Download - Hollinger International, Inc. Securities Litigation 04-CV-0834-Consolidated Amended Class Action
IN THE UNITED STATES DISTRICT COI) J 1 tI L pFOR THE NORTHERN DISTRICT C) j ,~JNOIS
2004EASTERN DIVISION
In Re HOLLINGER INTERNATIONAL, INC . ) Cons. Civil Action No . 04-C-0834SECURITIES LITIGATION ) C11V ft(--
CLASS ACTIONThis Document Relates To : )
ALL ACTIONS. ) ~+1 4s ~~, ,
~P+ CIS,
NOTICE OF FILIN
G To: See Attached Service List 14i1
PLEASE TAKE NOTICE that on August 2, 2004 we filed the Consolidated Amended
Class Action Complaint with the Clerk of the United States District Court for the Northern Distric t
of Il linois, Eastern Division . A copy of this document accompanies this Notice .
Respectfully submitted ,
DATED : August 2, 2004 MUCH SHELIST FREED DENENBERGAMENT & RUBENSTEIN, P.C.
Carol V . GildenConor R. Crowley191 North Wacker Drive, Suite 1800Chicago, IL 60606Tel: 312-521-2000Fax : 312-521-2100
Liaison Counsel
GRANT & EISENHOFER, P .A.Jay W. EisenhoferJohn C . Kairi s1201 North Market Street, Suite 2100Wilmington, DE 19801-259 9Tel: 302-622-7000Fax,. 302-622-710 0
LERACH COUGHLIN STOIA& ROBBINS LLP
William S. LerachTravis E . Downs IIIScott H. SaharaErin P . McDaniel401 B Street , Suite 1700San Diego , CA 92101Tel : 619-231-105 8Fax : 619-231-7423
Co-Lead Counsel for Plaintiffs
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CERTIFICATE OF SERVICE
I, Carol V. Gilden, hereby certify that the foregoing and attached Notice of Filing andConsolidated Amended Class Action Complaint were served on counsel listed on the attachedservice list in the manner indicated on this 2nd day of August, 2004 .
Carol V. Gilden, Esq .
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SERVICE LIST
VIA FIRST CLASS MAIL
Gordon B . NashCurtice W. Scot tGardner Carton & Douglas191 N. WackerSuite 3700Chicago, IL 60606
Paula E. LittVeronica GomezSchopf & Weiss312 W. RandolphSuite 300Chicago, IL 60606
John F. HartmannTimothy D . ElliottMichael DuffyKirkland & Elli s200 E. Randolph, Suite 5800Chicago, IL 60601
Ted S . HelwigKarl R. BarnickolKatten Muchin Zavi s
Rosenman525 West Monroe Street
Suite 1600
Chicago, IL 6066 1
Robert Kravitz John L. Warden Leigh R. LaskyPaul Weiss Rifkind Laurent S . Wiesel Lasky & Rifkind, Ltd .Wharton & Garrison Sullivan & Cromwell, LLP 351 W. Hubbard, Suite 4061285 Avenue of the 125 Broad Street Chicago, IL 6061 0Americas New York, NY 10004New York. NY 10019
Michael E . SwartzIrwin J . SugarmanSchulte Roth & Zabel, LLP919 Third AvenueNew York, NY 10022
David C . JacobsonDavid E . SingerSonnenschein Nath &Rosentha lSears Tower233 S. Wacker DriveSuite 8000Chicago , IL 60606
Marvin A . MillerMatthew E . Van TineJennifer Winter SprengelMiller Faucher &Cafferty,LLP30 N. LaSalle StreetSuite 3200Chicago, IL 60602
Nathan P . EimerAndrew G. KlevomEimer Stahl Klevorn &
Solberg, LLP224 S. MichiganSuite 1100Chicago, IL 60604
John T . DeCarloDeCarlo Connor & Selvo533 South Fremont Avenue9th FloorLos Angeles , CA 9007 1
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VIA FEDERAL EXPRESS
John C. Kairis William S . LerachGRANT & EISENHOFER, P .A . Darren J . Robbins1201 N. Market Street Lerach Coughlin Stoia & Robbins, LLPSuite 2100 401 B Street , Suite 1700Wilmington , DE 19801 San Diego , CA 92101-4297
Marc A. TopazRichard A. ManiskasSchiffrin & Barroway, LLPThree Bala Plaza East, Suite 40 0Bala Cynwyd, PA 19004
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOI S
EASTERN DIVISION
In Re HOLLINGER INTERNATIONAL, INC .SECURITIES LITIGATION,
+iUt7 A ?004
Cons . Civil Action No . 04-C-0834
j JUDGE DAVID H. COAR
This Document Relates To :
ko"ALL ACTIONS. ) CLASS ACTION6
CONSOLIDATED AMENDED CLASS ACTION COMPLAIN T
Lead Plaintiff, Teachers' Retirement System of Louisiana ("Teachers"), and plain t
Washington Area Carpenters Pension and Retirement Fund ("Washington Carpenters") and E . Dean
Carlson ("Carlson") on behalf of themselves and all otherpurchasers of Hollinger International, Inc .
("Hollinger" or the "Company") securities (hereinafter collectively the "Plaintiffs") between and
including August 13, 1999 and March 31, 2003 (the "Class Period"), allege in this Consolidated
Amended Class Action Complaint ("Complaint") the following upon information and belief, except
as to those allegations concerning Plaintiffs, which are based upon personal knowledge . Plaintiffs'
information and belief are based upon, among other things : (a) an investigation conducted by and
through their attorneys; (b) review and analysis of filings made by Hollinger with the Securities and
Exchange Commission ("SEC"), (c) review and analysis of filings made by companies affiliated with
Hollinger such as Hollinger Inc_, among others ; (d) the complaint filed by the SEC against Hollinger
in the United States District Court for the Northern District of Illinois, docketed as No . 04C 0.336 ;
(e) the complaint filed in the United States District Court for the Southern District of New York by
the Special Committee of the board of directors of Hollinger ("Board"), on Hollinger's behalf,
against Lord Conrad M . Black ("Lord Black" or "Black") and others, docketed as No. 04 Civ 0040 8
(the "New York Special, _C,or attee Complaint") ; (f) the First Amended Complaint filed in the
United States District ~Gourt-for )the Ngrtl e1in District of Illinois by Hollinger International Inc .
U.S . i t; ` f :`cfr, UJUi?T 3(0
against Hollinger Inc. and others, docketed as Case No. 04C-0698 (the "Illinois Special Committee
Complaint") ; (g) the complaint filed by Cardinal Value Equity Partners, L .P. against Lord Black,
Hollinger and others, in the Delaware Chancery Court, docketed as C .A. No. 20406 (the "Cardinal
Complaint") ; (h) press releases , public statements, news articles , securities analysts' reports and
other publications disseminated by or concerning Hollinger ; and (i) other publicly available
information about Hollinger .
Additionally, Plaintiffs have recently obtained copies of approximately 1,000 separat e
documents, including minutes and resolutions of Hollinger's Board of Directors ("Board"), copies
of internal emails sent to and from Lord Black and other individual defendants, copies of asset sale
agreements and other documents relating to Hollinger's sales of its newspapers and other assets to
entities owned and controlled by Lord Black and other individual defendants, copies of non-compete
agreements and draft non-compete agreements purportedly entered by Hollinger and/or certain of
the individual defendants, and other documents that were submitted as trial exhibits or were
otherwise part of thejudicial record in an action filed by Hollinger against Lord Black and others in
the Delaware Chancery Court, docketed as C .A. No. 183-N_ These trial exhibits and other
documents were filed by Hollinger, Lord Black and others in the Delaware Chancery Court action
under seal . Hollinger, Lord Black and other parties to that action refused to provide Plaintiffs with
copies of or access to such documents, forcing Plaintiffs to file a motion to lift the protective seal
on those documents, which the Delaware Chancery Court granted on June 29, 2004. Plaintiffs
obtained copies of the documents in that action on July 12, 2440 . Plaintiffs' claims in this action
are based in part on those documents, the transcript of the trial in the Delaware Chancery Court
action, and on the pleadings and the court's decision, following trial, issued on February 26, 2004
and reported at 844 A ..2d 1022. In that decision, the Delaware Chancery Court made numerous
factual findings regarding certain of the Defendants' wrongdoing which support Plaintiffs' claims
in this action- Plaintiffs believe that further substantial evidentiary support will exist for th e
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allegations in this Complaint after a reasonable opportunity for discovery . Additional facts
supporting the allegations contained herein are known only to Defendants or are within their control .
SUMMARY OF THE ACTIO N
1 . Throughout the Class Period, Defendants failed to disclose the transfer of millions
of dollars of Hollinger funds into their own pockets, falsified the Company's financial results, and
materially misrepresented Hollinger's sales of Company assets and its dealings with related parties .
Defendants compounded their fraud by falsely claiming that the Company's related-party
transactions were approved by the Board and the Audit Committee of the Board, when they were not .
Defendants also artificially inflated the Company's circulation figures in a pervasive scheme to
generate advertising dollars, and thereby portray the Company as reaching growing numbers of
consumers, when it was not .
2. The chief architect of this fraud is Lord Conrad N . Black ("Lord Black"), Hollinger's
controlling shareholder and former Chief Executive, who raided the Company's coffers to finance
his extravagant lifestyle but failed to disclose this piracy to shareholders. Lord Black and his
acolytes surreptitiously pocketed millions of dollars generated from sales of Hollinger assets -
money that belonged to Hollinger - without disclosure to the shareholders and without being
challenged by Hollinger's Board or the Board's Audit Committee which knew or were reckless in
not knowing that such theft was taking place . When some of these self-dealing transactions were
called to the Board's attention, the directors simply rubber-stamped the transactions and failed to
correct prior misrepresentations about the transactions which the Board and Audit Committee knew
were false .
3 . Defendants accomplished their fraud by misrepresenting to the shareholders the term s
of Hollinger' s asset sales to third party publishers. During the Class Period, Hollinger reported
proceeds from the sales of its newspaper assets, and a reduction of its debt and strengthening of its
balance sheet through the use of proceeds from such sales- However, unbeknownst to investors,
significant portions of those proceedswere diverted to Lord Black and his lieutenants under the guis e
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of "non-compete payments ." The payments to Lord Black and his lieutenants were concealed from
investors, and the Company's independent directors failed to review or negotiate the asset sale
transactions or the non-compete payments or assess their fairness to the Company and it s
shareholders .
4. Hollinger's shareholders were deceived in several ways. First, they were told that
only Hollinger was profiting from. the sales of its assets and that the independent directors had
approved the Company's asset sales, when that was untrue . Investors who purchased Hollinger stock
based upon the Company's ability to raise funds through divestitures and other transactions were
misled into believing that all the money obtained through the Company's sales of its own assets went
into the Company's coffers, when in fact millions of dollars were transferred to Lord Black and his
associates. Investors who purchased Hollinger stock based upon the Company's representations that
its independent directors had approved the Company's asset sales and related party transactions were
also deceived .
5. The shareholders were also deceived by the Company's misrepresentations that it wa s
receiving services. pursuant to management services agreements with The Ravelston Corporation
Limited ("Ravelston"), a Lord Black controlled company, and Ravelston's subsidiaries, Ravelstorx
Management Inc. ("RMI"), Argus Corporation Ltd. ("Argus"), Moffat Management ("Moffat") and
Black-Arniel Management ("Black-Amiel") (on information and belief owned, controlled and
managed by Lord Black's wife, Barbara A.miel Black) . Through Ravelston and its subsidiaries, and
through a complex system of intertwining ownerships and payments between various companies
controlled by Lord Black, Lord Black surreptitiously funneled additional Hollinger funds to himself
and his associates but concealed this from the shareholders .
6 . . As Lord Black admitted in his answer filed in the Delaware Chancery Court action,
Toronto-based Hollinger Inc . owns 30% of Hollinger's shares but controls 72 .8% of its voting
shares . Lord Black controls the Toronto parent through Ravelston and other holding companies
owned by Black which are paid to manage Hollinger . From 1995 to 2003, Lord Black and hi s
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cronies have used this byzantine corporate network to divert additional hundreds of millions o f
dollars from Hollinger to themselves, this time under the guise of purported "advisory and consulting
fees" provided by Ravelston pursuant to management services agreements. However, unbeknownst
to the shareholders, no such management, advisory or consulting services were provided by
Ravelston to Hollinger- the management services agreements were simply a ruse to funnel monies
to Lord Black_ These facts were concealed from the shareholders .. Additionally, defendants falsely
represented that the service agreements were negotiated at arms' length and approved by the Board
and Audit Committee, when they were not .
7. Lord Black also misrepresented the Company's dealings with related parties .
Hollinger sold numerous newspaper assets to third parties that were secretly controlled by Lord
Black in deals structured to prevent competing bids from emerging . While this prevented Hollinger
from receiving higher values for its assets, it enabled the Black-owned and controlled parties to
purchase Hollinger assets at fire-sale prices . Hollinger did not disclose that the deals precluded
competitive bids and that the purchasers of Hollinger's assets were companies owned and controlled
by Lord Black and Radler, his first lieutenant at Hollinger. Hollinger also failed to disclose that
these deals were consummated only because Hollinger provided the financing needed by the Black-
owned companies to close the deals with Hollinger.
8. Lord Black never disclosed the diversion of Company funds to himself, his acolyte s
and the companies he controlled . The reason is that he had utter disdain for shareholders who he
considered lacking any right to basic information about how he "compensated" himself and paid for
his personal expenses out of Company funds . Lord Black considered himself the "proprietor" of
Hollinger who could take Company funds without the disclosure which would arouse what he
characterized as the "agitations of shareholders ." Although Lord Black was previously found by the
SEC to have violated federal securities laws through misrepresentations to shareholders, Lord Black
continued to treat outsiders with contempt, referring to activist investors as "corporate governance
zealots" and "terrorists ."
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9 . When Hollinger finally dribbled out to the shareholders some information about the
self=dealing transactions and non-compete payments, it misrepresented the amount of the non-
compete payments ; it falsely stated that those payments were "required" to close the Company's
asset sales, and it falsely claimed that the Company's independent directors had approved the
payments . These misrepresentations were contained in a Form 10-K for fiscal year 2002 filed with
the SEC on or about March 31, 2003 (the "2002 10-K")n In addition to misrepresenting the amounts
and circumstances surrounding the non-compete payments .; the 2002 10-K failed to disclose that,
although Hollinger was paying Ravelston millions of dollars each year pursuant to management
services agreements, Raveiston was not providing any services to the Company . The 2002 10-K also
failed to disclose the terms of its prior asset sales which were designed to favor companies controlled
by Lord Black and his cronies . On the 2002 10-K, Lord Black signed his certification (required
under the Sarbanes-Oxley Act of 2002) "that to the best of [his) knowledge . . . the Report fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act . . . and
. . . the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company." As Lord Black knew, this certification was
false .
10 . Investors were also deceived regarding the amount of subscribers to Hollinger' s
various newspapers . Throughout the Class Period, the Company reported increasing numbers of
subscribers to its flagship United States newspaper, the Chicago Sun Times, as well as other
newspapers, trumpeting to advertisers the ability of Hollinger to reach more and more consumers .
Advertisers paid handsome sums to place their ads in Hollinger's newspapers, and investors
purchased Hollinger's stock based upon their belief that the Company was more valuable due in part
to its success in growing its subscriber base . As the Company reported ever larger numbers of
subscribers, its stock price rose in tandem .
11 . However, unbeknownst to investors (and the Company's advertisers), Lord Black,
Radler and other defendants had engaged in a scheme to artificially inflate the Company's reporte d
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number of subscribers, in order to generate additional advertising revenue and give a false
appearance of value . As later disclosed by a rival newspaper, Hollinger had inflated its number of
subscribers by at least 25% through a pervasive fraudulent scheme implemented throughout the
Company .
12. Hollinger and the Individual Defendants could not have implemented and concealed
their fraudulent scheme without the substantial assistance, or extreme recklessness, of Hollinger's
purportedly independent auditors, KPMG LLP ("KPMG") . KPMO was aware of facts and/or
deliberately ignored or recklessly disregarded facts that showed that HolIinger's financial statements
fi led with the SEC and publicly available to (and read by) investors were materially false and
misleading . Nevertheless, KPMG certified the Company's financial statements as comporting with
applicable accounting rules and SEC regulations and as accurately presenting the financial condition
of the Company when they did not_ KPMG's reason for participating in and/or aiding and abetting
defendants' fraud was simple -- money . During the Class Period, KPMG billed Hollinger
approximately $20 million in audit, tax and other fees for services rendered to Hollinger, not
counting KPMG's fees for fiscal 2003 which have not yet been disclosed . KPMG billed additional
sums to Hollinger, Inc .., which was controlled by Black, who also ran and controlled Hollinger .
KPMG did not want to jeopardize its long-standing and lucrative relationship with Hollinger and
Hollinger Inc . by questioning or challenging Hollinger's improper accounting practices or refusing
to certify the Company's financial statements as "clean ."
13 . Hollinger's misrepresentations and fraud began at least as early as its 10-Q filed o n
August 13, 1999 . On August 13, 1999, at the beginning of the Class Period, Hollinger's stock traded
at $10.08 per share. By March 28, 2002 it traded at $13 .11 per share, as a result of the artificial
inflation of Hollinger stock resulting from the fraud of Lord Black and the other Defendants .
Beginning in April 2002, isolated information about Lord Blacks' improper dealings began to dribble
into the marketplace . As the marketplace reacted to the news of Lord Black's self-dealing,
Hollinger's stock began to drop in price . However, not until March 31, 2003, under pressure from
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its institutional investors, did Hollinger begin to disclose the improprieties by Lord Black and his
accomplices, and the price of the Company's stock dropped that day to $7 .90 per share . This action
therefore is brought on behalf of a class of individuals who purchased Hollinger securities from
August 13, 1999 through March 31, 2003 (the "Class Period") . Investors lost millions as a result of
Defendants' fraud, and seek compensation in this action .
THE PARTIE S
14 . Lead Plaintiff Teachers, a Louisiana public trust fund, is a public employee pension
plan. Teachers is charged with the investment and reinvestment of the trust fund of the Teachers'
Retirement System of Louisiana, a public employee welfare and pension benefit plan, and certain
other funds- Teachers maintains its office and principal place of business at 8401 United Plaza
Boulevard, Baton Rouge, Louisiana . During the Class Period, Teachers purchased and held common
stock of Hollinger .
15 . Plaintiff Washington Carpenters is a Taft Hartley trust fund with over $315 million
in assets and approximately 5,300 participants and retirees . During the Class Period, Washington
Carpenters purchased and held common stock of Hollinger.
16. Plaintiff Carlson is a citizen of the United States and resident of Topeka, Kansas .
During the Class Period, Carlson purchased and held common stock of Hollinger . Carlson regularly
attended Hollinger's shareholders meetings during the Class Period .
17 . Hollinger is a global newspaper publisher with English-language newspapers in th e
United States, Great Britain, and Israel . Its assets include the Daily Telegraph, the Sunday Telegraph
and The Spectator magazine in Great Britain, the Chicago Sun Times and a large number of
community newspapers in the Chicago area, the Jerusalem Post and the International .Jerusalem Post
in Israel, a portfolio of "new media investments," and a variety of other assets . The Company's daily
newspapers have a worldwide combined circulation of approximately .2 million readers per day .
Hollinger is a Delaware Corporation with its primary place of business at 401 North Wabash
Avenue, Suite 740, Chicago, Illinois 60611 . The Company's shares are registered with the SEC and
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its Class A Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol
HLR. As of May 5, 2004, the Company had 90 .13 million outstanding shares, comprised of 75 .14
million shares offClass A Common Stock and 14 .99 million shares of Class B Common Stock with
an aggregate market capitalization of approximately $1 .8 billion (assuming conversion of the Class
B Common Stock) . The Class B common shares are owned in their entirety directly or indirectly
by Hollinger Inc .
18. Hollinger is controlled by its parent company, Hollinger Inc ., a Canadian corporatio n
which owns 30 .3% of Hollinger's shares . Because a majority of the Hollinger shares owned by
Hollinger Inc . are Class B common shares that have a 10-to-1 voting preference over the Class A
shares held by Hollinger's public shareholders, Hollinger Inc . controls 73% of Hollinger's overall
voting power despite owning only a minority interest in Hollinger's equity . Lord Black and Radler
created this structure at the time of Hollinger's initial public offering to enable them to control
Hollinger separate from their ownership position . As Lord Black admitted in his answer filed in the
Delaware Chancery Court action, he controls Hollinger Inc . through Ravelston, Lord Black's private
holding company, which directly and indirectly through its subsidiaries (RMI, Argus, Moffat and
Black-Amiel), controls approximately 78% of the shares of Hollinger Inc .
