Former Associate to Testify Against Conrad Black

IT IS NOW WIDELY AGREED that Conrad BLACK is in an inescapable legal trap - sprung by his long-time associate, David Radler.

Former Associate to Testify Against Conrad Black

IT IS NOW WIDELY AGREED that Conrad BLACK is in an inescapable legal trap - sprung by his long-time associate, David Radler. Last month, when Radler decided to plead guilty to fraud, and to co-operate with the ongoing investigation into alleged financial corruption at Hollinger International, pundits were unanimous: this was a legal catastrophe for the fallen press baron. His name hasn't even been mentioned by prosecutors. But hey, we've all seen enough Law and Order to know that once you get the trusted lieutenant to flip on the Big Guy, you've only got a few minutes before credits roll - just enough time for a guilty verdict, and a world-weary sermon from Jack McCoy.

But unlike Law and Order, real life sometimes provides surprise endings. And in the case of Everybody v. Conrad Moffat Black, a few assumptions have been made that may yet prove unfounded. And they could provide some unexpected plot twists before the story's over.

The popular presumptions begin with the fraud indictment brought last month against Radler, former Hollinger lawyer Mark Kipnis, and Black's private holding company Ravelston. Ever since Hollinger International accused Black and Radler of presiding over a "corporate kleptocracy," the world has been waiting for the feds to lower the boom. But now that charges have finally been filed, they look a little scrawny. The case against Radler, Kipnis and Ravelston deals with only a handful of allegedly unauthorized or falsified transactions. According to prosecutors, the executives, along with a few yet-unnamed "co-schemers," diverted US$32 million out of Hollinger through bogus non-compete payments and bonuses between 1998 and February 2001.

Now, where I come from, US$32 million is still a lot of dough, and the charges carry a maximum penalty of 35 years in prison, so this is hardly penny-ante stuff. But it is a far cry from the US$400-million conspiracy outlined by Hollinger more than a year ago. As kleptocracies go, the feds are alleging a rather modest one. What's more, the suspect deals covered by the criminal charges are old news. The company first discovered and disclosed them in the fall of 2003. At the time, they were considered scandalous, but certainly not criminal. Initially, Black was allowed to stay on as chairman. It wasn't until weeks later that the whole affair got really messy and Black was ousted.

The indictment makes no mention of tens of millions of dollars in disputed fees paid to Black, Radler and others as part of the sale of Hollinger's major Canadian newspapers to CanWest in 2000. There's nothing about the hundreds of thousands of dollars in personal expenses contested by the company. And there's no reference to the various questionable loans between Hollinger International and the outlying colonies in Black's Byzantine media empire.

This has left many puzzled, and has led to a widespread belief that there must be a bigger, more damning, more humiliating indictment on the way for Black.

Well, maybe there is. But not necessarily.

The Hollinger report was full of accusations, and a long list of outrageous abuses of corporate power. But even if they're all true (which hasn't been proven), it's not clear that any of them amount to criminal fraud. In fact, most of the central complaints - including the CanWest payments, the alleged misuse of expense accounts, and bloated management fees - were either approved by the board, or fall into the realm of subjective judgment.

It's a big leap from bad governance to criminal fraud. And although we journalists don't often concern ourselves with such distinctions, Federal Court judges do. If much of the alleged misconduct by Hollinger's former executives was disclosed or approved in one way or another, it'll be tough to make a case that anybody should go to the slammer for excessive fees, or hopping the corporate jet for a trip to Bora Bora.

Don't bother floating this possibility in casual conversation however. In New York, London and Toronto, the chattering classes are convinced Black will share the fate of Dennis Kozlowski - the former chief executive of Tyco - who let shareholders finance his opulent lifestyle and is now facing 30 years in the clink. Ask the gossips and they'll tell you the feds are still building a similar case against Black. Radler, they say, is now spilling all the secrets, telling investigators where to look for buried bodies. And there you run into assumption number 2: that David Radler can and will implicate Conrad Black in criminal wrongdoing.

Let's review for a moment what little we know about the way business was conducted in the Hollinger group of companies. For almost 40 years, Radler was Black's ever-present disciple, the nuts-and-bolts operator supporting the big-picture strategist. And if there's one skill with which Radler is universally credited, it's his ability to track every penny flowing through a business. Black, on the other hand, was more interested in mingling with society's upper crust than donning a green eyeshade for some hard-core number crunching.

Black surrounded himself with a group of trusted allies who handled the details. Radler was his hatchet man, Jack Boultbee was his tax expert, Peter Atkinson and Kipnis his lawyers. And while Radler may testify that he was structuring deals on Black's orders, finding a paper trail to corroborate that claim won't be so easy, since decisions at the top executive level were rarely put in writing. You can be sure that if there was any piece of paper, with Black's signature on it, that explicitly detailed malfeasance, Hollinger or the feds would have happily ended our suspense by now.

Everything we know about the company suggests that, at some point, a jury will be asked to weigh one man's word against another's. And that raises the most widely held assumption of all: that David Radler will be a credible star witness for the prosecution.

On this point it's useful to consider some of the major corporate corruption cases that have gone to trial over the past couple of years. Take, for instance, the case of Richard Scrushy, the former chief executive of HealthSouth Corp., who was charged with more than a dozen counts of fraud and money laundering in 2003. The government gathered 15 guilty pleas from other HealthSouth executives, including five former finance chiefs, and they all testified against Scrushy. One even secretly recorded the CEO talking about accounting irregularities at the company.

But in June, Scrushy was found not guilty on all counts. In a statement released to the media after the decision, jurors said "the reason behind our verdict was the lack of substantial evidence and witnesses' credibility." After listening to more than two months of testimony, the jury simply didn't believe a bunch of admitted fraudsters seeking to mitigate their own punishment by shifting blame up the line of command.

Of course, there are many other top executives - Bernie Ebbers at WorldCom and John Rigas at Adelphia, for example - who have been convicted on the word of their underlings. But the fact remains that testimony obtained from co-conspirators is inherently flawed. And given that Radler was widely known to be a more hands-on executive than Black was, it seems prosecutors are going to need a lot more than his word to make a case stick.

We all think we know how this story is going to end, but let's bear a few things in mind while we wait for the curtain to fall. There's a gap between what we know and what we've assumed. After more than a year of investigation, Conrad Black has not even been charged, let alone tried. We have no idea what David Radler is going to say. And even the most damaging testimony is no guarantee of conviction. None of that excuses what happened at Hollinger, of course. If just half of the allegations are true, it'll go down as one of the ugliest cases of corporate mismanagement on record. But many of Black's detractors are way ahead of themselves.

It's worth remembering that it was Black who initiated the company's internal investigation to quell shareholder unrest. And when the board first uncovered the contentious US$32 million, Black blamed it on administrative bungling by subordinates, and promised to pay back every penny. From there, the Hollinger affair devolved into a snake pit of lawsuits, counterclaims, threats and intimidation. But through it all, Black has never wavered from his contention that, as far as he knew, everything at Hollinger was done within the letter of the law.

It may be that Black is in a legal corner he can't escape. Maybe he'll be charged. Maybe he'll be convicted. Maybe he'll even go to jail. And maybe, that would be justice. But if even one of our many assumptions is off the mark, then there is another possibility few have paused to consider: maybe Conrad Black - after losing his publishing empire, his reputation, his cherished circle of influential friends and much of his money - has already faced all the punishment he's likely to get.

Maclean's September 12, 2005