The Deal from Hell

by James O'Shea

  As the Newsday investigation unfolded, two things became clear: the imagination of Sito’s team worked overtime, and Newsday wasn’t alone. When ABC auditors suspected that hawkers got copies of Newsday in preferential deals that allowed them to sell what they could and dump the rest in recycling bins, the auditors tried to clandestinely observe whether the sales actually occurred. But Sito’s team got wind of the probe and dispatched Newsday employees to the hawker sites to buy up the papers.

  The entire U.S. newspaper industry was watching the evolving investigation with bated breath. There was more than a grain of truth to the “everybody does it” defense that Newsday employees articulated. “I don’t think people were doing stuff that was criminal,” said Jack Klunder, the former director of circulation at the Los Angeles Times. “But a lot of people aggressively pushed the limits of the ABC rules.” Circulation directors would convince the local Ford dealer to buy 1,000 to 50,000 papers at a discount to be donated to schools. The newspaper would publicly recognize the Ford dealer as a pillar of the community, school kids would get papers, and the newspaper got paid circulation because of the Newspaper In Education (NIE) program, which was permitted by ABC rules. What few knew was that the Ford dealer often got a discount on the ads purchased that was eerily similar to what he had paid for the papers: In effect, the papers often were free. As details leaked out of the secretive federal investigation on Long Island, other newspaper publishers looked within.

  The potential scope of the problem the industry faced is buried in ABC audit reports, complex documents available to dues-paying members and full of granular data that newspaper publishers slice and dice to show advertisers how they can penetrate choice zip codes full of affluent readers. Even after Newsday cleaned up its act, its ABC audit for 2004, the year that Giaimo filed suit, reported that it sold an average of 482,182 papers a day. But if you add up the totals reported for home-delivery and single-copy sales, you get an average of only 354,215 papers sold each day, a gap of 127,967 papers that fall into a dubious category that includes bulk sales of papers provided at a discount to schools or hotels or parking lots for a balloon race. That’s really “junk” circulation. Even if you assume that the ABC reports accurately on single-copy and home-delivery sales, 27 percent of the circulation that Newsday reported to the ABC fell into the junk category. And that’s after the paper restated its circulation figures to remove bogus readership.

  By 2005, when the scandal was unfolding, ABC audits revealed that many American newspapers had junk circulation profiles similar to Newsday’s, particularly large metro dailies where circulation decline was most acute. At the Los Angeles Times, junk accounted for 21 percent of its circulation; the San Jose Mercury News—23 percent; the Houston Chronicle—25 percent; the Miami Herald—23 percent; the Atlanta Journal—15 percent. A few papers like the Chicago Tribune showed only 5 percent, but many others had built up a sizable portfolio of junk circulation designed to inflate their numbers and support higher ad rates.

  Banar summoned the Tribune brass one by one to a cavernous room in the spacious marble halls of the U.S. District Courthouse in Brooklyn. FitzSimons had made Hiller publisher of the Chicago Tribune and he soon found himself at the U.S. Court House in Brooklyn, under scrutiny by Banar and her team. Even whistle blowers like Digby Solomon were under suspicion:I had written a memo about what I knew and gave it to Crane [Kenney, the Tribune’s general counsel] and then I got a call from this guy with the IRS. We had one meeting at the [courthouse in Brooklyn]. I thought I was going in as a friendly witness. I walk into this big room and here are all these people. One guy has a freaking 38 strapped to his bicep. It became obvious to me that Louie has spun the story well. They started asking me stuff like, ‘Why didn’t I tell Dennis FitzSimons to fire Ray Jansen?’ Then I gave them a statement that contradicted one of their witnesses. And this guy [a prosecutor] says to me, why don’t we take a break and you go out into the hall and discuss with your attorney the penalties for perjury.

  The investigation that Banar started would last for years and have a huge impact in newspaper offices across the country. Circulation directors couldn’t figure out where Banar and the Feds drew the line between pushing the limits on ABC rules and circulation fraud. Advertisers too began to question readership totals that included junk circulation. Soon publishers began quietly pruning junk circulation from their totals, accelerating the circulation declines in the numbers they reported to the ABC, and making a bad situation look worse.

