stinging Report on Ex-Officials

By GERALDINE FABRIKANT
September 1, 2004

In a 513-page report shot through with sarcasm and disgust, a special committee
of the publishing company Hollinger International Inc. concluded that the former
officials Conrad M. Black and F. David Radler ran a "corporate kleptocracy,"
diverting to themselves virtually all the company's $400 million in earnings
over seven years.

The report, which was filed as part of Hollinger's effort to recover $1.25
billion from Lord Black and others, also criticized certain directors as being
"ineffective and careless" in stopping the "systematic looting" of the
company. And it reserved some of its harshest criticism for Richard N. Perle,
the former Reagan administration official and current board member, calling on
him to return $5.4 million in pay after "putting his own interests above those
of Hollinger's shareholders."

"Behind a constant stream of bombast regarding their accomplishments as
self-described 'proprietors,' Black and Radler made it their business to line
their pockets at the expense of Hollinger almost every day, in almost every way
they could devise," said the report, prepared by the committee and its adviser,
Richard C. Breeden, a former chairman of the Securities and Exchange Commission.

It cites, among other examples, Lord Black's use of the corporate plane for a
10-day vacation to Bora Bora at a cost to the company of more than $250,000,
while expensing the $90,000 refurbishing of his Rolls-Royce. Lord Black also
charged Hollinger International for a $42,870 birthday party for his wife,
Barbara Amiel Black, at the Manhattan restaurant La Grenouille, with a guest
list that included Barbara Walters, Peter Jennings and Charlie Rose; "summer
drinks'' that cost $24,950; and 80 percent, or $28,480, of the cost of three
dinners for Henry A. Kissinger and his wife, Nancy. (Mr. Kissinger was a
Hollinger board member.)

In a statement yesterday, the Ravelston Corporation, the holding company of Lord
Black and Mr. Radler that effectively controls Hollinger International,
dismissed the report as trafficking in recycled "exaggerated claims laced with
outright lies."

"Mr. Breeden and the special committee," the statement added, "have squandered
more than $25 million of shareholders' money in a futile 14-month investigation
that paralyzed Hollinger International, eroded the value of its assets, and
persecuted and defamed the men and women who created the value they are now
vandalizing.''

"The report is full of so many factual and tainting misrepresentations and
inaccuracies that it is not practical to address them in their entirety
here. These issues will ultimately be resolved in courts of justice where the
facts and the evidence will exonerate the men and women who are being attacked
in this report."

Mr. Perle was traveling in Europe and was not available for comment, according
to his assistant.

Last fall, Lord Black resigned as Hollinger International's chief executive and
Mr. Radler resigned as president and chief operating officer when the company
contended that they and other officials received $32 million of unauthorized
payments. Since then, Lord Black and Hollinger International have been locked in
legal combat, fighting over claims by shareholders for compensation for the
payments to former executives.

Hollinger International, which owns The Chicago Sun-Times, The Jerusalem Post
and other papers, has a complex corporate structure. Lord Black controls
Hollinger International through his holding company, Ravelston, which owns 78
percent of the stock of the Canadian company Hollinger Inc., which in turn
controls 68 percent of the voting shares of Hollinger International.

After Lord Black tried to sell his stake in Hollinger Inc. to the Barclay
brothers, the Delaware Chancery Court barred Lord Black from interfering in
Hollinger's strategic process of selling some of its assets. Hollinger
International last month sold the British-based Telegraph group, home to The
Daily Telegraph, to the Barclays for about $1.3 billion. The investigation by
the special committee began in May 2003 after complaints from shareholders, led
by the New York investment firm Tweedy Brown. And the resulting report minces
few words.

"At Hollinger," the report said, "Black as both C.E.O. and controlling
shareholder, together with his associates, created an entity in which ethical
corruption was a defining characteristic of the leadership team."

The report lays out several ways its says Lord Black and Mr. Radler arranged
millions in unjustified payments from Hollinger International to companies they
controlled.

