The Deal from Hell

by James O'Shea

  The parking caper was one of Newsday’s more benign practices, and Sito and his team didn’t game that particular element of the system as well as some other papers. The next time you check into a hotel, take a look at the cardboard sleeve that houses your plastic keycard. Chances are, there will be some fine print telling you that included in your room charge is $.75 for a copy of USA Today, whether you want it or not. If you ask the hotel what is going on, you’re likely to get the same response as did Jay Schiller, a former ABC auditor who questioned both the Marriott and Hyatt hotel chains about the practice. A Marriott vice president told him the paper really was complimentary. Pete Sears, a Hyatt vice president, explained: “By including this verbiage . . . the newspaper companies are able to include our daily newspaper spend in their circulation count. In exchange for [a] very favorable ‘subscription [rate],’ we have agreed with our newspaper partners to refund any guest [the newsstand price] should he decline the paper. The cost of the paper in no way is added to the cost of your room.” Gannett, publisher of USA Today, has cut deals with hotel chains across the country for such arrangements. Something that was referred to vaguely as “other paid single copy” circulation at one point totaled an astonishing 35 percent of USA Today’s paid circulation. If you add to the total the stacks of papers that sit in the lobby for the taking, the total comprised an even larger percentage of USA Today’s circulation.

  At Newsday, Sito also engaged in far more sinister plots, arranging kickbacks for dealers who dumped unsold copies rather than return them to be counted against paid circulation. Newsday was delivered to homes that hadn’t ordered the paper or to readers who were dead. Foley’s FUDGE ABC software program was employed to create the illusion that the fake circulation was real. Ironically, Sito’s house of cards wasn’t exposed by his brazen disregard for the rules, but by the paper’s desire to solidify its monopoly.

  In March 1998, an arm of Newsday led by Sito acquired a Queens newspaper distribution company owned by Michael Pouchie and Anthony Orlacchio and folded it into United Media Distributions, Inc., which became the sole distributor of Newsday and Hoy in the greater New York metropolitan area. Pouchie knew the local newspaper distribution business cold from years of experience making sure readers on Long Island got their newspapers. And, as he would unabashedly reveal in an interview with me, back then he packed heat—in his case a .38 and a 9-millimeter. “I had a permit,” he explained, matter of factly, sitting in his Queen’s office with posters of news delivery boys in baseball caps on his wall.

  A lawsuit filed by Joe Giaimo laid out the details of a scheme that would unfold over the next couple of years: After Newsday bought their company, Pouchie and Orlacchio said they ended up with 47 percent of United Media Distributions, while Newsday’s distribution arm, DSA, or Distribution Systems of America, owned 51 percent. As an independent agent, the suit said Pouchie had been distributing Newsday for years, and he knew what he was getting into—a few years earlier he’d begun meetings with people who worked for Sito to discuss the best ways to pad Newsday’s circulation. Giaimo’s suit exposed the sophistication of the setup: Those involved in the scheme would receive alerts when ABC auditors were due to show up. Ed Smith, a Newsday and Hoy circulation consultant who would later plead guilty to fraudulent circulation practices, had entertained the auditors to gather intelligence for Newsday and conducted tutorials on how to lie to the ABC about paid circulation information.

  At first, things seemed okay at United. But things took a turn when it began distributing Hoy, which was Sito’s baby. Months before, Sito had noticed how Newsday’s penetration rate of 65 percent in several Long Island communities started to plummet when Hispanic immigrants bypassed Manhattan for the suburbs. Sito had convinced Jansen he could turn adversity into opportunity with a Spanish language daily newspaper designed to capture this pocket of readers and recover some of the numbers lost on Newsday’s end.

  In November 1998, Hoy debuted with Sito, who had added the title of publisher of Hoy to his duties at Newsday. Judging from the spin, Hoy was an immediate hit. But it wasn’t a hit with Pouchie, who distributed the paper, mainly to single-copy dealers, vending machines, and hawkers.

