onrad 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.
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
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
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
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.