According to the report, Hollinger paid Ravelston "management fees" of $226
million from 1996 to 2003, a total that "far exceeded Ravelston's costs of
providing services to Hollinger."

Hollinger International also paid companies controlled by Ravelston as well as
Hollinger Inc. a series of "noncompete" fees from the proceeds of sales of
various Hollinger newspapers. Those totaled $90 million from 1990 to 2001.

In a number of cases, Hollinger sold newspapers to entities controlled by Lord
Black and his associates for far below their market value. For example, The
Mammoth Times, in Mammoth Lakes, Calif., carried a sale price of $1 when there
was a competing bid of $1.25 million.

In some of the newest details made public in the Hollinger case, the Blacks, as
well as Mr. Radler, used the corporate coffers to support their personal
lifestyles, the report found.

The report says that the company spent over $23 million from 2000 to 2003 to
lease and operate aircraft that were used "indiscriminately" to fly the Blacks
to their "collections of homes," including New York; Palm Beach, Fla.; London;
and Toronto.

The special committee acknowledged that some use of corporate planes and other
perks was permissible, but at Hollinger, it said, the cost was "prohibitive" and
often the perks were solely for personal use. According to the report, when Lord
Black learned "there was a plan to personally charge him'" $388,000 for his Bora
Bora trip, his response was, "Needless to say, no such outcome is acceptable."

Then there were the apartments. Hollinger International acquired a cooperative
apartment for the two at 635 Park Avenue in Manhattan for $3 million in 1994. At
the same time, the Blacks themselves bought a smaller apartment in the same
building for $499,000.

When the couple decided to buy the larger apartment from the company six years
later, the real estate market had soared and the apartment was worth about $5.4
million. But the Blacks paid only $3 million for it and were able to use as part
of the payment the smaller apartment, valued at $850,000.

In another example of Hollinger International's losing money, the company spent
$8 million in 2001 to buy the Grace Tully Collection of Franklin Delano
Roosevelt papers and memorabilia. Lord Black, a Roosevelt expert who displayed
many of the objects in his own home, told a Hollinger International executive
that the collection was probably worth $12 million or more. Recently, Hollinger
accepted an offer of $2.4 million for the collection in a deal brokered by
Christie's.

From 1996 to 2003, Hollinger International and its subsidiaries donated at least
$6.5 million to hundreds of charities in the United States, Canada, Britain and
Israel, but often the company was not given the public credit - it went instead
to the Blacks or the Radlers.

Hollinger International also made donations to organizations to benefit Lord
Black and other Hollinger directors. Hollinger pledged $40,000 to the Museum of
Modern Art, where Marie-Josée Kravis, a board member at the time, was
co-chairwoman of the annual corporate lunch; $52,000 to the Museum of Television
and Radio, where Mr. Kissinger was a trustee; and $1.47 million to the foreign
policy journal National Interest Inc., where Lord Black, Mr. Kissinger and
Mr. Perle all had posts.

Not only did Lord Black and his top associates take money from the company for
their own use, but they arranged for Hollinger to hire family members for
exorbitant salaries.

For example, Hollinger International paid Lady Black $1.1 million a year for a
corporate post that did not require her to do anything. The report added that a
post at The Jerusalem Post was also found for Mr. Radler's daughter,
Melissa. She started as a New York correspondent at a salary of $38,000, but was
later given a raise to $62,000 only because Mr. Radler sought it, Tom Rose, The
Post's former publisher, told the committee.

While the report was careful to insist that Lord Black and Mr. Radler were the
"primary offenders, the consistent inaction of the Hollinger board also resulted
in squandering opportunities for stopping abusive acts before the damage was too
great."

Members of the audit committee come under particular fire. Its members -
Ms. Kravis, an economist and wife of the financier Henry Kravis; the former
Illinois governor, James R. Thompson; and Richard R. Burt, a former ambassador
to Germany, were "ineffective and careless," the report stated. Of Mr. Thompson,
the chairman of the audit committee, the report said, "He failed to apply the
critical part of former President Reagan's famous dictum to 'Trust, but Verify.'"

