The Deal from Hell

by James O'Shea

  “I went to see him [Geffen] at Jack Warner’s old estate in Beverly Hills. The place was full of paintings,” Wolinsky recalled. “It was unbelievable. I hardly said anything. It was a two-hour diatribe about Tom King [a former Wall Street Journal writer who had written a book about Geffen that he didn’t like] . . . all of the people he didn’t like, including a lot of people at the Los Angeles Times.” Wolinsky left not knowing much more than when he’d arrived. In the following weeks, neither Broad nor Geffen made a move.

  Carroll started thinking about his future, too. He had talked of resigning, but his wife urged him to stay on: “I thought that I’d probably be fired and that if I was fired, it would be a big disruption and if they did that, they probably wouldn’t name my deputy, Dean, to succeed me. Dean and I talked about this.... I felt that Dean could last longer, perhaps until there was a change in CEOs. There was always the possibility of change from above.”

  In July 2005, Times publisher Jeff Johnson assembled the staff to announce a change in newsroom command. Carroll, an editor who had won thirteen Pulitzers in five years and had revived the Times from the depths of the Staples scandal, was stepping down and would be replaced by Baquet. The staff gave Carroll a standing ovation when he and Baquet embraced. “I’m taking over one of the best newspapers in America at the top of its game, in a city I care about, succeeding somebody who’s a close friend,” Baquet announced. “While every newspaper now is under budget pressure, I wouldn’t be doing this if I didn’t think I could still make the paper better.”

  In the barrage of publicity surrounding Carroll’s departure, one writer happened to note that Carroll’s tenure in the editor’s office represented a puzzling, even disturbing, case study in journalistic excellence accompanied by declining circulation. Carroll didn’t think that the paper’s editorial content had anything to do with the circulation decline. Instead he cited the problems spawned by the Newsday scandal, the do-not-call list, the cuts in promotional and marketing budgets, and increased competition for readers’ time.

  Behind the scenes, the circulation department at the Times was working furiously to make sure that no one could discover that Carroll’s sentiments were more accurate than anyone knew, including Carroll. By the time ABC auditors acted on Klunder’s tip and swept into the Times, circulation boosting programs like “Ten for Ten” had helped inflate home delivery circulation by about 100,000 copies, which was about the extent of fake circulation at Newsday. Johnson said everyone was scrambling to avoid being placed on an ABC list that alerted advertisers across the land to newspapers where ABC audits exposed a disparity of greater than 2 percent between the numbers verified by auditors and those the newspaper had claimed on its publisher’s statement, the basis of ABC’s reports to the public.

  Lee, who had recently received a coveted Tribune Company corporate achievement award, was now under the gun. The former PepsiCo executive in charge of marketing and circulation at the Times, said “Ten for Ten” was just one of the programs that contributed to the problem. “There was all kind of pressure to get the numbers up at the same time they were cutting costs. Tribune always had the feeling that the Los Angeles Times was this huge operation that sucked up costs. I think the Tribune guys put all of their chips on the table with a merger that was questionable on economic grounds and they wanted to justify it by slashing costs. Then you had all of these ABC rules that were kind of screwy and everyone was trying to push the limits.”

  The outside vendors the company had hired to sell papers through “Ten for Ten” and the other programs were cheating “and we didn’t have out best people on checks and balances to watch them.” Lee said it was like the old sport’s cliche that “if you’re not cheating, you’re not trying.” He said “everyone was focused on getting the number up and getting around the rules and when the auditors came in and caught them, I was the head marketing guy and circulation came under marketing. It was not my area of expertise but at the end of the day, I was the head of the department and I took responsibility for it.”

  The Times successfully stayed off the dreaded 2 percent list, Johnson said, thanks to someone in the circulation department who came up with a technicality that satisfied ABC. The paper also used its junk circulation to obscure the extent of the circulation decline that made its way into public reports. Once auditors removed dubious circulation from the Times books, the newspaper’s home delivery number dropped by 123,738 papers over a two-year stretch that ended in 2005. Simultaneously, the Times had sharply increased its junk circulation, the kind allowed under ABC rules. Indeed, between 2003 and 2005, the paper had added 116,000 copies in junk circulation to its totals. Without the junk circulation, the Times would have reported a 17 percent decline during that period instead of the 3.1 percent recorded in ABC audits.

