SUZANNE TAYLOR February 19 2007


SUZANNE TAYLOR February 19 2007


Lost years. Lost money. Why those who triggered Conrad Black’s downfall are having second thoughts. BY STEVE MAICH

The in ners the thing middle from about of the losers war it, telling is, is often when the imposyou’re winsible. Usually, in fact, it seems like no one is winning at all. Only in hindsight is it possible to distill the chaos into a neat and tidy digest of conquering heroes and flawed villains. Those who live through the battles are keenly aware, even in victory, of all that’s been lost. So it is for those who went to war against Conrad Black.

Sitting in a windowless conference room in the Park Avenue offices of investment firm Tweedy Browne, the man who fired the first shot against Black alternates between bemusement, frustration and resignation as he reflects on the whole exhausting affair. It was just over five years ago that Chris Browne, owner of more than 13 million shares of Hollinger International, sent a sharply worded letter to the board of directors demanding answers about the company’s poor performance and the rising payments to Black and others in senior management. That life-altering piece of mail triggered a stunning corporate coup, and a spectacular fall from grace for a man who had, for more than 20 years, held prominent status in the business and social elites of three countries.

Today, Browne looks back on it all with a deep ambivalence. Yes, he managed to force out a management team that he considered oppressive, possibly even criminal. But the managers who took over, though they played by the book, allowed the company to waste away. Yes, he managed to reap a huge amount of good publicity for taking a principled stand on behalf of investors. But the investment itself has been a failure, and Browne gets paid to make money, not headlines. He makes no bones about it—if he could go back to the beginning, he would just take a pass and let Hollinger International be somebody else’s

problem. Still, he tries to remain philosophical about it all.

“It’s the old saying, you sleep with dogs, you wake up with fleas,” he says with a shrug. “All I can do now is get myself upset and start screaming and ranting and raving at people, but it’s not going to get anything done. It’s a failed marriage. You have to move on.”

After five years, hundreds of millions of dollars in legal fees, four books, thousands of newspaper articles, one movie and countless claims and allegations, moving on still isn’t possible. Next month, in a federal courthouse in Chicago, Black and three co-defendants will go on trial on more than a dozen criminal charges, ranging from racketeering and tax evasion to money laundering and obstruction of justice. After that will come the civil cases, which could stretch on for years. Black

may well be acquitted of the charges—he remains staunchly convinced that he will be cleared of all wrongdoing—but he cannot win, not really. At this point, no one can.

A few years ago, the Hollinger affair seemed to be a critically important showdown. It was about shareholder rights, and fiduciary duty, and rooting out corruption. But that kind of righteous idealism is hard to find today. It’s been lost in a mind-boggling legal quagmire, and the sad anticlimax of watching a proud business torn apart and sold off in pieces. Most of the Canadian chain of newspapers now belongs to CanWest Global Communications. The Daily Telegraph, the jewel of the Hollinger empire, was sold to Britain’s Barclay brothers for $1.8 billion soon after Black lost control of the company. And the steady stream of smaller asset sales that followed reduced the company to a single collection of papers in the Chicago area. Last year, the board dumped the Hollinger name and rebranded itself Sun-Times Media. As new management dismantled all that Black built, the company sank deeper into financial distress.


In 2005, revenue dropped by 17 per cent from the previous year, resulting in a net loss of US$12 million. In 2006, things got much worse. In the third quarter—the most recent one for which results are available—revenue plummeted 28 per cent and the company lost a staggering US$34.9 million in just three months. As a result, a stock that crested above US$20 in early 2004, just after Black was removed as CEO, has tumbled to US$4.38 as of last week. Including the US$5.50 in special dividends paid out following the Telegraph sale, the stock is pretty much exactly where it was in 2001, when shareholders began complaining about Black’s leadership. There is little optimism that things will get better soon. In December, the company announced it was suspending the quarterly dividend of 5 cents per share to conserve cash.

Bert Denton has watched it all unfold with a mixture of frustration and contempt. Denton was one of the most prominent shareholder activists in the campaign against Black. He works from a tiny office on the fourth floor of an old converted townhouse on New York’s upper east side. On the wall beside his ancient desk hangs a leather Ducati motorcycle jacket. Nearby is a framed Forbes magazine profile from 1997, titled “Be Not a Wimp.” Denton practises full-contact capitalism, and he loves every minute of it. Since 1991, when he founded fund manager Providence Capital, he has locked horns with more than 80 companies, using lawsuits, proxy battles and the ever-present threat of public humiliation as his weapons of choice. He got involved in the Hollinger saga back in 2002, and he openly relishes the thought of seeing Black and his lieutenants go to jail. But when the topic turns to the performance of the company since Black was ousted, Denton gets angry all over again.

