CONRAD BLACK: The United States vs. Conrad Black
Is Conrad Black a sophisticated fraud artist? Or an innocent man persecuted by legal zealots and betrayed by disloyal friends?
COLIN CAMPBELL | Mar 12, 2007 |
In the wake of a Hollinger International shareholders meeting in New York in 2002, Conrad Black found himself on the defensive. Concerns had erupted at the meeting over millions of dollars in payments he and other company officers had received from the sale of Hollinger newspapers. Afterwards, Black allegedly emailed the company's investor relations officer, Paul Healey, asking him to do his part "stamping out" the notion that their actions had hurt the value of the company's stock. "Two years from now, no one will remember any of this," he wrote. The statement, outlined in evidence prosecutors plan to present when Black goes to trial on March 14 over accusations he looted Hollinger International, surely falls into that unfortunate category of famous last words.
What might have once blown over as an internal debate at Hollinger International about compensation and bonus payments, has instead blown up into one of the most captivating corporate scandals in decades. Black faces 14 charges -- including mail and wire fraud, racketeering, money laundering and obstruction of justice -- in a trial set to play out in a Chicago courtroom over the next few months. Unlike other major white-collar criminal cases, such as Enron and WorldCom, this one is not about a company going bankrupt or investors being swindled out of their life savings. Rather, it is about a larger-than-life British lord and press baron who -- depending on who is to be believed -- was either a fraudster corrupted by his own greed and sense of entitlement, or a businessman betrayed by his closest allies and persecuted by overzealous authorities.
The trial is the latest, and most crucial chapter in the Black saga. With his empire dismantled, many of his assets sold off, and his reputation in tatters, the trial is Black's one shot to face his accusers in a court of law, and to write a surprise ending to what has been a spectacular fall-from-grace story. His belief in his own innocence is unshakable and he has repeatedly stated that he will win. Of the prosecution Black says: "They have a slight problem in that the defendants are all innocent. I don't know where they're going to get their evidence. It's a mystery to me but it's not my problem."
The stakes could not be higher. If he loses, the 62-year-old will almost certainly face the rest of his life in jail(his sentence could reach 95 years)and millions of dollars in fines and forfeitures(as much as $92 million for the racketeering charge).
The charges Black faces revolve around the central allegation that he, along with former Hollinger executive Jack Boultbee and former Hollinger attorneys Peter Atkinson and Mark Kipnis, orchestrated and carried out a series of fraudulent schemes designed to loot Hollinger International for their personal gain. This was chiefly done, prosecutors say, through payments the defendants received from the buyers of the company's newspapers in return for promises not to start rival papers in those same markets. These so-called non-compete agreements are common, but unusual in this case because the payments went to Black, the other defendants, and other companies controlled by Black, rather than to Hollinger and its shareholders. In some cases, the agreements were not even asked for by the buyers, say prosecutors. In one instance, a non-compete was allegedly paid to a company partly owned by Black and his partner, David Radler. That resulted in "an agreement with themselves, not to compete against themselves resulting in them paying themselves approximately $1.2 million." The government alleges that Black and the others diverted US$51.8 million from Hollinger International's sale of newspapers to CanWest Global Communications in 2000 as well as more than US$32 million in other transactions.
A second scheme, prosecutors allege, involved the misuse of corporate perks and "breaches of fiduciary duty," such as Black's use of company money to throw his wife, Barbara Amiel, a "lavish" birthday party at the New York restaurant La Grenouille, and his taking the company jet on a vacation to the remote islands of Bora Bora. The frauds, said FBI agent Robert Grant in 2005, "were blatant and pervasive. They extended from the backrooms to the boardroom, and from Park Avenue to the South Pacific."