  Lee resigned and moved on. “It was clear that I didn’t have a future with the company,” he said. And Johnson turned around and hired a seasoned circulation pro to replace him—Jack Klunder.

  14

  Civil War

  Anybody watching the Weather Channel in the summer of 2005 knew that New Orleans would be hit by Hurricane Katrina. Nobody guessed how bad it would be, though. My son, who lives forty miles west of the Crescent City, called me from Houston, Texas, to tell me his flight home had been canceled. He’d rented a car to try to drive home, with the hopes of beating the storm. I protested to no avail and grew increasingly worried as reports of the storm’s unyielding force flowed into the Chicago Tribune newsroom.

  Covering a natural disaster like Katrina challenges any newsroom: It’s a scramble to find reporters and photographers hotel rooms, communications in ferocious weather are strained at best, and the general tone of a city under environmental siege is one of unease. Katrina was a special case, though, and not just because I feared my son had wandered into the eye of the storm. The fallout from the disaster exposed a persistent vein of racism that shocked many Americans, scattered the poor to points near and far, and shattered the nerves of an already stressed and corrupt police force in New Orleans.

  Big newspapers across the country reacted quickly to get the most out of the story. At the Chicago Tribune, we immediately dispatched Howard Witt from our Houston bureau and Lisa Anderson, who had become New York bureau chief and a seasoned natural disaster reporter. Working in tandem, Witt and Anderson secured necessities like maps, headlamps, and waders, set up an emergency newsroom, booked cars, established cellphone reception, located supplies, and found a house we could rent temporarily, all the while filing stories and briefing editors back home on the lay of the land. Tribune editors in Baltimore, New York, Orlando, and Los Angeles reacted similarly as the casualty toll mounted. Everybody, including Gerry Kern high up in his Tribune Tower office, swung into action. In New Orleans, Kern saw a tremendous opportunity.

  Over the next couple of months, Tribune journalists would share scarce rooms, eat meals at their laptops, work sixteen-hour days, and spend weeks away from their families, as Kern began compiling the raw material for “Hurricanes Katrina and Rita,” his 2005 report about “Tribune’s coverage of the big storms and the implications for future national coverage.” It was an impressive document that in twenty-two richly colored pages detailed how many stories each Tribune paper ran on Katrina and Rita, what percentage of those stories were written by staff, and what percentage by writers from papers in the Tribune family. Kern examined what percentage of papers covered common themes, and counted stories by topic (there were ninety-nine stories covering hurricane evacuation and shelters but only ten on pets, zoos, and aquariums). An appendix detailed that the Los Angeles Times received 97 percent of its stories from its staff at the site of the disaster, while the Orlando Sentinel got 30 percent of its stories from staff in the disaster zone. Kern gave his Tribune bosses a report card that told them what they wanted to hear: While coverage from Tribune reporters was good, there was a need to “leverage [Tribune’s] scale and talent.” The media would later be criticized for exaggera
ting the Katrina debacle. With their own reporters on the scene, papers like the Chicago Tribune had questioned the accuracy of those reports from wire services and other sources. But Kern focused his report on the duplication of effort, and not on the content of reporters at the scene.

  Baquet had settled in as editor of the Times, and we had joined forces in an effort to deal with some of the legitimate issues that Kern raised. We all understood we could save the company money with commonsense steps like collaborating to limit the number of people each paper sent to cover a story. But we also knew that cooperation had its limits and, despite what Kern thought, could compromise the quality of our news reports. Our main goal was to limit the centralization of news coverage championed by Kern and others at Tribune Publishing. We didn’t want to hurt smaller papers with foreign and national news staffs like Newsday and the Baltimore Sun. But this was every newspaper for itself, and Baquet and I came up with a plan to cut the foreign and national staff 20 percent by phasing out numerous foreign and national bureaus at the smaller papers, forcing them to rely on the Los Angeles Times and Chicago Tribune for coverage. This was not fun, but all Tribune papers faced enormous challenges as revenue started to dry up and the company’s stock price sunk. We understood that the mission at hand was to maintain the integrity of our newspapers.

