The board of Hollinger International repeatedly approved deals that benefited Conrad Black, its chairman, and other company executives without independent analysis, opinions on fairness or extensivediscussion of the rationale behind them, according to a lawsuit filed by a major Hollinger shareholder.
In several cases, the agreements were costly to Hollinger, but the board agreed to the deals after Black, without any independent confirmation, recommended them.
The suit accuses the board, which had many prominent members, of letting Black and his executives line their pockets at shareholder expense. Among the members were Henry Kissinger, Alfred Taubman (who remained on the board even while serving a prison sentence in relation to his role in a price-fixing scheme at Sotheby’s) and Marie Josee Kravis, wife of the financier Henry Kravis.
The hedge fund Cardinal Value Equity Partners filed the suit in Delaware Chancery Court in early December against present and past Hollinger board members as well as two separate companies controlled by Black. It had been under seal because many of its accusations were based on notes from audit, compensation and board meetings that Cardinal Value Equity had obtained. A judge ordered it unsealed on Friday.
Hollinger, which owns The Daily Telegraph of London, The Chicago Sun-Times and The Jerusalem Post, among other newspapers, has been embroiled in a series of revelations regarding payments to executives, including Black, who has resigned as chief executive.
On Wednesday, Black failed to make an initial $700,000 payment that was due as part of the $7.2 million that he had agreed to repay Hollinger by June, according to a person close to the company. The $7.2 million was part of $32 million paid out to Hollinger corporate executives in noncompete fees that were not authorized by the board.
A spokesman for Black said: He has yet to compete his inquiry into the facts underlying whether the payment was in fact authorized. He is working with the company’s special committee to answer that question.
The special committee, established under the leadership of Hollinger’s new chief executive, Gordon Paris, has hired Richard Breeden, a former head of the U.S. Securities and Exchange Commission, to review board and management actions. The company and Cardinal have asked that the lawsuit not proceed until the committee has completed its work.
Cardinal Value Equity is affiliated with Cardinal Capital Management, which holds 1.869 million Hollinger shares, making it the company’s seventh-largest investor.
The suit describes a series of transactions, costing Hollinger $300 million or more, in which the board rubber-stamped sales of Hollinger assets to companies controlled by Black and other Hollinger executives, paid them noncompete fees or raised their compensation without question.
In a 2001 meeting, for example, the audit committee which included James Thompson, a former governor of Illinois; Richard Burt, a former ambassador to Germany; and Marie Josee Kravis, an economist approved the sale for $1 of two publications to a company controlled by Black and David Radler, a former chief operating officer at Hollinger.
The explanation for the sale of the properties, which had negative cash flow, was that their fair market value had been obtained. But there was never any independent evaluation of the properties. Nor did the committee even discuss, the suit charges, why a company controlled by Black should sell properties for so little, if a second company controlled by Black obviously believed they could be made profitable.
At that same meeting, the committee agreed to a raise of more than 7 percent in the annual management fees paid to Ravelston, a company controlled by Black. In the previous year, the company had been paid $24 million.
The annual payments to Ravelston included fees for both management services to Hollinger and Black’s compensation. But according to the minutes of the meeting, there was no independent analysis of the payments, review of their propriety or discussion of whether the services could be obtained at a lower cost. The meeting, which took a half-hour, also approved raises for the fees paid to board members without any explanation or review of the propriety of the raises.
In another deal struck in 2000 with little board oversight, Hollinger agreed to swap profitable newspapers that it owned for less profitable ones that belonged to a company owned by Black. According to the suit, Black’s company, Horizon Publications, did not yet own the newspapers it planned to swap.
As to why Hollinger would swap profitable papers for less profitable papers, the company argued that it would have room to improve the performance of the less profitable papers. The entire transaction, the suit said, was done on the recommendation of Radler and Jerry Strader, a Hollinger employee. Since Radler was involved with Horizon, he could benefit from the deal, for which the board never got any independent evaluation.
Though Hollinger’s accounting firm, KPMG, told the board that it was difficult to assess whether Black’s use of the company jet was for personal or business reasons, the audit committee agreed to continue to pay for the jet for security reasons. It also approved paying 300,000 Canadian dollars, or more than $230,000, to staff one of Black’s homes, as well as payments to Black’s wife, who was also a board member.
Black and Kravis declined to speak about the lawsuit, and Burt did not return phone calls seeking comment. Thompson said, Just because someone alleges something in a lawsuit does not mean it is true.