  During the first week Hoy was on the market, United sold about 38,000 copies, or 7,600 copies for each of the five days the paper hit the streets. But Robert Garcia, Hoy’s circulation director, who also would plead guilty to fraudulent circulation practices, ordered Pouchie to increase reported sales to 88,000 papers, or 17,600 copies a day for the reports that would form the basis of Hoy’s ABC numbers. Those, in turn, were used to set ad rates. Giaimo’s suit said the same thing happened the second week; United sold 40,000 papers, or 8,000 copies a day, but Garcia ordered up double that, or 16,000 copies daily. In week number three, Sito ordered Pouchie to rig the reports to show that United had sold 120,000 copies of Hoy, or 24,000 papers a day, when the legitimate daily sale really totaled only 8,000 papers. Giaimo said Pouchie refused. A week later at Newsday’s Christmas party, Orlacchio got a message from Sito: “We’ll screw you if Pouchie refuses to change the Hoy circulation volume.” Pouchie resisted the muscle, though, and a week later, discovered that the locks on United Media Distributions’ doors had been changed. He and Orlacchio had also been locked out of the company’s computer system. In other words, they’d been fired, even though they still owned 47 percent of the company.

  Not to be outdone, Pouchie and his partner formed a new distribution company and took one of Pouchie’s old clients, a Puerto Rican newspaper called El Vocero de Puerto Rico, with him. El Vocero continued to be printed and delivered to Pouchie’s old office at United, where he would pick them up and distribute them. But a couple of months after he’d been locked out, United refused to give Pouchie his papers and he went to the facility to demand them. “The cops told me a Newsday employee called them and said some mad man was inside waving a gun around,” Pouchie said, adding that he had asked for his papers and when they said no, he started to leave: “When I got outside, there were like fourteen police cars with cops pointing guns at me. They told me to give up my guns and lay down on the concrete. I did and then they handcuffed me.”

  Elisabeth Vreeburg, a Queens lawyer, took the call from Pouchie, who she’d been representing in divorce proceedings. He was in a Queens jail, on a charge of trespassing, something about Newsday, fraud, guns, and his Puerto Rican paper. Two days later when Pouchie showed up at Vreeburg’s office, she asked her partner Joe Giaimo, who had more experience as a litigator, to sit in. When Pouchie sat down, Giaimo recalled, “he wants to sue them for false arrest, and I hear his story about all of this circulation fraud, and I tell him, ‘You got more than a false arrest suit here, brother.’” In truth, Newsday probably could have settled the whole controversy for $500,000 to $1 million at the time. “I’d probably have settled for a million,” Giaimo later said, and none of the industry’s shady practices would have been exposed in court.

  But Sito said Jansen got his back up. After the dust-up over the Puerto Rican papers, in April 1999, Newsday had acquired Pouchie and Orlacchio’s interests in United. When Sito later came to Jansen and told him that the duo, now represented by Giaimo, wanted some more money, Sito said Jansen told him, “Tell them we’ll see ’em in court.”

  Sitting in his cluttered office across the street from a Chicken House restaurant near the Kew Gardens subway stop in Queens, Giaimo is as Queens as St. John’s Law School, his alma mater. He once worked as legislative staff for New York City Mayor Robert F. Wager in Manhattan and as counsel to Moses “Mo” Weinstein, a legendary majority leader in Albany. Short, with thinning gray hair and a raspy voice, he walks fast and always seems to have misplaced something in the banker boxes stuffed with files scattered everywhere over the fraying blue carpet.

  But Giaimo is always ready for a fight, and, within months, he’d lined up several companies that had advertised in the Long Island paper as clients and had a road map from Pouchie on the gritty details of the paper’s circ
ulation scam: “Look, they’re dumping papers, they’re dumping them everywhere and they want to threaten me? Ok. You want to be an animal,” Giaimo said. “I’ll be an animal. You want to be a prick, I’ll be a prick.” After Jansen and Newsday refused to engage him or his clients for the next few years, he finally filed suit in early 2004.