19. Defendant Hollinger Inc . is an Ontario, Canada corporation with its principal offic e
located in Toronto, Canada . It is a holding and mutual fund company that trades on the Toronto
Stock Exchange under the symbol HLG . During the Class Period, Hollinger Inc . served as an
investment vehicle enabling Lord Black and Radler to control Hollinger. Hollinger Inc . has since
the mid-1990s solely been a holding company, devoid of any operating activities, having as its
principal asset its 30 .3% equity stake in Hollinger .
20. Defendant Ravelston is an Ontario, Canada corporation with its principal office
located in Toronto, Canada. According to the Illinois and New York actions commenced by the
Hollinger Special Convnittee, Ravelston and its subsidiaries collectively beneficially own 78% of
Hollinger Inc .'s stock, and therefore, during the Class Period, Ravelston in effect owned 23 .6% of
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Hollinger . As Black admitted in his answer in the Delaware Chancery Court action, Ravelston
controlled Hollinger Inc ., and Black controlled Ravelston . Thus, Black and Ravelston had total
control of Hollinger through Hollinger Inc . Ravelston is a privately-held entity, with 98 .5% of its
equity owned by officers and directors of Hollinger and Hollinger, Inc . and 1 .5% of its equity owned
by the estate ofa former Hollinger, Inc . director . Lord Black owns 65 .19% and Radler owns 14.29%
of Ravelston, providing them with indirect equity stakes of 0 .94% and 1 .95% individually and
10 .89% collectively. Lord Black controls most of the decisions and actions of Ravelston, with input
from Radler .
21 . Defendant RMI is a Canadian corporation with its principal office located in
Toronto, Canada. According to the actions commenced by the Hollinger Special Committee, RMI
is a wholly owned subsidiary of Ravelston .
22_ Defendant Argus is a public Canadian corporation traded on the Toronto Stock
Exchange under the symbol "AR" whose major investment is a 62% interest in the retractable shares
of Hollinger Inc . and whose parent is Ravelston ,
23. Defendant Lord Conrad N. Black of Crossharbour ("Lord Black"), was throughou t
the Class Period Chairman of the Company's Board until he was discharged by the Board on
January 17, 2004. Lord Black was the Chief Executive Officer of Hollinger until November 19,
2003. He remains CEO of Hollinger Inc . and of Argus . Lord Black has held these positions since
1978. Lord Black owns (through Conrad Black Capital Corporation) 65 .1% of Ravelston and
therefore controls Raveiston and Hollinger Inc_ During the Class Period, Lord Black signed many
of the Company's false and misleading SEC flings . Lord Black owns, directly or indirectly, equity
securities of Hollinger Inc. or has the right to acquire equity securities of Hollinger Inc. through
Hollinger Inc.'s Executive Share Option Plan. As found by the Delaware Chancery Court, Lord
Black "was the creator of this group of companies [Hollinger, Hollinger, Inc ., Ravelston and
Ravelston's various subsidiaries and affiliates], has personally dominated their affairs, and put in
place boards to his liking ." Hollinger International Inc. v . Black, 844 A .2d 1022, 1030 (Del . Ch.
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2004). As a result, throughout the Class Period, the boards of these companies "have comported
themselves in a supine manner that confirmed Black's confidence in his power ." 1d- Black's control
extended even to the Company's outside directors - as the Delaware Chancery Court found,
Hollinger's "board was largely filled with outside directors Black had hand-selected and with whom
he had a personal relationship-" rd. at 1029. The Company's officers and directors named as
defendants herein axe identified below .
24. Defendant Dwayne 0 . Andreas ("Andreas") was a member of the Board fro m
February 1996 until his resignation in May 2002 . During the Class Period, Andreas signed many
of the Company's false and misleading SEC filings. Andreas owns, directly or indirectly, equity
securities of Hollinger Inc. or has the right to acquire equity securities of Hollinger Inc. through
Hollinger Inc.'s Executive Share Option Plan .
25. Defendant Peter Y. Atkinson ("Atkinson"), is Executive Vice President of th e
Company and was a member of the Board from early 2002 until his resignation in November 2003 .
He served as Vice President of the Company from 1997 to 2002 . Atkinson also holds or has held
various positions in entities affiliated with Hollinger or Lord Black . He is an owner of Ravelston
and an officer and director of Argus, Hollinger Inc ., and Hollinger Canadian Newspapers G.P. Inc .
During the Class Period, Atkinson signed many of the Company's false and misleading SEC filings .
Atkinson owns, directly or indirectly, equity securities of Hollinger Inc . or has the right to acquire
equity securities of Hollinger Inc, through Hollinger Inc .'s Executive Share Option Plan .
26. Defendant Barbara Amiel Black ("Lady Black") is a citizen of Canada and the Unite d
Kingdom living in London, England, New York, New York, Palm Beach, Florida and Toronto,
Canada, She is the Vice President, Editorial (since September 1995) of Hollinger and a member
of the Board (since February 1996) . Lady Black is the wife of Defendant Lord Black . Lady Black
is also a director of Hollinger Inc . and the Jerusalem Post- Lady Black is the direct owner of 391,000
shares and indirect owner, through her spouse, Lord Black, of an additional 2,105,000 shares of
Class A common stock . During the Class Period, Lady Black signed many of the Company's fals e
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and misleading SEC filings . Lady Black owns, directly or indirectly, equity securities of Hollinger
Inc. or has the right to acquire equity securities of Hollinger Inc . through Hollinger Inc .'s Executive
Share Option Plan, and she is (and was during the Class Period) a shareholder of Ravelston .
27. Defendant Jack A . Boultbee ("Boultbee") is a Canadian citizen living in Canada . He
was an Executive Vice President of the Company from 1996 until his termination in November
2003 . He was a member of the Board from 1990 to 2001 . In addition, he served as Chief Financial
Officer from 1995 to 1999 . Boultbee is (and was during the Class Period) an owner and director of
Ravelston . Boultbee has also held positions at the following entities affiliated with Lord Black and
Hollinger: Hollinger Canadian Publishing Holdings Inc . (Executive Vice President, Chief Financial
Officer and Director) and Argus (Director). Boultbee owns at least 603,000 shares of'the Company's
Class A common stock . During the Class Period, Boultbee signed many of the Company's false and
misleading SEC filings . Boultbee owns, directly or indirectly, equity securities ofHollinger Inc . or
has the right to acquire equity securities of Hollinger Inc . through Hollinger Inc .'s Executive Share
Option Plan, and he is (and was during the Class Period) a shareholder of Ravelston .
28 . Defendant Richard R . Burt ("Burt") has been a member of the Board since Septembe r
1994 and was on the Board's audit and compensation committees during the Class Period . Burt is
also Chairman of IEP Advisors L ..L.P_, an emerging markets investment banking and advisory
services firm . During the Class Period, Burt signed many of the Company's false and misleading
SEC filings-
29 . Defendant Raymond G.. Chambers ("Chambers") was a member of the Board from
February 1996 until his resignation in May 2002_ During the Class Period, Chambers signed many
of the Company's false and misleading SEC filings-
30. Defendant Daniel W. Colson ("Colson") is a Canadian citizen currently living in
London, England . He was a Vice Chairman and a Director of the Company and a Vice Chairman
and Director of Hollinger Inc- until December 2003 . He also served from 1995 and during the Class
Period as Deputy Chairman, Chief Executive Officer and Director of The Telegraph, an affiliate d
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company of which Lord Black is the Chairman, until Colson resigned in March 2004 . Colson also
served as Chairman and a Director of Hollinger Telegraph New Media Ltd ., Vice Chairman and a
Director of Hollinger Digital Inc ., and a Director of Argus, until he resigned from those positions
in March 2004. During the Class Period, Colson signed many of the Company's false and
misleading SEC filings . Colson owns, directly or indirectly, equity securities of Hollinger Inc . or
has the right to acquire equity securities of Hollinger Inc . through Hollinger Inc .'s Executive Share
Option Plan, and he is (and was during the Class Period) a shareholder of Ravelston .
31 .. Defendant Mark S . Kipnis ("Kipnis") is an attorney who serves as Vice President,
General Counsel and Secretary of Hollinger. During the Class Period, Kipnis signed certain of the
Company's false and misleading SEC filings .
32 . Defendant Dr. Henry A. Kissinger ("Kissinger"), has been a member of the Boar d
since February 1996 . The Wall Street Journal recently reported that Hollinger has given $200,000
a year to the National Interest, a conservative publication that includes Kissinger and Lord Black as
advisers . Kissinger, until earlier this year, sat with Lord Black on the strategic advisory board of
Trireme Partners LP (a company in which Hollinger made a $2 .5 million investment) . During the
Class Period, Kissinger signed many of the Company's false and misleading SEC filings . .
33. Defendant Marie-3osee Kravis, O .C_ ("Kravis") was a member of the Board fro m
February 1996 until October 2003 and was on the Board's audit committee during the Class Period .
In the past, Kravis sat on the Board of Directors of Canadian Imperial Bank of Commerce with Lord
Black. During the Class Period, Kravis signed many of the Company's false and misleading SEC
filings.
34. Defendant Sh.muel Meitar ("Meitar") has been a member of the Board since February
1996. Meitar was from 1992 to 2002 a Director of Jerusalem Post, a newspaper owned by Hollinger .
During the Class Period, Meitar signed many of the Company's false and misleading SEC filings .
35 . Defendant Richard N . Perle ("Perle") has been a member of the Board since June
1994 and until March 1, 1998 he sat on the Board's compensation committee . Perle is a shareholder
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and Co-Chairman of Hollinger Digital Inc ., a subsidiary of the Company, and receives a salary from
Hollinger Digital Inc . to help find investments . He is also a Director of the Jerusalem Post .
According to the Wall Street Journal, Hollinger made a $2 .5 million investment in Trireme
Associates LLC, which is the general partner of Trireme Partners LP, a venture capital fund that is
co-managed by Perle . Perle is also a 5% owner ofTrirerae Associates LLC . Lord Black sits on the
strategic advisory board of Trireme Partners LP . The Wall Street Journal also reported that
Hollinger has given $200,000 a year to the National Interest, a conservative publication that includes
Perle and Lord Black as advisers . During the Class Period, Perle signed many of the Company's
false and misleading SEC filings.
36. Defendant F. David Radler ("Radler") is a Canadian citizen currently living i n
Vancouver, Canada and Palm Springs, California . He lived in Chicago, Illinois during the Class
Period and worked out of his offices at the Chicago Sun-Times building in Chicago . He was the
Deputy Chairman, President, Chief Operating Officer and a member of the Board of Hollinger until
his November 2003 resignation- Additionally, Radler has served as President and Chief Operating
Officer since October 25, 1995, as Deputy Chairman since May 1998, as a Director since 1990, and
was Chairman of the Board from 1990 to October 25, 1995 . He was during the Class Period a
President and Chief Operating Officer at Hollinger Inc . and also held numerous other high level
positions at that company, and he has been a Director of the following Hollinger affiliates : Argus,
The Telegraph and Jerusalem Post. Radler is (and was during the Class Period) an owner of
Ravelston_ Radler, along with Lord Black, is also an owner of Horizon Publications, Inc ., a company
that, as described below, acquired newspapers from Hollinger at bargain prices, while failing to
disclose some of the transactions . During the Class Period, Radler signed many of the Company's
false and misleading SEC filings- Radler owns, directly or indirectly, equity securities of Hollinger
Inc . or has the right to acquire equity securities of Hollinger Inc . through Hollinger Inc-'s Executive
Share Option Plan .
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37 . Defendant Robert S_ Strauss ("Strauss") was a member of the Board from February
1996 until his resignation in May 2002 . During the Class Period, Andreas signed many of the
Company's false and misleading SEC filings .
38. Defendant A. Alfred Taubman ("Taubman") was a member of the Board from
February 1996 until his resignation in May 2002 . In December 2001, Taubman, who was then the
majority owner of Sotheby's Holdings Inc .., was convicted of colluding to fix prices with rival
auctioneer Christie's International Plc . Despite having a high-powered legal team, which included
former Whitewater special prosecutor Robert Fiske Jr, in April 2002 Taubman was sentenced to one
year in prison and fined $7.5 million. Incredibly, Taubman remained on the Hollinger Board for six
months after his criminal conviction . During the Class Period, Taubman signed many of the
Company's false and misleading SEC filings- Taubman owns, directly or indirectly, equity securities
of Hollinger Inc . or has the right to acquire equity securities of Hollinger Inc . through Hollinger
Inc.'s Executive Share Option Plan _
39. Defendant James R. Thompson ("Thompson") has been amember of the Board sinc e
June 1994 and was the chairman of the Board's Audit Committee and sat on the Compensation
Committee during the Class Period . Thompson is a resident of Illinois . In the past, Thompson
received substantial political contributions from Lord Black .. During the Class Period, Thompson
signed many of the Company's false and misleading SEC filings .
40. Defendant Lord Weidenfeld of Chelsea ("Weidenfeld") was a member of the Board
from February 1996 until his resignation in May 2002 . During the Class Period, Weidenfeld signed
many of the Company's false and misleading SEC filings .
41 . Defendant Leslie H . Wexner ("Wexner") was a member of the Board from February
1996 until his resignation in May 2002 . During the Class Period, Wexner signed many of the
Company's false and misleading SEC filings-
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42. Lord Black, Andreas, Atkinson, Lady Black, Boultbee, Burt, Chambers, Colson,
Kipnis, Kissinger, Kravis, Meitar, Perle, Radler, Strauss, Taubman, Thompson, Weidenfeld and
Wexner are referred to collectively herein as the "Individual Defendants ."
43. Defendant KPMG LLP ("KPMG") is a "Big Four" accounting firm with partners that
are residents of, and offices that are located in, every state, including New York and Illinois, Where
KPMG's office located at 303 East Wacker Drive, Chicago, Illinois handled the outside audits of
Hollinger . At all times relevant to this action, KPMG was Hollinger's independent auditor . KPMG
certified certain of Hollinger's false and misleading financial statements that are the subject of this
action- During the Class Period, KPMG also served as the independent auditor of Hollinger Inc .,
with the outside audits handled by KPMG's offices located at Suite 500, 4120 Younge Street, North
York, Ontario, Canada M .2P 2B8.
NATURE OF ACTIONAND JURISDICTIO N
44 . This is a class action brought on behalf of Teachers, Washington Carpenters, Carlson
and similarly situated shareholders of Hollinger, who purchased securities of Hollinger from August
13, 1999 through March 31, 2003 (the "Class Period") .
45. This Court has jurisdiction over the subject matter of this action pursuant to 28 U .S.C.
§§ 13 .31, 1337 and 1 367, and Section 27 of the Securities Exchange Act of 1934 (the "Exchange
Act"), 15 U.S .C. § 78aa .
46 .. The claims asserted herein arise under and pursuant to Sections 10(b), 18 and 20(a)
of the Exchange Act, 15 U .S.C . §§78 (b), 78r and 78t(a), and Rule IOb-5 promulgated thereunder
by the SEC, 17 C .F.R. §240 .1 Ob-5 ,
47. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U .S.C .
§78aa and 28 U .S .C . §1391 (b) and (c), because Hollinger maintains an office in this District and
many of the acts and practices complained of herein occurred in substantial part in this District .
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4$ . In connection with the acts alleged in this Complaint, Defendants directly or indirectly
used the means and instrumentalities of interstate commerce, including but not limited to the mails,
interstate telephone communications and the facilities of the national securities markets .
FACTUAL BACKGROUND
A. Lord Black The Kin g
49, To understand this case, it is necessary to understand Lord Black . For Lord Black,
wealth and extravagance are a birthright to be continued in the fashion of Citizen Kane, that is,
before the mythical figure's downfall . Not even Dennis Kozlowski, the disgraced former head of
Tyco Ltd . who became famous for spending $6,000 on a shower curtain (on Tyco's tab), can match
Black when it comes to a taste for the finer things . Lord Black has palatial homes : a 21,000 square
foot beachfront mansion in Palm Beach, Florida; a four-story home in London's exclusive
Kensington enclave bought from Australian financier Alan Bond ; a stunning Toronto mansion
complete with a domed roof modeled on St . Peter's Basilica in Rome with a chapel consecrated by
Toronto's Roman Catholic archbishop and a 12-acre estate ; and the obligatory multimillion dollar
Park Avenue apartment. All these abodes are stuffed with works of art, historical curios and busts
of great military leaders - Caesar and Napoleon being his favorites . What makes such extravagances
relevant (and objectionable) is that, unbeknownst to investors during the Class Period, the
extravagances were funded (in part) by Hollinger -- Hollinger pays the cost of maintaining Lord
Black's Park Avenue apartment (over $100,000 last year), and paid a portion of the salaries of the
staff (Butlers, Senior Butlers, Under Butlers, Houseman, Footman, chef, chauffeurs, security
personnel and maids) at his various residences . Hollinger was charged nearly $9 million for Lord
Black's acquisition of historic papers of the former President Franklin D. Roosevelt, most of which
were stored in Lord Black's various residences so that he could write a 900-page biography of FDR
while he was being paid to run the Company, not be an author . Additionally, the Company made
charitable donations not in its own name, but in the name of (and thus on behalf of) Lord and Lad y
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Black (and Radler) . The Company also paid Lord Black's monthly tab at the notoriously expensive
Le Cirque 2000 restaurant in New York .
50. During the Class Period, Hollinger also paid for Lord Black's and Lady Black's travel
to and from their various residences, whether by air or ground transportation . Lord Black has a
vintage 1958 Rolls Royce Silver Wraith to squire him around London, with upkeep and insurance
paid by Hollinger . Though owned and titled in the name of Ravelston, from 2000-2003 Hollinger
was billed approximately $90,000 to refurnish the limousine .
5l . Although Hollinger is not a large company, it maintained two corporate jets use d
indiscriminately by Lord Black and Lady Black for personal, rather than business, purposes, such
as to transport them to and from their various residences or on vacation to exotic locations such as
Bora Bora . Lord and Lady Black were the primary users of a Gulfstreain N jet -- leased by
Hollinger and refurbished (with an exotic wood table, luxury sofa with fold-out bed, and Christofle
silverware) at a cost of $3 million . Lord Black and his wife also had at their disposal the Company's
Challenger jet . Running both planes reportedly costs Hollinger $4 .7-$6.5 million a year .
52, For Lord Black, social status is extremely important . Black surrounds himself wit h
famous people -- businessmen, politicians and power brokers -- whom he entertains lavishly . His
Board includes a former U .S . Secretary of State (Kissinger), a former Assistant Secretary of Defense
(Perle), a former Governor of Illinois (Thompson), and the wife of corporate raider Henry Kravis
(Kravis) . His second wedding to Barbara Amiel was held at the posh Annabel's nightclub in
London, where Black was seated between Margaret Thatcher and the Duchess of York . Status and
title are so important to Black that be renounced his Canadian citizenship so that he could obtain a
seat in England's House of Lords and the "Lord Black of Crossharbour" title that went with it .
53 . For Lord Black, there is no distinction between what is Hollinger's (and Hollinger's
shareholders') and what is his . Rather, Hollinger and the rest of his media empire are personal
piggy-banks to be raided when necessary to fund his extravagant lifestyle- He considers himself (and
his fellow Ravelston shareholders) to be "proprietors" who can without shareholder review o r
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challenge use the Company's funds to cover personal expenses . As Lord Black stated in an August
5, 2003 e-mail to Atkinson (submitted as Joint Trial Exhibit ("JX'') 043 in the Delaware Chancery
Court action) :
There has not been an occasion for many months when I got on ourplane without wondering whether it was really affordable . But I'mnot prepared to reenact the French Revolutionary renunciation of therights of nobility . We have to find a balance between an unfairtaxation on the company and a reasonable treatment of the founder-builders-managers . We are proprietors, after all, beleaguered thoughwe may be .
54 .. Viewing himself as "proprietor" or king, Lord Black believed he could pay himsel f
out of the Company's coffers without any disclosure to the shareholders or even to the Company's
independent directors . After giving himself millions of dollars of Company money in the form of
purported "non-compete" payments, Lord Black gloated in a September 6, 2002 memorandum that
he had "pretty well won the great battle over the non -competition agreements and a decent inte rval
has passed ," and that the actions of "controlling shareholders [such as himself] . . . to ensure their
comfortable enjoyment of the position they (we, in fact), have created for themselves" should not
be hindered by "the agitations of shareholders . "
55 . Lord Black's contempt for the public shareholder majority was apparent in his
August 3, 2002 e-mail to Atkinson and Boultbee , where he stated :
We have said for some time that [Hollinger] served no purpose as alisted company other than relatively cheap use of other people'scapital, and privatization noises have been audible for a long time .We now have an unsatisfactory situation where a number of theshareholders think we are deliberately suppressing the stock price,some others think we are running a gravy train and a gerrymanderedshare structure, and we think they are a bunch of self-righteoushypocrites and ingrates, who give us no credit for what has been askillful job of building and pruning a company in difficultcircumstances . just ahead of seismic financial events .
