The ABC's of Monopoly

Texas lawsuit looks at fraud in
Hearst newspaper circulation

Editor of The Putnam Pit
© 2003 Geoff Davidian

HOUSTON, Texas (October 14, 2003) – Monopoly: It’s not just a board game anymore.

And where the money comes from isn’t just chance, according to five former distributors of the Hearst Corporation’s flagship newspaper, The Houston Chronicle.

A Texas lawsuit brought by the former distributors asks the Court to consider whether their contracts were terminated because they refused to cooperate with a series of Hearst schemes allegedly contrived to inflate circulation figures reported to the Audit Bureau of Circulation (ABC). The ABC is a not-for-profit organization whose rules govern not only how audits are conducted but also how publishers report their circulation figures. Advertisers determine where to put their money based in part on the ABC circulation figures.

For the past decade, the Hearst Corp. has eliminated competition in markets from Texas to San Francisco. During that period, Hearst closed down newspapers and monopolized print journalism in Houston, where Houston Post employees lost their jobs,  and San Antonio, where Hearst closed its own newspaper and acquired its competitor. The Antitrust Division of the Department of Justice has reviewed or investigated five Hearst acquisitions, possible mergers or other antitrust cases since 2000.

Elsewhere, of the 12 Hearst newspapers in the United States, the DOJ Freedom of Information Case Logs include antitrust investigations involving the New York publishing giant’s purchase of the San Francisco Chronicle (DOJ File 60-2711-0079), the only file available to the public, and the Joint Operating Agreement between Hearst’s Seattle Post-Intelligencer and the Seattle Times (DOJ File 60-127-129). The logs indicate that the Justice Department file number 60-2711-0078 concerns Hearst, Blethen, the Seattle Times and Knight-Ridder. Blethen owns 51 percent of the Seattle Times, while Knight-Ridder owns 49 percent of the Pulitzer Prize-winning daily.

The records of news-related antitrust investigations were uncovered by Washington DC-based researcher Michael Ravnitzky, who spotted several of them while reviewing correspondence logs of the Antitrust Division.

"This list of antitrust investigations may not be complete, since it reflects only those investigations which were the subject of Freedom of Information requests to the Justice Department."  He adds, "But it certainly suggests that the Justice Department has been concerned about the anti-competitive implications of newspaper mergers and acquisitions, the modification of existing Joint Operating Agreements, and transitions to single newspaper towns."

Since 1983, The Seattle Times Company and the Hearst Corporation, publisher of the Seattle Post-Intelligencer, have had a Joint Operating Agreement (JOA). Under this agreement, The Seattle Times Company handles all advertising, production, marketing and circulation operations, and most business and Web site production functions for both The Seattle Times and the Seattle P-I. According to terms of the agreement, The Times can scuttle the JOA if it loses money for three consecutive years, which it says it has. But when it tried to pull out, Hearst sued in an attempt to force The Times to continue the partnership. Times management says the suit is meant to bleed and weaken the paper.

In its most recent deal, Hearst in 2000 gave its San Francisco Examiner and a $66 million “subsidy" to a local publishing family in order to overcome Department of Justice anti-trust concerns regarding the publisher’s purchase of the Examiner’s more successful competitor and partner under the Newspaper Preservation Act, the San Francisco Chronicle. During that deal, the Department of Justice investigated the elements of the purchase and a federal trial forced Hearst to provide circulation and financial information.

How could Hearst afford to acquire and close newspapers while paying the competition to keep publishing?

The Houston lawsuit may offer some insight into this question.

Dating as far back as the 1980's, Chronicle officials played fast and loose with the ABC, directing managers to take ABC auditors to topless bars, get them drunk and keep them hung over so they couldn’t do their jobs, according to the deposition of Steven Halpern, one of the plaintiffs in the Houston lawsuit, Norris, et al. vs. Hearst Partnership LP.

In interviews and in court pleadings, plaintiffs say their contracts as independent distributors were terminated because they refused to ratchet up the fraud following Hearst’s purchase and subsequent shut down of its competing Houston Post on April 18, 1995. The Chronicle also paid the distributors a bonus to “draw” more newspapers than they could deliver. Plaintiffs say the program, called “cost plus,” required distributors to “buy” as many as 600 extra copies a day for which there was no market. At the end of the month, the Chronicle would “credit” distributor accounts with the cost of the extra papers plus a bonus for participating. The papers, which sometimes were taken directly to a recycling center, were then reported to the ABC as “paid circulation.”

Advertisers look to the ABC for the independent verification and dissemination of paid newspaper circulation, readership and audience. The ABC's Board of Directors is comprised of 36 members, including representatives from the publishing and advertising communities. Advertisers use the ABC figures when deciding which media to place their messages, and to determine the value of the ad rates.

Depositions in the Texas lawsuit suggest that for decades the Chronicle has been inflating the paid circulation number to the ABC. And if that’s so, the ABC has breached its contract, says Gregory P. Clausen, executive vice president and director of media for Cramer-Krasselt (C-K), the Milwaukee-based public relations and advertising agency with clients including Hyatt Hotels, Corona beer and Winn-Dixie Stores.