  The charges of massive circulation fraud at Newsday caught Timothy Knight off guard. About a year earlier, Knight had dropped by to visit Jack Fuller at his rustic cabin in Michigan and learned that Long Island was in his future. A former Skadden & Arps corporate lawyer, Knight had joined Tribune in 1996 and had become one of Fuller’s fair-haired boys, assuming a variety of jobs in the publishing group until Fuller told him to head east:There was an understanding that Ray [ Jansen] would retire in the next two or three years when he was sixty-five. Jack had put a Tribune person in charge of all the other Times Mirror papers but nothing had been done at Newsday. . . . He said Ray really didn’t want anyone from Tribune but that he would take me, or words to that effect.... Jack was pretty clear that it was unlikely I would be publisher but to go out there and learn another business unit and try to identify opportunities for Newsday to work with other parts of Tribune.

  A boyish-looking man with a bright smile, freckles, and a receding hairline, Knight arrived at Newsday in March 2003 as the paper’s general manager and went to work learning the paper and Long Island. Tribune had put Jansen in charge of all East Coast papers, and Knight soon discovered Jansen ran the place like a fiefdom. When Giaimo filed his suit, Jansen’s folks told Knight not to worry: “It appeared at first it was some lawyer who was trying to gin up some clients because [someone] who supported the lawsuit . . . was an ex-employee or vendor who . . . had something that Newsday had taken over and the guy was unhappy; it was a disgruntled somebody, a vendor or distributor or something like that. They were small advertisers, out in the boroughs,” Knight said. But Giaimo’s suit got publicity, a lot of it, including stories in Newsday and other New York papers: “I’m in all the papers,” said Giaimo. “I got former sales agents calling me, telling me stuff. I’m on CNN. Everywhere! I got people from all over the country calling me and saying they worked for papers and the same thing is going on in their city, Chicago, Milwaukee, Baltimore, Philly, you name it. From all over the country!”

  The lawsuit got people’s attention in Chicago. Fuller, who ran the publishing division of the company, told Knight they needed to get some answers—fast. Tribune had strong corporate and newspaper ethics policies that threatened employees with termination if the rules weren’t followed. Tribune executives soon showed up at Newsday’s offices in Melville to help investigate the situation, along with lawyers from Sidley Austin, Tribune’s outside lawyer, and auditors from ABC. Across the country, newspapers with dubious circulation practices watched the events at Newsday closely.

  Knight didn’t quite know what to make of the call from one Newsday reader—Elaine Banar, a hard-nosed federal prosecutor at the Eastern District of New York’s office in Brooklyn. Banar recalled: “He [Knight] laughed at why we would even be investigating this. He said it was not that significant and why would we be wasting our time with subpoenas.” By then, Sito had been promoted to head Tribune’s Hispanic media efforts by Fuller, who faced diversity problems in his management ranks. Knight soon confronted Sito’s handpicked successor at Newsday, Bob Brennan, about the allegations in Giaimo’s lawsuit: “He said this was just a problem in one office in the boroughs. I hadn’t seen enough data to form an opinion. And, you know, . . . you could argue that the lawyer [Giaimo] . . . was just trying to shake us down.” As the internal investigation gathered steam, trouble surfaced in Chicago.

  A Chicago edition of Hoy had been launched to replace Exito, the Chicago Tribune’s Spanish language paper, and Fuller had selected Digby Solomon to launch it. Solomon recalled:I think it was a couple of weeks before the launch, and Louie stepped in with a bunch of people from New York, and they said they would take over distribution. He brought in Bob Brennan and Richie Czack. . . . As soon as Richie started, we couldn’t get any numbers. We had sold [ads in Hoy] to national advertisers, but nobody could get any numbers [on how many papers had been sold]. I finally confronted Louie and asked why we couldn’t get any numbers. He said the number is 10,000 but our number is 17,000. He put his finger up to his lips and said, ‘don’t tell anybody.’ . . . Now if I’m going to accuse anybody of fudging numbers, I needed some evidence.

  Solomon, also a Cuban native, headed out to the Hoy distribution warehouse the next afternoon:I got there and counted three skids full of papers, almost a full day’s run of the paper that should have been delivered that morning, sitting on the loading dock. So I say to Richie, ‘What’s that?’ Richie says, ‘What’s what?’ And I said those skids, and he says, ‘What skids?’ and I say, ‘Those skids.’ That was enough. So I went in the next day figuring I may get canned, but this is wrong.” Solomon reported his findings to his boss, David Hiller.

