Journal Sentinel lawsuit includes gag order, raises questions about credibility

By Geoff Davidian

MILWAUKEE (July 15, 2002) -- Here’s a line from a story that would define our times: A big corporation enters into a pact that keeps everyone in a lawsuit quiet about allegations that it manipulates its stock prices and that it tried to bilk investors out of the fair value of the shares they purchased to prepare them for retirement. Along the way, allegations of conversion of funds and fraudulent transfer against the corporation are raised and dismissed; trustees of the stock plan are accused of breach of fiduciary duty but the statute of limitations ran, sparing them liability; files are sealed, depositions from corporate officials are withheld from the public and a motion for remedial contempt sanctions against the firm that evaluated the value of shares is filed.

In return, the corporation agrees to pay out $9.6 million, while everyone involved agrees to publicly say there was no admission of wrongdoing.

Enron? MCI Worldcom. No, it’s closer to home.

Former employees who sued the Milwaukee Journal Sentinel say they are forbidden by a gag order from discussing anything about the class action lawsuit that ended by settlement July 1 - three years, two dozen briefs, 20 motion hearings and dozens of motions, affidavits and depositions after it was filed.

But the damage to the newspaper may have been greater than the cost of the lawsuit, Thomas A. Gauthier, et al., v. Journal Sentinel, Inc, which included $3 million in legal fees for Demet and Demet, who represented the former employees in the class action. And the cost will go beyond the untold millions to pay the four Foley & Lardner lawyers who defended the defendants, Journal Communications, Inc., Journal Sentinel, Inc., Journal Employees Stock Trust, Christine A. Farnsworth, Monica I. Sanchez, Robert A. Kahlor, Steven J. Smith and Thomas M. Karavak.

Journal Sentinel circulation declineThe suit, brought by five former employees including Shepherd Express columnist Joel McNally, and later affecting 148 former employees, cost the company its most important asset, says one lawyer: credibility.

This case arises out of the Journal Communications, Inc.'s (JCI) company wide reorganization. On January 23, 1995, Journal Communications offered a severance pay package to hundreds of employees that was drafted by Journal/Sentinel, Inc. and was presented to the plaintiffs on a take it or leave it basis. Some of the plaintiffs signed an Agreement and Release, which described their severance pay, then unilaterally imposed the severance terms contained in the January 23, 1995 memo, as the terms of severance for the other plaintiffs who were involuntarily terminated in 1995.

The plaintiffs filed a complaint alleging breach of contract; breach of fiduciary duties; conversions/fraudulent transfers against JESTA (the stock trust), its trustees, Journal Communications, Inc. and Journal/Sentinel, Inc., and a state wage claim.

Why would a newspaper that frequently files motions in court actions opposing secrecy when others are involved support an agreement that no one speak about its own deals?

“We have no comment,” says the paper’s spokesman, Bob Dye.

Will it hurt the papers standing when it goes to court asking judges to open records in other cases when it enforces a gag order in its own case?

“We have a settlement agreement,” Dye says. “I have no comment.”

Would the company provide access to court documents, like depositions of its officers, that would reveal their actions in the case?”

“I have no documents,” Dye said.

Would he object to providing access to the court records if the other parties don’t object?

“You can go to the court and ask for the file,” Dye said.

In fact, we already had gone through the file.

A look through the five crates of documents in the chambers of Circuit Judge Thomas Donegan suggests the newspaper fought hard to suppress evidence -- some files have been sealed by the court and Judge Donegan denied a request to look through depositions filed in 1999, with a clerk suggesting it was not clear whether the documents, sealed in clear envelopes, had been “entered.” Among the depositions was the sworn testimony of Paul E. Kritzer, vice president and general counsel-media for the company since July 2001; vice president-legal from June 1990 to July 2001; secretary of the company since September 1992 and director of the company since June 1990.

The Journal’s legal team unsuccessfully sought a protective order barring depositions of Steven J. Smith, chairman of the board of directors of the newspaper’s parent company, Journal Communications; and Paul M. Bonaiuto, executive vice president of the company since June 1997 and chief financial officer since January 1996.

The company, which owns dozens of newspapers and broadcast outlets in markets across the company, obtained a “confidentiality” order allowing it to stamp “confidential” on documents to keep the public - and its own employees and participants in its stock program - from learning what the company did.

