Conrad Black Undone by Small Transactions

For most folks in the central California resort town of Mammoth Lakes, pop. 7,093, the so-called trial of the century involving Conrad BLACK was a non-starter.

Conrad Black Undone by Small Transactions

For most folks in the central California resort town of Mammoth Lakes, pop. 7,093, the so-called trial of the century involving Conrad BLACK was a non-starter. When the Chicago jury returned their guilty verdict on four counts against Black on July 13, the front-page story in the weekly Mammoth Times newspaper was about the impending closure of the local athletic club. But at least one resident, Wally Hofmann, the paper's former publisher, has followed every legal twist and turn with profound interest. After all, the newspaper was at the heart of one of the three relatively small fraud charges Black was found guilty of, and is inextricably linked to the disgraced press baron's downfall.

"I feel vindicated by the jury's decision," says Hofmann, who as publisher ultimately reported to Hollinger International, which owned the Mammoth Times through a subsidiary between 1999 and 2001. Hofmann gave evidence to the Hollinger special committee about the paper's financial health that contradicted statements from Hollinger executives. That report triggered the criminal investigation into Black and his co-defendants. Hofmann ultimately lost his job over his comments to the committee. "Bottom line, the results of this action are not just a man having some legal problems, and stockholders having financial problems," he says. "There are little fish in a little pond called Mammoth Lake whose lives got turned upside down for doing nothing other than telling the truth."

Conrad Black and his lawyers have done their best to spin his guilty verdict into a victory. The special committee first accused Black of stealing US$400 million from shareholders. By the time federal prosecutors got involved, the figure had been scaled down to US$90 million, then further snipped back to US$60 million. When Black was finally convicted, his lawyer Edward Greenspan went to great pains to stress the loss associated with those convictions was just US$2.9 million.

But for all Black's post-conviction bravado, the truth is his fate was sealed by three relatively measly transactions. Setting aside the obstruction of justice conviction, which paled next to the 12 fraud, tax, abuse of perks and racketeering charges he faced, the jurors have said they never really had any doubt Black was guilty on the three smallest charges. And so Black, who had strived to influence nations through such lofty titles as the Sunday Telegraph, was undone by the likes of the Mammoth Times and the Jamestown Sun. "They may have been small but they were the strongest counts and the most egregious examples," says Ted Chung, a Chicago lawyer and former U.S. prosecutor who followed the trial closely. "The jurors were able to make sense of the different counts."

Black's downfall began in the late 1990s. With Hollinger International struggling under debt, Black and his partner David Radler began to sell off the chain's small community papers to raise cash. According to prosecutors, with each sale Black and his co-defendants wrangled illegal payments out of Hollinger International in the form of non-compete payments from the purchasers.

That was the charge when it came to Hollinger's negotiations with Forum Communications. In September 2000, Forum, a tiny newspaper company in Fargo, N.D., snapped up a couple of Hollinger papers - including the Jamestown Sun (and its 7,100 readers) - for US$14 million. The deal included a $400,000 non-compete fee, which guaranteed that the seller would not open a rival paper anywhere near Jamestown, N.D., for three years. Forum's 61-year-old president Lloyd Case, who has been described as a "gravel-voiced, slightly weather-beaten figure," testified that he had not requested a non-compete. Why would he? He'd barely heard of Conrad Black. And he didn't expect Hollinger - which, as far as he could tell, was in the business of dumping properties - would ever want to set up across the street from him in Jamestown. But Case was assured that the non-compete didn't affect the purchase price. "We'd be silly not to take it," he told the jury. "It was not a consequential thing to me." So much so that when he inked the deal, Case, an accountant by trade, is reported to have hardly noticed that US$100,000 of the fee was heading straight into the bank account of Hollinger Inc., a holding company controlled by Black and Radler, instead of Hollinger International.

A couple of days later, Paxton Media Group bought about 20 newspapers from Hollinger for US$59 million. The deal, which involved papers in Michigan and Indiana, included a US$2-million non-compete payment, of which $500,000 went directly to Hollinger Inc. David Paxton, the president and CEO of the Paducah, Ky.-based firm, testified at the trial that while non-competes were standard practice for his company when dealing with those who had close ties with the community, he hadn't requested one of Black and his associates because he didn't consider them a competitive threat. But when it finally came down to signing on the dotted line, it "didn't hurt" to include Hollinger Inc.'s name in the deal, he testified, because it didn't affect the bottom line.