56 . Lord Black rebuked the Company's shareholders who he called "corporate
governance zealots" and "terrorists" who in his view had no basis or right to challenge his personal
use of the Company's money and assets . At last year's annual meeting, Lord Black reportedl y
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responded to shareholders' criticisms by saying, "You're entitled to what you think but you don't
know what you're talking about . "
57. Lord Black's disdain for shareholders has resulted in his outright violation of federal
securities laws designed to require disclosure to shareholders . On July 20, 1982, Lord Black entered
into a settlement with the SEC enjoining further violations of Sections 10(b) and 14(e) of the
Exchange Act for making misrepresentations in SEC filings related to the acquisition by Norcen
Energy Resources, Ltd . (a company that Lord Black chaired) of 8 .8% of Hanna Mining Co.'s
outstanding stock . The SEC found that Lord Black and Noreen failed to disclose that Norcen's
primary intention was to acquire a controlling interest in Hanna Mining Co . and the substantial steps
Norcen had taken to increase the amount of Hanna common stock which it owned .
58 . Lord Black has not learned his lesson . Before the Special Committee dethroned th e
"king" (just over a week prior to the institution of this action) by removing Lord Black from his
remaining title at the Company (as non-executive Chairman), Lord Black and his accomplices had
concealed their theft of Company money, misrepresented the Board's review and approval of their
actions, and materially misrepresented the Company's financial condition and its subscriber figures .
Plaintiffs seek compensation for the damages they have suffered as a result of Lord Black's and the
defendants' misrepresentations and fraud .
B . PAYMENTS RECEIVED FROM NON-COMPETITION AGREEMENTS
59. From 1998 through 2000, Hollinger sold various newspaper assets to third parties ,
but a significant portion of the proceeds of these sales secretly went directly into the pockets of Lord
Black and his lieutenants . In these transactions, the third party purchasers bought not only the trade
name of Hollinger's newspapers, but also the subscriber lists and advertising contracts, In
accordance with standard practice in the industry, the publishers negotiated as part of the transactions
an agreement by Hollinger not to launch any new newspaper, in the same market occupied by the
newspaper sold by Hollinger, While Hollinger sold its corporate newspaper assets in these
transactions, and Hollinger, and not any Hollinger executives, was (in many cases) a signatory to th e
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non-compete agreements, Lord Black and his cohorts received all of the money paid pursuant to th e
non-compete agreements, while Hollinger received nothing. In total, Lord Black, Radler, Atkinson
and Boultbee have diverted to themselves approximately $90 .25 million paid under the non-compete
agreements . Hollinger failed to inform its shareholders at the time of those transactions that some
of the proceeds from its asset sales went to Lord Black and his cronies and not Hollinger . When
Hollinger was finally forced to admit that non-compete payments had been made, it falsely claimed
that the Board had approved those payments, when it had not . While the Company told investors
that it was selling its community newspaper to raise capital, pay down debt and focus on its "core"
metropolitan daily newspapers, Black and Radler engineered these sales as a way to pay themselves
(and Boultbee and Atkinson) millions of dollars in secret and unauthorized non-compete payments ..
1 . Sales of U .S. Community Newspapers
6 0. In 1999, 2000 and 2001, Hollinger sold most of its U .S . community newspaper
properties, and publicly disclosed the proceeds of those transactions . However, the disclosures were
all materially false and misleading, as they failed to identify those portions of the sale proceeds
which were paid directly to Lord Black, his associates, and Hollinger Inc ., which Lord Black
controls . The disclosures were materially false and misleading for additional reasons --- they failed
to disclose that the Company's independent directors had never approved, in advance of those
transactions, the payments of any non-compete payments (or other proceeds from the sales) to Lord
Black, his associates, or Hollinger Inc. While the Company told investors that it was selling its
community newspapers to raise capital, pay down debt and focus on its "core" metropolitan daily
newspapers, Lord Black and Radler engineered these sales as a way to pay themselves millions of
dollars in secret and unauthorized non-compete payments .
61 . On or about August 13, 1999, Hollinger filed its Form 10-Q ("August 1999 10-Q")
where it described its sales of U . S . community newspapers as follows :
In February 1999, the Company sold approximately 45 communitynewspapers for gross cashproceeds of approximately $441 .0 million-
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The proceeds were used to pay down outstanding debt on the BankCredit Facility .
The Company described its pending sale of assets to Horizon Publications Inc . :
During the second quarter 1999, the Company entered into anagreement with Horizon Publications Inc . to sell 33 U.S . communitynewspapers for $43.7 million .
62 . On or about March 22, 2000, Hollinger filed its Proxy Statement (the "2000 Proxy
Statement") which made the following disclosure relating to the sale of community newspapers :
Effective April 1, 1999, the Company sold approximately 1 8properties of the Company's U . S, community newspaper group for anaggregate consideration of approximately $47 million . . . .
63 . On or about November 15,1999, the Company filed is Form I0 -Q (`November-1999
10-Q") where it again disclosed its February 1999 sale of "approximately 45 conununity newspapers
for gross cash proceeds of approximately $441 .0 million ."
64. The statements in the August and November 1999 10-Qs and the 1999 Proxy
Statement were materially false and misleading because there was no disclosure that any proceeds
of the asset sales discussed in those filings went (or would go) to Lord Black and other Hollinger
executives, rather than Hollinger, under the guise of non-compete payments- Lord Black, Radler,
Boultbee and Atkinson kept concealed from the Company's shareholders their plans to intercept
millions of dollars generated from the Company's sales of its U.S, community newspapers, money
that would be represented as being paid to Hollinger, when it was not . Thus, the disclosures of the
amounts the Company would receive in pending asset sales (in the August 1999 10-Q) and the
amounts the Company did receive in completed sales (in the November 1999 10-Q and the 1999
Proxy Statement) were materially false, as the Company received less money than was disclosed in
those filings, due to the non-compete payments .
65 . On or about March 30, 2000, Hollinger repeated its misrepresentations when it filed
its Form 10-K for its fiscal year 1999 (the "1999 10-K") . The 1999 10-K stated :
In January 1998, the Company completed the sale of 80 communitynewspapers for proceeds of $310 .0 million . In February 1999, the
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Company sold 45 community newspapers for approximately $460 .0million, of which $441 .0 million was cash. On a pre-tax basis, thesales generated capital gains of approximately $2012 million in 1998and approximately $249,2 million in 1999 .
During 1999, the Company sold to Horizon Publications Inc . 33 U.S,community newspapers for $43 .7 million resulting in a pre-tax gainof approximately $20 .7 million .
The 1999 10-K was signed by Lord Black, Radler, Colson, Lady Black, Andreas, Burt, Chambers,
Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Weidenfeld and Wexner.
66. The Company's Form 10-Q filed on or about May 15, 2000 (the "May 2000 10-Q")
contained general references to the Company's asset sales in 1999 . However, as with the 1999 10-
K, there was no mention of any non-compete payments being made to any individuals pursuant to
those transactions, and so the 1999 10-K and the May 2000 10-Q were materially false and
misleading both in their failure to disclose the non-compete payments and in their false
representation of the amounts the Company received in its asset sales-
67 . On or about August 2, 2000, the Company announced the sale of its remaining U.S .
community newspapers for approximately $215 million to Bradford Publications Company
("Bradford"), Newspaper Holdings, Inc . of Alabama ("NHIA"), Paxton Media Group, Inc . ("PMG'=)
and Forum Communications Company ("Forum") .
68. The Company repeated this disclosure in its Form 10-Q filed on or about August 14,
2000 (the "August 2000 10-Q") . These representations were false and misleading because they
failed to disclose the Company's plans to have the purchasers of Hollinger's assets pay Lord Black
and others pursuant to purported non-compete agreements, and because they falsely represented the
amount the Company would receive in the sale transactions . The specific amounts of the non-
compete payments would be disclosed years later by the Special Committee when it filed its
complaint against Lord Black .
69. On or about November 14, 2000, the Company disclosed in its Fong, 10-Q filed tha t
day (the "November 2000 10-Q") that the $215 million asset sale to four buyers was completed b y
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October 31, 2000 . As with prior filings, there was no disclosure in the November 200010-Q of any
non-compete payments being made as part of the asset sales, and the representation that the
Company would receive $215 million was false, because non-compete payments to parties other than
Hollinger would be made out of the sale proceeds .
70- In or about January 2001, Lord Black, Radler and Boulthee completed and signed
questionnaires regarding their year-2000 compensation for use in preparing the Company's
disclosures to be contained in the upcoming proxy statement and annual report (to be provided in
a 10-K). In those questionnaires, these Defendants failed to disclose the millions of dollars of non-
compete payments they tools out of the proceeds of the Company's asset sale transactions .
71 . On or about March 27, 2001, the Company filed is Proxy Statement (the "200 1
Proxy") where the Company stated that "[e] ffective July 20, 2000, the Company sold four properties
of the Company's U .S . community newspaper group for an aggregate consideration of approximately
$38 million to Bradford ." Hollinger also described its transactions with Horizon which the Company
stated were "unanimously approved by the Audit Committee and the independent Directors of the
Company as market value transactions . "
72. Similarly, on or about April 2, 2001, Hollinger filed in its Form 10-K for its 200 0
fiscal year (ending (December 31, 2000) (the "2000 10-K") where it stated that "[d]uring 2000 the
Company sold virtually all of its remaining United States community newspapers for proceeds of
approximately $215.0 million ." The Company also repeated the disclosures made in previous filings
regarding its asset sales in 1998 and 1999 :
In February 1999, the Company completed the sale of 45 U .S .community newspapers properties for approximately $460 .0 million,of which approximately $441 .0 million was cash . . . . During 1999,the Company sold to Horizon Publications Inc . 33 U.S . communitynewspapers for $43 .7 million resulting in a pre-tax gain ofapproximately $20 .7 million- . . . In January 1998, the Companycompleted a sale of approximately 80 community newspapers foraggregate case consideration of approximately $310-0 million-
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However, as with its previous filings, the Company failed to disclose in its 2000 10-K that proceed s
of the asset sales included payments to Lord Black and others purportedly for their agreement to be
bound by non-compete agreements . Therefore, the disclosures of the amounts the Company received
in the sale transactions were false . Additionally, the Company's representations (in the 2001 Proxy
Statement) that the transactions with Horizon were approved by the independent investors and Audit
Committee were false, as those transactions never received such approvals . The 2000 10-K was
signed by Lord Black, Boultbee, Radler, Colson, Lady Black, Andreas, Burt, Chambers, Kissinger,
Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Weidenfeld and Wexner .
73 . The Company's Form 10-Qs filed on or about May 15, 2001 (the "May 2001 10-Q") ,
August 14, 2001 (the "August 2001 10-Q"), and November- 14, 2001 (the "November 2001 10-Q"),
while describing the Company's sales of its U .S . community newspapers, also fail to disclose that
portions of the price paid in the transactions were allocated to non-compete agreements and paid
directly to parties other than Hollinger .
74 .. The Company's disclosures beginning with its August 1999 10-Q through its
November 2000 10-Q were false and misleading in their failure to disclose the non-compete
payments made in connection with the Company's sales of U.S. community newspapers discussed
in those SEC filings, and in their false representation of the amounts the Company received (or stood
to receive) in those transactions . In total, approximately $26 million in non-compete payments were
made to parties other than Hollinger, even though it was Hollinger that was the seller of the assets
in those transactions .
75 . While the Company in those filings did not disclose the non-compete payments, o r
break down each of its asset sales, the New York and Illinois Special Committee Complaints, and
the SEC's complaint against Hollinger filed in the United States District Court for the Northern
District ofillinois, describe the following non-compete payments that were made in connection with
the Company's asset sales .
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(a) Hollinger paid Hollinger Inc .. $2 million in non-competepayments in connection with the Company's May 1 I , 1998sale of assets, including the American Trucker publication, toInternee Publishing Company ("Internee") for $75 million,plus the $2 million in non-compete payments- As explainedin the Illinois Special Committee Complaint, no such non-compete agreement exists between Internee and HollingerInc., but Radler orchestrated this payment on behalf ofHollinger Inc . from his Company office in Chicago .
(b) In connection with Hollinger's February 1, 1999 asset sale toCommunity Newspaper Holdings, Inc . ("CNHI") for $472million, $50 million of which was allocated to non-competepayments, Hollinger instructed CNHI to wile $12 million ofthe non-compete allocation to Hollinger Inc . The IllinoisSpecial Committee Complaint explains that CNHI did not askHollinger for a non-compete agreement, but Lord Black,Radler and Boultbee requested CNHI's consent that Hollingersign such an agreement . Radler, working out of his Chicagooffice, instructed that Hollinger Inc . be added to the assetpurchase agreement as a non-competition covenanter, andRadler signed on that company's behalf at closing and orderedthat the $1 .2 million be wired to Hollinger Inc.
(c) Hollinger paid Hollinger Inc. $1 .2 million in non-competepayments in connection with the Company's asset sales toHorizon . Once again, Radler, working from his Chicagooffice, signed the non-compete agreement on behalf ofHollinger Inc .
(d) In connection with the Company's asset sales to Forum inSeptember 2000 for $14 million, $400,000 of which wasallocated to a non-compete agreement, Hollinger paidHollinger Inc . $100,000 in non-compete payments- Radlerinstructed Marc Kipnis, the Company's Secretary and GeneralCounsel in Chicago, to sign the non-competition agreementon behalf of Hollinger and Hollinger Inc ., though he had noauthority to bind Hollinger Inc . In fact, as found by theDelaware Chancery Court, Kipnis did not even have an officeat Hollinger, Inc . 844 A.2d at 1037 .
(e) Hollinger paid Hollinger Inc . $500,000 in non-competes inconnection with its October 2, 2000 asset sale to PMG .Kipnis again signed the non-compete agreement on behalf ofHollinger and Hollinger Inc . even though he had no authorityto bind Hollinger Inc . As the Delaware Chancery Courtfound, "these non-competition payments were not part of theasset sales agreements" and "Black, Radler, Atkinson andBoultbee never even entered into a non-competitionagreement with either Paxton or Forum ." 844 A_2d at 10 .37 .
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(f) In connection with Hollinger's November 1, 2000 asset saleto CNI-II for approximately $90 million, CNHI wired$750,000 of the transaction proceeds to Hollinger, Inc . (atHollinger's instruction), and Hollinger paid $4 .3 million eachto Black and Radler, and $450,000 each to Boultbee andAtkinson, for their entry into non-competition agreements,and paid a $100,000 "bonus" to Kipnis for arranging the non-compete payments . As found by the Delaware ChanceryCourt following its review of the CNHI asset purchaseagreement (3X 9) and the closing documents on thattransaction ( .IX 10), "by its own terms the CNHI . . .transaction did not call for any non-competition payment toindividuals," but Kipnis signed such non-compete agreementson behalf of Hollinger and Hollinger Inc . The non-competeagreements provided for payments of $ .2 .25 million toHollinger and $750,000 to Hollinger Inc . The SpecialCommittee explains in its Illinois Complaint that Radlerinstructed Kipnis in November 2000 to alter the non-competition agreement to provide for an additional $9.5million of purported non-compete payments to be made toBlack, Radler, Boultbee and Atkinson in the amountsdescribed above, and Kipnis was paid a bonus for thisdeception. However, as with the Forum and PMGtransactions, Kipnis had no authority to bind Hollinger Inc .
{f) As found by the Delaware Chancery Court and as alleged bythe Special Committee in its Illinois federal court action, inFebruary 2001, Lord Black and Radler caused the Companyto pay $5 .5 million to Black and Radler ($2,612,500 each)and Boultbee and Atkinson ($137,500 each), and then theseindividuals caused Hollinger employees to fabricate adocumentary record to make the payments appear to becompensation for non-competition agreements . Thepayments were made in checks issued in February 2001 butback-dated to December 31, 2000, purportedly in connectionwith a sale of U.S. community newspapers owned byAmerican Publishing Company, a Hollinger subsidiary with(according to the Delaware Chancery Court) "very minoroperating assets." 844 A .2d at 1037 . However, as stated inthe Illinois Special Committee Complaint, at the time thesham non-compete agreements were signed, AmericanPublishing Company had sold substantially all of its assetsand did not employ Black, Radler, Boultbee or Atkinson, .Moreover, the sham payments were never reviewed,negotiated or approved by the Company's independentdirectors . The Delaware Chancery Court ruled that "for thesepayments the Special Committee could not even identify apurchaser of assets to whom a non-competition commitmentran." 844 A.2d at 10.37 .
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76- Additionally, as explained in the Special Committee Complaints, Hollinger made
additional non-compete payments to Hollinger Inc- in connection with the Company's $310 million
asset sale in January 1998 to Cornrnunity Newspaper Group ("CNG"), in which CNG agreed to pay
$30,915,000, plus interest, for a non-competition agreement .
77. None of the non-compete payments discussed above were disclosed in the Company' s
public filings from the August 1999 10-Q through the November 2001 10-Q . All of those filings
materially misrepresented the Company's asset sales and the proceeds that the Company would
receive in those transactions . Thus, beginning with the August 1999 10-Q, Hollinger reported sales
of its U.S- community newspapers, and resulting improvements to the Company's financial
condition, which were materially false and misleading. However, the investing community was
unaware of the fraud, and so it reacted favorably, and the Company's stock climbed in response,
going from $10.08 per share on August 1 .3, 1999 to $1 .3 .11 per share on Friday, March 28, 2002 .
78_ It was not until April 1, 2002, when the Company filed its Foray IO-K for fiscal year
2001 ("2001 10-K"), that Hollinger disclosed that any payments relating to 1- .1e sales of community
newspapers were made directly to Lord Black and others, not Hollinger, pursuant to non-competition
agreements- Specifically, the Company stated:
During 2000, the Company sold most of its remaining U .S.community newspaper properties, for total proceeds of approximately$215 million. In connection with the sales of United Statesnewspaper properties in 2000, to satisfy a closing condition, theCompany, Lord Black and three senior executives entered intonon-competition agreements with the purchasers to which eachagreed not to compete directly or indirectly in the United States withthe United States businesses sold to purchasers for a fixed period,subject to certain limited exceptions, for aggregate consideration paidin 2001 of $0.6 million. These amounts were in addition to theaggregate consideration paid in respect of these non-competitionagreements in 2000 of $15 million . Such amounts were paid to LordBlack and the three senior executives, The Company's independentdirectors have approved the terms of these payments .
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The 2001 10-K was signed by Black, Boultbee , Radler, Colson, Lady Black, Andreas, Burt ,
Chambers, Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Lord Weidenfeld an d
Wexner.
79 . This representation, which was subsequently repeated in other Hollinger SEC filings ,
was materially false and misleading . The Company's disclosure that $15.6 million in non-
competition payments were made to four individuals was false because (i) those payments were not
made as genuine consideration for any individual's agreement, pursuant to a buyer's request, not to
compete with the sold businesses, and (ii) approximately $26 million in total non-compete payments
were made, of which $16 .75 million was paid to Hollinger Inc. Concealed from the shareholders
were the Company's payments to Hollinger Inc ., which is controlled by Lord Black and serves as
the corporate parent of Hollinger. Additionally, only $9 .5 million of the payments, not $15 million,
were made in 2000-
80 . Hollinger's 2001 10-K was also materially false because the payments were neve r
authorized by any independent Hollinger directors and were not made, nor did the Company or
Black, Radler or Boultbee ever sign any non-compete agreement, "to satisfy a closing condition,"
as represented in the 2001 10-K. As revealed almost two years later in the Special Committee
Complaints and the Delaware Chancery Court's recent decision :
(a) There was no independent director authorization of any non-compete payments made in the January 1998 CNGtransaction ;
(b) There was no non-competition agreement in the Interneetransaction, nor any Hollinger Board resolution authorizingany non-compete payment to Hollinger Inc . ;
(c) Neither Lord Black, Radler nor anyone else disclosed toHollinger's independent directors or its Board prior to itsapproval of the February 1999 CNHI transaction that anyamount (including the $12 million wired by CNHI toHollinger Inc.) would be paid to Hollinger Inc ., and thatpayment was made at the request of Black, Radler andBoultbee, as CNHI was prepared to enter the transactionwithout such non-compete agreement ;
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(d) Neither Lord Black, nor Radler, nor anyone else informedHollinger's Board at the time the Board reviewed the Horizontransaction that $1 .2 million of the proceeds would betransferred to Hollinger Inc . ;
(e) In the sale to Forum, Hollinger Inc. was added as a party tothe non-competition agreement, which was signed byHollinger's Secretary and General Counsel, Kipnis, on behaxfof both Hollinger and Hollinger Inc . ;
(f) In the sale to PMG, Hollinger Inc. was added as a party to thenon-competition agreement which, as with the Forumtransaction, was signed by Kipnis on behalf of Hollinger andHollinger Inc_ ;
(g) In the November .2000 asset sale to CNHI, Kipnis againsigned on behalf of Hollinger and Hollinger Inc ., and none ofthe non-compete payments made in that transaction were everreviewed, negotiated or- approved by the Company'sindependent directors ; in fact, the CNHI asset sale agreementdid not call for any non-competition payments to anyindividuals ;
(h) Hollinger paid a total of $5 .5 million in anon-competepayments to Lord Black, Radler, Boultbee and Atkinson sothey would not compete with businesses that AmericanPublishing had already sold or transferred, and even thoughthose individuals were not employed by American Publishing ;and
(i) Hollinger at the direction of Lord Black and Radler paid atotal of $600,000 additional non-compete payments to LordBlack and Radler ($285,000 each) and to Boultbee andAtkinson ($15,000 each) out of the Forum and PMGtransactions, even though they did not enter into any suchnon-compete agreements nor did Forum or PMG request theirsignatures on such agreements ..
