News Corp. Shareholders Bring Fresh Charges Against Company's Senior Management and Board of Directors

WILMINGTON, Del. and LONDON, Sept. 13, 2011 /PRNewswire/ -- A group of News Corp. shareholders has brought fresh charges against the media giant's senior management and board of directors for repeated failures to correct illegal conduct that has severely battered the company's reputation and market value.

Beyond the phone hacking scandal that has engulfed the company – leading to arrests of senior News Corp. executives and investigations by the U.K. government, and the closure of the popular News of the World tabloid – shareholders outline incidents involving several News Corp. U.S. subsidiaries, revealing that hacking, privacy breaches and anticompetitive practices were not confined to the newspaper division.

Shareholders allege that based on the reported longevity of documented wrongdoing – in some cases going back at least to the late 1990s – News Corp.'s board was well aware of widespread misconduct at several of its U.S. subsidiaries. The company was forced to pay nearly $1 billion in verdicts and settlements resulting from third-party privacy breaches at its consumer marketing unit News America Marketing.

The new charges are contained in a second amended complaint filed in Delaware Court of Chancery by News Corp. shareholders, led by Amalgamated Bank, trustee for various LongView investment funds, the New Orleans Employees' Retirement System and Central Laborers Pension Fund. The shareholder group is represented by leading securities and corporate governance law firms Grant & Eisenhofer P.A. and Bernstein Litowitz Berger & Grossmann LLP.

"The revelations surrounding News Corp.'s corporate governance lapses get worse with each new disclosure," said Grant & Eisenhofer partner Jay Eisenhofer. "In fact, our new complaint shows that the illicit phone hacking and subsequent cover-ups at News of the World were part of a much broader, historic pattern of corruption at News Corp., under the acquiescence of a board that was fully aware of the wrongdoing, if not directly complicit in the actions."

In their original complaint filed this past March, shareholders focused on events surrounding News Corp.'s $615 million acquisition of British TV production company Shine Group Ltd., a sweetheart deal which brought a $250 million windfall to Rupert Murdoch's daughter Elisabeth, who was being put forward for a seat on News Corp.'s board. She has since removed her name from consideration.

In July, shareholders brought their first amended complaint in the wake of the widening disclosures of illegal telephone hacking instigated by News of the World against some 4,000 individuals, including members of the Royal Family, celebrities, athletes, British soldiers killed in Afghanistan, and most notoriously, a 13-year-old murder victim, Milly Dowler.

The new filing sheds light on wrongdoing at two U.S. subsidiaries, News America Marketing and NDS Group.  NAM, a leading in-store marketer, was subject to five separate lawsuits alleging extreme forms of anticompetitive behavior, some of which foreshadows the phone hacking conducted by News of the World. In one case, a former NAM director testified that the company issued false press releases impugning a rival it was trying to purchase, while mutilating and removing the competitor's signage from retailers. Equally disturbing, the NAM competitor learned that its secure computer system had been breached on at least 11 separate occasions. The company "had evidence that someone working at NAM hacked into a password-protected website containing confidential information intended only for (it) and its customers."  

Following one jury trial, NAM was ordered to pay $300 million in damages, while the company paid $650 million to settle three of the lawsuits. At trial, NAM's CEO was reported to have told a rival executive, "If you ever get into any of our businesses, I will destroy you...I work for a man who wants it all, and doesn't understand anybody telling him he can't have it all," a reference to Murdoch. New Jersey Senator Frank Lautenberg recently asked the U.S. Attorney General and the FBI to take a fresh look at NAM's computer hacking as part of an ongoing investigation into reports that News Corp. also intercepted cell phone calls of victims of the 9/11 attacks.

The amended complaint also highlights troubles at News Corp.-owned smart card unit NDS, which was accused by satellite company EchoStar of illegally extracting software code from competitors' cards and posting the information online, allowing hackers to create counterfeit cards that could be used to intercept television programming. A federal jury found that NDS's practices were illegal and the court subsequently granted EchoStar an injunction preventing NDS from intercepting its satellite signal.

As shareholders note in their complaint, a number of current News Corp. directors and senior managers also served on the boards of NAM and/or NDS during these incidents. That includes Arthur Siskind, News Corp.'s former general counsel and senior executive vice president; David DeVoe, chief financial officer; Chase Carey, current president and chief operating officer; along with Rupert Murdoch and his son James.

In the newly amended complaint, shareholders also accuse board members of breaching their fiduciary duty in approving a $5 billion share buyback this past July as a means of buttressing the company's waning stock price in the face of the hacking scandal. Investors assert that the buyback mechanism potentially increases Murdoch's voting power and could permit him to obtain absolute voting control without providing any premium to News Corp.'s current public majority shareholders. The buyback plan, shareholders contend, is just another illustration of the way in which Murdoch runs News Corp. like a "personal fiefdom."

Despite the reputational hits which have adversely affected News Corp.'s operations and franchise value, the company's board has rebuffed numerous calls by shareholders and corporate governance experts to initiate reforms. According to the new complaint, Charles Elson, who heads the Weinberg Center for Corporate Governance at the University of Delaware, said that News Corp. has fostered a "culture with no accountability." The complaint also notes that Governance Metrics International has handed News Corp. an "F" grade in each of the past six years – putting it in the lowest 99th percentile of some 3,000 public companies rated by the research firm. According to GMI founder Nell Minow, the "F" was given only "because there is no lower grade possible."  And GMI's managing director adds, "While shareholders are free to suffer from a drop in the stock price because of scandal, they really cannot do anything but sell the stock. They have no control over the board or the CEO. If you wanted to make up the sort of company that will fail in the future, this is the sort of board you'd put together."  

"News Corp.'s board refused to restrain Rupert Murdoch even when the need to do so was obvious," said Bernstein Litowitz partner Mark Lebovitch. "Our clients look forward to the opportunity to hold the board accountable for their misconduct."

The case caption is: In re News Corporation Shareholder Derivative Litigation, No. 6285-VCN.

Note:  Grant & Eisenhofer P.A. and Bernstein Litowitz Berger & Grossmann LLP represent institutional investors and shareholders internationally in securities class actions, corporate governance actions and derivative litigation.  For more, visit www.gelaw.com or www.blbglaw.com.

SOURCE Grant & Eisenhofer P.A.