GO
Loading...

News Corp.’s Soft Power in the U.S

Over the last month, many Americans watched from a distance in horror or amusement as it became evident that the News Corporation regarded Britain’s legal and political institutions as its own private club.

News Corp.'s headquarters in New York.
Mark Lennihan
News Corp.'s headquarters in New York.

That could never happen in the United States, right?

As it turns out, a News Corporation division has twice come under significant civil and criminal investigations in the United States, but neither inquiry went anywhere. Given what has happened in Britain with the growing phone-hacking scandal, it is worth wondering why.

Both cases involve News America Marketing, an obscure but lucrative division of the News Corporation that is a big player in the business of retail marketing, including newspaper coupon inserts and in-store promotions. The company has come under scrutiny for a pattern of conduct that includes below-cost pricing, paying customers not to do business with competitors and accusations of computer hacking.

News America Marketing came to control 90 percent of the in-store advertising business, according to Fortune, aided in part by a particularly quick and favorable antitrust decision made by the Justice Department in 1997. That year, the News Corporation announced it wanted to buy Heritage Media, a big competitor, for about $754 million in stock plus $600 million in assumed debt. The News Corporation said it would sell the broadcast properties and hang onto the marketing division, which serviced 40,000 groceries and other retailers.

The deal would make News America Marketing the dominant player in the business and, for that reason, the San Francisco field office of the Justice Department recommended to Washington that the News Corporation’s takeover bid be challenged on antitrust grounds. Typically, such a request from a field office would carry great weight in Washington and, at a minimum, delay the deal for months.

But the Justice Department brass overrode San Francisco’s objections and gave its blessing in just two weeks. So who ran the antitrust division at the Justice Department at the time? Joel Klein, who this year became an executive vice president at the News Corporation, head of its education division and a close adviser to Rupert Murdoch on the phone-hacking scandal in Britain.

It’s worth noting that less than a year later, the Justice Department division led by Mr. Klein blocked the News Corporation from selling its share of a satellite company to PrimeStar, owned by a group of cable providers, on antitrust grounds, so any suggestion that a department of the United States government was snugly in the hip pocket of Mr. Murdoch would not be correct.

None of this suggests that Mr. Klein cut some sort of a deal that resulted in a job 14 years later. But the speed of the antitrust decision surprised even the people involved in the takeover. One of the participants, who declined to be identified discussing private negotiations, said he thought the sale was effectively blocked before the surprising turnaround.

“After that meeting with the San Francisco office, we all looked at each other and said, ‘This deal is not going to happen,’ ” he said.

My colleague Eric Lipton and I spent a few days trying to tease apart who made the actual decision to give the purchase the go-ahead — “It was as if a magic button had been pushed somewhere. We were all in shock,” said one of the same participants in the deal — but there is no paper trail.

People who worked at the Justice Department back then either could not recollect how the decision was made or declined to share information if they knew.

A spokeswoman for the News Corporation released this statement: “Joel didn’t know Mr. Murdoch at the time of the Heritage Media transaction 14 years ago. A year later, the D.O.J. under his leadership challenged the PrimeStar transaction in which News Corporation had a major interest. Any suggested inference is ludicrous.”

A lawyer who worked in the Justice Department in Washington at the time but did not want to be identified discussing internal matters, said: “This decision was made on the merits. The front office in Washington didn’t think a case could be won in court based on the very narrow definition of the market.”

But in retrospect, the anticompetitive fears of the San Francisco office were well founded.

After the Heritage Media deal, News America Marketing was in a position to throw its weight around and it did just that, drawing a variety of lawsuits in which competitors claimed they had been threatened and harassed. The News Corporation has settled those cases at a cost of over $650 million, and now the F.B.I. is looking into whether there was a pattern of illicit tactics by that division of the News Corporation.

“The way this whole thing got started was a horrible mistake. The government was bamboozled or worse,” said Thomas J. Horton, a law professor at the University of South Dakota who used to work at the Justice Department and represented a competitor, Insignia Systems of Minneapolis, in a lawsuit against News America Marketing. “The company has a long history of behaving unethically with no regard for our system of justice or legal ethics. They are ruthless.”

