naked capitalism

If you had any doubts the Murdoch’s NewsCorp was a criminal enterprise, this story by Nick Davies of the Guardian (who has been out in front on NewsCorp reporting) should settle it.

In case you managed to miss it, NewsCorp International has been embroiled in a widening scandal about the hacking of cell phones in its now shuttered tabloid News of the World, which led to the resignation of the head of NewsCorp International, Rebekah Brooks, and has put heir apparent James Murdoch in a perilous position. It has also led to what amounts to serious, and hopefully permanent break in the status Murdoch held in England as a kingmaker.

We now see a calculated scam on the business side designed to defraud advertisers by boosting circulation figures (ad rates are based on circulation, so higher circulation = more revenues). This is fraud, pure and simple. The operation was material, accounting for a full 16% of the Journal’s European sales. And the former Dow Jones CEO Les Hinton was told of the scam, and in predictable fashion, nothing was done and the whistleblower was fired.

Key sections of the Guardian report (hat tip readers Michael Thomas and Reader of Tea Leaves):

The Guardian found evidence that the Journal had been channelling money through European companies in order to secretly buy thousands of copies of its own paper at a knock-down rate, misleading readers and advertisers about the Journal’s true circulation.

The bizarre scheme included a formal, written contract in which the Journal persuaded one company to co-operate by agreeing to publish articles that promoted its activities, a move which led some staff to accuse the paper’s management of violating journalistic ethics and jeopardising its treasured reputation for editorial quality.

Internal emails and documents suggest the scam was promoted by Andrew Langhoff, the European managing director of the Journal’s parent company, Dow Jones and Co…The highly controversial activities were organised in London and focused on the Journal’s European edition, which circulates in the EU, Russia, and Africa…

In what appears to have been a damage limitation exercise following the Guardian’s inquiries, Langhoff resigned on Tuesday…Neither he nor an article published last night in the Wall Street Journal made any reference to the circulation scam nor to the fact that the senior management of Dow Jones in New York failed to act when they were alerted last year…

The Journal’s decision to secretly purchase its own papers began with an unusual scheme to boost circulation, known as the Future Leadership Institute. Starting in January 2008, the Journal linked up with European companies who sponsored seminars for university students…

The sponsoring companies were not reading the papers they were paying for; they were never even seeing them; and they were buying at highly reduced rates. The students to whom they were distributed may or may not have read them; none of the students paid for the papers they were being offered. But the Audit Bureau of Circulation ruled that the scheme was legitimate and by 2010, it was responsible for 41% of the European edition’s daily sales – 31,000 copies out of a total of 75,000.

In early 2010 the scheme began to run into trouble when the biggest single sponsor, a Dutch company called Executive Learning Partnership, ELP, threatened to back out. ELP alone were responsible for 16% of the Journal’s European circulation.

Desperate to keep ELP in, the Journal concocted a greatly sweetened barter arrangement. But the Journal appears to have botched execution, leading ELP to threaten to pull out again:

By the autumn of 2010, ELP were complaining that the Journal was failing to deliver its end of the agreement. They threatened not to make a payment of €15,000 that was due at the end of December, for the copies of the Journal which they had sponsored since April 30. Without the payment, the Journal could not officially record the sales and their circulation figures would suddenly dive by 16%, undermining the confidence of advertisers and readers.

So Langhoff set up a complex scheme to channel money to ELP to pay for the papers it had agreed to buy – effectively buying the papers with the Journal’s own cash. This involved the use of other companies although it is not suggested that they were aware they were taking part in a scam.

These are just the high points of the story; Davies provides considerably more in the way of sordid detail and I strongly urge you to read his account in full. I’m waiting to see what other shoes start dropping as a result of this revelation.

.