The defence tried to argue the non-compete payments were not just approved by directors, but that the existence of the payments weren't deal breakers for Paxton and Forum. But jurors drew the line between those buyers who simply acknowledged the non-compete clauses, and those who actually sought them out from Hollinger. For instance, the biggest payout Black and the other executives received came when Hollinger sold its Canadian dailies to CanWest Communications. The men pocketed US$51.8 million in non-competes. But in that case, CanWest's late chairman Izzy Asper had made it clear he wanted a non-compete clause to block Black from setting up shop again. That was enough for jurors to acquit the defendants on any charges related to CanWest.

While both the Paxton and Forum deals generated non-competes in the mere thousands of dollars, the big money, if it can be called that, was what Black and his colleagues extracted from a Hollinger subsidiary called American Publishing Co. APC had been a big owner of community newspapers in the U.S. in the 1990s, but by February 2001 almost all of of the papers had been sold off, except for the Mammoth Times. That didn't stop the Hollinger executives from signing a non-compete agreement with APC that saw them pocket a total of US$5.5 million in return for not opening up rival newspapers within three years of leaving the company. According to prosecutors, the money was nothing more than a bonus gussied up to look like a non-compete deal, because those types of payments were tax-free in Canada. What it meant though, was that Black and Radler took millions from APC not to compete with themselves. Months later Hollinger unloaded the Mammoth Times to Horizon Publications, a company then owned by Black and Radler, for a buck.

In the greater scheme of things, it was a blip of a transaction. In the Hollinger special committee's report, the whole APC non-compete payment warranted just a few paragraphs out of 513 pages. The report blasted Radler for creating "sham" documents to cover up the payments. But the special committee spent far more ink detailing much larger transactions. In any event, the deal stuck with jurors, who convicted Black on two fraud charges related to the APC payments.

There are some observers who think the jury settled on guilty verdicts in order to avoid further deadlock. "I think it was a compromise verdict," says Andrew Stoltmann, a Chicago attorney who followed the Black trial. "I think if you asked jurors why this particular one, they may not come out and say it was compromise but I bet that's what it was." Yet jurors who have spoken out since the trial have said they almost immediately reached a unanimous guilty verdict on the three smaller fraud charges.

If the jurors were initially divided over the legality of the Paxton, Forum and APC non-compete agreements, they'd have been well within their rights. Self-dealing of the type that went on with APC isn't necessarily illegal, say legal experts. But that assumes there is full disclosure to the company's board of directors. "You can do anything you want in terms of payments as long as the board approves it," says Peter Henning, a law professor at Wayne State University in Detroit who followed the trial. "You can argue, as the defence did, that there's nothing untoward about it."

So where did the defence go wrong, then? Chicago lawyer Hugh Totten says one of the defence team's greatest failures, in relation to the three fraud charges that stuck, was their inability to show how the deals were fair to Hollinger International's shareholders. Clearly it wasn't enough to prove the defendants disclosed the payments, but that the transactions were good for investors, too. "I think the defence went halfway," says Totten, who followed the trial.

Totten thinks that Greenspan and Co. successfully proved that non-competes of this kind are a normal way of doing business and that the amount of money paid was fair considering the overall size of the deals. But, he says - and this is one of the keys to Black's conviction - the defence failed to prove the deals were fair to the shareholders. "They were on the trail and I think they just failed to complete the circle," he says. "Either I missed it, or they just didn't feel they could." It would have been a huge task for the defence to prove Hollinger shareholders got anything out of Black's agreement not to compete with APC and its sole property, the Mammoth Times.

Black has since sold his stake in Horizon - and hence the Mammoth Times - to Radler, but his troubles with the California paper are far from over. The Securities and Exchange Commission has sued Black over the sale of the paper in August 2001. The SEC argues Black and Radler rejected a US$1.25-million offer from a small California publisher to clear the way for their $1 bid, without informing the board of the outside offer. In the end, it was the smaller transactions that sunk Black, and they will continue to haunt him well into the future. Readers in Mammoth Lakes, though, probably won't ever read about it.

Maclean's July 30, 2007