A spokeswoman said that Mrs. Kravis was traveling and could not be reached for
comment. Mr. Burt said he did not agree with the committee's findings about the
board and the audit committee in particular. Mr. Thompson also said he disagreed
with some of the criticism of the audit committee but agreed with most of the
committee's conclusions.

The board was only slightly critical of two independent directors, Mr. Kissinger
and Shmuel Meitar, vice chairman of Aurec Ltd., saying they could have done more
in reviewing transactions, but that their "reliance on the audit committee was
reasonable."

But its most scathing comments about a board member are aimed at Mr. Perle,
singling him out for his "flagrant abdication of duty" as a board member. It
said Mr. Perle, who headed Hollinger Digital, a unit of the parent company,
while he was a board member, rubber-stamped a large number of deals that
benefited Lord Black and others at the expense of Hollinger.

According to the report, Mr. Perle admitted to the committee that he never read
many of the documents or understood the underlying transactions before signing
off on them.

For example, in 1997, Hollinger International lent its Canadian parent $42.5
million on terms that were "unfair" to Hollinger, in part because the interest
on the loan was only 1.25 percent, the report said. Mr. Perle told the committee
that "he did not remember anything about the loan or the consent he signed
authorizing it."

The report particularly criticizes a bonus plan related to various investments
by Hollinger Digital that let Mr. Perle earn $3.1 million, even though the
investments lost $49 million over all.

"He should have resigned from the executive committee or the board should have
replaced him," it said.

After his link to Global Crossing Ltd., as an unpaid adviser, came to light,
Mr. Perle resigned last year as chairman of the Defense Policy Board, which
advises Defense Secretary Donald H. Rumsfeld.

Floyd Norris contributed reporting for this article.

Copyright 2004 The New York Times Company


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Panel Says Conrad Black Ran a 'Corporate Kleptocracy'

By FLOYD NORRIS
August 31, 2004

Conrad M. Black ran a "corporate kleptocracy" for his own benefit at Hollinger
International, the publisher of The Chicago Sun-Times and other newspapers, and
the board of directors failed in its responsibilities to monitor what he was
doing, a committee of that board concluded in a report filed on Monday in
federal court in Chicago and made available today.

"Hollinger wasn't a company where isolated improper and abusive acts took
place," said the report, largely written by Richard C. Breeden, a former
chairman of the Securities and Exchange Commission. Rather, it said, Hollinger
was "an entity in which ethical corruption was a defining characteristic."

Lord Black controlled Hollinger through a series of holding companies and super
voting stock, but his control of the company was effectively ended when the
board broke with him and persuaded a Delaware judge to allow the company to sell
The Telegraph papers over Lord Black's objections. The company has sued Lord
Black and his associates for $1.25 billion in federal court in Illinois.

While the report was careful to insist that Lord Black and F. David Radler,
Hollinger's former chief operating officer, were "the primary offenders, the
consistent inaction of the Hollinger board also resulted in squandering
opportunities for stopping abusive acts before the damage was too great."

The report was particularly critical of the audit committee of the board, which
it said had not performed its duties to monitor what was going on. But the
report saved its harshest criticism for Richard Perle, the former Reagan
administration official and current member of a Pentagon advisory board. It said
it did not consider Mr. Perle to have been an independent director and called on
him to return $5.4 million in pay he received after "putting his own interests
above those of Hollinger's shareholders."

It said James R. Thompson, a former governor of Illinois and the chairman of
Hollinger's audit committee when the abuse was taking place, had accepted the
word of Lord Black and Mr. Radler on many things, allowing them to take
excessive management fees and nearly all the company's profits for
themselves. "He failed to apply the critical part of former President Reagan's
famous dictum to `Trust, but Verify.' "

The report said that Hollinger's auditors, KPMG, and its outside Canadian law
firm, Torys, had not warned the audit committee that the management fees might
be so large as to violate fiduciary standards, as the special committee claims
they did, nor did the auditors or lawyers raise questions about "noncompete"
fees paid to Lord Black and Mr. Radler that the committee concluded were
improper.