Jerry S. Payne, the Houston attorney representing the plaintiffs, says the Chronicle is not the only Hearst paper “cooking the books.”

Payne said two distributors from Hearst’s Beaumont (Texas) Enterprise also have come forward, echoing the allegations of the five Houston plaintiffs.

Gary Randazzo, who was Hearst’s circulation guru at the Houston Chronicle in the late 1990s, was transferred to the San Francisco Chronicle after the scheme was revealed, Payne said.

The lawsuit names Randazzo as the "architect and executor of the criminal activity."

In a statement on its web site, the Hearst Newspapers acknowledge that their “top priority for 2002 was to get closer to its customers, and nowhere did that effort register more success than in circulation. Four of our metro newspapers recorded both daily and Sunday gains, most notably the San Francisco Chronicle—for the first time in nine years.

The San Antonio Express-News’ weekday circulation was up 4 percent, and Sunday was up 2 percent. The Albany Times Union, Houston Chronicle, Laredo Morning Times, Midland (Michigan) Daily News and Midland (Texas) Reporter-Telegram also recorded circulation gains.”

“ . . . San Francisco also enhanced its senior management ranks, tapping Gary Randazzo, the Houston Chronicle’s senior vice president for sales and marketing, to become San Francisco’s new vice chairman and associate publisher.”

The Houston Chronicle, in a Saturday issue published June 29, 2002, acknowledged the distributors’ lawsuit in four paragraphs as the fifth of five business news briefs, quoting Chronicle lawyer William W. Ogden saying, "This lawsuit is completely frivolous. We're well familiar with Mr. Payne's complaints, and they have been addressed time and again by the Chronicle and by me."

In a recent telephone interview, Ogden said there is no evidence of fraud, even by the plaintiffs. “They are not consistent about the time. Their stories conflict in every material detail.”

Asked whether any false circulation or financial information made its way to the Department of Justice or into evidence during the San Francisco trial, Ogden said he only represents the Chronicle and has no information about Hearst’s acquisitions.

Meanwhile, Marybeth Meils, director of communications for the ABC, gives Hearst and the Chronicle a clean bill of health. “We stand behind our figures,” she said, adding that because of the litigation she could not give specific details of how the Chronicle is monitored or whether the ABC has confronted the Chronicle with the allegations.

“[The ABC] is an organization that collects a fee to do a job,” C-K’s Clausen says. “But if [a newspaper] takes the effort to perpetuate fraud, if there are insiders involved, if there is collusion, that’s difficult for auditors to find.”

The ABC has “to show some ability to retract this statement,” Clausen says.

Clausen says the ABC audits by analyzing subscriber records, return policies, carrier and dealer records, and “gives us a consistent format – a way to analyze numbers. But is it a watchdog? No.”

“There’s no question we can prove the crime, the fraud,” Payne says. He is considering bringing a class-action suit on behalf of all distributors who were cut loose for "refusing to lie."

 “But the big class action will be on behalf of the advertisers who were defrauded.”

Some of the details of the alleged fraud have been coming out of recent depositions.

“. . . [B]ack in the Eighties, when I was a zone manager [at the Chronicle], we used to get the auditors drunk; keep them drunk,” Plaintiff Halpern said in a deposition. “We’d rotate around so they couldn’t do their job.”

Halpern said Chronicle circulation managers would “take [the auditors] to titty bars,” and “kept them hung over and not doing a very good job.”

Halpern also said that the Chronicle falsified the numbers of newspapers distributed to classrooms participating in the industry’s Newspapers in Education program, or NIE.

“And you know that there are rules by which that is – that can be counted as legitimate ABC auditable. Correct?” asked Ogden, the Chronicle’s attorney.

Halpern fired back: “Yeah, but there’s 200 students at the school. Twelve hundred seems a bit excessive, don’t you think?”

Ed Rossi, another plaintiff, started selling the paper in 1950 on a north Houston street corner at the age of 11.
On his first day, he recalled, he bought five newspapers for a dime each and sold them for 15 cents. He worked on that corner all the way through school, delivering to residences by foot in his spare time. Then, he bought a bike for $30, put a basket on it and started a route. He did so well he won a motor bike in a Chronicle paperboy contest, and by age 15 he was delivering 200 papers a day.

“I loved it,” Rossi said. “We used to tie the papers with twine. I used to be able to roll and tie 50 papers in three-and-a-half minutes.”

Ed Rossi
Ed Rossi

By 1961, Rossi was grossing $1,500 a month, and had built his single copy sales to 450 a day.

The Chronicle began having circulation trouble after Hearst bought out the Houston Post and found that many of the subscribers it thought it had acquired were fictitious. About the same time, The Chronicle raised its price, reducing further the number of copies being sold, said Rossi.

In 1995, Rossi was distributing 3,500 papers a day and grossing $80,000 a year. After the Post closed the price hike cut his circulation to 2,200 and he wanted to renegotiate his contract. But management under Randazzo had instituted a “new model” that rewarded distributors who reached “goals” that were unattainable, Rossi said – unless they lied. When he wouldn’t cooperate, he was offered a one-month contract, which was not renewed.

“I felt betrayed,” Rossi said. “I gave them my life and they did this to me?”