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 The Doofus Defense Conrad Black's indictment argues that he kept his board in the dark--and suggests how remarkably easy it was to do. Parsing the Conrad Black indictment . . . Total number of defendants: 5 -- Black, three other Hollinger International executives, and Black's Ravelston holding company. Number of times the defendants' alleged scheme was described in the indictment as intended to "defraud" Hollinger shareholders of not only money and property but their "intangible right of honest services" (the legal argument Jim Thompson successfully used to prosecute former governor Otto Kerner in 1973): 3. Proper role of the Hollinger board's audit committee, as described in the indictment: to function "as International's independent director committee for purposes of reviewing and approving the fairness of transactions between International and its controlling shareholders, officers and/or directors." Number of the 60 pages in the indictment that contain references to the audit committee: 36. Number of references to chairman of the audit committee, the board position held by Jim Thompson: 3. Number of references to the defendants' alleged failure to disclose important financial information to the audit committee: 16. Number of references to the defendants misleading the audit committee with false information: 6. Most intriguing of the indictment's 11 counts: the eighth. It concerns the 2000 sale of Hollinger properties in Canada to CanWest Global Communications for about $2.1 billion, of which $51.8 million was allegedly distributed not to the corporation but as "noncompete" payments to Black, the three other executives, and the previously indicted David Radler (who has agreed to plead guilty and turn state's evidence). Humiliating detail: About a third of the assets sold to CanWest were owned by Hollinger Canadian Newspapers, a limited partnership controlled by Hollinger International. Yet according to the indictment, the entire $51.8 million in noncompete payments was paid to the executives out of Hollinger International's share of the proceeds and none out of Hollinger Canadian Newspapers' share. Why? Allegedly "to avoid having to raise the issue of the non-competition payments with the [Hollinger Canadian Newspapers] Audit Committee, which [the defendants] feared would ask more questions than the International Audit Committee." (Who but Radler could have told the prosecutors this?) Were the defendants' alleged financial machinations subtle and impenetrable? Perhaps, but when the indictment was announced Robert Grant, head of the FBI's Chicago office, called them "blatant and pervasive." But not so blatant and pervasive as to be noticed by the audit committee? Here's a key they-were-clueless quote from the indictment: "After an outside attorney discovered and questioned these payments during the course of a due diligence inquiry, Black [and the other indicted executives] returned to International's Audit Committee and sought ratification of the payments on different grounds, claiming that the information previously provided to the directors misdescribed the transaction in a number of 'inadvertent' respects. In fact, the previous submission's falsehoods had not been inadvertent, and the second submission was false and misleading as well." Did the new explanation work? "The board approved the payments after the chairman of the Audit Committee summarized the information that had been presented to the Audit Committee, including several of the false statements set forth above." The indictment states that Black defended the noncompete arrangement at the 2002 shareholders' meeting, saying it was something CanWest's executive chairman had demanded. "Effectively the independent directors of this company determined that . . . it was something that he was paying valuable consideration for and some of that should come to us and not this company," Black said. "And that was not a matter negotiated directly by us." The indictment calls this statement "false and fraudulent" because, among other things, "the non-competition payments were not negotiated by the independent directors." Here's an unaddressed mystery. Why didn't the independent directors, who presumably remembered that they hadn't negotiated the payments Black said they negotiated, ask him what was going on? Were they too giddy with praise to notice? Unmentioned in the indictment but noted in a scathing August 2004 report by a "special committee" of the Hollinger board was what Black went on to say: "In all of the circumstances, the independent directors felt this was the fair thing to do, and I must say, I agree. . . . You're dealing with a best efforts attempt to accommodate to industry practice and do what's equitable as determined by independent directors who are as a group quite a distinguished group." Assessment of this "distinguished group" by the special committee: "It was characteristic of both the Audit Committee and the Board during this period that meetings were quite perfunctory. . . . Hollinger's Board may have had interesting lunches, but its deliberations do not reflect a serious effort to understand what Black and Radler were doing." |