It said Mr. Thompson and two other members of the audit committee, Richard
D. Burt, a former United States ambassador to Germany, and Marie-Josée Kravis,
the wife of the financier Henry Kravis, "failed to respond critically to the
repeated demands for noncompete payments even though they should all have known
these payments were highly unusual from the numerous boards on which they had
served."

The report was gentle in dealing with some former directors, including Henry
Kissinger, the former United States secretary of state. It said they had acted
reasonably in reviewing the recommendations of the audit committee and were
entitled to assume the committee had done its job properly.

But the committee said large Hollinger donations to "pet charities" of various
directors, including Mr. Kissinger and Robert Strauss, a former chairman of the
Democratic National Committee, "without the restraint of sound corporate
governance controls, raises questions regarding the independence of those
directors."

Mr. Perle was criticized for his involvement in Hollinger's Internet subsidiary,
in which he, Lord Black and others were granted 22 percent of profits on
successful investments ? a total of $8.3 million ? even though the subsidiary
lost money over all. His share came to more than $3 million.

The report said Mr. Perle "repeatedly breached his fiducicary duties" as a
member of the board's executive committee, in approving improper deals to
benefit himself and Lord Black. It said Hollinger had made a bad investment in a
partnership run by Mr. Perle. "As a faithless fiduciary, Perle should be
required to disgorge all compensation received from the company," the report
said.

Lord Black has repeatedly denied he did anything wrong and has said the board
approved the transactions for which he has been criticized. A call to his
secretary in Toronto was not immediately returned today. Nor was a call to
Mr. Perle at his office at the American Enterprise Institute in Washington.

A KPMG spokeman said the firm had cooperated in the investigation but did not
discuss its findings.

The report lays out in devastating detail the ways in which it says Lord Black
and his associates drained $400 million, or 95 percent of Hollinger's adjusted
net income from 1997 through 2003. It said much of that was accomplished by
having Hollinger pay a "management fee" to a company controlled by Lord
Black. It then paid management salaries, but the amounts were not disclosed and
the board evidently never asked for details. The report concluded that the
salaries were wildly exorbitant.

American companies are required to disclose salaries paid to the top five
officers, but the report said Hollinger failed to disclose as much as 96 percent
of the amounts it should have disclosed.

Copyright 2004 The New York Times Company

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Hollinger's Board: Most Irresponsible Ever?

By FLOYD NORRIS
September 1, 2004

Was there ever a board as irresponsible as the one at Hollinger International?

A special report of a committee of that board - a panel made up of new directors
who were not around when Conrad M. Black and his associates were running the
company as a "corporate kleptocracy," according to the report - certainly weighs
that case.

The report, released yesterday, harshly criticizes some directors but
essentially clears others, saying they were entitled to assume that others were
paying attention to what was going on.

The Hollinger board was studded with political heavyweights chosen by Lord
Black, a Canadian who became a British peer after Hollinger took control of the
Telegraph newspapers in London.

Among them were Henry A. Kissinger, the former secretary of state, and Richard
N. Perle, who was assistant secretary of defense under President Ronald Reagan
and is the former chairman of a Pentagon advisory board. Democrats were not left
out, with the board including Robert S. Strauss, a former chairman of the
Democratic National Committee and ambassador to the Soviet Union, and Richard
R. Burt, a former United States ambassador to Germany.

The report lets most of the directors off with little more than a mild rebuke
for not having shown much curiosity in how the business was run. The members of
the audit committee during the years when Lord Black was taking out hundreds of
millions of dollars in cash draw harsher criticism for their passiveness, but
the director who is excoriated in the strongest terms is Mr. Perle.

