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Panel Says Conrad Black Ran a 'Corporate Kleptocracy'

By FLOYD NORRIS

Published: August 31, 2004


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Lord Conrad Black, the former chief executive officer and chairman of Hollinger International, is shown here in February, 2004.

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Some of the most scathing criticism in the report was reserved for Richard N. Perle, a member of a Pentagon advisory board, shown here on Meet the Press in February, 2003.

Conrad M. Black ran a "corporate kleptocracy" for his own benefit at Hollinger International, the publisher of The Chicago Sun-Times and other newspapers, and the board of directors failed in its responsibilities to monitor what he was doing, a committee of that board concluded in a report filed on Monday in federal court in Chicago and made available today.

" Hollinger wasn't a company where isolated improper and abusive acts took place," said the report, largely written by Richard C. Breeden, a former chairman of the Securities and Exchange Commission. Rather, it said, Hollinger was "an entity in which ethical corruption was a defining characteristic."

Lord Black controlled Hollinger through a series of holding companies and super voting stock, but his control of the company was effectively ended when the board broke with him and persuaded a Delaware judge to allow the company to sell The Telegraph papers over Lord Black's objections. The company has sued Lord Black and his associates for $1.25 billion in federal court in Illinois.

While the report was careful to insist that Lord Black and F. David Radler, Hollinger's former chief operating officer, were "the primary offenders, the consistent inaction of the Hollinger board also resulted in squandering opportunities for stopping abusive acts before the damage was too great."

The report was particularly critical of the audit committee of the board, which it said had not performed its duties to monitor what was going on. But the report saved its harshest criticism for Richard Perle, the former Reagan administration official and current member of a Pentagon advisory board. It said it did not consider Mr. Perle to have been an independent director and called on him to return $5.4 million in pay he received after "putting his own interests above those of Hollinger's shareholders."

It said James R. Thompson, a former governor of Illinois and the chairman of Hollinger's audit committee when the abuse was taking place, had accepted the word of Lord Black and Mr. Radler on many things, allowing them to take excessive management fees and nearly all the company's profits for themselves. "He failed to apply the critical part of former President Reagan's famous dictum to `Trust, but Verify.' "

The report said that Hollinger's auditors, KPMG, and its outside Canadian law firm, Torys, had not warned the audit committee that the management fees might be so large as to violate fiduciary standards, as the special committee claims they did, nor did the auditors or lawyers raise questions about "noncompete" fees paid to Lord Black and Mr. Radler that the committee concluded were improper.

It said Mr. Thompson and two other members of the audit committee, Richard D. Burt, a former United States ambassador to Germany, and Marie-Josée Kravis, the wife of the financier Henry Kravis, "failed to respond critically to the repeated demands for noncompete payments even though they should all have known these payments were highly unusual from the numerous boards on which they had served."

The report was gentle in dealing with some former directors, including Henry Kissinger, the former United States secretary of state. It said they had acted reasonably in reviewing the recommendations of the audit committee and were entitled to assume the committee had done its job properly.

But the committee said large Hollinger donations to "pet charities" of various directors, including Mr. Kissinger and Robert Strauss, a former chairman of the Democratic National Committee, "without the restraint of sound corporate governance controls, raises questions regarding the independence of those directors."

Mr. Perle was criticized for his involvement in Hollinger's Internet subsidiary, in which he, Lord Black and others were granted 22 percent of profits on successful investments — a total of $8.3 million — even though the subsidiary lost money over all. His share came to more than $3 million.

The report said Mr. Perle "repeatedly breached his fiducicary duties" as a member of the board's executive committee, in approving improper deals to benefit himself and Lord Black. It said Hollinger had made a bad investment in a partnership run by Mr. Perle. "As a faithless fiduciary, Perle should be required to disgorge all compensation received from the company," the report said.

Lord Black has repeatedly denied he did anything wrong and has said the board approved the transactions for which he has been criticized. A call to his secretary in Toronto was not immediately returned today. Nor was a call to Mr. Perle at his office at the American Enterprise Institute in Washington.

A KPMG spokeman said the firm had cooperated in the investigation but did not discuss its findings.

The report lays out in devastating detail the ways in which it says Lord Black and his associates drained $400 million, or 95 percent of Hollinger's adjusted net income from 1997 through 2003. It said much of that was accomplished by having Hollinger pay a "management fee" to a company controlled by Lord Black. It then paid management salaries, but the amounts were not disclosed and the board evidently never asked for details. The report concluded that the salaries were wildly exorbitant.

American companies are required to disclose salaries paid to the top five officers, but the report said Hollinger failed to disclose as much as 96 percent of the amounts it should have disclosed.


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