  The credibility of journalists took a hit too, even though most had no idea what was going on in their own business offices, a perverse effect of the wall that separated them from the business of journalism. Bloggers, politicians, press critics, and academics already had started attacking the credibility of journalists for things like failing to expose the Bush administration’s faulty intelligence that led to the war in Iraq. Now they faced a more fundamental question: How can you trust news reports from people who don’t even tell the truth about how many papers they’ve sold? Nowhere was the impact of the scandal felt more tangibly than at Newsday. Knight set up a huge room where the paper’s employees began calculating the extent of the circulation fraud, and how much the paper owed advertisers who had paid ad rates based on the fake numbers. Knight concluded that Newsday had overstated its circulation by about 100,000 copies. When all was counted, the scandal cost Newsday $100 million in fines and ad rebates. And as for the man who started it all, Joseph O. Giaimo? His lawsuit is still pending.

  13

  Count Kern

  When the Newsday scandal broke, Fuller walked into FitzSimons’ office to offer his resignation. Not only had Fuller promoted Sito, the man in large part directly responsible for the nightmarish circulation fudging, he had failed to rein in Sito’s boss, Jansen, who had stubbornly resisted Tribune’s efforts to place controls on Newsday.

  I felt particularly bad about the fallout from Newsday. George de Lama, my top deputy, was Sito’s cousin. De Lama is a man of unparalleled honesty and character. I rarely made a decision I didn’t first discuss with him, and he saved me from myself more times than I can mention. I knew Sito and liked him, with the kind of affection you reserve for your most devious sources. Sito admitted circulation fraud in federal court, but he didn’t invent it. Jansen insists that he knew nothing about Sito’s “rogue” operation, but that was not true. Sito had openly disclosed bogus circulation numbers in a letter written to Jansen prior to the scandal. U.S. District Court Judge Jack Weinstein, who presided over the prosecution, didn’t buy the rogue operation defense either.“In going over the papers and records of the case, I decided it was highly unlikely that all of this could have occurred without the knowledge of the publisher . . . who had a reputation of running the place with a strong hand, or higher-ups at Tribune. This was a fraud that totaled over $100 million. So I insisted the U.S. Attorney make further inquiries,” the judge noted. In court, he publicly challenged prosecutors, demanding, “Why wasn’t the publisher prosecuted along with the underlings?”

  Fuller said that he didn’t know about the fraud at Newsday, but admits he should have. Had he not promoted Jansen and Sito, the scandal probably would have been discovered much sooner. Rather than accept his offer to step down, FitzSimons placed Fuller in charge of the company’s response to Banar’s investigation, for which Fuller rightly felt responsible. As a former Justice Department lawyer, Fuller was up to the task. In short order, he started an internal investigation designed to bring the whole controversy to an end. But Banar was just getting started. She and her Brooklyn colleagues were highly suspicious when Fuller hired Tribune’s long-term outside law firm, Sidley Austin, to conduct an in-house probe—particularly when the internal investigation contradicted Banar’s witnesses, who had told her that the fraud was not limited to one small department. If Banar’s witnesses were to be believed, Sito and Brennan, who’d been dismissed by Tribune, hadn’t acted in isolation. And Banar didn’t trust the auditors from ABC, which
was financed by the newspaper industry: “The ABC guys were all paper folks.” Banar noted. “There was no way they were going to blow the whistle. This was an industry regulating itself. They didn’t want to do anything that would cause the fall of newspapers.”

  Federal prosecutors routinely cut plea and sentencing deals with cooperating witnesses in return for testimony, and once Banar corralled as cooperating witnesses the men who had been dismissed by Tribune, she saw a pattern emerge, not unlike the one that Giaimo outlined in his lawsuit: “From the lower-level folks, we started to get a sense of a scheme in which sales agents are pressured to inflate the numbers. That’s when we really started to think there was something there.” With encouragement from public statements of Judge Weinstein, Banar shifted her focus toward executives high up at Tribune—including FitzSimons, Fuller, and Hiller. The Feds had concluded that Solomon was telling the truth when he said he’d alerted his superiors to the scheme. But prosecutors felt those same superiors had done their best to mask the extent of the problem.