The most important counts Black faces, and the ones the government will pursue hardest, are nine mail-and-wire fraud charges. Prosecutors will need to prove to 12 Chicago jurors, beyond any reasonable doubt, that Black and others devised fraud schemes and used the mail or electronic communications to carry them out. Mail fraud and wire fraud charges are broad and come with a heavy sentence(up to 45 years in prison in Black's case). "If the government can prove there was a fraud and if the mail was used, boom, they got him," says Douglas McNabb, senior principal with the Washington-based firm McNabb Associates. Under the fraud charges, the government must also show that Black deprived the corporation of the "intangible right of honest services." Such accusations have become common in recent years, and they rely heavily on subjective judgments by jurors. As such, they've proved troublesome for the government in appeals courts, where they are prone to be overturned, says McNabb.
The most aggressive charges levelled against Black involve racketeering. The Racketeer Influenced and Corrupt Organizations Act, commonly known as RICO, was created in 1970 as a tool to fight organized crime. It's often associated with bribery and extortion cases, but it can also simply relate to "a pattern of illegal activity." RICO charges are much harder to prove than mail and wire fraud -- prosecutors must not only show there was a fraud scheme, but a large-scale operation to loot the company. Black's lawyers have accused the government of "overreaching" with the charges, arguing that it is ridiculous to equate the defendants' conduct with that of mobsters. "They're difficult to win," says Peter Henning, a law professor at Wayne State University and a former U.S. Securities and Exchange Commission lawyer. "But if you win they can bring with them very substantial penalties, not only the criminal punishment but forfeiture of assets." In Black's case it could mean $92 million and another 20 years in prison.
To win a conviction on these fraud charges "the main element the prosecutor will have to prove is that the defendant had the specific intent to defraud," says Sam Buell, a law professor at Washington University and a former prosecutor who led past cases against top Enron executives. Prosecutors will have to show not simply that Black thought of breaking the law, but that there was the intent to deceive in a way that causes harm.
On top of all this, Black faces obstruction of justice charges for hauling away more than a dozen boxes of material from his 10 Toronto St. offices in 2005, violating a court order.(Black and his chauffeur were recorded by security cameras loading the boxes into a car.)The charge carries a maximum penalty of 20 years. Black is also accused of wiring "criminally derived" money(from one of the non-compete agreements)from a Canadian bank to a U.S. bank -- a money-laundering charge that carries a maximum 10-year sentence. And he is charged with two counts of filing a false corporate tax return, which carries a maximum three-year sentence.
Black faces an uphill climb, say lawyers who have studied the indictment. Recent high-profile white-collar crime cases in the U.S. have almost uniformly ended badly for the defendants. If convicted, Black will serve every last year he's sentenced to under U.S. federal sentencing guidelines, which eliminate the possibility of parole. "It's fair to say that if Mr. Black is convicted, his sentence is going to be analogous to that of a crack dealer," says McNabb. "White-collar crime in the U.S. is no longer treated lightly."
That is not to say, however, that Black doesn't have a decent chance of winning. Corporate perks and non-compete agreements are not illegal, nor is it a crime to make a lot of money. In the end, his fate rests entirely in the hands of 12 Chicago jurors, meaning the outcome is virtually impossible to predict. If the defence can convince just one of them that Black is not guilty beyond a reasonable doubt, they may at the very least win a mistrial and a chance to fight another day.
THE GOVERNMENT'S CASE
Many of Black's legal woes can be traced back to one man, Richard Breeden, the former SEC chairman, who led an internal Hollinger International investigation in 2004 that ended in a damning 500-page report outlining how the company was "victimized by its controlling shareholders" -- including Black and his business partner of over 35 years, David Radler. The report itself is not admissible, but prosecutors will likely reintroduce much of the detail contained in it. Under federal evidence rules, prosecutors will be able to use interviews the defendants gave during the Breeden investigation -- including details that may have been given more openly than they would under present circumstances. At one point, in describing payments Atkinson received, the Breeden report says, "In recent interviews with the Special Committee, however, Atkinson has conceded that the payment and associated non-competition agreements were improper." In the hands of prosecutors, such admissions are like dynamite.
