Corporate Kleptocracy
Why Conrad Black has Hollinger investors seeing red
If those folksy delegates in New York for last week's Republican convention strolled down Park Avenue, they must have wondered how anybody can afford such opulent homes. Here's one way: Get your company to buy a $3 million apartment in one of Manhattan's glitziest neighborhoods. Buy a much smaller pad in the same building for $499,000. Six years later, swap your little place and $2.15 million for the swankier digs. Forget the fact that the top-drawer space has appreciated considerably, and you just made a cool $2.5 million.
That's one of dozens of grandiose schemes that media mogul Conrad Black cooked up to finance his lavish, globetrotting lifestyle. Or so says a scathing, 513-page report a special committee of Hollinger International, the publishing conglomerate Black once ran, released last week. The Chicago-based company, which owns the Chicago Sun-Times and dozens of smaller U.S. and Canadian newspapers, ousted Black as chairman in January and sued him and other former top executives for $1.25 billion. The report depicts Hollinger as part Enron and part Tyco, a personal "piggy bank" for Black and his longtime business partner David Radler (formerly chief operating officer of Hollinger). "Behind a constant stream of bombast regarding their accomplishments as self-described 'proprietors,' Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise," fumes the committee in the report.
Fancy perks. From 1997 to 2003, the report alleges, Black and his cronies helped themselves to more than $400 million from Hollinger coffers--nearly equal to the company's net income during that period. Then there were the fringe benefits that Black allegedly expensed: $1.4 million for a personal chef, maids, and butlers at his four homes; $42,870 for a birthday bash for his wife, Barbara Amiel-Black; $390,000 for the care of his Rolls-Royce and other cars; "summer drinks," $24,950. Hollinger, meanwhile, began losing money, and its stock price drifted down. By 2003, the report concludes, Hollinger had become an enterprise "whose sole preoccupation was generating current cash for the controlling shareholders."
The portrait of excess might sound familiar. But the 14-month "corporate kleptocracy" investigation, as they call it, led by former Securities and Exchange Commission Chairman Richard Breeden, emboldens a growing posse of regulators and shareholders who for years have been demanding more accountability and better corporate performance from the grandiloquent Black, a 60-year-old Canadian who was declared Lord Black of Crossharbour and given a seat in Britain's House of Lords in 2001. It also reveals the curious connection between charismatic moneymen and the public eminences they court. As Black hobnobbed with high society, he attracted board members with unusually high wattage for a midsize company, including former Secretary of State Henry Kissinger and Richard Perle, a key Pentagon adviser. By and large, the group rubber-stamped ruinous management practices, according to the report. The committee singled out Perle, in particular, for "head-in-the-sand behavior" and speculates he may be liable for damages. Perle denies the charges (box, Page 44).
Black, who strenuously denies the allegations, has long been famous for his ego and flamboyance. And for many years he was also pretty good at publishing. Hollinger began as a family-owned mining company in the 1980s and started buying newspapers a few years later. In 1987, it purchased a controlling interest in the flagging London Daily Telegraph , which Black helped transform into a stable counterpunch to Rupert Murdoch's more liberal Times . Hollinger bought a majority stake in the Jerusalem Post in 1989 and purchased the Chicago Sun-Times in 1994, the same year Black took Hollinger public. Black soon became a social power, even publishing a memoir, A Life in Progress . To soften his image, Black directed Hollinger to donate several million dollars to charities but allegedly took credit for much of the philanthropy.
After Hollinger went public, its revenues rocketed from $422 million to $2.21 billion in 1997. The company owned more than 500 papers, but by then the seeds of corruption were deeply rooted, the report alleges. Black had established a convoluted ownership structure: In addition to their roles at Hollinger, Black and Radler also controlled two entities--Ravelston and HLG--which owned large chunks of Hollinger's voting shares. According to the report, Hollinger began paying "management fees" to the two firms--roughly $218 million in total--virtually all of which allegedly went into the pockets of Black, his wife, Radler, and a handful of others.
Pay plums. In the late '90s, Hollinger began selling many of its smaller publications to reduce debt. That led to so-called noncompete payments to Black and Radler that the report declared to be "nothing more than self-determined bonuses" worth an additional $90.2 million. Other unusual arrangements included allegedly paying Black's wife--an opinion columnist and ambitious socialite--$1.1 million in salary for a "no-show" post. Black and Radler also each had their own corporate jets--a $24 million tab--which mainly ferried them to their various proper-ties. And Hollinger bought nearly $9 million of Franklin D. Roosevelt memorabilia, most of which ended up in Black's homes and helped him write a biography of the former president.
Black issued a statement calling the committee's work a futile effort "that paralyzed Hollinger International, eroded the value of its assets, and persecuted and defamed the men and women who created the value they are now vandalizing." He offered no specifics but promised that he would be exonerated in his litigation with Hollinger, which also includes an $850 million countersuit by Black claiming several Hollinger directors defamed him. Through a spokesman, Radler said the accusations of improper compensation were "baseless" and "false," and pointed out that he has returned some of the noncompete payments as a good-faith gesture and offered to mediate other issues.
Besides, as both men point out, Hollinger's directors--a "renowned and sophisticated" group, in Black's words--approved all major transactions. In addition to Kissinger and Perle, Hollinger boards have included former U.S. Ambassador to the U.S.S.R. Robert Strauss, Limited Brands CEO Leslie Wexner, and former Illinois Gov. Jim Thompson. But they behaved "more like a social club," according to the report, and "were not alert and didn't notice when Black and Radler were driving their bloated fee requests past them." Except for Perle, those former board members get off relatively easy in the report, which noted they routinely received misleading information from the company's honchos.
Black, a war buff fond of military analogies, surely could find one that describes his current predicament. He could be on the hook for millions of dollars, the SEC might censure or fine him or, worse, seek criminal prosecution, and many of his well-connected friends now shun him. Is Black a Napoleon facing his Waterloo? Or a courageous Churchill shaking his fist at the Nazis? Whatever the case, don't look for him to surrender.
With Danielle Knight
This story appears in the September 13, 2004 print edition of U.S. News & World Report.