Ironically, the record suggests that the directors of the company also are directors of the employees’ stock trust, which empowers them to make decisions regarding the price, dividend and availability of units in the stock trust.

Regardless of what the secrecy surrounding the company’s actions will do to employee confidence in the plan, there’s no question the decision to fight the lawsuit diminished the value of the Journal Sentinel, which already was suffering from declining revenue.

For example, the newspaper’s contribution to Journal Communications’ bottom line declined from 30.6 percent in 1999, when the suit was filed, to 26.5 percent last year, the most recent period for which Security and Exchange Commission records are available.

Meanwhile, Journal Sentinel total revenue of $218.8 million declined $18.2 million or 7.7% from $237.0 million in 2000, according to the company’s statement to the SEC. Earnings before taxes in 2001 of $23.3 million declined 39.2% from 2000, the company reported. Cost reductions in virtually all areas of the newspaper operations did not offset the loss in employment advertising revenue. A total of $3.3 million in voluntary and involuntary workforce reduction programs were recorded in 2001. This charge consisted of termination benefits to be paid to approximately 130 employees.

Advertising revenue totaling $166.3 million was a $17.5 million decrease from 2000. Classified advertising of $67.9 million and $85.4 million in 2001 and 2000, respectively, accounted for the entire decrease, according to the SEC documents. Employment classified advertising decreased by $18.6 million or 36.0% from 2000. The Company “believes the downward trend of classified advertising revenue will continue in 2002, but is not expected to be as dramatic as in 2001,” the company reported. Increases in other revenue categories such as retail preprints, event marketing, solo mail and JS Online, the online version of the Milwaukee Journal Sentinel, were virtually offset by decreases in retail and general ROP (run-of-press) and general preprints. Run-of press refers to advertisements that are published in all editions of a particular day's newspaper.

Meanwhile, the company reported, “circulation revenue of $48.1 million in 2001 was essentially flat when compared to $48.3 million in 2000. Average year-to-date net paid circulation in 2001 for both the daily and Sunday newspaper decreased 7.4% and 1.6%, respectively, from 2000. Late in 2001, the Company decided to eliminate the out-state home delivery circulation. This decision is expected to reduce daily and Sunday net-paid circulation by 3.7% and 2.5%; however, there should be positive pretax earnings implications."

The newspaper’s editorial credibility also has suffered from the political and business activities of its corporate officers. For example, on March 4, 1994, former Gov. Tommy Thompson established the Governor's Milwaukee Stadium Commission and picked then-Journal Communications Chairman Robert Kahlor to head it.

Then, in August 10, 1994, a Milwaukee Sentinel poll asserted that 66% of Wisconsinites are "very much in favor" of creating a sports lottery to help fund the new ballpark. In the Milwaukee metropolitan area, the support is measured at 73%, the Sentinel poll said.

The reality was the exact opposite. Eight months later, voters rejected the policy by a 2-1 margin.

In fact, one judge points out, while the Journal was reporting on the stadium deal the newspaper was a registered lobbyist for it.

Most recently, corporate management’s non-editorial business decisions discredited the Journal Sentinel news department further by pulling its business section critical of Baseball Commissioner Bud Selig from promotional copies given - and sold - to baseball fans at John Hancock All-Star FanFest.

Whatever the culpability of officials might have been had the statute not protected them from violating their fiduciary duty, the fighting of the lawsuit may well represent another occasion of violating that duty considering the dismal performance of the newspaper. In fact, based on its own reports, the cost of fighting the lawsuit, plus the payout to the former employees of $9.6 million, could erase most of the company’s earnings for a year.

Worse yet, “by agreeing to a gag order, this is a newspaper that has lost credibility on the first amendment issue,” says Samuel J. Harris, an attorney who argues constitutional law at the United States Court of Appeals for the 6th Circuit.

“By asking for a gag order, the newspaper has lost the credibility to stand up and ask for decency in the neighborhood. They’ve reduced the value of the product.”

Beyond that, the newspaper’s management has violated its fiduciary duty by devaluing the newspaper, Harris says, “and employees need to re-evaluate who they elect as trustees.”


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