Many of the things first outlined in the Breeden report have already emerged in court documents filed by prosecutors leading up to the trial, providing a basic outline of their case and strategy. Prosecutor's will attempt to show that Black and other officers deceived the Hollinger board and audit committee in pressing for non-compete payments, and in transferring money between various companies controlled by Black. There is no shortage of documentary evidence here -- the government has millions of pages of it and will use memos, emails and other communications between the defendants to demonstrate how vital information was hidden from the company's audit committee. Prosecutors, for instance, will present testimony from Healey, the investor relations officer, that Black lied about the non-competes during the 2002 shareholders meeting. Some of the evidence will also be used to try to show that Black took a cavalier attitude to shareholder concerns. In a 2002 memo, Black allegedly wrote to Radler, Boultbee and Atkinson, "We have a certain style that all these shareholders were aware of when they came in. We should fine-tune that style, not revolutionize it with a damascene conversion to vows of poverty."
One of the most well-documented transactions was Hollinger International's sale of Canadian newspapers to CanWest in 2000. Government lawyers will point to evidence allegedly showing that Boultbee and Atkinson's names didn't appear in the original non-compete agreement presented to the audit committee, but were inserted after the fact and that the payments, worth over US$50 million, were never properly disclosed. Questions only emerged after a New York law firm, doing due diligence on another matter, raised questions about the lack of disclosure.
In building their case, prosecutors will try to avoid getting bogged down in the minutiae, say lawyers familiar with the case. "It's a complicated case, so one of the key challenges will be making it understandable to a jury," says Robert Kent, who was the lead attorney on the Black case until he left his position last September for private practice. "There can be a massive logistical challenge in a case such as this, with so many documents and so many witnesses." It's widely felt that the first trial of former Tyco International executive Dennis Kozlowski, who was also accused of looting his company, ended in a mistrial because prosecutors put the jury to sleep outlining a complicated litany of spending. Lessons from the Kozlowski trial will not be lost on government lawyers in Black's case.
Prosecutors will try to show the big picture. They will "focus on the large dollar figures" as well as "Black's use of the money," says Henning, the law professor and former SEC lawyer. That strategy has already been evident in pre-trial manoeuvring and the government's effort to make admissible details of purchases made in part for Black's wife, Barbara Amiel, that were charged to the company. Some of the purchases, highlighted in the Breeden report, include handbags worth US$2,463, opera tickets for Black and Amiel worth US$2,785, jogging attire for Amiel worth US$140, as well as nearly US$25,000 in "summer drinks." Last month, a judge ruled such purchases would be allowed into evidence -- an early setback for Black. Prosecutors will also allege that Black, for instance, held a surprise birthday party for his wife costing US$62,870(two thirds of which was billed to Hollinger)just two weeks after receiving US$12 million in non-compete payments from the CanWest deal. They'll also focus on Black's purchase of an apartment in New York from Hollinger for US$3 million. Jurors may get lost in the description of the non-competes, but they'll understand the end result -- Black made and spent a fortune.
The biggest weapon in the government's arsenal, however, is Radler, who pleaded guilty to a fraud charge and will testify against Black in exchange for a 29-month sentence, likely to be served in the more comfortable confines of Canada's penal system. Radler was a key player arranging the non-competes, and in deceiving the board, prosecutors will argue. "The challenge is to present him, hopefully, for what he is, and that is a convicted felon who knows a whole lot about what happened but has accepted responsibility for his misdeeds and is telling the truth," says Kent. Members of the board and audit committee are also expected to testify that they were misled, and prosecutors say lawyers with Torys LLP and auditors with KPMG(firms that oversaw the CanWest deal)will also testify. Radler and others will make accusations of fraud and deceit, which the government must back up with documentary evidence. "The key for the prosecution is corroboration," says Buell, the former Enron prosecutor.