81 . The Delaware Chancery Court ruled after trial that "the Special Committee wa s
unable to find any evidence in the corporate minute book, or through other sources, that any of the
non-competition payments had been the subject of specific approval by either [Hollinger]
International's audit committee or its board of directors ." Hollinger International . Inc . Y . Black, 844
A.2d 10.22, 103 7 (Del_ Ch . 2004) . At that trial, Lord Black argued that the Board had later "ratified"
the non-compete payments through the exercise of written consents . However, the Delaware
Chancery Court reviewed the written consents (submitted as JX 616-618) and found that they di d
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not refer to any non-compete agreements or payments to Hollinger's executives or Hollinger Inc_,
nor did the Board minutes "indicate that the [Hollinger] International board was shown the consents
or informed about the non-compete aspects of those resolutions ." 844 A.2d at 1068 . As the court
held :
I do not discern in these consents evidence of proper approval byindependent directors of a conflict transaction .
There is no indication that there was any discussion of non-competesby the board or that the word even came up at the board . . . [The non-compete agreements] were not actually placed before the board, andwere ratified by a board that never saw them and was not informedthat they contained within them authorization for officers to negotiatefuture conflict transactions in favor of other unspecified officers-That is, by their own terms, the consents do not even approve specificnon-competition contracts .
844 A.2d at 1068 .
82, The court ruled that, with respect to the November 2000 sale to CNHI, "[b ]y its plain
teraxms, this written consent nowhere refers to any non-compete agreements with individual executive s
of [Hollinger] Inte rnational ." Id. Additionally, "two of the three authorizing signatures were Blac k
and Radler, the two principal beneficiaries of the non-competes ." Id .
83- The written consent purporting to authorize asset sales and non-compete agreement s
with PMG "does not mention non-compete payments to [Hollinger] Inc . or specify the officers . It
also does not set forth the terms of the non-competes or indicate that the action executive officers
would receive money ." Id. With respect to the written consent relating to the Forum transaction,
"[n]o mention of a non-compete with [Hollinger] Inc, is included. Nor is there any specification of
the dollar amounts of the non-compete or that the certain (unspecified) officers would receive
payments." Id. The Company did not disclose these facts, instead falsely representing that the
transactions and the non-compete payments had been approved by Hollinger's independent directors,
when they had not .
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84. Lord Black was ultimately forced to admit that the non-compete payments were made
without proper Board authorization, and the Company has admitted that its SEC filings were
materially false and misleading. On or about November 15, 2003, Lord Black signed a n
acknowledgment as part of a written agreement (the "November Agreement") with the Compan y
which stated:
. . . the term "Payments" shall mean the aggregate US $16,550,000paid to Hollinger Inc_ ("I-ILG"), the aggregate US $7,197,500 paid toeach of Messrs . Black and Radler, and the aggregate US $602,500paid to each of Messrs . Atkinson and Boultbee from 1999 to 2001 .The payments were not properly authorized on behalf of theCompany .
Thus, the Company's prior statement (in its 2001 10-K) that the independent directors had approve d
the non-compete payments was false, and the independent directors knew, or were reckless in no t
knowing, that such statement was false .
85 . As the Company later admitted in its press release on November 17, 2003, contained
in a Form 8-K filed with the SEC on or about that date (the "November 2003 Press Release"), and
in a Form 10-Q filed on November 21, 2003 (the "November 2003 10-Q"), "[p]rior to November
17, 200.3, the Company's public disclosure relating to these [non-competition payments] had been
incomplete or inaccurate ." The Company explained in its November 2003 10-Q that the Special
Committee and Audit Committee determined, through their investigation of allegations regarding
related party transactions, that ,
a total of $32.15 million in payments styled as "non-competitionpayments" were made to Lord Black, Messrs . Radler, Boultbee andAtkinson, and [Hollinger Inc .] that were not authorized or approvedby either the audit committee or the full board of directors of theCompany. Of the total unauthorized payments, $16 .55 million waspaid to [Hollinger Inc .] in 1999 and 2000, approximately $7 .2 millioneach was paid to Lord Black and Mr. Radler in 2000 and 2001, and$602,500 was paid to each Mr. Boultbee and Mr . Atkinson in 2000and 2001 .
Before November 17, 200.3, the $16.55 million in payments to[Hollinger Inc .] had not been publicly disclosed in the notes to theCompany's financial statements or in filings with the U .S. Securitiesand Exchange Commission (the "SEC") . The $15, .6 million inpayments to the four individuals were disclosed in the Company's
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Form 10-K filed in March 2002 . As the Company disclosed onNovember 17, 2003, however, this disclosure was inaccurate becauseit stated that the payments in question had been authorized by theindependent directors of the board, which did not occur, and that thepayments were made "to satisfy a closing condition," which was notaccurate . In addition, as disclosed on November 17, 2003, $5 .5million of such payments had previously been reported to haveoccurred in 2000 rather than in 2001, when such payments wereactually made .
86. Hollinger also admitted that its financial statements in prior SEC filings were
materially false. Specifically, Hollinger admitted that the unauthorized non-compete payments ha d
a material impact on the Company's financial condition . The Company stated in its November 200 3
Press Release :
In light of the fact that steps to authorize the payments in questionwere not completed as required, each of Lord Black, Mr_ Radler andMr. Atkinson have agreed to repay Hollinger the full amount of theunauthorized payments received by them, together with interestdating from the date of receipt of these funds, not later than rune 1,2004, In addition, Lord Black has agreed to seek repayment in full by[Hollinger Inc .] of the amounts received by it, with interests, by nolaterthan June 1, 2004 . Upon receipt of such restitution, Hollinger'scash position and net worth will be increased compared withpreviously reported amounts .
87 . The November 2003 Press Release also announced that Lord Black would retire as
CEO effective November 21, 2003, and that effective immediately, Radler had resigned as President
and COO, Messrs . Radler and Atkinson had resigned from the Board, Boultbee's employment had
been terminated, and Mark Kipnis, Vice President, Secretary and Corporate Counsel, had also
resigned. Later, on .January 17, 2003, after the SEC and the Special Committee filed their complaints
against Lord Black and Hollinger, Lord Black was forced to resign from his position as non-
executive chairman . The circumstances under which these executives resigned and/or were
tern-inated suggest that these actions were required or precipitated by the executives' complicity in
fraudulently directing Company money to themselves and fraudulently concealing their theft from
the shareholders.
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2. Sales to CanWest Global Communications Corp .
88. In the Company's sales of assets to CanWest Global Communications Corp .
("CanWest"), Lord Black and his cohorts repeated their pattern of stealing from the Company under
the guise of "non-competition payments" and hiding their theft from the shareholders .
89. On July 31, 2000, the Company announced that it had entered into an agreement to
sell certain assets to Ca.nWest . The Company's August 2000 10-Q stated that the purchase price
would be $2,.35 billion, subject to adjustments, and that the "cash proceeds [would be used] to
eliminate bank debt and possibly to cancel debentures and shares and create a substantial reserve of
liquid assets ."
90. In a Fonn 8-K filed with the SEC on August 16, .2000, Hollinger again stated that i t
(along with its affiliates Hollinger Inc ., Southain Inc. and Hollinger Canadian Newspapers) ha d
reached agreement to sell certain assets to CanWest_ The press release attached as an exhibit to the
8-K quotes Lord Black as saying :
Hollinger International expects to emerge from this process with adrastically reduced debt level and smaller number of outstandingshares, a stronger strategic position in relation to other media (andespecially new media), appreciably higher earnings per share, and alarger cash reserve with which to take the company forward to thenext stage of its development .
91 . The Company's November 2000 10-Q filed with the SEC on November 14, 200 0
again discussed the pending sale to CanWest for $2 .35 billion, which was expected to be completed
the next day_
92. The Company provided additional details of the CanWest transaction in its pres s
release attached as an exhibit to its Fonn 8-K filed with the SEC on December 1, 2000 . That press
release announced the completion of the CanWest sale for $2 .1 billion, "plus interest and subject to
adjustment." Hollinger stated that as a result of that transaction and other asset sales, Hollinger was
able to "repay all of its back debt and certain other debt" and "dramatically strengthen its balance
sheet .'"
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93 . The disclosures in these press releases and 10-Qs were materially false an d
misleading because they did not reveal that part of the proceeds from the sales to CanWest would
go directly to Lord Black and other senior Hollinger executives, rather than Hollinger itself . While
the shareholders were informed that the entire proceeds of the CanWest transaction would be used
to pay corporate debt and strengthen the Company's balance sheet, a significant portion of the sale
proceeds were improperly diverted to Lord Black and his cronies . The revenues received by
Hollinger were substantially less than what was represented in the Company's public filings, and the
amount of its debt paid off as a result of the sale to CanWest would have been greater absent the
undisclosed misappropriation of corporate money by Lord Black and his associates-
94. As disclosed in the Illinois Special Committee Complaint, the CanWest transactio n
agreement allocated $52 . .9 million of the purchase price to non-competition agreements, Although
Hollinger was the seller of the assets, the Company paid the entire non-competition agreement plus
interest ($5412 million in total) to Ravelston ($26 .44 million), Black and Radler ($11 .9 million
each) and Boultbee and Atkinson ($1 .32 million each) .
95 . The Company repeated its fraud in its 2000 10-K, where the Company stated that it s
"Canadian operations were significantly reduced on completion of the sale to CanWest of a
significant number of Canadian newspapers and Internet properties for a total sale proceeds of $1 .8
billion including both cash and CanWest equity shares ." The Company's representation that the sale
was completed "at fair value" was false because, unbeknownst to the shareholders, much of that
value went to Lord Black and other executives, and so Hollinger received less than $1,8 billion in
the transaction, but could have received more had the unauthorized, undisclosed non-compete
payments not been made . The Company listed the CanWest transaction as among other "sources of
revenue" for the Company which were used "to pay down the Company's Back Credit Facility,"
without telling shareholders that even more debt would have been paid off had a portion of the
proceeds of the CanWest transaction not been diverted to Lord Black and other Hollinger executives-
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96, The Company likewise failed in its 2001 Proxy Statement to disclose that proceed s
from the CanWest transaction were diverted directly to Lord Black and other Hollinger executives .
Thus, Hollinger's shareholders did not know when they voted to elect Lord Black and others to the
Board that those same executives had misappropriated Company funds generated from the sales to
CanWest „
97 . The Company did not disclose that any non-competition payments had been made b y
CanWest until the Company filed its May 2001 10-Q with the SEC . And when the non-compete
payments were disclosed, the disclosure was utterly fraudulent-
98 . The Company stated in its May 2001 10-Q :
Also, as required by CanWest as a condition to the transaction,Ravelston, Hollinger Inc . and Messrs. Black, Radler, Boultbee andAtkinson, entered into non-competition agreements with CanWestpursuant to which each agreed not to compete directly or indirectly inCanada with the Canadian businesses sold to CanWest for a five yearperiod, subject to certain limited exceptions, for aggregateconsideration received by Ravelston and the executives of Cdn .S80million ($53 million) paid by CanWest in addition to the purchaseprice referred to above, consisting of Cdn .$38 million paid toRavelston, Cdn.$19 million paid to Mr. Black, Cdn .$19 million paidto Mr. Radler, Cdn.$2 million paid to Mr . Boultbee and Cdn.$2million paid to Mr. Atkinson.
99 . The May 2001 10-Q was materially false and misleading because : ( i) it stated that
the $53 million in non-compete payments were in addition to the purchase price paid by CanWest
for the Hollinger assets, when in fact the non-compete payments reduced the purchase price ; (ii) it
falsely stated that CanWest required that Boultbee and Atkinson enter the non-competition
agreements ; (iii) it falsely stated that CanWest determined the amount of the payments to each of the
individuals, when in fact the allocation of those payments was determined solely by Hollinger's
executive officers, including Lord Black and Radler .
100. As explained in the Special Committee Complaint, Lord Black denied in th e
Company's May 2 .3, 2002 annual shareholders meeting in New York, in response to a question fro m
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a shareholder regarding the non-competes, that Lord Black or the other interested directors had any
role in allocating the non-compete payments, stating :
Mr. Asper demanded that there be a non-compete arrangement andeffectively the independent directors of this company determined thatsince he wished - that it was something that he was paying valuableconsideration for and some of that should come to us and not to thiscompany . And that ivas not a rnatler negotiated directly by its .[Emphasis supplied . ]
[CanWest] attached significant commercial value to a non-competeagreement with us . Not with Hollinger International .. . . . And, Iaccept that there's a conundrum as to the division between thecompany's interest and our thing like that, so we effectively handedit to the independent directors to determine, stayed above the 10 timesmultiple, shrunk our own incomes, undoubtedly saved all of theshareholders a tremendous inconvenience by doing these deals thathave enabled this company to sail relatively painlessly through adifficult time . . _ .
And in all the circumstances, the independent directors felt this wasthe fair thing to do and I must say, I agree . . . .
You're dealing with a best efforts attempt to accommodate to industrypractice and do what's equitable as determined by independentdirectors who are a group -- quite a distinguished group .
. . . we leave the determination of these matters in the hands ofdisinterested people, who do, as I said in my remarks, conductwhatever analysis they think is appropriate . It's not for us to tell themwhat to do. . . .
101 . Lord Black's statement that the payments were negotiated by the independent
directors (on the Audit Committee) is false (and the independent directors knew or should have
known that the statement was false), as those payments were set by Lord Black, Radler, Boultbee
and Atkinson. Additionally, Lord Black's representation that the payments were made directly by
CanWest is false, as Hollinger made the payments out of the transaction proceeds, with CanWest
having no input as to the specific amounts paid to Lord Black and the other Hollinger executives and
Ravelston .
102 . According to the Special Committee, Lord Black also stated at the May 2002
shareholders meeting that the non-competition payments did not reduce Hollinger's sales proceeds :
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The answer is that it was in our opinion not technically speaking areduction of the compensation paid to the company . Theconsideration was not reduced there by the acquirer in the principlecase that you're referring to, the CanWest deal .
103. This is false, as Lord Black and Radler caused the $53 million in non-compet e
payments to be removed from the agreed-upon transaction proceeds into the non-competitio n
agreement allocation, and then ultimately into the bank accounts of Ravelston and its shareholders
- Lord Black, Radler, Boultbee and Atkinson .
104. Even after the Company disclosed the existence of the non-compete payments, i t
continued the fraud by falsely stating that the payments were required as part of the CanWes t
transaction . The Company stated in its 2001 10--K that :
Also, as required by CanWest as a condition to the transaction, theCompany, Ravelston, Hollinger Inc ., Lord Black and three seniorexecutives entered into non-competition agreements with CanWestpursuant to which each agreed not to compete directly or indirectly inCanada with the Canadian business sold to CanWest for a five-yearperiod, subject to certain limited exceptions, for aggregateconsideration of Cdn,$80 million ($53 million) paid by CanWest inaddition to the purchase price referred to above of which Cdn .$38million ($25 .2 million) was paid to Ravelston and Cdn .$42 million($27.8 million) was paid to Lord Black and the three seniorexecutives. The Company's independent directors have approved theterms of these payments ,
105. In similar language, Hollinger again stated in its 2002 10-K that the non-competitio n
agreements were entered by "the Company, Ravelston, Hollinger Inc., Lord Black and three senior
executives," that the agreements were "required as a condition to the transaction," and that
I-iollinger's "independent directors approved the terms of these payments ." All these disclosures
were false .
106 . The 200210-K was signed by Lord Black, Radler, Colson, Boultbee, Atkinson, Lad y
Black, Burt, Kissinger, Kravis, Meitar, Perle, Taubman and Thompson .
107. The Company's disclosures prior to May 2001 were fraudulent because they faile d
to disclose the non-compete payments at all . The Company's disclosures in its May 2001 10-Q an d
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subsequent filings were fraudulent because, infer cilia, they falsely claimed that the non-competitio n
payments were required by CanWest "as a condition to the transaction . "
108 . CanWest has emphatically denied ever allocating any amount of the purchase pric e
to any non-competition agreement . As the Wall Street Journal reported on November 21, 2003 :
CanWest spokesman Geoffrey Elliot said his company agreed only onan overall price to acquire the newspapers and receive the non-competition agreement from Hollinger and didn't negotiate a separateamount allocated for the non-competition clause . That clause was "apart of the overall transaction," and the $53 million amount was"established by Hollinger," Mr . Elliot said . CanWest paid theacquisition price to Hollinger and not to any individuals, he added .
109. Additionally, the Special Committee stated in its complaints that no one from or on
behalf of CanWest ever requested or, demanded that any part of the purchase price for Hollinger' s
assets be paid to anyone other than the Company.
110. Finally, the disclosures in the May 2001 10-Q and 2001 and 2002 1 0-Ks were false
and misleading because the payments were not approved by "independent directors" ; in fact, after
the May 2001 10-Q and the 2001 10-K were filed, the Audit Committee attempted to "ratify" the
payments that had already been made .
111 . As explained by the Special Committee in its Illinois and New York Complaints ,
Hollinger's Audit Committee originally met on or about September 11, 2000 to review the CanWest
transaction- However, the committee completely failed to conduct any review of the terms of that
transaction or their fairness to Hollinger . The Audit Conunittee failed to discuss or conduct any
inquiry into the negotiation and circumstances surrounding the terms of the CanWest sales
agreement, or attempt to determine how the amount and recipients of the non-compete payments
were determined. Had the Audit Committee conducted any inquiry, it would have learned that : (i)
CanWest did not require that any non-competition payments be made to any individual, but Lord
Black and Radler inserted only three days before closing a provision allocating portions of the
purchase price to the non-competition agreements ; (ii) Lord Black and Radler actually increased the
original non-compete allocation upward (from $37 .7 million to $52.9 million) exclusively for thei r
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own benefit; (iii) Ravelston, Lord Black, Radler, l3oultbee and Atkinson would receive an additional
$1 .1 million as a percentage of the August 2000-November 2000 interest allocation the CanWest
transaction agreement provided the Company would receive ; (iv) CanWest originally proposed that
the post-closing management services agreement would be with Hollinger, but Lord Black
unilaterally decided that the agreement would be with Ravelston ; (v) CanWest rejected as
unreasonable and excessive the proposed Ravelston post-closing annual management services fee
that Lord Black originally proposed, and only agreed to pay approximately 32% of that proposal ; (vi)
the proposed management fee that CanWest rejected as uraeasonable and excessive was
approximately the amount that Ravelston had been charging Hollinger to manage those assets ; (vii)
Holl ingerpaid Colson a $1,073,719 "bonus" as part of the CanWest transaction, though this payment
was never approved by the Company's independent directors ; and. (viii) Lord Black and Radler
negotiated for themselves an annual management fee and a termination fee paid by CanWest if it
were to terminate the management services agreement ($30.3 million) or even if Ravelston were to
terminate ($15 .1 million) ..
112. As a result of the complete recklessness and lack of inquiry or discussion of even the
basic terms and circumstances surrounding the CanWest transaction, Hollinger's Audit Committee
completely abdicated its fiduciary duties and failed to make an informed review of the transaction
and its fairness to Hollinger"s shareholders .
11 .3 . As alleged in the Special Committee Complaints, as a result of the lack of any inquiry
or discussion by the Board or Audit Committee, the Board and committee failed to inquire : (i)
whether Ravelston, Black, Radler, Boultbee and Atkinson would be receiving an interest allocation
on top of the non-compete payments ; (ii) whether Hollinger's subsidiary Hollinger Canadian
Newspapers Limited Partnership ("HCNLP"), which was owned 87% by Hollinger and 13% by
public limited partners, and was selling one-third of the assets in the CanWest transaction, was being
charged for any portion of the non-compete payments ; (iii) whether Ravelston had any role in
extracting the agreement from CanWest to pay Ravelston an annual management services fee t o
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manage the assets ; and (iv) whether CanWest would have to pay Ravelston if Can West or Ravelston
were to terminate the services agreement .
