Last week the Fort Worth Star-Telegram broke a story saying the Dallas County district attorney had sent a grand jury subpoena to the Belo Corp., owners of The Dallas Morning News, as part of a criminal investigation of business fraud at the paper. The Morning News published a catch-up story about itself the day after the story broke in the Star-Telegram.
No pants, man.
Circulation fraud is claiming to distribute more newspapers than are really distributed and then charging advertisers a higher rate because of it. It's serious. The equivalent would be a cell phone company telling you it has towers all over the country, and later you find out they have only one tower on top of their double-wide office building.
It's cheating. But is it criminal? A local criminal probe was announced last year in Nassau County, New York, shortly after a circulation fraud scandal broke at Newsday. The Securities and Exchange Commission has been looking into circulation fraud issues at Hollinger International, the Tribune Co. and Belo as well, but neither of those investigations has produced accusations or indictments.
The known and alleged details in the Belo story can be read at least two ways: 1) Top Belo officials knew about the circ fraud problem at the News a year before they disclosed it to investors and covered it up with a fake story, or 2) top Belo management sniffed trouble early on and jumped on it. Now devil-dog class-action lawyers are trying to portray Belo's reform efforts as a conspiracy. More on all that in a minute.
The thing we know for sure right away is that someone in the Belo Corp. is making the Morning News look as doofusy as possible while this business drags on. Ticklish, squeamish, goosey: Whatever you want to call the paper's public posture, it's exactly the wrong thing. It's the kind of behavior that elicits public stoning.
On one hand, I guess, this should make me happy. I skipped school the day they taught us not to gloat. On the other hand I enjoy crossing swords with the city's only daily newspaper, not watching it commit suicide.
Left to its own devices and given the number of sophisticated news professionals on its staff, the Morning News certainly would have broken this story itself, had it been able. I have to believe the squeamishness is corporate and lawyerly.
But to what end?
The subpoena from a Dallas County grand jury sat on the desk of Morning News Publisher James M. Moroney III for a week before anybody made a peep. Maybe Belo needed time to digest.
The problem was that Belo Corp., a public company, had to publish its first quarterly report and disclosures on April 21--Thursday of last week. They actually put their report up on their Web page the day before, on Wednesday, and in that disclosure, they had to reveal the subpoena to investors in order to stay right with federal securities law.
I knew about it within maybe half an hour of when it went up on the Web site. How? Well, I must ask: Who wants to know? If it is my employer asking, then the answer is that I noticed it as part of my painstaking and unstinting surveillance of the news front, which I carry out even at the cost of sleep and personal happiness, in my relentless search for important stories that may be of journalistic and/or commercial value to my employer.
If it's you, I can tell: A helpful and much appreciated source interrupted me in the middle of my morning oatmeal and told me. I'm sure the Startlegram found out in a similar fashion. Sources do call, thank goodness.
Thus is the way of the world.
And thus is what, by the way, Belo should have known. Give me a break. Somebody thought they were going to slip it into the agate type down at the bottom of a disclosure, and maybe nobody would notice?
Genius.
Here is the really bizarre part: When the Morning News finally did report the story, the paper did it under the byline of a reporter for The Providence Journal in Rhode Island--a Belo property. Somehow, using the guy in Providence is someone's idea of how to avoid an appearance of conflict of interest at the News. But it just looks goofy. It makes no sense, like in addition to no pants, they have their shirt on backward.
Contrast all of this with Newsday, the Long Island, New York, newspaper caught in a circulation fraud story last year when a group of advertisers sued. Newsday sent out a team of reporters to do a thorough, hard-hitting story on its own circulation department. That is the only way a news medium can cleanse a wound to its credibility. When your basic product is supposed to be the truth, you better not let wounds like that fester.
So what could the Dallas County district attorney possibly be looking at? Belo has already conducted an internal investigation, some of which was made public. The company says employees and contractors lied about circulation in order to cash in on an incentive program.
Shortly after the Belo circulation story broke, William Lerach, a class-action lawyer in San Diego, brought suit against the company in federal court for violation of securities laws, claiming Belo's top management had harmed shareholders by misleading them about circulation. The Morning News gave Lerach's suit and a couple of others that followed some cursory coverage when they were filed.
But things have changed. In February, an amended complaint was filed in the Lerach suit, which has received no coverage in the News. In this new complaint, we begin to see some of the detail that the Dallas County district attorney also may be looking at.
The new complaint claims that Robert Decherd, Belo chairman and CEO, and six other members of an elite management committee knew they had a circulation fraud problem in late 2003 or early 2004, almost a year before they had acknowledged knowing in public statements. The suit says Decherd and other top officers knew they were going to have to revise circulation numbers downward, but they dissembled about why. The suit says Belo officers told investors that circulation for the News was going to decline because the News was changing the way it counted state circulation.
The suit quotes Belo as telling investors: "The decrease is attributable to a change in our methodology for calculating state circulation from one acceptable method to another."
The suit then concludes: "This statement was an outright lie, as defendants knew that the circulation decline was not because of a change in calculation methodology."
We have to do a few cautions here. Neither Lerach nor Belo called me back in response to my request for comment on this lawsuit. It looks to me as if Lerach has harvested a good deal of his detail from Belo's own investigation and declarations. He's in the class-action lawsuit business.
I can't tell you how much I hate thinking up Belo's defense, especially after they have snubbed me by not calling me back. Fortunately, I guess, this is about the 2,475th time they've snubbed me, so maybe I'm a little used to it. But if I were Belo (God forbid, for both our sakes), I guess I'd claim that they started smelling a rat in circulation early on. They cut off the incentive programs that were feeding the rat. Later, when they found out how big the rat was, they killed the rat. Now this class-action guy in California wants to use their best efforts against them as proof of a conspiracy.
And if I were District Attorney Bill Hill, I might smell rat leavings in all of it. Take the incentive programs. Belo gave cash and trips to delivery contractors for increasing circulation. But ask yourself: How much salesmanship did they really expect from the brave men and women in pickup trucks who drive up and down our urban streets throwing papers when it's still dark outside? How many new subscribers could they sign up? And why were incentives also given to the full-time employees who were supposed to audit the numbers provided by the contractors?
At the bank, you don't give the internal auditor a gift certificate to a gentleman's club for reporting that deposits have increased. Well, I guess we did do that quite a bit in Dallas back in the '80s, but that's also why we no longer have locally owned banks.
Is any of it a state crime, though? Securities fraud is one thing, but is there enough strictly local dirt here--enough of a shot at a Texas felony charge--to warrant a grand jury probe? People who are politically wired have expressed surprise to me that a county politician would even take on the city's only daily newspaper.
For that, Hill deserves respect. It can't be easy for any political official to go after the region's single biggest manufacturer of local political news.
But I guess I have to add this, too: Maybe the single factor that gives Hill the best cover and makes it possible for him to do this is the ridiculous posture Belo has forced on its flagship newspaper in this story. The paper looks like it's trying to kill the story by sitting on it, which seems arrogant and overweight. That makes people stoop and begin to gather stones--a basic principle of public relations that has been in operation pretty much since the Old Testament.
