Ex-governor, two other Hollinger audit panel members may face suit
By James P. Miller and Susan Chandler
Tribune staff reporters
Published December 14, 2005, 11:18 PM CST

The Securities and Exchange Commission is considering suing former Illinois Gov. James Thompson and two other directors of Hollinger International Inc. for failing to notice that Chief Executive Conrad Black and other officials were looting the Chicago-based newspaper company.

Last month the SEC mailed notices to Thompson; former U.S. ambassador to Germany Richard Burt; and Marie-Josee Kravis, the wife of New York financier Henry Kravis, a source with knowledge of the notification told the Tribune Wednesday.

All three were members of the company's audit committee, headed by Thompson, which was charged with overseeing Hollinger's financial activities.

Separately, the U.S. Attorney's Office plans to expand its criminal case against Black, perhaps as soon as Thursday, accusing him of racketeering, according to a source with direct knowledge of the case.

The SEC action against Thompson and the other board members involved delivering to them Wells notices that advise potential defendants that the SEC is considering filing a civil suit. They are offered a chance to respond and explain before the regulatory agency formally acts.

If the SEC does sue the Hollinger directors, the move may hold ramifications for corporate boards nationwide. That's because, while it's routine for stockholders to take a company's board to court for failing to rein in management's misdeeds, the SEC has normally not done so.

Historically, the agency has instead tended to focus its legal attention on the principal actors, rather than on boards that may have served as passive enablers.

"It's highly unusual for the SEC to be bringing an action against an outside director, and I would think it would represent a change in SEC policy if they did that," said former Securities and Exchange Commission chairman David Ruder, who is now a professor at the Northwestern University School of Law.

"The commission has normally been anxious to find the true wrongdoers, the ones at the heart of the wrongdoing, not to sue the guardians, or the watchdogs, if you will," Ruder added.

Thompson and Burt remain board members but are slated to leave next month. Critics have accused the board's audit committee of being a sleepy watchdog that displayed little interest in challenging Chairman Black's questionable fiscal maneuvers.

Committee members have repeatedly maintained, however, that Black and the other criminal defendants used misrepresentations, outright lies and phony documents to prevent them from spotting the financial shenanigans the internal probe eventually turned up.

Burt's attorney couldn't be reached Wednesday, and a spokesman for Kravis, who left Hollinger's board in 2003, had no comment. Thompson, who in addition to his 14-year stint as Illinois governor formerly served as U.S. attorney for Chicago, and heads the Winston & Strawn law firm in Chicago, also declined to comment.

The SEC's Wells notices are "a big deal," said Burt Denton, president of Hollinger stockholder Providence Capital. If the SEC files suit against the Hollinger directors, it will in effect be telling boards, "Let's be awake when you're at the switch. Let's dig in instead of just saying `aye.'" Such a move by the SEC, Denton continued, "is long overdue."

Hollinger International, which owns the Chicago Sun-Times and numerous smaller papers, was long headed by Black, its controlling stockholder.

The board forced Black out of the top job in late 2003, however, after an internal probe found evidence that he and longtime lieutenant F. David Radler had been improperly diverting to their own pockets huge sums of money that should have gone to the company.

Hollinger then filed suit against Black and Radler, alleging the two men had taken about $400 million as they operated what the in-house probe characterized as a "corporate kleptocracy."

In that 2004 litigation, Hollinger acknowledged that the audit committee had approved dubious items, including the annual payment of millions of dollars in management fees to a private company controlled by Black. But that happened, the suit maintains, because Black and his allies "had learned how to manipulate and dominate the audit committee."

The SEC subsequently filed its own suit against Black and Radler, claiming the disgraced executives had violated federal securities law. Both those civil cases remain pending.

In late summer, U.S. Atty. Patrick Fitzgerald brought criminal charges against Radler and some other former Hollinger executives. Radler agreed to cooperate with the prosecutor and has pleaded guilty in exchange for reduced charges.

Last month, Fitzgerald filed criminal fraud charges against Black, who stoutly denies any wrongdoing.

The high-profile allegations have focused on the deceptive behavior of Black, Radler and the other criminal defendants. In painting the cadre of insiders as brazen and skillful liars, the prosecutor has indirectly lent support to the Hollinger audit committee members' claim that they were deceived.

Hollinger International's fall from grace has already spurred some legal settlements.

Last week Torys LLC, a Canadian law firm that had provided legal advice to the Chicago company and two of Black's holding companies, agreed to pay Hollinger $30.3 million to settle potential legal claims.

Hollinger is also known to be in settlement talks with former auditor KPMG over the issue of whether the auditor adequately warned the company's board about the company's financial dealings. KPMG has asserted it acted appropriately.

In addition, unhappy shareholders earlier filed a suit against most of Hollinger's board-seeking to tap the company's director and officer insurance coverage-and a $50 million settlement is now being negotiated. Under terms of that so-called derivative suit, the money from that settlement will go to Hollinger, rather than to individual stockholders.