Belo Stockholders Cry Foul
A lawsuit charges that top Dallas Morning News officials were told of circulation abuses long before they made them public.
By Charles Layton
Of the three major newspapers where circulation scandals led to lawsuits last year, the case of the Dallas Morning News has drawn less press coverage than those of Newsday and the Chicago Sun-Times. But as the suits proceed, the one in Dallas may turn out to be the most interesting.
Charles Layton (firstname.lastname@example.org) is a former editor and reporter at the Philadelphia Inquirer and a former AJR senior contributing writer.
Here is why:
The Belo Corp., which owns the Morning News, announced last August that its circulation figures were overstated--by how much and for how long remains unclear, because the paper's records are unreliable. Belo's chairman and CEO, Robert W. Decherd, said in a news release that he had discovered in late July 2004 that a problem existed and that he "immediately ordered a stepped-up investigation."
Some Belo stockholders are challenging that version of events. They say, in a class-action suit, that top officials at Belo knew about the problem much earlier, kept it quiet and only came clean when they felt in danger of being found out.
That basic claim was made in papers filed in August and February in U.S. District Court in Dallas. But an amended complaint, filed in April, goes further. In it, the aggrieved shareholders claim to have evidence that Decherd was explicitly told a year-and-a-half earlier--in January 2003--that the Morning News was cheating on its circulation reports.
The amended complaint includes statements by a newspaper distributor and others who worked in circulation. The distributor is reported to have said that his superiors tried to force him and others to sign documents, during an audit, overstating the number of papers they sold. This distributor "had a dozen audiotapes he had made of conversations instructing him to lie on the audit," the amended complaint says.
It says the distributor wrote letters and made phone calls to top executives, including Decherd and James M. Moroney III, publisher of the Morning News, outlining fraudulent practices. Along with a January 10, 2003, letter to Decherd, the complaint says, the distributor sent one of the tapes he had made.
Six days later, says the complaint, the distributor received a letter from Belo's assistant general counsel, David S. Starr, writing on behalf of Decherd. In that letter, Starr said Belo was investigating the issues raised by the distributor. Starr also requested copies of all the distributor's other tapes. During the next few weeks, according to the complaint, the distributor was contacted repeatedly by Starr and various executives in the circulation department, "each of whom begged the distributor to turn over the tape recordings."
The executives "were in a frenzy to get a hold of and permanently destroy this damning evidence that threatened to expose their whole scheme," the complaint says. It says they repeatedly told the distributor things like, " 'Do you know what this will do to the Dallas Morning News?' and 'We can't let those tapes out.' "
Decherd said in a statement that the lawsuit is "without merit" and that the company will seek to have it dismissed. In the statement, the CEO also acknowledged having received the letter and tape from the distributor. He said the company made "a thorough investigation" in early 2003 to see "whether there were similar situations with other contractors." He said the company concluded that "there wasn't a larger problem with respect to circulation." However, he also said that several circulation managers were fired as a result of the 2003 inquiry.
The plaintiffs' amended complaint says the distributor who wrote to Decherd was concerned about threats from the company that he would lose his route unless he kept quiet and signed off on the false numbers. Eventually, Belo did take away his route, the complaint says.
Distributors are independent operators who work under contract with the newspaper. They normally pay the Morning News for papers and make their profit by selling them at a higher price to customers. There are several hundred of these distributors in the Dallas metropolitan area.
The complaint says Morning News managers assigned their distributors highly unrealistic circulation "goals" prior to each audit period, and the distributors had to sign forms confirming the goals. According to the complaint, the form stated: "Failure to meet these goals will result in a review of your contract." Faced with such threats, it says, the distributors accepted many more papers than they could sell. Sometimes they tossed excess papers on the doorsteps of nonsubscribers. Sometimes they ditched them in dumpsters by the hundreds.
The suit does not name the individuals quoted in the complaint, and an attorney for the law firm representing the plaintiffs, Lerach Coughlin Stoia Geller Rudman & Robbins, said they were not willing to be interviewed for this article. Neither would the law firm allow AJR to review any of the evidence, although the complaint alludes to an "enormous paper trail."
However, other former Morning News circulation officials and independent contractors interviewed by AJR confirm having been pressured to overstate the number of papers they sold. All of these sources say the falsification of circulation figures was very widely known among employees and managers alike. They paint a picture of a harsh, Darwinian work environment in which lies and deception were enforced with a vengeance.
"I was told, you sign this or you don't have a job. And this was after I'd been with the company for 17 years," says Bob Johnson, a former distributor to home delivery customers. As the Morning News struggled to maintain and increase circulation, he says, the pressures grew from year to year, to the point where he was accepting hundreds more papers per day more than he could sell.
"I remember my car just being loaded with extra papers," he says. "You'd drive around to dumpsters, throwing them away."
Others say that papers were delivered to people who'd never asked for them. They speak of people being kept on the circulation rolls for many years after canceling their subscriptions, of papers being delivered to customers who had long since moved away or died, and of many distributors losing their contracts for failing to meet the goals imposed by the company. These terminations stood as a warning to the contractors who remained.
"These contractors walk on eggshells because of their job," says a former Morning News circulation official, who asked that his name not be used for fear of economic retribution. "They're always being threatened." He described contractors who, in their desperation, gave away papers for free. "I can tell you about a contractor who took names out of a church directory," he says. "He made his goals. He went to this church. He gave all his parishioners a letter saying they'd be getting the newspaper for free for the next 90 days."
Such stories are plentiful, and the circulation people I interviewed said the cheating was systematic and pervasive.
The Morning News was the last of the three major newspapers hit by circulation scandals last year. In February 2004, a group of advertisers filed suit against Newsday, alleging circulation fraud. Although that paper's owner, Tribune Co., denied the allegations in the suit, it has confirmed that circulation figures were inflated going back to 2001. In June of last year, the Chicago Sun-Times admitted to similar overstatements. It, like Belo, has been sued by shareholders of its parent company, Hollinger International.
The plaintiffs in the Dallas case argue that news of the problems at the Sun-Times and Newsday spurred Belo to come clean about its own overstatements, because, with all newspapers now facing greater scrutiny, the truth was bound to come out.
A great deal is known about the circulation fraud at Newsday, because a team of Newsday reporters began an aggressive investigation soon after the story broke. The paper has published high-profile, deeply detailed articles over a period of many months, describing some of the same practices alleged in the Dallas suit--intense pressure to falsify numbers, papers delivered to people who never asked for them, papers thrown in dumpsters and so forth. The stories revealed wrongdoing that went beyond what their company had admitted.
The Morning News has published very little about its circulation practices. As of this writing, for instance, it had not told its readers anything about the allegations in the shareholders suit.
In April, Belo informed the Wall Street investment community that the Dallas County District Attorney's office had subpoenaed documents related to the circulation problems. A spokesman in the D.A.'s office later said that a grand jury was looking into the possibility of criminal wrongdoing.
These developments were first reported in the Fort Worth Star-Telegram and on the Web site of "D" Magazine, a Dallas monthly. The Morning News ran a catch-up story a day later. ###