  For FitzSimons, Banar’s investigation couldn’t have come at a worse time. He had inherited the reins of a company that had consistently delivered strong financial results. Over time, Wall Street had come to expect high returns from Tribune. FitzSimons was under enormous pressure to cut costs while maintaining profitability north of 20 percent. The constant pressure to keep profits at a steady rate of increase invariably resulted in culture clashes—between Wall Street and Tribune’s business operations; between the business side of the paper responsible for generating revenue and editorial; between TV journalists (whose already lean budgets had come under increased scrutiny) and newspaper journalists; between web journalists (who viewed their counterparts in print as dinosaurs) and print journalists; and, notably, between Fuller and FitzSimons.

  Relations between Fuller and FitzSimons had never been smooth. Fuller had labored long and hard to educate the business side of the paper about the importance of editorial integrity, which he outlined in his book News Values. He had gone so far as to mandate mock page-one meetings for business executives to educate them about the thoughtful process editors went through to select top stories for page one. The sessions changed the way many business executives viewed journalists, but not FitzSimons. Fuller had given FitzSimons a copy of News Values when the company named him CEO. But FitzSimons, by Fuller’s account, later told him he kept the book on his bedside table so he’d have something he could read—when he wanted to fall asleep. In 2004, when the Pulitzer board announced that Tribune papers had won five Pulitzers for news coverage in 2003, the awards provided Fuller a moment of respite from warding off critics and recent charges in the Newsday case. At a management meeting following the Pulitzer announcement, Fuller was incensed when FitzSimons dismissed the prizes as rigged, ego-driven rewards that journalists used to impress their friends in the business. The chasm between the president of Tribune publishing and its CEO was too great to sustain.

  Fuller announced his resignation on October 28, 2004, six months after Giaimo had filed his lawsuit. For severance, Fuller received a “consulting fee” of $51,500 a month, for a year, plus office space in Tribune Tower. As an editor and journalist, I disagreed with Fuller on a number of things—chief among them, his libertarian politics and his lack of enthusiasm for investigative journalism. But I respected Fuller. He was someone who could embrace his critics, and he had the ability to truly inspire people. He promoted journalists with whom he routinely disagreed to positions of power and influence because he believed in the power of journalism. He knew a good newspaper editor needed independence as much as ink and paper.

  On his last day at Tribune, Fuller dropped in on the Chicago Tribune’s page-one meeting. He said he wanted to leave the building from the newsroom, his point of entry at a newspaper he had helped build into a respected institution of which he was justifiably proud.

  Although his skeptics didn’t believe him, Fuller said he didn’t leave because of the circulation scandal at Newsday. And I believed him. He could have weathered a circulation scandal; he simply couldn’t stand FitzSimons.

  I felt the impact of Fuller’s departure and the impending sea change almost immediately—the same way my Irish Setter used to duck under the porch before anyone knew a storm was brewing. FitzSimons replaced Fuller with Scott Smith, the publisher of the Chicago Tribune and a man I had come to respect despite his waspy North Shore pedigree and soulless belief that doing more with less was one of the Ten Commandments. Hiller, the lawyer who had been in charge of due diligence on the Times Mirror deal, was named the publisher of the Tribune. My gut told me that things had changed more fundamentally than these new appointments might suggest, and as a reporter I had learned to trust my gut. At meetings with business colleagues, I felt a cool shift. I detected a sense of empowerment in the irreverent questions that flourished about why editors put depressing news of the Iraq war on page one instead of “what readers wanted”—frivolous celebrity gossip and less serious news. The business side of the paper began to look at editorial differently, with less respect and with less intimidation. It was painfully clear that we no longer had a powerful advocate in the upper reaches of the Tower.