One of News America Marketing’s other competitors was Floorgraphics, a small New Jersey company that did in-store ads. George Rebh, who founded Floorgraphics along with his brother Richard, met with Paul V. Carlucci, head of News America, in 1999 at a Manhattan restaurant, and the News Corporation executive got right to the point.

“I will destroy you,” Mr. Carlucci said, according to his deposition in the Floorgraphics suit against News America, adding, “I work for a man who wants it all, and doesn’t understand anybody telling him he can’t have it all.” (Mr. Carlucci is now the publisher of the News Corporation-owned New York Post.)

Just in case the Rebh brothers did not get the point, court records indicate that beginning in October 2003, someone working out of the Connecticut headquarters of News America Marketing gained access to the Floorgraphics computer network, which included a collection of advertisements the company had created for its customers.

The News Corporation’s executives, as they have in case of phone hacking in Britain, said they had no idea that people working for them were engaged in such activity.

But in 2004, a Floorgraphics board member sent a letter to David F. DeVoe, chief financial officer of the News Corporation, detailing that Floorgraphics computers had “been breached by News America, as identified by their I.P. addresses.” News America has since admitted in court to breaching its competitor’s computers, but attributed it to lax security and a rogue employee.

According to correspondence that has been forwarded to members of the New Jersey Congressional delegation, Mr. Rebh also got in touch with the F.B.I., which sent two special agents to the Floorgraphics offices in 2004. One of the agents, Susan Secco, followed up with an e-mail in which she commented on the evidence Floorgraphics had compiled.

“I believe I have all I need to conduct interviews, as there is an excellent paper trail,” she wrote.

She then got in touch with the United States attorney in New Jersey and, after an initial burst of interest, the case died a slow death. The United States attorney at the time in New Jersey was Chris Christie, now governor of New Jersey and a rising star in the Republican Party.

Michael Drewniak, the governor’s press secretary, said politics played no role. “The U.S. attorney’s office receives thousands of referrals each year from parties seeking criminal investigations. Any decision to prosecute or not prosecute is based strictly on the strength of the evidence or lack thereof,” he said.

Two senior lawyers who supervised the unit that handled the initial investigation — Kevin O’Dowd and Deborah L. Gramiccioni — are now senior aides to Mr. Christie in the governor’s office. A state official said neither Mr. O’Dowd, then an assistant United States attorney, nor Ms. Gramiccioni, then chief of the office’s commercial crimes unit, recalled the details of the case and suggested that it had been handled at a lower level.

In early 2005, Mr. Rebh urged Representative Rush Holt and New Jersey’s two senators at the time, Jon S. Corzine and Frank R. Lautenberg — both Democrats — to press Mr. Christie and Alberto R. Gonzales, then the United States attorney general, to pursue the matter. The Federal Trade Commission asked for jurisdiction and was denied by the Justice Department. Frustrated, the Rebhs went to the Secret Service, but the case died for lack of cooperation.

Floorgraphics filed a civil lawsuit in federal court in 2009, but the suit was dropped when the News Corporation agreed to buy the assets of Floorgraphics for $29.5 million.

Given the pattern of conduct revealed recently in Britain, there is renewed interest in how News America behaved in the in-store business. Mr. Lautenberg and Mr. Holt sent a letter last month to Attorney General Eric H. Holder Jr., reminding him about the original accusations made by Floorgraphics and suggesting that the Justice Department revisit the case.

Although the statute of limitations on many of the ostensible crimes has expired, Mr. Lautenberg and others have indicated that the Senate Commerce Committee may hold hearings to investigate whether there was a broad pattern of misconduct by the News Corporation.

It’s too early to say what the result of these accusations and inquiries might be. And certainly no one has credibly said that the News Corporation’s employees here have hacked phones as they did in Britain, or replicated in America the kind of cozy, possibly corrupt relationships British employees fostered with officials.

Then again, maybe they didn’t have to. In America, where the News Corporation does most of its business and also has a long reach into film, TV, cable and politics, the company’s size and might give it a soft, less obvious power that it has been able to project to remarkable effect.

Contact Europe News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Europe Video