  In Los Angeles, Baquet was sitting on a powder keg. He was a charismatic man who was popular with his staff, but there was a lingering sourness over how Carroll had been forced out of the organization, despite his claim, upon stepping down, that he was doing so to spend more time with his family. Times employees had had it, and in a survey conducted by an outside research firm, they let the Times editors know just how disheartened they were. Although the Los Angeles Times newsroom viewed itself as the lone voice of journalistic dissent, the Tribune Company policies also angered Chicago Tribune journalists, but the anger was not as public as in Los Angeles, where Kevin Roderick, a former Los Angeles Times reporter who had started the blog LA Observed, had a pipeline into the newsroom.

  In the fall of 2005, for the first time in decades, I had to lay off a handful of employees at the Tribune. I started losing highly regarded reporters, like Jeff Zeleny, a brilliant young political writer whom I had hired from the Des Moines Register who left for the New York Times, and Jan Crawford, for my money the nation’s best legal affairs reporter, who went to a national network television job. Baquet and I fought cuts and knew that keeping star reporters would be much harder without a robust foreign and national news staff. But the problems that we faced paled in comparison to the bad news that started to engulf FitzSimons.

  The first dose came courtesy of the due diligence in the Times Mirror deal led by Hiller and Tribune’s general counsel, Crane Kenney. The proxy on the deal suggests it had lasted only two days. As noted earlier, Times Mirror had sold the Matthew Bender & Company, a legal publishing subsidiary, and health science publisher Mosby, Inc., for more than $2 billion. Times Mirror had structured the convoluted sale as a tax-free deal that allowed the company, then controlled by the Chandlers, to avoid federal income taxes. But the IRS had challenged Times Mirror’s handiwork, and Tribune inherited the dispute when it bought the company. Tribune knew what it was getting into and could have paid the tax and applied for a refund, thereby avoiding the IRS’ substantial interest and penalties. Unterman said he told Tribune Company that that was the strategy that Times Mirror had planned to follow. But given the optimistic revenue projections that underpinned the deal, Tribune considered the Bender case an acceptable risk. Bad bet. In September 2005, the Tax Court ruled that Tribune owed the government $1 billion in unpaid taxes, interest, and penalties. Chagrined, FitzSimons said the company would pay the $1 billion and appeal. Wall Street pounded Tribune’s already depressed stock price. (Eventually the case was settled with Tribune paying about $650 million in taxes and penalties.) But the Bender case was just the start.

  At first, relations between the Chandlers and the management in Chicago had seemed cordial. Soon after Tribune purchased Times Mirror, three Chandlers and Unterman took seats on the Tribune board. However, about a year after the deal was closed, Madigan kicked Unterman off the board because Tribune needed more people with CEO pedigrees. From day one, Unterman, a Jewish Democrat, thought the Tribune board, which was packed with Madigan’s friends, was insular and suspicious of anyone who wasn’t white, Irish, Catholic, and Republican. It soon became clear that Tribune board members were determined to keep control of the company in Chicago at all costs. Unterman warned Madigan that he might one day need someone on the board that had a good relationship with the Chandlers. But Unterman said Madigan ignored the advice.

  The Chandlers became concerned with the slide in newspaper stock prices in mid-2005. To diversify the family’s investment in Tribune, the Chandlers wanted to carefully unwind two trusts that had been established earlier to increase their dividends and avoid taxes. They had a lot riding on the timing of the transaction and the financial valuations that would be placed on the assets in the trusts, which included real estate headquarters for most of the Times Mirror papers and some Tribune preferred and common stock.

  The Chandlers’ negotiations with Tribune about how their trusts could be skillfully handled involved a range of proposals. But they soon found themselves locked in a disagreement with FitzSimons that turned bitter. FitzSimons said the Chandlers wanted to place valuations on the assets in the trusts and time their dissolutions in a way that would minimize the family’s taxes at the expense of Tribune shareholders. Smarting from the $1 billion welt the company had suffered in the Bender tax case, the non-Chandler Tribune board members said no way.