  Following Fuller’s departure, the culture clashes that had begun to brew only intensified. It was notably apparent at the Los Angeles Times, the company’s largest source of revenue, which had a staff nearly double the size of the Chicago Tribune. The Times newsroom resented the Chandlers’ sale of the paper to Chicago, even though Willes and the Staples incident had smeared the paper’s reputation to the rest of the publishing world.

  Lipinski had been promoted to editor of the Tribune after her boss, Howard Tyner, had been given a high-level job in the publishing group to help devise ways that the newspaper, television, and Internet operations could work together. During Tyner’s first editors’ meeting at Tribune Tower, which included editors from all the Tribune papers, Los Angeles Times editor John Carroll made it clear that he could care less about synergy, the buzzword that everyone used to describe collaboration among Tribune business units. Carroll was paticularly caustic on the subject and made remarks that Chicago Tribune editors considered insulting, comparing Chicago Tribune stories to advertorials. Commenting upon the Los Angeles Times’ tendency to run long stories that often “jumped” (continued to different pages of the paper), Newsday editor, Tony Marro, whose tabloid was known for much shorter stories, quipped: “If I wanted to run Los Angeles Times stories in Newsday, I’d have to jump them into the Hartford Courant.”

  I had always envied the sheer size of the Times editorial staff. In Chicago, my staff and I fantasized about what a difference it would make in our ability to compete in the marketplace if Fuller would take just a hundred jobs from the Times and give them to the Tribune. But I knew cooperation between the papers was no game-changing strategy and that it had its limits. Tyner had not been given any real authority to make people cooperate. So he relentlessly tried to jawbone the papers into working with each other, although none of the champions of synergy could really articulate exactly how cooperation would help with anything other than to lower costs.

  Tribune’s headquarters in Chicago was known as “synergy city,” but in truth the idea of working together had never really worked. We had created newsrooms in television studios and broadcast outlets in newsrooms, but most television journalists privately thought interviewing a print reporter on air was simply bad TV. Some newspaper reporters willingly participated in interviews, but many balked. Most KTLA broadcast journalists castigated the Los Angeles Times on air as arrogant because the paper looked down its nose at KTLA’s celebrated morning news show, which Baquet described to me as “the gong show.”

  The company’s effort to place correspondents and reporters from various Tribune papers near each other also backfired. The Chicago Tribune probably had more in common with Newsday than with the Los Angeles Times. But synergy with Newsday didn’t work either.

  To save on rent, w
e had moved the Chicago Tribune’s four New York correspondents into 2 Park Avenue in New York, where Newsday and the Los Angeles Times also had bureaus. But Jansen soon engineered a renovation in New York, erecting a wall that made it physically impossible for Tribune correspondents to go to the bathroom unless they exited the bureau space, walked down a hall, and reentered the bureau through another door. When New York–based Tribune reporters had chance encounters on the elevator with journalists from Los Angeles Times, they were often ignored. When the Times sent a platoon of reporters to New York to help out with coverage of the terrorist attacks on September 11, 2001, Lisa Anderson, the Tribune’s New York bureau chief, couldn’t help but notice that the Los Angeles Times bureau catered meals from Eli Zabar’s lavish Madison Avenue deli.

  No one really had the guts to say what synergy was really about until Tribune Company promoted an ambitious corporate aide who would expose the whole scheme for what it really was: the desire to cut staff as much as possible without readers catching on. Gerould W. Kern came to the Chicago Tribune in 1991 as a deputy editor on the metro desk. Unlike many Tribune editors, Kern had never worked as a correspondent, covered a war, or distinguished himself as an investigative reporter. Prior to the Chicago Tribune, the biggest job he’d ever had was as managing editor of the Arlington Heights Daily Herald, a suburban Chicago newspaper where he helped drive up the circulation by strengthening the paper’s zoned local news and mimicking the more sophisticated coverage of the Chicago Tribune. The Tribune hired him in a drive to improve its zoned coverage: local news sections targeted to a narrower audience of readers and advertisers.