114. The Special Committee Complaints further explain that in or about May 2001, Lord
Black and Radler sought to obtain from the Audit Committee and Board an after-the-fact
"ratification" of the November 2000 CanWest non-compete payments- Even with this "second
chance" to conduct an adequate review of the CanWest deal and the non-compete payments, the
Audit Committee and Board still abdicated their duties to review the fairness of that deal and those
payments- This is particularly surprising as Lord Black and Radler told the Audit Committ ee and
Board that CanWest did not require that any particular amounts of the total non-compete payment
allocation be paid to any individual or entity- Thus, the Board and Audit Committee knew, or were
reckless in not knowing, that it was Lord Black and his associates, rather than CanWest, that decided
that the non-compete payments would be made to these individuals, rather than to Hollinger.
Nevertheless, neither the Audit Committee nor the Board even asked how the amounts of the
payments or the recipients were determined . Unbeknownst to investors, neither the Board nor the
Audit Committee nor any of the independent directors fully and fairly reviewed, approved or
"ratified" the non-compete payments and corporate opportunities present in the CanWest transaction .
Nor did they review and approve the over $1 million "bonus" payment to Colson, a payment that
Colson requested and Lord Black ordered .
3 . Sales to Osprey Media Group Inc.
115. In July and November 2001, in two separate transactions, Hollinger and Hollinge r
L.P . sold Canadian newspapers to Osprey Media Group, Inc . ("Osprey") for approximately $166
million- As with the Company's sales of U .S. community newspapers, a portion of the sale proceeds
went directly into the pockets of Lord Black and his cronies, but that was not disclosed to the
shareholders- While Hollinger apparently agreed not to compete in the markets occupied by the
Canadian newspapers it sold, Lord Black and other Hollinger executives, not Hollinger, received
payments pursuant to the non-competition agreements . As explained in the Special Committee' s
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Illinois federal court action, Atkinson sent an email on June 18, 2001 to Hollinger Inc,'s outside
counsel to "add the names of Conrad [Black], David [Radler], Jack [Boultbee] and me to the non-
competes .- Accordingly, in connection with the Company's sale of its Canadian newspapers,
Osprey paid a total of $5,100,000 in non-compete payments which were allocated as follows :
$2,300,000 was paid to Lord Black; $2,300,000 was paid to Radler ; $243,000 was paid to Atkinson,
and $243,000 was paid to Boultbee_ However, Hollinger kept these non-competition payments a
secret from the Company's shareholders until well after those payments had been made .
116. The Company first disclosed the July 2001 sale to Osprey in the Company's August
2001 10-Q, which was signed by Boultbee . The Company stated :
On July 31, 2001, the Company announced the sale of most of itsremaining Canadian newspapers for approximately Cdn,$220 million,subject to adjustments . Included in this sale were communitynewspapers in Ontario such as The Kingston Whig- Standard, TheSault Star and the Peterborough Examiner . The consideration forthissale was paid in cash at closing .
There was no mention of any non-competition payments in this filing .
117. Sinailar disclosures of the sales to Osprey were made in Hollinger's November 200 1
10-Q, its Registration Statements on Forms S- 3 filed with the SEC on December20, 2001 and March
25, 2002, and its Prospectuses on Forms 424 B3 filed on December 31, 2001 and April 4, 2002 .
None of these filings mentioned any non-competition payments as being part of the Osprey
transaction .
118. In the Company's 2001 10-K (filed on or about April 1, 2002 ), the Company again
disclosed the sales to Osprey, stating under the heading "Related Party Transactions," that.
In two separate transactions in July and November 2001, theCompany and Hollinger L .P . completed the sale of most of itsremaining Canadian newspapers to Osprey . . . for total sale proceedsof approximately Cdn,$255 .0 million ($166 .0 million) plus closingadjustments primarily for working capital .. Pre-tax gains ofapproximately $0 .8 million were recognized on these sales .
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119, The Company also disclosed for the first time that as part of the Osprey transactions
non-competition payments were made to Lord Black and other senior Hollinger executives . The
Company stated in its 2001 10-K :
The Company's independent directors have approved the terms ofthese transactions .
In connection with the two above sales of Canadian newspaperproperties to Osprey, to satisfy a closing condition, the Company,Hollinger Inc,, and Lord Black and three senior executives enteredinto non-competition agreements with Osprey pursuant to which eachagreed not to compete directly or indirectly in Canada with theCanadian businesses sold to Osprey for a five-year period, subject tocertain limited exceptions, for aggregate consideration of Cdn. $7.9million ($5 .1 million)„ Such consideration was paid to Lord Blackand the three senior executives and has been approved by theCompany's independent directors ..
120. The Company broke down the non-compete payments for the first time in its 2002
Proxy Statement, fi led on April 2, 2002, as follows :
In connection with the two sales of Canadian newspaper properties toOsprey Media Group Inc . ("Osprey") in 2001, to satisfy a closingcondition, Hollinger Inc., the Company, Lord Black and Messrs .Radler, Atkinson and Boultbee entered into non-competitionagreements with Osprey pursuant to which each agreed not tocompete directly or indirectly in Canada with the Canadian businessessold to Osprey for a five year period, subject to certain limitedexceptions, for aggregate consideration ofCdn .$7,940,000, consistingof Cdn.$3,591,995 paid to Lord Black, Cdn_$3,591 .905 paid to Mr .Radler, Cdn.$378,095 paid to Mr. Atkinson and Cdn.$378,095 paidto Mr. Boultbee .
121 . Hollinger' s shareholders learned from the 2001 10-K and the 2002 Proxy Statement
(filed on consecutive days) that Hollinger did not obtain all of the benefits of its sales to Osprey, a s
portions of the sale proceeds were directed to Lord Black and other Hollinger executives .
122 . However, IIollinger 's attempts to "come clean" in its 2001 10-K and 2002 Prox y
Statement were unsuccessful, as the Company falsely stated in those filings that the terms of th e
Osprey transactions and the non-competition payments were approved by the Company' s
"independent directors," when that did not occur.
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123. As explained in the Illinois and New York Special Committee Complaints, in the first
Osprey transaction (completed on or about July 31, 2001), Hollinger paid Lord Black and Radler $2
million each in non-compete payments, while Boultbee and Atkinson received $223,429 each,
without obtaining prior approval from the Audit Committee or the independent directors . Rather,
months later, in or about September 2001, Lord Black and Radler presented the payments to the
Audit Committee for after-the-fact "ratification ." According to the Special Committee :
The rationale provided to the Audit Committee was that Ospreyinsisted on the same non-competition agreements that CanWest hadobtained and wanted to avoid competition frown Defendants Black'sand Radler's "private interests in other newspaper operations ." Thelatter was a reference to Horizon, which the Audit Committee hadalso allowed Defendants Black and Radler to own and run withoutadequate fairness analysis ,
124. Once again, the Audit Committee and Board failed to conduct any review or inquir y
necessary to approve or "ratify" the payments .. The Audit Committee and the Board failed to ask
whether the HCNLP public limited partners were paying (or being asked to pay) any part of the non-
competition allocation, whether Lord Black, Radler, Boultbee and Atkinson had become parties to
the non-compete agreements at their request or on the request of HCNLP, or whether those
executives had previously received non-compete payments in connection with Hollinger's sales of
its U.S_ community newspapers . The Audit Committee simply rubber-stamped the non-compete
payments even though it knew that it had completely failed to become fully and properly informed
as required to analyze the fairness of the Osprey transaction and the non-compete payments to
Hollinger and its shareholders, .
125- In the second Osprey transaction (completed on or about November 30, 2001), Lor d
Black and Radler each received $314,844, and Boultbee and Atkinson each received $33,141, in
non-compete payments, though once again, without Audit Committee or independent director
approval- Again, these individual defendants presented the non-compete payments to the Audit
Committee for "ratification," but the Audit Committee and Board failed to conduct any due diligence
or other inquiry, and consequently lacked basic information required to be fully informed and abl e
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r 7-7 . r-- P" [ : P"" ""OR r---n W"
to analyze the fairness of the payments to Hollinger and its shareholders . The Company did not
inform the shareholders of the complete lack of care and inquiry by the Audit Committee and Board
in their review, approval or purported ratification of the Osprey transactions .
C. RAVELSTON MANAGEMENT SERVICES AGREEMENT S
126. Since at least 1995, Hollinger and its subsidiaries entered into management service
agreements with Ravelston and its subsidiaries . Ravelston is and was during the Class Period
owned by Lord Black, Radler, Colson, Boultbee and Atkinson, and non-defendants, Peter White, the
Estate of Dixon Chant and Charles Cowan (all of whom are current or former officers and/or
Directors of Hollinger Inc . and the Company) . According to the Company's 2001 Proxy Statement,
Ravelston is paid by Hollinger for the following services under the management service agreements :
Pursuant to the Service Agreements, Ravelston provides advisory,consultative, procurement and administrative services to theCompany and its respective subsidiaries including, among otherthings, strategic advice, planning and financial services (includingadvice and assistance with respect to acquisitions, divestitures or jointventure arrangements); consulting services regarding riskmanagement and insurance coverage; and assistance in operationalmatters .
The Company provided a similar description of the services provided by Ravelston in the 200 3
Proxy Statement, which was signed by Kipnis in Chicago, Illinois on or March 26, 2003 .
127. Since at least March 1999, the Company has fraudulently assured investors that the
management services agreements were properly negotiated by the Company so that the fees paid
pursuant to those agreements were a fair value for the cost to Ravelston of providing the
management services. The Company further assured investors that the Board's Audit Committee
had reviewed and approved the fees as reasonable. However, these representations were false . The
Company admitted in its 2002 10-K that the payments may not be reasonable, because the Board,
and the Audit Committee in particular, had undisclosed conflicts of interest and lacked
independence . But that was not the full story. In fact, Raveiston was not providing any services
pursuant to the management services agreements, so the payments could not possibly be reasonable
or a fair value for the services provided. In fact, the management services agreements were jus t
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PNWN
another part of defendants' fraud orchestrated by Lord Black and Radler to funnel Hollinger's money
into their pockets (and the pockets of Boultbee and Atkinson) .. As explained in the Illinois Special
Committee Complaint, Boultbee knew that the Company did not fully deduct the management fee
in preparing its tax returns, based on advice from the Company's tax advisors that the Company
could not defend the reasonableness of the fees in the event of an audit . However, Hollinger did not
disclose this fact in any public filings in the Class Period .
128, Misrepresentations regarding the management services agreements were made in th e
1999 Proxy Statement, where the Company stated :
Pursuant to the Management Agreement, the Company has paidRavelstor. (whose affiliates include Messrs. Black, Radler, Colson,Atkinson, Boultbee and Creasey and Mrs . Black, who are officersand/or directors of both Hollinger Inc . and the Company and who,with the exception of Mrs. Black, do not receive compensationdirectly from the Company in their capacities as executive officers ofthe Company or Hollinger Inc .) approximately $32 million in 1998and paid Hollinger Inc. pursuant to the Services Agreementapproximately $26 million in 1997. The amount of the managementfees was approved by the Audit Committee as reasonable for theservices rendered to the Company .
129. The 2000 Proxy Statement described the services provided by Ravelston to Hollinger ,
the Company's Southarn Inc . subsidiary and their respective subsidiaries pursuant to the managemen t
services agreements, and also stated :
in 1999 and 1998 in the aggregate approximately $38 million and $32million, respectively, was paid in fees pursuant to the ServicesAgreements . The fees paid by the Company were approved by theAudit Committee as reasonable for the services rendered . . . .Additionally, $2.3 million was paid to Ravelston's affiliate, MoffatManagement, for services provided to the Company's CommunityNewspaper Group .
130, The 2001 Proxy Statement again described the services provided under the Ravelsto n
management services agreements, and provided the following information regarding payments t o
Ravelston and its affiliates :
In 2000 and 1999 in the aggregate approximately $24 million plusCdn_$18_ 5 million and $38 million, respectively, was paid in feespursuant to the Services Agreements . The fees paid by the Companywere approved by the Audit Committee as reasonable for the service s
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rendered- . _ . Additionally, $1 .56 million was paid to Ravelston'saffiliate, Moffat Management, for services provided to theCompany's Coniniunity Newspaper Group .
131 . The 2002 Proxy Statement disclosed the following payments pursuant to th e
Ravelston management services agreements, stating :
In 2001 approximately $25 .8 million plus Cdn.$7.6 million was paidin fees pursuant to the Services Agreements . The fees paid by theCompany were approved by the Audit Committee as reasonable forthe services rendered . . . . Of the aforementioned ServicesAgreements fees, approximately $770,000 and $230,000,respectively, were paid to Ravelston's affiliates, Moffat Managementand Black-Atniel Management, for services provided .
132_ The 2003 Proxy Statement disclosed little more than that information contained i n
preceding Proxy Statements with respect to the Ravelston management se rvices agreements :
In 2002 approximately $21 .4 million plus Cdn .$3 .6 million was paidin fees to Ravelston and RMI pursuant to the Services Agreementsand approximately $1,176,000 in the aggregate was paid to MoffatManagement and Black-Amiel Management pursuant to separateservice agreements . In addition to the services provided under theServices Agreements and separate services agreements, in 2002 LordBlack and Mr. Colson received $719,000 in the aggregate from TheTelegraph in respect of executive services provided .
133. Hollinger also described in its May 2001 10-Q and in its .2001 10-K the managemen t
services agreement with CanWest and National Post_ In those filings, the Company did not identify
the total amount paid to Ravelston from all the service agreements involving Hollinger and its
various newspaper properties and subsidiaries, but did disclose that the agreements with CanWest
required CanWest to make annual payments of $4 million to Ravelston .
134. In all, Hollinger disclosed payments from the Company and its subsidiaries t o
Ravelston and its subsidiaries and affiliates that totaled approximately $202 million from 199 5
through 2002.
135. Each of the above statements (in the 1999-2003 Proxy Statements) regarding the
Ravelston management services agreements was materially false and misleading when made .
Contrary to the Company's earlier statements , on March ,3I, 2003, Hollinger suddenly admitted in
its 2002 10-K that the teens of Ravelston services agreements may have been drafted in favor o f
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R.avelston and thus maybe unfair to Hollinger, and that the amounts paid under the agreements may
have been unreasonable and therefore excessive . The Company conceded in its 2002 10-K that :
All of the Service Agreements were negotiated in the context of aparent-subsidiary relationship and, therefore, were not the result ofarm's length negotiations between independent parties- The terms ofthe Service Agreements may therefore not be as favorable to theCompany and its subsidiaries as the terms that might be reachedthrough negotiations with non-affiliated third parties .
136. The Company also disclosed that certain management services agreements were
assigned by Ravelston to RM,I, and that RMI as well as Ravelston had been paid by Hollinger for
management services pursuant to these agreements . Additionally, the Company disclosed for the
first time that executives at Ravelston and affiliates of Ravelston and RMI received personal
payments pursuant to separate services agreements with Hollinger's subsidiaries- The 2002 10-K
stated :
The Company and its subsidiaries have entered into a servicesagreement with The Ravelston Corporation Limited (`°Ravelston"),whereby Ravelston acts as manager of the Company and carries outhead office and executive responsibilities . This services agreementwas assigned on July 5, 2002 to Ravelston Management Inc .a wholly-owned subsidiary of Ravelston . Ravelston and RMI billedto the Company and its subsidiaries fees totaling $23,731,000,$28,956,000 and $33,618,000 for2002, 2001 and 2000, respectively,pursuant to this agreement. Certain executives of Ravelston andMoffat Management and Black-Amiel Management, affiliates ofRavelston and RMI, have separate services agreements with certainsubsidiaries of the Company . Amounts paid directly by subsidiariesof the Company pursuant to such agreements were $1,895,000,$1,697,000 and $3,659,000 for 2002, 2001 and 2000, respectively .The fees under Ravelston's and RMI's services agreement and thefees paid directly to executives and affiliates of Ravelston, inaggregate, are negotiated with and approved by the Company'sindependent directors .
137 . Through the 200210-K filing, Hollinger's shareholders learned for the first time that
not only was Hollinger paying Black and Radler -controlled entities for m anagement serv ices, the
Company and its subsidiaries were directly paying executives at Black and Radler -controlled entities .
While the Company did not disclose the names of these executives , the controlling owners and/or
executives of RaveIston and RMI include Black and Radler, and additional Ravelston shareholder s
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are Lady Black, Boultbee and Colson . The "executives" of Black Amiel Management that were paid
by Hollinger under the management services agreements include, on information and belief, Lady
Black. These directors (Black, Radler, Lady Black, Boultbee and Colson) were among those deemed
by the Company to be "independent" and providing approval, but the inherent conflict in having
them review and approve transactions in which they stood on both sides and would benefit precluded
them fi-orn being independent . Thus, the Board, Audit Committee and independent director review
and approval, which the Company had previously and falsely represented as occurring and resulting
in agreements fair to the Company, instead meant nothing . The Company stated that it could no
longer stand behind the payments that it had previously represented as being reasonable . Individuals
who had invested believing, based upon Company representations, that the Company was paying a
fair and reasonable price for various consulting and management services, were now warned that the
Company may, in fact, be overpaying for those services . Significantly, the recipient of these
apparent overpayments was Ravelston, an entity controlled by Lord Black, who also ran Hollinger .
138. The 2002 10-K did not tell the whole story regarding the management services
agreements, In fact, those agreements were simply a mechanism to funnel additional Hollinger
money to Lord Black and his associates through payments to Ravelston, RMI, Black Amie l
Management and/or "executives" at those entities -- such as Lord Black, Radler, Boultbee, Colson
and Lady Black . Also concealed was the fact that Ravelston did not provide any services whatsoever
to earn the fees it received from Hollinger . Rather, Hollinger remained managed by Lord Black,
Radler and the other senior Hollinger executives, but payments were made to Ravelston for
purported management services which were never provided by Ravelston . As Hollinger remained
managed by its Board and officers and other employees, there were no additional services provided
by those who were paid personally pursuant to the management services agreements - the
"executives" receiving such payments (on information and belief Black, Radler, Boultbee, Colson
and Lady Black) already managed the Company through their positions at Hollinger .
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139. Also not disclosed in the 2002 10-K was the manner in which the management fee s
were determined- As explained in the Illinois and New York Special Conmiittee Complaints, the
management services agreements did not establish specific fee amounts to be paid to Ravelston, as
the fee was to be negotiated every year between Ravelston and the independent members of
Hollinger's board . While the Company's Board delegated this responsibility to the Audit
Coirhnittee, the Audit Committee did not discharge this duty, as each year it was Radler who
proposed a management fee to the Audit Committee . Radler knew that the fee he proposed had
nothing to do with Ravelston's costs of providing services to Hollinger, because no such services
were provided . The Special Committee stated in its complaints that Radler consulted with Black and
Boultbee in deterarzining a fee to propose, using as a starting point not the cost of providing such
services, but the amounts Raveiston "needed" to support its activities and service its debt, as well
as to satisfy Lord Black's appetite for additional compensation. Radler has stated that the proposed
fee was based roughly on an estimate of Ravelston's salaries, bonuses, benefits, pensions and
overhead, plus 20% for Ravelston's "profits", and 2'/~ times Ravelston's salaries and bonuses .
140, These "standards" were not disclosed to Hollinger's shareholders . As Hollinger-use d
its own senior management team to provide management se rvices to Hollinger, there was no reason
to pay Ravelston for any management services, and indeed, none were provided by Ravelston .
141 . Not disclosed in the 200210-K, or in any previous Company filings, was the fact that
the Audit Committee approval of the management services fees was a sham, because : (i) the Audit
Committee never requested any documentation or support for the proposed annual fees or
Ravelston's costs of providing management services to Hollinger ; and (ii) the Audit Committee
never considered any performance-based criteria (such as percentages of revenues, net income or
EBITDA) in evaluating the fee proposal, basing its approval instead upon reference only to the prior
year's fee and the Company's size (in relation to the previous year) . Thus, the Audit Committee
recklessly failed to conduct any meaningful review, analysis, or valuation of the proposed fee
amounts or the work Ravelston would purportedly perform under the management service s
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r"11 I ORONO ON-"
agreements, and so lacked basic information required to approve those agreements . These facts were
concealed from investors .
142 .. Also concealed from investors was Hollinger Inc.'s role in helping Raveiston extrac t
the exorbitant fees from Hollinger . Hollinger Inc . used those fees to pay its own debt obligations
to the Company .
D. ASSET SALES TO AFFILIATED ENTITIES
143. Unbeknownst to Hollinger's shareholders , the Company engaged in transactions wit h
entities owned and/or controlled by Lord Black and his cronies. While Hollinger represented that
it was improving its financial condition through sales of its assets to third parties, Hollinger faile d
to disclose that Lord Black owned those third parties, that Hollinger's Board had not given prior
approval for the transactions, that the Board failed to engage in any review or analysis of the value
of the properties it was selling, and that the purchases from Hollinger were financed with Hol Iinger's
own money.