In fairness, he acknowledges that the print advertising market softened at a bad time, and that newspaper companies everywhere have been struggling. But even in a bad market, he says, Sun-Times stands out for all the

wrong reasons: lousy ad sales, stubbornly high costs and virtually no progress on the central problems facing the business. And for that, responsibility falls squarely on the shoulders of Gordon Paris, the man who headed the special committee investigation into Black’s leadership, and who replaced him as CEO in 2003. “Who is Gordon Paris?” Denton asks rhetorically. “He’s an investment banker—no newspaper experience whatsoever. Where does he live? New York City. Where’s the business? In Chicago. How stupid. How utterly stupid. You cannot run a company in Chicago from New York. He didn’t know what was going on.”

Through it all, investors say, the company has been uncommunicative and arrogant, treating shareholders as an afterthought. “At least when [former head of investor relations] Paul Healy was there, somebody would tell us what was going on once in awhile,” Browne says. “As far as communication goes, things are as bad or worse now as they were under Black.”


For in a to management win back the team faith that of was the brought market, such comparisons are stinging, and the company has acknowledged it must do better. At the end of December, Gordon Paris resigned and was replaced by Cyrus Friedheim, a well-respected executive who previously turned around the troubled food giant Chiquita Brands International. The company also recently hired an in-house investor relations person to improve communications. But it may be too late to mend fences.

By the time he stepped down, Paris was well aware that the shareholders were unhappy, to say the least. In 2004, he was paid US$2.8 million in salary and bonus, plus 2.3 million deferred share units. Investors complained that the pay was excessive given the company’s myriad problems, and in 2005 his share units award was cut to 1.2 million, though Paris’s salary and bonus still added

up to more than US$2.8 million. “We had a meeting at Michael’s restaurant and I told him, ‘Gordon, you get $9,000 a day... Saturday,

Sunday, Kwaanza, Christmas, Hannukah, Valentine’s Day... $9,000. Your incentives are not aligned with what the shareholders want,”

Denton says.

Paris chafed at the criticism, insisting that he wanted nothing more than to resolve Hollinger’s legal mess and return to his career in banking. As a sign of good faith, last year his salary was cut to US$900,000. But when he quit in December, he received a cash separation bonus of US$2.7 million for his service to the company. Denton was not amused. “For him to collect a bonus after that performance is gag-worthy. He has no clue. And why he’s still on the board now beggars the imagination. Having taken the stock from $20 to $4, he should not be directing this company.”

Paris declined an interview for this story. Company spokesperson Tammy Chase said simply that “Gordon Paris was paid in keeping with his 2005 employment contract. New management and the current board are deeply committed to strictly controlling costs.” New CEO Friedheim is in the process of developing a plan to address the company’s many problems, which he will present publicly within the next couple of months. “We care about our shareholders and look forward to working with them,” she said. “The focus right now is on improving the operations of the paper. Company performance going forward is really the main thing now.”

But the issue of Paris’s golden parachute will not easily fade into the past. It’s just another reminder that in the campaign to overthrow Conrad Black, everybody seems to have gotten rich except the shareholders. Between 2003 and mid-2006, the company’s legal fees and expenses topped US$136 million, and the meter is still running. To put that in perspective, it was US$202 million in management fees, paid over eight years to Black and his private companies, that sparked the shareholder revolt in the first place.

That staggering cost has sowed discontent toward everyone involved in management, even Richard Breeden, the former head of the SEC who spearheaded the Black investigation and still serves as special monitor of the company. Once considered the unassailable voice of integrity, he has become the

of integrity, he has become the object of skepticism and resentment. “You know I’m just not sure what incentive Breeden has to wrap it all up. He gets paid like a lawyer. There’s no pot of gold for him at the end. He just keeps the clock running and keeps collecting his $800 an hour,” Browne says. “At the end of the day, I think Breeden’s out for Breeden.”

Denton looks at the mounting legal bills and just shakes his head. With more than 20 lawsuits flying in every direction, it seems the wrangling

could go on for years yet. Once the legal profession is done picking over the wreckage of Hollinger, it’s not clear what will be left worth salvaging. “It has been extremely expensive. The costs of the lawyers are out of control,” he says. “We’ve got lawyers charging $1,000 an hour in a $100-an-hour world. It’s outrageous. But I don’t know what you do about that.”