His many and varied roles at Hollinger seem to have aroused questions even from
Lord Black - a man who knew conflicts of interest if anyone did. In one case,
Lord Black is said to have sent a letter to Mr. Perle, questioning the
conflicts. There is no record of whether Mr. Perle answered the letter, the
report says, and nothing seems to have been done about the issue.

Mr. Perle was chairman of Hollinger's Internet investing subsidiary, which lost
lots of money. But he and other insiders had an unusual deal that gave them a
share of profits from good investments without requiring those amounts to be
offset by losses from bad investments.

Mr. Perle collected $3.1 million through that deal - payments that the committee
said were not fully disclosed to shareholders, as they should have been. By the
committee's account, Mr. Perle was responsible for $63.6 million in Hollinger
investments, on which the company lost a net $49 million.

After the Internet boom collapsed, Mr. Perle persuaded Hollinger to invest in
Trireme Partners, a venture capital firm that he helped found. He even signed,
on Hollinger's behalf, the commitment letter for the investment.

The committee said that such an investment should have been approved by the
audit committee or by independent directors, but no such approval was sought. It
was Mr. Perle's dual status as an employee of Trireme and a Hollinger director
that led to Lord Black's questions.

Both Lord Black and Mr. Kissinger sat on a strategic advisory board for Trireme.

Mr. Perle was one of three members of Hollinger's executive committee, and the
closest thing to an outsider on that committee. The other two members were Lord
Black and F. David Radler, Hollinger's chief operating officer at the time.

"Perle's own description of his performance on the executive committee was
stunning," the report states. For example, he said the committee never met but
that from time to time he would get a package of documents to sign. He also said
he never discussed the documents with the other committee members and often did
not bother to read them before signing.

"It is difficult to imagine a more flagrant abdication of duty than a director
rubber-stamping transactions that directly benefit a controlling shareholder
without any thought, comprehension or analysis," the committee report says. "In
fact, many of the consents that Perle signed as an executive committee member
approved related-party transactions that unfairly benefited Black and Radler,
and cost Hollinger millions."

It appears that the directors viewed Hollinger as Lord Black's company to do
with as he pleased. They never asked for information on such basic issues as how
much he was being paid. Lord Black did control the company through holding
companies and supervoting stock, but his economic interest was just 18
percent. That fact did not stop him and Mr. Radler from taking $400 million, or
95 percent of what the report concludes were the company's real profits from
1997 through 2003.

Now the courts have effectively stripped Lord Black of the power of a
controlling shareholder. His effort to block the sale of the Telegraph papers
failed, and Hollinger is suing him and his associates for $1.25 billion. The
report says Mr. Perle has stopped talking to the board committee that drew it
up. It says he should repay the $5.4 million he received from the company and
says he may be liable for more. Mr. Perle could not be reached for comment.

The abuses described in the Hollinger report should have been impossible. But
they should be even harder now. The Sarbanes-Oxley Act, which passed in 2002,
requires that auditors review the internal controls of companies and report to
shareholders if there are serious problems. That has aroused hostility from
companies that fear the review, known as a 404 after the section of the law that
requires it, will be too expensive.

This case provides evidence that such measures are needed.

But Section 404 depends on the independent auditor, and the report raises
questions about the performance of KPMG, Hollinger's auditor.

In some cases, KPMG appears not to have noticed things the committee finds
significant and outrageous. In others, it knew of them but did not warn the
board or its audit committee.

The report says that KPMG initially resisted the special committee's requests
for information but later cooperated, although its Canadian affiliate would not
let the committee copy documents in its possession. KPMG issued a statement
yesterday saying it had fully cooperated with the committee, but did not
elaborate.

So was this the worst board ever? The report says there are "few parallels to
Black and Radler's self-righteous and aggressive looting of Hollinger," but
there have been other boards, like Enron's, that looked the other way when
outrageous things were happening.

But few boards have had as many Washington heavyweights. For foreign policy
discussions, the Hollinger board may have had no equals. But the directors
evidently did not think their duties extended to actually paying attention to
what Lord Black was doing.

Copyright 2004 The New York Times Company