1 . Horizon Publications Inc .
144. In or about 1998, Lord Black and Radler established a new private company, Horizo n
Publications Inc . ("Horizon"), which they would use to buy newspaper assets from Hollinger at
below-market rates- Lord Black and Radler were in a good position to turn a quick profit on
newspapers acquired from Hollinger, as they knew the operations and earnings potential of the
Company's newspapers, as well as the identity of third parties who might be interested in acquiring
then . Indeed, as Lord Black later wrote to a potential investor in-Horizon :
We have bought and sold hundreds of these little Americannewspapers in public companies and have never failed to makehandsome profits on them. We sold them a few years ago to clear thedebt of our public company and are buying them back now for ourown account, knowing their profit potential intimately.
145. Lord Black and Radler kept their controlling ownership interest in Horizon a secret .
Lord Black owned 24.099% of Horizon through his Ontario corporation Conrad Black Capital Corp . ,
and Radler owned 24 .099% of Horizon through his Prince Edward Island Corporation F_D, Radle r
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Ltd. In addition, Lord Black and Radler controlled another 24 .752% of Horizon through Vee
Holdings, Ltd ., a British Columbia company. Radler instructed Todd Vogt - who had been a
Hollinger employee in Chicago until early 1999, when Radler installed him as Horizon's President
and CEO - to act as the registered holder of the Vee Holdings Ltd .'s Horizon shares, but to secretly
hold those shares in trust for Radler's F .D . Radler Ltd . In the Declaration of Trust, dated April 30,
1999, Vogt stated that he would vote the Vee Holdings Ltd.'s Horizon shares "only as directed by"
F.D. Radler Ltd_ "and in no other manner," and that Radler - who had been Vogt's boss at Hollinger
and was his boss and Horizon - would have "full authority" to. give Vogt "instructions and
directions" on behalf of F .D . Radler Ltd .
146 . Lord B lack and Radler did not inform Hollinger's Board that they owned a controlling
interest in Horizon. To the contrary, on November 30,1998, when they first discussed Horizon with
the Board, Lord Black and Radler, stated only that they would "take equity positions" in Horizon, and
they characterized that company as a venture conceived by Jerry Strader and Vogt, two Hollinger
employees . Lord Black and Radler portrayed themselves as involved in Horizon only as passive
investors providing needed financing and additional equity .
147. Ultimately, Lord Black and Radler used Horizon in at least five separate transactions
to take advantage of Hollinger. First, Horizon acquired U .S. community newspapers from Hollinger
at prices favorable to Horizon and without prior disclosure of the controlling interest Lord Black and
Radler held in Horizon . Second, Horizon engaged in an asset exchange transaction in April 2000
in which it swapped a group of newspapers that were losing money for a series of profitable
Hollinger newspapers . Third, Hollinger paid Horizon $150,000 to take two newspapers from
Hollinger even though a third party had just offered $750,000 for those assets . Fourth, Hollinger
sold additional community newspapers to Horizon at prices substantially below market price, and
without obtaining any independent appraisal of the value of the transferred properties. Fifth,
Hollinger sold a newspaper to Horizon for one dollar, even though less than two years earlier it had
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purchased that paper for $1 .75 m illion and had just negotiated to sell it to a third party for $1 .25
million,
a . Horizon's Acquisition of Hollinger's Community Newspapers
148, During 1999, Horizon, owned and controlled by Lord Black and Radler, acquired 3 3
U.S. community newspapers from Hollinger for $43 . 7 million . The Board resolution approving the
sale shows that the Board was not aware of the controlling interest which Lord Black and Radler ha d
in Horizon . That resolution stated :
WHEREAS , the board of directors has been informed that Messrs.Strader and Vogt, two directors of [Hollinger subsidiary] AmericanPublishing Company ("APC" ) . . . are interested in acquiring theHorizon assets for approximately IOx EBITDA , and that Messrs.Black and Radler are interested in assisting Messrs . Strader and Vogtin obtaining financing and by providing equity for such transaction .
In fact, Lord Black and Radler conceived, created and controlled Horizon, and allowed Strader an d
Vogt to make small equity investments but were instructed to assist Lord Black and Radler i n
running that company .
149 . Horizon was able to complete its acquisition of assets from Hollinger becaus e
Hollinger loaned it at least $8 million needed to finance the purchase. The terms of this loan favored
Horizon -- the loan was unsecured and Horizon was given until 2007 to repay Hollinger . The reason
the transaction was skewed in favor of Horizon was that Lord Black and Radler owned and
controlled Horizon and stood to benefit personally in the transaction . A January 30, 2004 article in
the Wall Street Journal entitled "Behind Paper Sales, Lord Black Played A Double Role," reported
that, although Lord Black was "on both sides of the transaction" due to the equity stake he and
Radler had in Horizon, Hollinger loaned Horizon $8 million to help finance the deal, and the loan
was not approved by the Board . Hollinger's shareholders were not informed of the $8 million loan
or the fact that the Board never approved this sweetheart deal to Horizon until the Special Committee
and the SEC filed their complaints against Lord Black and the Company. In fact, as disclosed in the
-5 .3-
Illinois Special Committee Complaint, Horizon has defaulted on its debt obligation to Hollinger an d
currently owes the Company $5 million .
150 . When the Company first disclosed its sale of assets to Horizon , it did not disclos e
Horizon' s affiliations with Black and Radler. In the 1999 10-K the Company stated only that :
During 1999, the Company sold to Horizon Publications Inc .. 33 U.S .community newspapers for $43 .7 million resulting in a pre-tax gainof approximately $20 .7 million . Horizon Publications Inc . ismanaged by former Community Group executives and owned bycurrent and former Hollinger International Inc . executives ,
The Company made this identical disclosure in its 2000 10-K .
151 . Hollinger's 2001 10-K contained similar language, adding that Horizon is "controlle d
by certain members of the Board of Directors" and that "[t]he terms of these transactions [with
Horizon] were approved by the independent directors ofthe Company ." None of the Company's 10-
Ks named Lord Black or Radler as having any ownership stake in Horizon or that they controlled
this closely held company. The Company's Proxy Statements also stated that the Horizon
transactions had been approved by the Company's independent directors. In the 2000 Proxy
Statement, the Company stated :
Effective April 1, 1999, the Company sold approximately 18properties of the Company's U .S. community newspaper group for anaggregate consideration of approximately $47 million to a companyformed by a former Vice President of American Publishing . Certainmembers of the Board of Directors and senior management of theCompany are shareholders of such company . The transactionreceived an independent fairness opinion and was unanimouslyapproved by the independent Directors of the Company as a marketvalue transaction .
The 2000 Proxy contained absolutely no mention of Horizon.
152. The Company's 2001 and 2002 Proxy Statements both reported that the Company
had consummated transactions with Horizon which were "unanimously approved by the Audit
Committee and the independent Directors of the Company as market value transactions ." Like the
Company's I0-Ks, these Proxy Statements failed to identify Lord Black's and Mr . Radler's
ownership stake in and control of Horizon .
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r-! P"" r--`' !mow PW"
153. The Company's 2001 Proxy Statement reported additional sales of U.S. properties
to Horizon and misleadingly assured investors that those transactions had been approved by
independent directors, when in fact the members of the Board had undisclosed conflicts of interest
that prevented them from exercising independent business judgment . The 2001 Proxy Statement
reported :
The Company consummated three transactions with HorizonPublications Inc ., a company formed by a former Vice President ofAmerican Publishing and having certain members of the Board ofDirectors and senior management of the Company as shareholders .Effective April 1, 2000, in two transactions valued at approximately$2.5 million and unanimously approved by the Audit Committee andthe independent Directors of the Company as market valuetransactions, American Publishing transferred properties in NorthDakota and Washington in exchange for properties in Illinois, andXSTM sold the stock of Westbourne Investments Inc . to Horizon .Effective November 1, 2000, Horizon acquired two properties inCalifornia and Idaho in a transaction valued at approximately S4 .1million. The Company had previously contracted to sell suchproperties to Newspaper Holdings, Inc . as part of a larger transaction,but conveyed title to those two properties directly to Horizon pursuantto an assignment to Horizon from Newspaper Holdings, Inc .
The Board apparently knew, but did not disclose, that Black and Radler owned and controlled
Horizon, as the Company vaguely stated that Horizon had "certain members of the Board of
Directors and senior management of the Company as shareholders ." Additionally, the statement that
Horizon was "formed by a former Vice President of American Publishing" was false and misleading,
as Black and Radler formed, owned and controlled Horizon.
154. The Company's 200 .2 Proxy Statement also falsely represented that the sales t o
Horizon had been approved by the Audit Committee and independent directors :
The Company consummated two transactions with HorizonPublications, Inc_, a company formed by a fonner Vice President ofAmerican Publishing Company and controlled by certain members ofthe Board of Directors and senior management of the Company asshareholders, which were unanimously approved by the AuditCommittee and the independent Directors of the Company as marketvalue transactions . American Publishing Company transferred assetsin Saagot Valley and San Juan Islands, Washington and MammothLakes, California in exchange for net working capital .
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155. The Company's transactions with Horizon could not have been approved by the
Company's independent directors, as the directors who "approved" those deals had conflicts whic h
prevented them from being "independent ." Additionally, the Board never approved the $8 millio n
loan to Horizon to finance its purchase .
156. According to aNovember 18, 2003 Wall Street Journal article , Horizon has continued
to quietly buy small newspapers from Hollinger without any disclosure in the Company's SEC
filings . In fact, the Wall Street Journal reported that Radler assumed the role of the president and
chief operating officer of Horizon about a year ago (though he reportedly stepped down from those
positions in late November 2003) and that he has continued the buying spree . Recent articles report
that Hollinger is in the process of concluding yet another asset sale to Horizon, and that Horizon now
owns about 70 papers across North America . In fact, the majority of Horizon's newspapers were
purchased from Hollinger. This fact has never been disclosed in any of Hollinger's public filings .
b. Horizon 's Asset Exchange With Holsinge r
157. In or about March and April 2000, Lord Black and Radler arranged a swap o f
profitable Hollinger newspapers for unprofitable newspapers owned by Horizon and its wholly-
owned subsidiaries, Horizon Hawaii and Horizon Illinois . Pursuant to an asset exchange agreement
dated April 1, 2000, Hollinger transferred three newspapers in Colville and Deer Park, Washington,
and Valley City, North Dakota, in exchange for a group of'Chicago weekly publications that Horizon
had acquired from Lerner Publications (the "Lerner Newspapers") and a Hawaiian paper called the
Honolulu Pennysaver that Horizon had acquired from Hollinger in the Company's 1999 sale of
community newspapers to Horizon .
158. The Company reported its asset exchange with Horizon and the Ho rizon subsidiarie s
in the Company's 2001 Proxy Statement, which stated :
The Company consummated three transactions with HorizonPublications Inc ., a company formed by a former Vice President ofAmerican Publishing and having certain members of the Board ofDirectors and senior management of the Company as shareholders .Effective April 1, 2000, in two transactions valued at approximately$2.5 million and unanimously approved by the Audit Committee an d
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r~ tom- - """ ~-----_ r--
the independent Directors of the Company as market valuetransactions, American Publishing transferred properties in NorthDakota and Washington in exchange for properties in Illinois, andXSTM sold the stock of Westbourne Investments Inc. to Horizon .
159. Again, while the Company disclosed that its Directors and senior management were
shareholders of Horizon, it omitted the material information that Black and Radler owned and
controlled Horizon. In addition, those two defendants created Horizon, not (as represented) any
former Vice President of American Publishing.
160. In the 2002 Proxy Statement, the Company reported that it had :
consummated two transactions . with Horizon Publications, Inc ., acompany farmed by a former Vice President of American PublishingCompany and controlled by certain members of the Board ofDirectors and senior management of the Company as shareholders,which were unanimously approved by the Audit Committee and theindependent Directors of the Company as market value transactions .
The 2002 Proxy Statement contained the first disclosure that any Board members or executives of
Hollinger controlled Horizon _
161 . The Company's Proxy Statements contained patently false and misleadin g
representations regarding its asset exchange transaction with Horizon, as Lord Black, Radler and the
other Defendants knew, because Horizon obtained Hollinger's assets in the exchange for
substantially less than those assets' fair market value, and the transactions were not approved in
advance but received only after-the-fact ratification .
162 . As described in the Illinois Special Committee Complaint, the Company exchanged
profitable publications for publications that were worth millions less and had lower cash-flow
margins than any other property the Company owned at the time . In fact, the Lerner Newspapers
were losing money and had realized a positive EBITDA in only one of the previous three years . Not
surprisingly, the Lerner Newspapers lost money for Hollinger in both 2000 and 2001, and their
EBITDA for 2000 was only about $140,720-
163 . The Audit Committee and Board failed to conduct any review or inquiry into the
value of the properties Hollinger would receive in the asset exchange, nor did the Audit Committe e
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F-7 , NA rte.. .... ~-,
or Board obtain a fairness opinion, any independent valuation of the properties being exchanged or
retain any independent financial or legal advisors at all to review the asset exchange transaction, nor
did they engage in any negotiation over the teams of that transaction. Additionally, the Proxy
Statements were materially false and misleading in their failure to identify Black and Radler as
controlling shareholders of Horizon . As the Board knew of Black and Radler's controlling stakes
in Horizon, the Board knew that the disclosures in the 2002 Proxy Statement were materially
misleading in their failure to identify Black and Radler as the individuals that controlled Horizon,
and knew that the disclosures in the 2001 Proxy Statement were completely false in their failure to
mention anyone affiliated with the Company as owning and controlling Horizon .
164 . Finally, the Board and Audit Committee did not approve the asset exchange prior to
its consummation ; rather the Audit Committee "ratified" the already consummated asset exchange
during a meeting held on or about May 11, 2000, based in part on Radler's presentation at that
meeting . The representations in the 2001 and 2002 Proxy Statements that the transaction were
"unanimously approved by the Audit Conunittee and the independent Directors of the Company"
were false and misleading, as was the representation in the 2002 Proxy Statement that the transaction
was a "market value" transaction .
165 . As the Board was aware that Black and Radler owned and controlled Horizon, they
were on inquiry notice that the transactions with Horizon may not have been fair to the Company,
and so the Board had a duty to at least investigate whether the asset exchange transaction, and all
other transactions with Horizon, were fair to Hollinger . The Board's failure to conduct such an
investigation, obtain a fairness opinion or make any inquiry into the value of the assets transferred
to or received from Horizon was reckless .
c. Hollinger Pas Horizon To Take Newspaper Assets From Ho l linger
166 . Pursuant to a stock purchase agreement dated as of May 1, 2000, but effective as o f
March :31, 2000, Hollinger paid Horizon and Horizon USA $149,999 to take from Hollinger it s
Skagit ValleyArgus ("Arhus") and Journal ofthe San Juan Islands ("Journal") newspaper properties .
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The agreement specified a purchase price of $1 "plus or minus a working capital adjustment (current
assets minus current liabilities)," which was a negative amount (i .e., payable by Hollinger to
Horizon) of approximately $150,000, thus requiring Hollinger to pay Horizon $149,999 to take
assets from Hollinger. Rather than disclose this gift transfer, Hollinger told its shareholders
something completely different ..
167 . The Company reported in its 2001 Proxy Statement that :
Effective April 1, 2000, in two transactions valued at approximately$2 . 5 million and unanimously approved by the Audit Committee andthe independent Directors of the Company as market valuetransactions, American Publishing transferred properties in NorthDakota and Washington in exchange for properties in Illinois, andXSTM sold the stock of Westbourne Investments Inc . [the companythat owned the Argus and Journal properties] to Horizon .
This statement was false and misleading, as the transactions were not at "market value" and there
was no disclosure of the $1 "sales price"plus a $150,000 negative working capital adjustment or an y
disclosure that Hollinger actually paid Horizon to take the Company's assets .
168 . The 2002 Proxy Statement was equally false and misleading , as it provided :
The Company consummated two transactions with HorizonPublications, Inc ., a company formed by a former Vice President ofAmerican Publishing Company and controlled by certain members ofthe Board of Directors and senior management of the Company asshareholders, which were unanimously approved by the AuditCommittee and the independent Directors of the Company as marketvalue transactions . American Publishing Company transferred assetsin Saagot [sic - Skagit] Valley and San Juan Islands, Washington andMammoth Lakes, California in exchange for net working capital .
As explained above, Horizon was formed and controlled by Lord Black and Radler ; it was not
"formed by a former Vice President of American Publishing Company ." Moreover, the
characterization of the transactions as "market value" was false, as the Board and Audit Committee
failed to conduct any investigation or appraisal necessary to make that representation, and the Board
and Audit Committee were precluded from being independent due to conflicts of interest in certain
Company directors (including Black and Radler) having ownership stakes in and control of Horizon.
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169. Neither the Board nor the Audit Committee retained any independent legal o r
financial advisors or received any valuation of the Hollinger assets being transferred to Horizon, nor
did they ever receive any fairness opinion evaluating of the transaction . The Board and Audit
Committee also failed to negotiate the terms of the transaction or determine whether unrelated
parties would be interested in purchasing the properties . Indeed, before that transaction closed, a
third party had offered to buy one of the papers for approximately $750,000, but that, too, was
concealed from investors, and within eighteen months of the closing of the deal with Horizon,
Horizon resold the two properties for a $720,000 profit.
170. In or about September 2001, Horizon sold the .Journal to Sound Publishing Co ., a
wholly-owned subsidiary of the party that offered to buy the Journal when it was owned b y
Hollinger, for $280,000 . In or about October 2000, Horizon sold the Argus to Skagit Valle y
Publishing for about $450,000 .
171 . Hollinger concealed from investors the failures of its Board and Audit Committee t o
undertake even the most basic investigation into the value of the properties being "sold" to Horizon
or the fairness of that transaction to Hollinger. Hollinger's 2001 and 2002 Proxy Statements were
materially false and misleading in stating that the transactions were at "market value" and in their
failure to disclose that Hollinger was paying Horizon to take Hollinger' s assets .
d. Hollinger's Sale of Additional Community Newspapers to Horizon
172_ Hollinger sold additional community newspapers to Horizon in another transactio n
to a related party which was not approved by the Audit Committee . Through an assignment clause
in the September 28, 2000 asset purchase agreement with CNHI, Lord Black and Radler caused
Hollinger to sell its properties in Bishop, California and Blackfoot, Idaho to Horizon for $4 .1
million, substantially below market price . Through this transaction, the Company undermined the
value of its newspaper in Mam.mouth Lakes, California, which is located only .35 miles from the
Bishop area, and which uses the same printing press as the Bishop paper. Morgan Stanley had
recommended to Hollinger-'s management in May 2000 that the Bishop and Mammouth Lake
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properties "be considered one operating unit for purposes of [the] sale process" and thus be sold
together to maximize their value . However, Black and Radler caused Hollinger to sell its
Marnmouth Lakes property separately, and then they convinced the Audit Committee to sell the
Mammouth Lakes property to Horizon for only $1 because it was, according to them, essentially
worthless .
173 . Hollinger disclosed its sale of the Bishop and Blackfoot properties in the 2001 Proxy
Statement as follows :
Effective November 1, 2000, Horizon acquired two properties inCalifornia and Idaho in a transaction valued at approximately $4 .1million . The Company had previously contracted to sell suchproperties to Newspaper Holdings, Inc. as part of a larger transaction,but conveyed title to those two properties directly to Horizon pursuantto an assignment to Horizon from Newspaper Holdings, Inc .
As Lord Black and Radler knew, this statement was false and misleading for several reasons-
174. First, there is no disclosure that the transaction was to a related party - Horizon --
requiring Audit Committee approval . Rather, the disclosure misleadingly characterizes the
transaction as a transfer from a third-party purchaser to Horizon .
175. Second, as explained in the Illinois Special Committee Complaint but not disclosed
in the 2001 Proxy Statement, Lord Black and Radler had arranged for CNI-H to assign the properties
to Horizon before the Company "contracted to sell such properties to [CNHI] as part of the larger
transaction ." In or about August 2000, Radler asked CNHI to modify the asset purchase agreement
to include the Bishop and Blackfoot properties among those CNHI would purchase, and to insert a
provision permitted CNHI to assign immediately to Horizon "its rights and obligations with respect
to the Bishop and Blackfoot properties," upon which the purchase price would be reduced from
$95.2 million to $90 million . A corresponding assignment agreement was drafted to allow CNHI
to immediately assign away the Bishop and Blackfoot properties . Thus, the 2001 Proxy Statement
was false and misleading in not disclosing that Radler had pre-arranged the assignment of the
properties to Horizon even before the Company had agreed to sell them to CNHI .