After all that has unfolded, shareholders like Denton and Browne have pretty much given up hope that most of the people directly involved in the destruction of Hollinger International will ever be held to account for their performance. Breeden’s investigation concluded that Black and others operated Hollinger as a “corporate klep-

tocracy,” and savaged the board for being indifferent to its responsibilities. But the company opted not to sue the board for negligence. In October, the SEC dropped its investigation of former Illinois governor James Thompson, retired ambassador Richard Burt, and economist Marie-Josee Kravis, all of whom sat on Hollinger’s audit committee and approved most of the contentious payments to Black and others.

In short, despite an abundance of evidence suggesting a pattern of lax oversight at the very least, directors such as Thompson, Kravis, Shmuel Meitar and Henry Kissinger were allowed to quietly tender their resignations and walk away from the mess. “They got off scot-free and that’s a real tragedy,” Browne says. “They will all claim ‘we were misled.’ Well you can’t be misled if you don’t ask any questions. They never asked. They said ‘yeah, okay, whatever you want. That’s fine. Can I have some more Claret? What’s for lunch?’ ”

Even a lawsuit brought against independent directors by one aggrieved investor group yielded little satisfaction. The case was settled last year, when Hollinger’s insurance provider agreed to pay US$50 million back to the company on behalf of the departed board members. That, of course, will be reflected in higher insurance premiums from now on. Even when the shareholders win, they seem to lose.

The result has been a pervasive sense of disillusionment and anger on all sides. Investors no longer respect the people brought in to clean up the company. And those who came in, and have dedicated thousands of hours to the case under extremely stressful circumstances, have developed a resentment toward shareholders that rivals even Black’s contempt for the “corporate governance zealots” who laid him low. In unguarded moments, they grumble their regrets at ever having gotten involved.

At had the different heart of the priorities matter, all the along. two groups Shareholders wanted their rights defended, and to maximize their return. But for the investigators, bankers and lawyers who descended on the company, it quickly became an all-consuming crusade to bring down Black. Shareholders sometimes found themselves caught in the crossfire.

In October 2004, for example, Black offered to buy out the shares of his beleaguered and debt-laden Canadian holding company Hollinger Inc. for $760 a share. It was a huge premium for a stock that was trading for just $4.31 at the time. Staff with the Ontario Securities Commission endorsed the deal, saying there was no other logical buyer for the stock. But allowing the deal to proceed would have strengthened Black’s hand to fight the allegations he was facing in the U.S. In the end, regulators bowed to pressure from Breeden and others, and blocked the deal. The shares of Hollinger Inc. collapsed. Last week, they were changing hands for $1.00.

The zeal with which prosecutors have pursued Black has been breathtaking. In October 2005, U.S. federal agents seized almost US$9 million in proceeds from the sale of Black’s New York apartment. At the time, he had not even been charged with a crime, let alone convicted. When he finally was indicted, an Illinois judge set his bail at US$20 million—twice as much as Bernie Ebbers, chief executive of WorldCom, and four times more than that of Enron’s Jeffrey Skilling. Even that was soon deemed insufficient. When Black continued to live a luxurious lifestyle in Toronto, offering up a $500,000 donation to the Canadian Opera Company, prosecutors went back to court accusing him of lying about his finances, and the judge tacked another US$1 million onto his bail. His right-hand man David Radler has already agreed to plead guilty, serve 29 months in prison, and testify against his long-time partner. And it is expected that a parade of former directors will take the stand and claim that Black misled them about a broad array of questionable deals and spending to support an opulent lifestyle at shareholders’ expense. If convicted on all counts, he could face up to 95 years in prison and US$7 million in fines.

For Browne and Denton and the others who endured belittling lectures, threats and mockery when they dared to question Black, there is some enjoyment in imagining him in an orange prison jumpsuit. But there is more than one moral to this complicated story.

Back near the start of it all, in May 2002, at Hollinger International’s annual meeting at the posh Metropolitan Club in Manhattan, a disgruntled shareholder named Edward Shufro stood and informed Black that, though most of those present were too polite to say so, many of them considered him a thief. According to those present, Black responded with a glare. “Sell your shares and get out,” he said. “If you think I’m a thief, then go.” At the time, Black’s response was seen as imperious and arrogant, further proof of his inability to deal gracefully with those who challenge him. But with the benefit of hindsight, those words sound very different. Now they sound like good advice. In future, when angry investors run up against an intransigent CEO, they may remember what became of Hollinger, and choose to heed those words. War is misery. And justice, whatever that means, is prohibitively expensive. M