News Corp. Noose Tightens in the U.S. (Analysis)
This story first appeared in the May 18 issue of The Hollywood Reporter magazine.
The News Corp. scandal is like a fast-moving wildfire that seems to be zero percent contained. Yet while many analysts on Wall Street don't even smell smoke, there are several signs that the inferno could jump the Atlantic to its U.S. headquarters.
"We find it difficult to foresee meaningful problems for News Corp.'s non-U.K. assets, which represent the vast majority of News Corp.'s market capitalization," BTIG analyst Richard Greenfield said in a May 1 report -- the day that a British parliamentary panel found that CEO Rupert Murdoch is "not a fit person" to run the company that he built.
But the developments are worrisome enough that one longtime media investor says he wouldn't own News Corp. stock, even though the company's assets are strong and the share price is relatively low. "I don't want to own the sweater because the sweater is unraveling," he says.
News Corp. faces multiple investigations in the U.S. that have the potential to lead to staggering fines and even criminal proceedings going all the way to the top. And British attorney Mark Lewis, who led the charge in representing hacking victims in U.K. litigation, has threatened civil lawsuits in this country, too, potentially leading to more bad publicity and payouts.
Certainly, the British parliamentary committee that issued the damning report May 1 has no power to impose sanctions on News Corp. But it used specific words that have legal resonance and could hint at trouble awaiting the company.
The phrase "willful blindness" or "willful ignorance" appears several times in the report. In one instance, the committee declared that in connection with the hacking scandal, "News International and its parent News Corporation exhibited willful blindness, for which the companies' directors -- including Rupert Murdoch and James Murdoch -- should ultimately be prepared to take responsibility."
In this country, News Corp. would appear to face potential vulnerability relating to the Foreign Corrupt Practices Act, aimed at preventing U.S. companies from bribing foreign officials. New York attorney Danforth Newcomb at Shearman & Sterling, an expert on that statute, notes executives may face heavy fines and prison time for showing willful blindness with respect to violations.
FCPA attorney Lucinda Low at Steptoe & Johnson in Washington agrees that from the U.S. perspective, willful blindness is "a well-understood term that has criminal implications." Applying them specifically to the Murdochs appears to send a very specific message. It's worth noting that News Corp. is a U.S. company and Rupert and James Murdoch are naturalized citizens.
In FCPA cases, federal authorities often coordinate fact-finding with the British, who seem to be moving toward potential prosecutions based on bribery: There have been more than two dozen arrests in connection with the inquiry into alleged News Corp. illegal payments. Those detained include Murdoch confidante Rebekah Brooks, who was CEO of News Corp.'s British newspapers, and Andy Coulson, a former News of the World editor who served as media adviser to Prime Minister David Cameron. As recently as May 3, a former British policeman became the fourth current or retired officer to be arrested in connection with the investigation.
"If News Corp. paid an English policeman anything of value to provide the company with improper advantage, that could be a violation of the FCPA on its face," says Newcomb. Given that News Corp. has hired lawyer Brendan Sullivan (known for his defense of Oliver North in the Iran-Contra scandal), Newcomb says, "Clearly there is enough smoke that they are worried about it."
According to Low, criminal U.S. prosecution of high-level individuals could be part of a federal strategy given that authorities have an enforcement priority that targets senior management. "I understand that these are big fish," she says, "but it's definitely not out of the realm of possibility." Noting the cooperation between the U.S. and Britain that is common in such cases, she adds, "Clearly from what I've seen and heard, they're sharing information, talking and evaluating."
If charges were to be brought in this country, News Corp. could settle such cases without acknowledgement of guilt through the payment of fines. Wall Street would probably shrug, says Sanford C. Bernstein analyst Todd Juenger. "Investors look at fines that are paid as a one-time event, even if it's hundreds of millions of dollars," he says. "It's not recurring. It's a financial blip." Juenger says the same attitude applies even if top News Corp. executives were to be indicted.
More troublesome from an analyst's point of view is language in the parliamentary report that might foreshadow much more damaging problems. Ofcom, the authority that regulates British broadcasting, is weighing whether News Corp. is "fit and proper" to own its 39.1 percent stake in satellite broadcaster BSkyB. Given the report's conclusion that Rupert Murdoch was "not a fit person" to run his own company, the hint to Ofcom would seem to be obvious.