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176. Third, the Proxy Statement 's representation that the transaction was "unanimousl y
approved by the Audit Committee and the independent Directors of the Company" was false and
misleading, as Lord Black and Radler arranged for the "approval" through an "Executive Committee
Unanimous Written Consent," obtained at a Hollinger executive board committee meeting held on
September 15, 200 and attended by Lord Black, Radler and Perle . None of those directors was
independent, as Lord Black and Radler had controlling stakes in Horizon, and Perle was an employee
at Horizon reporting to Lord Black . While the Board later "ratified" the transaction during a
December 4, 2004 Board meeting, the Board was not informed of the controlling stake in Horizon
held by Lord Black and Radler, or that the Bishop and Blackfoot properties had already been sold
to Horizon .
177. Finally, the Proxy Statement' s representation that the properties were "valued" at $4 . 1
million was false and misleading, as neither the Board nor the Audit Committee ever obtained any
independent valuation of the properties or retained any independent financial or legal advisors, nor
did they or any independent Hollinger director or representative negotiate the terms of the
transaction, The Company simply had no basis to represent that the properties had a $4 .1 million
value, or that the Company had engaged in any valuation of the properties at all .
e. Horizon's $1 Acquisition of Hollinger's Mammouth Times Newspape r
178 . As reported in the July 20, 2003 Chicago Tribune, Hollinger "put individual paper s
up for sale, rather than selling regional publishing clusters, which would be more attractive to buyers .
Such a tactic would help deter other bidders and ensure that Horizon got the Hollinger papers it
sought without a messy bidding war . . . ," The January 30, 2004 Wall Street Journal article
explained that:
Shopping the two papers together would have made them moreattractive to potential buyers, since they dominated the local market,Hollinger, however, split them up, making them less attractive tobuyers .
However, these facts were not disclosed to the shareholders .
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I79 . In addition to not shopping its assets so as to obtain the highest and best price in any
sale, Hollinger actually rebuffed offers for its newspapers in order to sell them to Lord Black-
controlled Horizon at fire-sale prices . For example, in 1999 Hollinger purchased the Mammoth
Times newspaper for $1 .75 million . According to the January 30, 2004 Wall Street Journal article
exposing the give-aways to Horizon, in October 2000, Jack Humphreville of California publisher
Target Media signed a letter of intent with Hollinger to buy the Mammoth Times in Mammoth
Lakes, California for $1 .25 million . The Special Committee stated in its Illinois Complaint that
Target Media sent a letter on November 2, 2000 which was accepted by Jerry Stradler, the Hollinger
manager in charge of that division. Mr. Iluanphreville also told Hollinger that he was interested in
also buying Hollinger's Bishop, California paper, but Lord Black and Radler had Hollinger sell that
paper to Horizon (which Black and Radler owned) without giving Humphreville a chance to make
an offer . While Hollinger would have obtained more money in a combined sale of the Mammoth
Times and the Bishop, California papers, Black and Radler sold these papers in separate transactions
for their own purposes and to the detriment of the Company and its shareholder s
180. Hollinger effectively killed the negotiations with Humphreville . On or about January
30, 2001, Jerry Strader, then president of Hollinger's community newspaper division and a Horizon
shareholder, sent a memorandum to the Mammoth Times instructing its onsite executive not to
provide all the information that Hurnphreville was requesting in his due diligence . Additionally,
Target Media sent Hollinger in or about January 2001 a draft purchase agreement and non-
competition agreement which required Hollinger and Horizon to refrain from competing with the
Mam outh Times for five years, though Horizon would be permitted to operate the nearby Bishop
properties it had just acquired from Hollinger . Hollinger (through Linda Loye, a Hollinger corporate
counsel located in Chicago who reported to Radler) refused to sign the non-competition agreement.
As a consequence, Target Media was forced to withdraw its offer, in or around late February 2001 .
181, For the next five months, nether Lord Black, Radler, nor any other Hollinger
employee or representative undertook any significant efforts to market the Mammouth Times t o
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other prospective buyers. Instead, Hollinger simply took the Mammoth Times (on or about August
2, 2001) themselves, "selling" it to Horizon for $1, even. though that newspaper was, and remains,
a profitable enterprise . As reported by the Wall Street Journal, Wally Hofrnaim, the onsite executive
for the Mammoth Times, stated that the paper showed a profit in the seven months before the sale ;
it earned $119,700 in the month before the deal closed, and it is still profitable .
182. However, HoIlinger 's shareholders did not know (until the January 30, 2004 Wal l
Street Journal article) that Hollinger had rejected a $1 .25 million offer in order to sell its profitabl e
newspaper to a company owned and controlled by Lord Black and Radler for a grand total of on e
dollar, because Hollinger never disclosed these facts .
183 . The Company tersely reported in its 2001 1 O-Kthat"[d]uring 2001, the company sol d
its last remaining United States community newspaper." The Company's 2002 Proxy Statement
stated that:
The Company consummated two transactions with HorizonPublications, the., a company formed by a former Vice President ofAmerican Publishing Company and controlled by certain members ofthe Board of Directors and senior management of the Company asshareholders, which were unanimously approved by the AuditCommittee and the independent Directors of the Company as marketvalue transactions . American Publishing Company transferred assetsin Saagot Valley and San Juan Islands, Washington and MammothLakes, California in exchange for net working capital-
These statements were false and misleading because they do not disclose that the sale was to a
related party ; instead, the Proxy Statement characterizes the transaction as if it were to a third-party
in falsely stating that Horizon was "formed by a former Vice President of American Publishing
Company" when in fact it was formed and controlled by Lord Black and Radler . Additionally, the
Mammouth Times was sold for $1 with "no working capital adjustment," not for "net working
capital" as represented by the Company ,
184 . All of the Company's prior disclosures of its transactions with Horizon wer e
materially false and misleading in their failure to disclose the Company's sales ofassets to Horizo n
at below market rates, such as for one dollar, and their failure to disclose those "sales" to Horizo n
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where Hollinger actually paid Horizon to take Hollinger's assets. By completely failing to disclose
these gift transfers to Horizon, or by lumping these transactions with other asset sales to Horizon and
disclosing only a total sale price for all the transactions together, the Company concealed from
investors its outright transfer of assets to Lord Black and Radler (through their ownership and control
of Horizon) for essentially no consideration .
185. The Company's disclosures regarding its various transactions with Horizon an d
Horizon subsidiaries and affiliates were materially false and misleading also because they concealed
the complete failure of the Audit Committee and Board to engage in any review or discussion of the
terms of the Horizon transactions which deterred other bidders and thus precluded the possibility of
Hollinger receiving higher prices for its assets . The Audit Committee and Board failed to engage
in the inquiry required to assess the fairness of the transactions, and were thus in no position to
characterize or approve them as "market value transactions," as represented in the 2000-2002 Proxy
Statements . Rather, the Audit Committee and Board rubber-stamped these deals which were
negotiated and structured by Lord Black and Radler to benefit themselves and Horizon, which the y
controlled . In fact, as the Wall Street Journal reported on January 30, 2004, the Board did not
approve the sale of the Mammoth Times for $1 ; rather, the directors approved the deal
"retroactively" after it was consummated .
186. Shareholders were not told that Lord Black and Radler owned and controlled Horizon .
These individuals steadfastly refused to define their stakes in Horizon, and Hollinger's filings
contain only opaque references to "certain current and former Hollinger directors" who have stakes
in Horizon. The Audit Committee failed to engage in any investigation to determine who these
unnamed Hollinger directors were, or whether their affiliation with Horizon had any effect on the
terms of the transactions .
187. Lord Black was finally forced to define his ownership and control of Horizon i n
defense of a lawsuit brought by Paul Winkler, who was wrongly terminated as publisher of a pape r
owned by Hollinger Inc, Winkler worked for the Kelowna Capital News, a paper owned b y
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Hollinger Inc. that was in a fierce fight for subscribers and advertising dollars with archrival Darby
Courier, a paper purchased from Hollinger by IZorizon . Winkler alleged in his wrongful termination
suit that Radler and other Hollinger Inc_ executives directed business to and supported the Darby
Courier to the detriment of the Capital News, and then fired Winkler .
188 . Winkler prevailed and won $160,000 . He also was able to get Black to concede tha t
he and Radler each owned 24% ofHorizon with the remainder held by others connected to Hollinger .
As reported in the November 19, 2003 issue of the Globe and Mail and in the Special Commi ttee
Complaints , Black and Radler each own 24% of Horizon plus additional interests through affiliated
companies giving them 50% ownership and complete control over Horizon . However, these facts
were not disclosed to the Company 's shareholders in its SEC filings touting the sales of newspaper
assets to Horizon .
2. Bradford Publishing Company
189. Hollinger also sold newspapers to another company -Bradford Publishing Compan y
("Bradford") - which had affiliations with Lord Black which were not disclosed to Hollinger's
shareholders . In 2000, Hollinger sold four newspapers (the Bradford Era, the Salamanca Press, the
Salamanca Pennysaver, and the Olean Times Herald) to Bradford for $37 .559 million. The 2001
Proxy Statement disclosed only the following with respect to this transaction :
Effective July 20, 2000, the Company sold four properties of theCompany's U .S. community newspaper group for an aggregateconsideration of approximately $38 million to Bradford PublishingCompany, a company formed by a former Director and Vice Presidentof American Publishing . Certain members of the Board of Directorsof the Company are shareholders of such company . The transactionwas unanimously approved by the Audit Committee and theindependent Directors of the Company as a market value transaction ..
190_ The 2001 10-K provided even less information , stating that :
the Company sold fourU.S. Community Newspapers for an aggregateconsideration of $38 million to Bradford Publishing Company, acompany formed by a former U .S. Community Group executive andin which some of the Company's directors are shareholders. Theterms of this transactions were approved by the independent directorsof the Company .
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191 . The 2002 10-K contained almost identical language regarding the asset sales to
Bradford .
192. Unbeknownst to Hollinger' s shareholders , these representations were false an d
incomplete, as they did not disclose that Bradford was able to purchase Hollinger's newspapers onl y
because it received financial assistance from Hollinger . The reason Hollinger provided the financin g
- Lord Black and Radler owned 50% of Bradford and controlled it - was also concealed .
193 . It was not until Hollinger filed its 2003 Proxy Statement on March 31, 2003 that th e
Company even suggested that the July 20, 2000 transaction with Bradford was at least partially
financed by Hollinger. In that filing, Hollinger stated that "[a]s reflected in the Company's financial
statements, as of December 31, 2002, there is due and owing to the Company from Horizon and
Bradford, respectively, $4 .9 million plus accrued interest and $5 .9 million." The shareholders were
left to guess why Bradford owed Hollinger anything .
194. The Company's 2002 10-K (filed on March 31 , 2003) made the following belate d
disclosure of the financing provided to Bradford :
[W]e sold four U.S_ Community Newspapers for an aggregateconsideration of $38 million to Bradford Publishing Company, acompany formed by a former U .S. Community Group executive andin which some of our officers are shareholders. Our independentdirectors approved the terns of this transaction .
Bradford Publishing Company, a company in which certain of theCompany's officers are significant shareholders, owes the Company$4.1 million at December 31, 2002 . Such amount represents thepresent value of the remaining amounts owing under a non-interestbearing note receivable granted to the Company in connection witha non-compete agreement entered into on the sale of certainoperations to Bradford Publishing Company during 2000 . The notereceivable is unsecured and due over the period to 2010, andsubordinated to Bradford's lenders .
This filing did not disclose the material facts that Lord Black and Radler owned and controlle d
Bradford. The filing was also misleading in its failure to disclose that, by that time , Bradford wa s
significantly in arrears on its payments on the note .
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195 . Recent news articles and filings by the Special Committee in the Illinois and New
York federal court actions provided shareholders with additional information about the nature of the
financing provided to Bradford and about Lord Black's connection to Bradford- The Wall Street
Journal reported on October 3 and November 18, 200 .3 that Hollinger gave Bradford a sweetheart
financing deal in the form of an unsecured note due in 2010 . Additionally, while the 2001 Proxy
Statement misleadingly assured investors that the Bradford transactions had been approved by
independent directors, the Special Committee Complaints and the Cardinal Complaint filed in
Delaware Chancery Court disclosed that the members of the Board had undisclosed conflicts of
interest that prevented them from exercising independent business judgment.
196 . According to those complaints, Radler presented this transaction to the Audit
Committee on May 11, 2000, . During this meeting, Radler advised the committee of the impending
sale of certain community newspapers to Bradford, a company in which "certain members of the
Board of Directors and senior management of the Company would be stockholders-" Radler
revealed that the Company had not shopped its newspaper properties to any third party and that the
price had already been established by Lord Black .
197 . As stated in the Cardinal Complaint, Radler distributed to the members of the Audit
Committee a memorandum drafted by Stradler, a Hollinger employee, which stated that Stradler
"believe[d] [that Radler] promised John Satterwhite (the son of the person from whom the
newspapers were purchased) that the properties would never be sold or split," that If serious due
diligence was performed by a third party, we would be forced to pay off .John in a handsome
manner," and that attempting to sell "these properties to an`outsider' would greatly reduce the value
Hollinger would receive ." Neither Radler nor anyone else provided any support for the claims in
Stradler's memorandum, nor did the Audit Committee ever ask for such substantiation .
198 . The Audit Committee also failed to engage in any inquiry or analysis of the fairnes s
of the purchase price for the newspaper properties to be sold to Bradford- The purchase price ha d
already been negotiated by Black with himself (as shareholder of Bradford) . The purchase price for
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Hollinger's newspapers included a $6 million non-compete agreement with Hollinger, though the
minutes of that meeting do not reflect any discussion of who would receive the non-compete
payments- Unlike other transactions, where Lord Black and his associates received their non-
compete payments up front, Hollinger instead received a non-interest-bearing ten-year note for the
payments which was subordinated to Bradford's lenders. Thus, the vehicle for the interest-free
financing was the Company's agreement not to compete with the sold properties, to which $6 million
of the purchase price was allocated . Hollinger itself was financing Bradford's purchase of the
Company's assets, and the non-compete payment, which represented 16% ofthe purchase price and
would not be fully paid until ten years later, significantly reduced the effective price paid by
Bradford .
199 . The Audit Committee also failed to conduct any inquiry into Bradford's ability t o
repay the note. Had the committee investigated Bradford's creditworthiness, it would have
discovered that Bradford had borrowed $22 million from Bank One to help pay the remainder of the
purchase price . Radler allowed Bradford to consent to certain restrictions in this credit facility that
precluded Bradford from making payments to Hollinger under certain circumstances . An April 2000
memorandum from Roland McBride, a senior financial officer at Hollinger, to Radler explained that
"the non-compete payments can only be made as long as the Total Leverage Ratio is 4 to 1 or less
(year 2003 and beyond) or the EBITDA is at least the amount listed ." Thus, the Company's $6
million note was subordinated to Bradford's $22 million credit facility which contained restrictions
that could preclude Bradford from making its annual $600,000 payments to Hollinger . These facts
were not disclosed to investors
200 . Notwithstanding the inherent conflicts of interest in the Company selling its asset s
to an entity owned and controlled by Lord Black and other Hollinger executives, the Audit
Committee unanimously approved the sale of Hollinger's assets to Bradford without further inquiry .
The Audit Committee did not attempt to verify the claims made by Stradler and Radler, or discuss
how the purchase price was negotiated or whether it was fair . The committee did not even inquire
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as to who were the "certain members of management and the Board of Directors" who had
ownership stakes in Bradford, or ask why it was in the Company's interest to sell its assets, and why
they should be sold to Bradford . Nor did the committee even deign to investigate Bradford's ability
to repay its significant loan from Hollinger,
201 . The Company did not inform the shareholders of the complete lack of care and
inquiry by the Audit Committee in its review and approval of the Bradford transaction . The
shareholders were not aware that Lord Black, and not the Audit Committee, had negotiated the
transaction, and that the committee simply rubber-stamped the deal to sell properties to a company
in which Lord Black and other Hollinger officers and directors owned shares . These facts would not
be revealed to the shareholders until the Cardinal Complaint and Special Committee Complaints
were filed against Lord Black and others years later .
202. In fact, Bradford has not made all of its $600,000 annual payments to Hollinger. As
of May 2004, Bradford should have made at least three $600,000 payments, totaling $1 .8 million.
However, Bradford has paid only $700,000, $100,000 of which was paid in December 2002, and
$600,000 of which was paid in October 200.3 .
E. CANWEST'S MANAGEMENT SERVICES AGREEMENT WITH RAVELSTO N
203 . In connection with Hollinger's sale of certain newspapers and related assets to
CanWest for $2 .1 billion, Ravelston entered into a management services agreement with CanWest
and National Post pursuant to which it agreed to continue to provide management services to the
Canadian businesses sold to CanWest in consideration for an annual fee of $4 million payable by
CanWest . Furthermore, CanWest agreed to pay Ravelston a termination fee of Cdn . $45 million in
the event that CanWest chose to terminate the management services agreement or Cdn . $22 ..5 million
in the event that Ravelston chose to terminate the agreement . Incredibly, all of these payments were
in addition to the $25,200,000 non-competition fee received by Ravelston in the Calffest transaction
(of the total $53,000,000 non-competition fees paid) . As explained below, the terms of thi s
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agreement were not disclosed by the Company until April 2002 when Hollinger filed its 2001 10-K,
Even then, the disclosure was misleading and incomplete .
204. In a press release first announcing the CanWest transaction dated July 31, 2000,
Hollinger stated the following :
Through its [Hollinger's] 15% shareholding in CannWest, its 50%direct interest in the National Post and as continuing manager of theseassets, Hollinger will continue to participate in the future growth andexploitation of the franchise value of the assets in conjunction withCanWest's television, cable channel, radio and other Canadian andinternational media assets .
This is an absolute falsehood as the management services contract was for the benefit of Ravelston,
not Hollinger, even though Hollinger was the owner of the assets sold to CanWest . Additionally,
Ravelston would not provide any services to CanWest, but would be paid by CanWest pursuant to
the management services agreement .
205 . On August 14, 2000, the Company filed with the SEC a Form 10-Q which describe d
the CanWest management services agreement as a tempora ry arrangement to facilitate the chang e
in ownership and control of the newspapers sold by Hollinger . The August 14, 2000 10-Q state d
only the following with respect to this agreement :
With respect to the other newspaper assets being sold to CanWest,Mr. Black and his associates will enter into a management servicesagreement for at least 17 months in order to ensure operatingcontinuity and to facilitate a smooth transition to the newarrangements .
This was untrue . Contrary to the Company's public representations, Lord Black and his cronies
intended to benefit from the CanWest management services payments for the indefinite future .
Indeed, as reported in the December 19, 2003 issue of the Financial Times, CanWest remains
obligated under an existing management services agreement to make payments to Ravelston .
Furthermore, the August 14, 10-Q failed to disclose Ravelston as a principal beneficiary of this
agreement .
206. On December 1, 2000, the Company filed with the SEC a Form 8-K whic h
incorporated as exhibits the asset sales agreements for the CanWest transaction , Although the asset
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sales agreements reference the Ravelston management services agreement, the Ravelston agreemen t
itselfwas not incorporated in this document and has not been publicly disclosed . The assets sales
agreement reproduced in the December 1, 2000 8-K states the following regarding related-party
transactions :
4,36 INTER-AFFILIATE ARRANGEMENT S
Schedule 4 .36 sets forth a complete list of all Contracts between andamong Ravelston, Hollinger Inc., Hollinger, any Affiliate orsubsidiary of Hollinger and the Excluded Businesses relating to thePurchased Businesses and the National Post Business. Except asdisclosed on Schedule 4 .36, all such Contracts are on reasonablecommercial terms that are not less advantageous to any pasty than ifsuch Contract had been obtained from a Person or company dealingat arm's length with such party . A] I such Contracts may be terminatedby CanWest upon not more than 30 days prior notice without bonusor penalty .
The Schedule 4 .36 referenced in the asset sales agreement was not attached to the 8-K or to any other
public filings by the Company.
207 . The December 1, 2000 8-K, as well as the Company's prior disclosures regarding the
CanWest transaction (beginning with the July 31, 2000 announcement), are all materially false in
their failure to disclose that Raveiston would not, in fact, provide any services to CanWest pursuant
to the management services agreements but would nevertheless be paid for such services, .
Additionally, the following information regarding the management services agreements were not
disclosed to the shareholders : (i) CanWest originally proposed that the post-closing management
services agreement would be with Hollinger, but Lord Black unilaterally decided that the agreement
would be with Ravelston ; (ii) CanWest rejected as unreasonable and excessive the proposed
Ravelston post-closing annual management services fee that Lord Black originally proposed, and
only agreed to pay approximately 32% of that proposal ; (iii) the proposed management fee that
CanWest rejected as unreasonable and excessive was approximately the amount that Ravelston had
been charging Hollinger to manage those assets ; and (vi) Lord Black and Radler negotiated for
themselves an annual management fee and a termination fee paid by CanWest if it were to terminate
the management services agreement ($30.3 million) or even if Ravelston were to terminate ($15 . 1
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million). These filings are also misleading in their failure to disclose that the agreements benefitte d
Lord Black and the other owners of Ravelston .