As is always the case with complicated allegations, the government is relying heavily on the memory of its witnesses, and sporadic bouts of memory loss are a constant challenge. Some of the events in question happened over seven years ago, and witnesses may have forgotten some of the finer details on which prosecutors will build their case. Lawyers will use documents to prompt witnesses through any lapses, but memory could still be an area the defence can exploit. "Rest assured, the government's witnesses' memories will be sharp," says Jacob Frenkel, an attorney and former SEC senior counsel. But "the test is always cross-examination."
If all the efforts to prove fraud fail to convince a jury, prosecutors still have the relatively minor, but easier to prove tax charges to fall back on. "Al Capone didn't go to jail for any mob-related crime," notes Ross Albert, a partner at Morris, Manning & Martin in Atlanta, and a former prosecutor and SEC lawyer. "He went to jail for tax evasion."
While many corporate fraud cases in recent years have devolved into mind-numbing excavations of legal minutiae, Black's lawyer Edward Greenspan says he plans to keep it simple. "This is a jury of 12 people who are not heads of corporations, they're not involved in corporate process, they're not involved in Sarbanes-Oxley, and they're definitely not involved in the intricacies of special committees and restructuring agreements. No matter how complicated the case is, the case has got to be reduced to its simplest form, and it has to be fought on that basis: is it fraud or is it not fraud?"
Of course, beneath that seemingly elementary question lies a tangle of complex transactions and relationships. Much of what the government will portray as bald lies and theft may not be nearly so clear-cut once Black's defenders have a chance to address the jury. As prosecutors try to narrow their focus on the money trail, defence lawyers will dwell on the often blurry line between legitimate corporate expenses and personal ones. Therein lies the path to acquittal. "If the jury doesn't understand the case, they will refuse to convict. They will rely on the concept of reasonable doubt," says Albert.
For example, the defence has made it clear they will argue everything about the non-compete agreements, so far as the defendants knew, was proper, says Henning. In the CanWest deal, for instance, the head of CanWest himself, Izzy Asper, asked that Black and the other defendants be named in the non-compete contract. Before his death, he even wrote to Black confirming this.
More to the point, the defence will focus on the role the board played, as well as lawyers and accountants who ultimately approved the deals and payments. The Hollinger audit committee was an illustrious group, including members like former Illinois governor James Thompson and economist Marie-Josée Kravis -- not types easily duped or confused by even the most complex business transactions. The defence will say, "everything we got was reviewed and approved by the board of directors and that's how it's supposed to work in a corporation," says Buell. Playing up the committee's financial acumen is key, says Daniel Horowitz, a criminal defence lawyer based in Oakland, Calif. "One of the great arguments you can make is to talk about how sophisticated these people are and how high their IQs are. You say, 'They knew far more about this than you ever will in two months. They didn't see anything wrong.' "
The defence will seek to show that everything of substance was disclosed, and if lesser details were not, it was an administrative oversight for which a CEO can't be held criminally responsible. Questions about what exactly was disclosed and how it was done is expected to lead to some contentious days of testimony and cross-examination of board members. Regarding the CanWest deal, even the government's documents highlight significant confusion and disagreement among outside lawyers over what needed to be made public, underscoring that issues of disclosure and approval are not always black and white, even to seasoned legal minds.
On the charges of obstruction of justice, defence lawyers will argue that the boxes Black removed from his Toronto office contained only personal items unrelated to any court orders. Who, after all, doesn't remove personal belongings when leaving a job? Last year, the judge in the case, Amy St. Eve, ordered the boxes be turned over to prosecutors, to the objection of Black's lawyers.
The boxes are currently with the Canadian court, says Jane Kelly, a lawyer with the defence team. Because the boxes are in Canada, the U.S. prosecutor must proceed by the Mutual Legal Assistance Treaty(MLAT)to get them, she explains. The matter is currently before the Canadian court. "We're making submissions about the validity," Kelly says. "We're trying to work through before March 14, but there's no guarantee." The exact contents of the boxes have not yet been disclosed.