  Meanwhile, back at Newsday, Knight and his investigative team got some disturbing news from Brennan, who had downplayed the seriousness of the problem months before. According to Knight: He comes in and tells me that the story he told me is untrue.... I was shocked because he had essentially lied to my face a number of times. He never said why he did it. When I suspended him and told him you’re off for the rest of the week, he thought I was overreacting.... We called the U.S. Attorney that night, and I called ABC because we had been putting forth a defense that had relied on Brennan and crew. We went to them as promptly as possible to say we are looking into it, but what we had told you clearly wasn’t true.... It was probably one of the low points of my life because the guy lies to you and before then I was trying to support him, you know, let’s get the facts before you convict somebody. . . . Ray [Jansen] was up at the U.S. Open in the Hamptons, and I called him and told him. . . . Okay, I’ve got a guy who has lied to me, our circulation director, his circulation director long before I was here. The story is breaking in the paper. You need to figure out what is going on with the government; they are trying to figure out what’s going on, and what we’d told them is obviously not 100 percent correct because we had relied on Brennan and . . . they are not sympathetic, they are pissed. And the big issue is that Ray doesn’t come back.... He stays in the Hamptons.

  Although Knight felt that Tribune was doing everything it could to unearth the story, Banar and the feds didn’t see things that way:We were getting the same story from lower-level folks who told us about the pressure to deliver higher numbers.... We started to get a sense of a scheme. . . . The Newsday people will say that they convinced Brennan [to go to the Feds and] give it up, come forward. But Brennan had a different story and I tend to believe him. He said the pressure got to him. . . . The lawyer for Newsday also said the fraud was limited; that it was just one small department. He said they did an internal investigation and came back to us and said it was just one department.”

  She decided to expand her investigation to determine just who knew what in the upper reaches of the Tribune’s corporate hierarchy. She wasn’t alone.

  As news of his lawsuit spread, Giaimo received a call from the U.S. Securities and Exchange Commission (SEC), and from a former agent and employee of Newsday who offered him an inside account of circulation fraud at the paper. He flew to Florida to meet with the insider and an SEC attorney from the agency’s Miami office when his office called and told him to get in touch with Banar: “I called Banar from the airport to tell her I planned to travel to Miami to meet with the SEC. She immediately stopped me cold and told me that if there was a criminal investigation of the allegations in my complaint, it would be conducted through her office with the participation of the SEC and the Internal Revenue Service.” Ditto for the calls from the U.S. Postal Service and the Nassau County Sheriff’s Office. In other words, Banar pulled rank and took control of the investigation.

  In mid-2004, Jansen stepped aside, and Fuller made Knight publisher, ev
en though he had virtually no experience running a newspaper. Knight immediately hit the road trying to mollify advertisers angry at the circulation fraud revelations:In a perverse way, it was a great way to start off as publisher because I had to go speak to all of our advertisers. It was a bit of a mea culpa, and I discovered that Newsday had been extremely arrogant in dealing with advertisers. Over the past twenty years, we had pushed through rate increases not being customer service focused and not just treating people well with the viewpoint of, ‘Well, where else are these guys going to advertise?’ . . . It was good for me to hear it and set up a path on how we were going to treat advertisers better. . . . The advertisers were angry but it was anger based upon twenty years of compounded bad behavior.

  By now, though, the federal investigators were working their way up the corporate ladder, zeroing in on people in executive suites who had been applying all of the pressure for higher numbers. A federal subpoena from the SEC soon demanded “documents relating to or referring to communications concerning circulation figures or revenue or advertising fees or revenue between Dennis FitzSimons, Jack Fuller, Donald Grenesko, David Hiller, Raymond Jansen, Louis Sito, Robert Brennan, and Robert Garcia.” Banar began to think that people at the top of the corporation knew what was going on: “They didn’t want to be connected with it, but they knew. The internal auditors tried to figure it out, but people at the top kept things from them, too.... None of the internal audits ever got to the right questions.”