  The dispute came to a head in May 2006 when FitzSimons and the Tribune board authorized a “leveraged recapitalization” or “Dutch auction” in which the company would buy back up to 25 percent of its stock from shareholders for up to $32.50 a share. Managers typically engineer buybacks to goose a company’s reported earnings by retiring stock so profits can be spread across fewer shares. It is a tactic largely viewed as an alternative for weak managers who, in the words of one Tribune executive, “are not looking out for our tomorrow.”

  But the move infuriated the Chandlers, who thought the recapitalization was a bad idea and a move that would jeopardize the value of the assets in their trusts. “It was like giving the Chandlers the finger,” Unterman said. So the Chandlers trotted out the family lawyer, William Stinehart, who publicly filed a blistering eleven-page critique of the company, its management, its board, and its lack of strategy that, in effect, put the company up for sale. “It’s the beginning of the end game,” Edward Atorino, a stock analyst at the Benchmark Company, told reporters.

  In the spring of 2006, Newsday hit the news again when Sito, Brennan, Czack, Smith, Garcia, and four others pleaded guilty in the U.S. District Court to a range of fraudulent circulation practices. Judge Weinstein didn’t sentence anyone, though, because they had begun cooperating with Banar’s investigation as she continued to scrutinize the upper reaches of the company, particularly after the judge raised questions about how such a substantial fraud could take place without the knowledge and culpability of higher authorities at Tribune.

  Even journalists accustomed to a heavy diet of news had a hard time digesting the developments at Tribune Company and keeping their focus on their jobs. In August, Kern convened a meeting with Baquet, myself, Earl Maucker, the editor of the Tribune-owned Sun Sentinel in Fort Lauderdale, and a couple of others to discuss—you guessed it—“working together.” Kern held the meeting at Maucker’s paper in Fort Lauderdale.

  A native of Alton, Illinois, Maucker, the Sun Sentinel’s longtime editor, was a go-along kind of man who lived in a huge, gorgeous house. He took us to dinner in his yacht, The Final Edition, which docked at a pier in his backyard. The paper he ran did some excellent investigative reporting, but Maucker bought FitzSimons’ line of mixing marketing and local news with a heavy emphasis on parochial stories. After dinner, we c
ruised the canals around Fort Lauderdale, smoked cigars, and had drinks on a delightfully pleasant night. We were there to discuss foreign and national news collaboration (otherwise known as budget cuts), but most of the discussion revolved around the turmoil engulfing Tribune, as we swapped rumors about who in the upper reaches of Tribune would survive and who wouldn’t.

  Baquet and I had arrived early to have dinner in Miami the night before and to talk strategy to ward off the centralization that Kern was championing with the support of Scott Smith, who had succeeded Fuller as head of the publishing group. “If I tell Scott that I won’t make any more cuts, do you think he will fire me?” Baquet asked. (Smith’s philosophy was to push managers until they reached their limits.) “No,” I reassured him. “He will just keep pressing you to agree to cuts and will quit when he thinks he got as much as he can get.”

  Later I asked Baquet if he had indeed resisted Smith’s pressure for more cuts when he had returned to Los Angeles. “I did,” he replied. “I felt pretty good about it, although I don’t think Scott did. I told him I wasn’t going to cut anymore. I then got up, walked over to him, shook his hand, and said, ‘You have to do what you have to do, and I have to do what I have to do.’ I then walked away and he just kind of sat there and slumped in his chair.”

  Meanwhile, FitzSimons discovered that his problems weren’t limited to the breakdown in the talks with the Chandlers. In the midst of his fight with the family, he learned he had prostate cancer and had to check into a hospital to deal with his health. Once FitzSimons had recovered from his surgery, private talks with the Chandlers resumed as the family started proposing scenarios in which the company would either be broken up in tax-free spinoffs or sold at a premium at a time when buyers of newspapers were about as plentiful as Dead Sea Scrolls. The Tribune had said it would find another $200 million in budget cuts to help repay the $2 billion it had borrowed to buy back stock, and Smith started seeking plans to implement the cuts when another bomb dropped.