As for the attention-grabbing details of corporate excess, the defence will argue that Black's social expenditures were all part of building a media empire that relies on top-level contacts and social exposure. Perks are part of the corporate game, and criminal lawyers say juries generally understand that executives make a lot of money and won't convict people simply for living high off the hog. For example, the defence will argue that the birthday party for Black's wife in New York was a legitimate corporate expense because it coincided with a directors' dinner that had long been in the works. Black, it will be argued, generously agreed to pay for part of the dinner with his own money precisely to avoid any hint of impropriety. But if these sorts of details become too much of a focus, the defence will seek to turn it around on the government, says Buell. "Every time the government emphasizes that evidence, come back and say, 'this is irrelevant and the only reason they're emphasizing it is because they know the substance of their case is weak.' " The defence will make it hard for prosecutors to strike a balance between evoking moral outrage and leaving jurors feeling manipulated.
Just as with the government's strategy, how the defence handles Radler is crucial. Radler's cross-examination will be gruelling -- it could go on for a week or more, say lawyers familiar with the case. The aim will be to make Radler look like a liar, or at least an unreliable witness. "If you make him look dirty, if he comes across as shifty, the jury may just hit the 'off' button," explains Henning. Greenspan has acknowledged that is a weakness he will surely exploit: "Now he's got to admit that everything he said before was a lie. And it's, 'Well, which is the lie? Now? Then?' "
Furthermore, by asking Radler what sort of jail time he was facing before he struck a deal with the government, the defence can use him as leverage to give the jury a sense of the massive jail time Black now faces, something they are never otherwise told, says Horowitz. "The jury will go, 'wait a minute, killers get 25 years.' " Jurors may sympathize with Black's plight if they understand that by convicting him, he won't simply receive a slap on the wrist, but could go to jail for the rest of his life.
Black's lawyers will seek to isolate Radler and attempt to show that, working from his office in Chicago, he was behind the non-competes, and he was the one assuring everyone that the agreements were on the level and approved by the board, when in fact they may not have been. According to the Breeden investigation, for example, Boultbee reported that "Radler assured Atkinson that the [non-compete] payments had been approved." Black also hinted at this strategy when he spoke to reporters after appearing in a Chicago court in December 2005. "The obligation of all of us is to tell the truth. And if the truth is that he committed a felony, he's right to admit it. Better late than never. If he goes further and tries to incriminate innocent people, that is something else," he said.
But guilt alone may not undermine Radler's credibility. "Prosecutors will argue we didn't pick Mr. Radler. Mr. Black did -- as his business partner," says Kent, the former government attorney on the Black case. "If you're going to get an inside view of criminality, you're going to have to get it from a criminal." Indeed, the testimony of high-ranking individuals has been pivotal in both the Enron and WorldCom trials, says Buell. The Bernard Ebbers trial had former WorldCom CFO Scott Sullivan as its critical witness. The Jeffrey Skilling and Kenneth Lay trial had former Enron CFO Andrew Fastow.
Lawyers liken the Black case to that of Dennis Kozlowski, the former Tyco executive. Kozlowski used a similar defence to the one Black is expected to use. At its crudest: "I was a pig, but I was allowed to be, or nobody stopped me," explains Henning. Even though Kozlowski's first trial ended in a hung jury, he was not so lucky the second time around. He's now serving up to 25 years in prison -- a bad omen for Black. But there is one final strategy the defence may employ at any time if things start to look dire: stop the trial and strike a deal with prosecutors in exchange for a lighter sentence.
It may be a prudent choice, but to those who know anything about Black, it's highly unlikely. This has been a scorched-earth confrontation from the start, fanned by high-pitched rhetoric on both sides. The time for deals, it would seem, has long since passed. Prosecutors are interested only in abject surrender, and Black is willing to contemplate only total vindication. As the prime defendant said himself last year, when he entered a not-guilty plea to all charges, "It's going to be a great trial."
With Charlie Gillis and Anne Kingston
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