The committee was not unanimous with respect to that language -- which some have decried as politically motivated -- and some in the U.K. believe Ofcom will not act. (It has only rescinded one broadcasting license, and that case involved repeated misconduct and pornography.) But if Ofcom does act, News Corp. will have gone from being poised just a year ago to buy BSkyB outright for $12 billion to potentially losing its entire holding in the company.
"That position is worth something like $7.5 billion, and that's a meaningful part of News Corp.'s value," says Juenger. (The company's total enterprise value is about $55 billion.) "It would be a forced sale, and nobody's going to pay a premium for that." BSkyB issues could be a "trigger point" for a broader re-evaluation of the company's prospects, he says.
Given the pall overhanging the company, the media investor believes that at best, the stock will "bounce around and do nothing for at least a couple of years." And things could get worse if high-level executives in the U.K. are hit with criminal charges. At that point, he says, "Somebody probably pins the tail on the donkey more directly." In other words, the scandal could be tied directly not just to James Murdoch, 39, but to Rupert, 81, as well.
Still, Juenger says some on Wall Street will not be fazed if what happened in Britain does not stay in Britain -- not to mention what happened elsewhere around the globe. In fact, some see potential benefit in increased scrutiny of the Murdochs, even if it means their familiar grip on News Corp. is pried loose. Says Juenger, "If [News Corp. deputy chairman] Chase Carey gets to run the place for a while, if he got five good years to do that, investors would say that would be great."
NEWS OF THE WORLD: A look at News Corp's global portfolio of legal troubles.
► UNITED STATES
One area of interest is whether possible bribes in Britain and Russia violated the U.S. Foreign Corrupt Practices Act. That can result in heavy fines and even criminal indictments.
News America Marketing, a division that creates ad circulars and in-store coupons, has faced litigation over alleged misconduct in several states. Between 2009 and 2011, News Corp. paid out about $655 million to settle such claims.
The FBI is reportedly investigating hacking of the computers of New Jersey ad concern Floorgraphics. In 2009, News Corp. paid $29.5 million to settle a federal suit involving the company, and soon after, News Corp. bought it.
In 2003, a company that manufactured access cards and systems for pay TV services accused Murdoch-owned software company NDS of hiring a hacker named Christopher Tarnovsky to help pirates steal Dish Network's programming. After five years of litigation, a California jury cleared NDS of the most serious allegations, and the company ultimately won an award of nearly $19 million in legal fees.
News Corp., already the owner of television stations in Turkey, is bidding for Sabah-ATV, the country's second-largest media group, which is expected to sell for more than $700 million. The U.K. scandal might raise regulatory opposition, though News Corp. has said its issues in Britain have not caused problems with possible acquisitions elsewhere.
The Wall Street Journal -- owned by News Corp. -- reported in March that the FBI was investigating whether News Corp. paid bribes for billboard placement in Russia. News Corp. sold its nearly 80 percent stake in News Outdoor Russia in July, and a spokesman for the Russian company has denied that its former owner was involved in bribery.
Multiple police investigations are under way into phone hacking and bribery. More than 40 arrests have taken place. The government's Leveson Inquiry into media ethics and the relationship of the media with public, police and politics is set to question former News International CEO Rebekah Brooks and ex-News of the World editor Andy Coulson on May 10 and 11.
British regulator Ofcom is considering whether News Corp. is "fit and proper" to own its 39.1 percent stake in satellite broadcaster BSkyB.
More than 100 civil lawsuits have been brought on behalf of hacking victims by attorney Mark Lewis and others. News Corp. has taken a $104 million charge related to hacking, saying 85 percent of that went to professional fees.
British paper The Independent in March reported that Pasquale Caiazza, an Italian hacker on trial for piracy of pay TV encryption cards, had been receiving regular payments from a bank account controlled by News Corp.'s News International in Britain. (The piracy ring also allegedly targeted News Corp.'s Italian broadcasting businesses.) The U.S. Department of Justice is said to be monitoring court proceedings in that case.
In March, Britain's Panorama investigative TV series and The Australian Financial Review published allegations of piracy involving NDS. These reports allege that NDS employed a unit of former police officers in the mid-1990s to pirate the smart cards of broadcast competitors Austar, Optus and Foxtel with the goal of helping News Corp. wrest control of Australia's lucrative pay TV market. The Financial Review obtained a cache of 14,000 e-mails allegedly from the computer of Ray Adams, an ex-police officer employed by the News Corp. unit as head of security in Britain from 1996 to 2002. News Corp. has vigorously denied wrongdoing. On March 28, Australian communications minister Stephen Conroy called for a police investigation.