208 . The same material information omitted from the December 1, 2000 8-K was als o
omitted from the Company's 2000 10-K; indeed, the 2000 10-K does not even mention th e
Ravelston management services agreement. The 10-K stated only the following with respect to th e
CanWest deal :
On November 16, 2000, the Company and its affi liates , Southam andHollinger L.P. ("Hollinger Group ") completed the sale of most of itsCanadian newspapers and related assets to CanWest . Included in thesale were the following assets of the Hollinger Group :
• a 50% interest in National Post, with the Company continuingas managing partner ;
• the metropolitan and a large number of communitynewspapers in Canada (including the Ottawa Citizen, TheVancouver Sun, The Province (Vancouver), the CalgaryHerald, the Edmonton Journal, The Gazette (Montreal), TheWindsor Star, the Regina Leader Post, the Star Phoenix andthe Times-Colonist (Victoria) ; and
• the operating Canadian Internet properties, includingcanada.com.
The sale resulted in the Hollinger Group receiving approximatelyCdn. $1 .7 billion ($1 .1 billion) cash, approximately Cdn . $425million ($277 million) in voting and non-voting shares of CanWestat fair value (representing an approximate 15 .6% equity interest and5.7%voting interest) and subordinated non-convertible debentures ofa holding company in the CanWest group at fair value ofapproximately Cdn . $697 million ($456 million) . The aggregate saleprice of these properties at fair value was approximately Cdn . $2 .8billion ($1 .8 billion), plus closing adjustments for working capital atAugust 31, 2000 and cash flow and interest for the period SeptemberI to November 16, 2000 which in total approximates an additional$40.7 million . $972 million of the cash proceeds from this sale wereused to pay down the Company's Bank Credit Facility-
The 10-K is materially false and misleading in its failure to provide to the shareholders th e
information contained in the immediately preceding paragraph regarding the management service s
agreement with CanWest .
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209. It was not until April 1, 2002, when the Company filed its 2001 10-K, that Hollinge r
made any disclosure about the terms of the Ravelston management services agreement . The 200 1
10-K stated :
In connection with the sale to CanWest, Ravelston, a holdingcompany controlled by Lord Black through which most of his interestin the company is ultimately controlled, entered into a managementservices agreement with CanWest and National Post pursuant towhich it agreed to continue to provide management services to theCanadian businesses sold to CanWest in consideration for an annualfee of Cdn . $6 million ($4 million) payable by CanWest . In addition,CanWest will be obligated to pay Ravelston atermination fee of Cdn .$45 million, in the event that CanWest chooses to terminate themanagement services agreement or Cdn . $22.5 million, in the eventthat Ravelston chooses to terminate the agreement (which cannotoccur before December 31, 2002) . . . . The Company's independentdirector's have approved the terms of these payments .
210. The above disclosure is false and misleading because Hollinger failed to disclose that
the management services contract was for the benefit of Ravelston, not Hollinger, even though
Hollinger was the owner of-the assets sold to CanWest, and that Ravelston would not even provide
any services, but would be paid under the management services agreement . The 2001 10-K also
falsely represents that this agreement was approved by "independent directors," when that was not
the case, as the directors' conflicts of interest and divided loyalties precluded them from exercising
independent business, judgment .
211 . Additionally, as explained herein, the Audit Committee and Board completely faile d
to conduct any due diligence or inquiry regarding the CanWest management services agreements
prior to reviewing and purportedly approving of these agreements . The Audit Committee and the
Board never asked how the management fees were negotiated or determined, nor did they require
or obtain any opinion on the fairness of these fees, Hollinger's independent directors did not have
the information necessary for them to make an informed review of the CanWest management
services agreement or its fairness to Hollinger's shareholders . Accordingly, the "independent
directors" were in no position to "approve" the agreement, as represented in the 2001 10-K .
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F. THE TELEGRAPH GROUP AND OTHER SELF-DEALING TRANSACTION S
212 . Hollinger's shareholders for years were told that the full Board controlled all
decisions regarding the declaration of dividends . The 2001 10-K states that dividends are
discretionary, are declared "by the Board," and that the ability of Hollinger's subsidiaries to pay
dividends "are subject to statutory restrictions and restrictions in debt agreements." However, this
statement is false as, unbeknownst to investors, Lord Black, and not the entire Board, determined
when and if dividends were declared by Hollinger and/or its subsidiaries .
213 . Hollinger's 2002 and 2003 Proxy Statements contain disclosures about Lord Black's
compensation but fail to contain any mention of any dividends being paid to Lord Black by Hollinger
subsidiaries .
214, Hollinger's 2002 Proxy Statement reported that Lord Black was paid a salary of
$443,283, a bonus of $250,000, options on 400,000 shares of Hollinger stock and paid $123,302 in
"other compensation" associated with his service on the boards of various Hollinger affiliated
companies .
215. Hollinger's 2003 Proxy Statement, filed with the SEC on March 31, 2003, reporte d
that Lord Black's annual compensation was $462,460 plus options on 375,000 shares of Hollinger
stock and $248,000 in "other compensation" (based upon Lord Black's service on the Boards of
Hollinger-owned newspapers) . The 2003 Proxy statement also states that Lord Black receives
salaries paid by the Telegraph Group (a wholly-owned indirect subsidiary of Hollinger incorporated
in England that publishes the Daily and Sunday Telegraph newspapers) and Ravelston under
management services agreements . The Company did not disclose the amount paid to Lord Black by
the Telegraph Group, but characterized that payment as "salar[y] ." There is no mention whatsoever
in the 2002 or 2003 Proxy Statements of Lord Black being paid any dividends by the Telegraph
Group .
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216. The Company' s disclosure of the compensation paid to Lord Black was false in that
it failed to disclose millions of dollars paid to Lord Black in the form of extraordinary dividends b y
the Telegraph Group .
217. On November 29, 2003, the Financial Times reported that Lord Black had receive d
more than £53 million ($93 million) in dividends in 2002 from the Telegraph Group . These
dividend payments stand in stark contrast to the modest £600,000 in dividends paid in the preceding
year. Moreover, the Financial Times reported that this payout exceeded the Telegraph's pre-tax
profits by 37 percent- The Financial Times reported that, during the past three years, the Telegraph
Group has paid more than £4 million in management services fees to entities owned by or affiliated
with Lord Black - in other words, fees that are similar to the Ravelston management services
agreement fees paid by Hollinger-
218_ The reason the Telegraph Group suddenly paid such enormous dividends to Lord
Black is now clear -- Lord Black needed the cash, and he dictated that a check be made out to hi m
in the form of dividends .
G. HOLLINGER'S INFLATION OF CIRCULATION FIGURE S
219. In public filings, Hollinger disclosed to investors the circulation figures of it s
newspapers which, according to the Company, rose (for the most part) during the Class Period .
Based upon the large (and generally growing) number of consumers reading its newspapers,
Hollinger was able to charge higher rates for the placement of advertisements in its papers, and it
reported growing revenues based on its higher circulation figures and advertising revenue . The
market price of the Company's stock, in turn, increased on this news .
220. However, Hollinger throughout the Class Period artificially inflated its reported
circulation figures by 25% or more in a massive and pervasive scheme to defraud advertisers and
investors alike. This scheme, orchestrated by Radler, was carried out in numerous and diverse
distribution centers for Hollinger's newspapers, particularly the Sun Times . The Company's
employees, under the direction of distribution managers (who ultimately reported to Radler) boldl y
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disposed of newspapers secretly so that the discarded newspapers would not be counted by the Audi t
Bureau of Circulation ("ABC"), an organization which monitored circulation figures and to which
Hollinger reported its circulation figures . The Company's employees under Radler's direction
counted unsold, returned papers as sold, and even used power failures (on which days circulation
figures were not reported) in an attempt to hide decreasing circulation figures ,
221, At the beginning of the Class Period, on November 1, 1999, Radler stated that he "i s
particularly pleased by the success of the National Post" and that "circulation has surpassed our
wildest dreams," Radler did not say that the reported circulation figures were, like dreams, pure
fiction .
222. In the Company's 1999 10-K, the Company stated :
CHICAGO GROUP
The Company's Chicago Group consists of three daily and 77 non-daily newspapers including the Chicago Sun-Times, the eighth largestcirculation metropolitan daily newspaper in the United States, thePost Tribune in Gary, Indiana and the Daily Southtown . The ChicagoSun-Times is published in atabloid format and has become Chicago'sbest read newspaper, attracting some 1,684,000 readers every day .
CIRCULATION
Circulation revenues are derived from single copy newspaper salesmade through retailers and vending racks and home deliverynewspaper sales to subscribers . Approximately 65% of the copies ofthe Chicago Sun-Times sold in 1999 were single copy sales .Approximately 70% of 1999 circulation revenues of the Chicago areasuburban newspapers were derived from subscription sales .
The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 472,000 and 405,000, respectively, the dailyand Sunday paid circulation of the Daily Soutlhtown is approximately52,000 and 60,000, respectively, the daily and Sunday paidcirculation of the Gary Post-Tribune is approximately 63,000 and68,000, respectively, and the aggregate non-daily paid and freecirculation ofthe Chicago area suburbannewspapers is approximately254,000 and 492,000, respectively .
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223 . Based on the Company's purportedly growing circulation figures, Hollinger reported
in its May 2000 10-Q that the operating revenue from circulation in the Chicago Group was
$20,070,000 in 2000, up from $19,971,000 in 1999 . Those revenue figures, like the circulation
figures in the 1999 10-K, were false, as they resulted from a secret scheme to artificially inflate
circulation figures through improper means, including secretly throwing out newspapers . However,
this false reporting fooled investors as well as purchasers of'Hollinger's assets .
224. On August 1, 2000, the National Post published an article detailing the proposed sale
by Hollinger of a stake in the National Post to CanWest Global . CanWest chairman Izzy Asper
trumpeted the circulation numbers of Hollinger's National Post, stating :
What CanWest snared is a stake in a newspaper property with anincreasing circulation and rising revenues . According to interimunaudited figures for the Audit Bureau of Circulation expected to bereleased in the next few weeks, National Post's paid circulation hasincreased 28% to 335,000 for the six-day week and 390,000 forSaturday-
225 . Hollinger continued to report false circulation figures,. The Company reported in it s
August 2000 10-Q the following information pertaining to its Chicago Group :
Circulation revenue in the second quarter 2000 was $19 .8 million,down $0 .9 million or 4.4% from 1999 . In the six months ended June3 0, 2000 circulation revenue was $39 .9 million, down $0.8 million or2.0% from 1999 . Although circulation revenue declined comparedwith 1999, average daily ABC circulation was up as of the end ofJune 2000 compared with June 1999 .
226 . The Company reported in its November 10-Q that :
The average ABC circulation for the Chicago Sun-Times reflects anincrease in circulation of about 1% for the six months endedSeptember 30, 2000 compared with the same period in 1999 asprovided by the September Publisher's Statement.
227 . The Company reported in its .2000 10-K the following :
The Chicago Sun-Times is published in a tabloid format and hasbecome Chicago's best read newspaper, attracting 1 .7 million readersevery day .
Approximately 65% of the copies of the Chicago Sun-Times sold in2000 were single copy sales . Approximately 78% of . 2000 circulation
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pomp
revenues of the Chicago area suburban newspapers were derived fromsubscription sales .
The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 478,000 and 393,000, respectively . The dailyand Sunday paid circulation of the Daily Southtown is approximately51,000 and 60,000, respectively- The daily and Sunday paidcirculation of the Post Tribune is approximately 64,000 and 67,000,respectively . The aggregate non-daily paid and free circulation of theChicago area suburban newspapers is approximately314,000 and975,000, respectively . The average paid daily and Sunday circulationof the recently acquired Copley Chicago Suburban newspapers isapproximately 105,000 and 92,000, respectively .
The Chicago Sun-Times is the ninth largest metropolitan dailynewspaper in the United States, based on circulation .
However, the circulation and revenue figures in the Company's 10-K and 10-Q filings for 2000 were
materially false and misleading, as they were propped-up by a widespread and coordinated effort at
the Company to inflate its circulation figures through illicit means. The Company's subsequent
public filings during the Class Period were also false and misleading in their complete
misrepresentation of the Company's circulation figures .
228. The September 20011 O-Q reported that "Chicago Group Circulation" for the quarte r
was $22,950,000 as compared to the same quarter the prior year and that the average circulatio n
volume at the Sun Times increased 3 .5% compared with the third quarter of 2000 .
229. The Company reported in its 2001 10-K :
The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 480,000 and 383,000, respectively . TheChicago Sun-Times has had consecutive increases over the past twoyears in the paid daily circulation. The daily and Sunday paidcirculation of the Daily Southtown is approximately 48,000 and383,000, respectively . The Chicago Sun-Times has had consecutiveincreases over the past two years in paid daily circulation . The dailyand Sunday paid circulation of the Daily Southtown is approximately48,00.0 and 55,000 respectively. The daily and Sunday paidcirculation of the Post-Tribune is approximately 64,000 and 69,000,respectively- The aggregate daily and Sunday paid circulation of theChicago Suburban Newspapers is approximately 98,000 and 111,000,respectively, The aggregate free circulation and bi-weekly pai d
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PROM PRO"
circulation of the Chicago Suburban Newspapers is approximately472,000 and 20,000, respectively .
The Audit Bureau of Circulation reported average daily circulationfor the Chicago Sun Times for the fourth quarter of 2000 reflected anincrease of approximately 6,000 compared with the fourth quarter of1999. However, circulation revenue was lower resulting from pricediscounting to building and maintain market share-
230. The Company reported in its Form I0-Q filed on March 31, 2002 (the "March 2002
10-Q") that :
Circulation revenue in 200 .2 was $22 .9 million compared with $23 .5million in 2001, a decrease of $0 .6 million or 2 .6%. The decreasewas primarily at Chicago Sun-Times and results almost entirely fromthe price discounting. However, the Chicago Sun-Times averagedaily circulation in the first quarter 2002 was approximately 1,900higher than the 480,818 average daily circulation in the first quarter2001 . Printing and other revenue was $2.5 million in 2002 comparedwith $3 .4 million in 2001, a decrease of $0 .9 million. .
231 . All of these disclosures regarding the Company's circulation were false an d
misleading . However, they fooled investors and, journalists alike,.
232. On November 2, 2002, National Post's Financial Post & FP Investing (Canada)
reported :
Last year, Hollinger sold its biggest Canadian assets, including thispaper, to Izzy Asper's CanWest Global Communications Corp . for$3,2-billion, netting a $920-million gain over their original purchaseprice years before . Now, Hollinger's "paltry" assets are stillimpressive : The flagship The Daily Telegraph in Britain, the ChicagoSun Times and the other Chicago papers with combined circulationof 1 .9 million, the prestigious Jerusalem Post and hundreds moresmall papers south of the border . There are roughly 6,000 employeesand Davis is the ands-on publisher of the Jerusalem and Chicagopapers . . . . Hollinger's business strategy has been to buy mediocrepapers or basket cases, then quickly, some say ruthlessly, turn themaround for a profit. Along the way, David earned the nickname"happy hacker ." In Canada, journalists invested a new verbsynonymous with being downsized : "Radlerized . "
233 . On February 27, 2003, Canada News Wire Ltd . reported :
About Hollinger International Inc . . . . The Company 's principal assetsare the Chicago Sun-Times, which has the second highest circulationand the highest readership of any newspaper in the Chicagometropolitan area, more than 1000 titles in the greater Chicago
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metropolitan area, and The Daily Telegraph, the highest circulationbroadsheet daily newspaper in the United Kingdom and in Europe,and its related publications in the United Kingdom . The Companyalso owns The Jerusalem Post in Israel . In addition, Hollinger has anumber of minority investments in various Internet and media-relatedpublic and private companies .
234. On June 15, 2004, Hollinger announced that its Audit Committee is conducting an
internal review of practices that resulted in an overstatement of circulation figures by the Sun-Times
over the past several years- The Company stated that it does not expect to issue any further
announcements until the Committee concludes its investigation . Also on June 15, Hollinger Inc .
issued a statement that it had no knowledge of unusual circulation practices, that its executives had
favored reducing subsidized circulation, and that it advised Hollinger International against a recent
cover price increase (from $0,35 to $0.50) for the Sun-Times.
235 . The Chicago Tribune published stories in the next few days following Hollinger' s
announcement, reporting that "sources close to the paper said the Sun-Times had overstated its daily
newsstand sales by at least 25% or more than 78,000 copies a day, for at least two years and possibly
longer" which had the effect of "boosting profits while overcharging its customers ." As stated in
a June 16, 2004 Tribune article, a Hollinger spokeswoman revealed that "the audit committee had
reached a point in its review they knew the circulation figures were materially overstated back
several years," industry experts said that the Sun-Times may have to pay refunds to advertisers, and
Hollinger International may have to restate its financial results . The Tribune article described the
"circulation schemes [as] involving} counting as sold papers that never got into readers' hands ."
A former top executive at the Sun-Times said that "[t]ens of thousands of papers were going out in
the morning and coming back at night." The article described a widespread scheme at the Sun-
Times and noted that "[t]he Sun-Times circulation scandal fell under the watch ofRadler, the former
publisher who is accused of taking millions of'dollars in unauthorized payments ." The Audit Bureau
of Circulations ("ABC"), to whom newspapers report their circulation bi-annually, stated that it is
launching its own investigation-
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236. The Tribune provided further details of the scheme on June 17, 2004 . According t o
unnamed sources quoted in that article, "[t]here was tremendous pressure to keep numbers high" at
Hollinger International . The sources said that "a number of programs geared to `manufacturing the
numbers in the field' were employed in several occasions," including instances where "distributors
were compensated to keep returned newspapers or to Just `get rid of papers ."' The internal
investigation which revealed the inflation of circulation figures was initiated afterthe increase in the
newsstand price from $0 .35 to $0.50, and the discovery of an apparent discrepancy between
circulation numbers and revenue figures .
237. A June 21, 2004 article in the Wall Street Journal provided additional detail s
regarding the scheme at Hollinger. Circulation "officials" at the Sun-Times apparently "set up sham
sales accounts and told distributors to trash newspapers in a complex effort to inflate circulation ."
According to the article, "[ojne method used was to count unsold papers returned to Sun-Times
printing plant as being received on days when official circulation figures weren't being compiled,
rather than reducing sales totals for days when figures were reported to circulation authorities ."
Other facets of the scheme involved "taking advantage of so-called throw-out days" which "occur
when an event such as a power failure, storm or printing plant failure impedes distribution, causing
that day's circulation figures not to be counted in the data compiled for ABC ." Throw-out days were
also used in instances where there were no unusual event (such as a power failure) :
For example, if Tuesday was throw-out day, papers returned onThursday would instead be attributed to Tuesday, since the Tuesdaynumber wasn't going to be counted in official tallies .
A person within the circulation department at the Sun-Tines said thatif drivers came back to the office with say, 500 returns, circulationofficials often would mask down 400 returns . The disparity would bereconciled on days such as holidays and snow days, when ABC didn'tmonitor circulation .
This person said Sun-Times circulation officials set up fake accountsat the Sun-Tin}es-owned agencies that distributed papers to homes,stores and vending machines around Chicago and its suburbs .Drivers took papers to the agencies from the Sun-Times's printingplant. Circulation officials "told the guys at the agencies to junk the
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papers . They said, `We don't care what you do with them . Don'tsend them back here,"' according to this person .
This person estimates that there may be as many as 100 agencies, andthat 200 to 300 papers could have been trashed at each of theagencies, resulting in 20,000 to 30 ,000 papers being trashed daily .The Sun-Times repo rted average weekday circulation of 481,798 andaverage Sunday circulation of 372,527 for the six months endedSeptember 2003 .
238 . Former 1-Hollinger executives who worked in the circulation and operations
departments of the Sun-Times during the Class period have provided additional and corroborating
information regarding the circulation fraud at Hollinger . A former Sun-Times national account
manager (who worked at the Sun-Times from 1995-2000) and an individual who worked in
Hollinger's circulation department stated that the Company set up fake accounts at distributors,
which Hollinger controlled, to inflate circulation figures at the Sun-Times, According to these two
internal sources, Hollinger caused the drivers to take papers to Hollinger-controlled distributors who
would dispose of the papers . The former Hollinger national account manager knew about the
circulation fraud because this source was directly involved in soliciting advertising business for the
Company's newspapers . These sources estimate that Hollinger used over 100 of these sham
distributors to dispose, rather than sell, Hollinger's papers . Each of these sham distributors disposed
of approximately 200-300 papers daily, thereby materially overstating the Sun-Time's circulation
by approximately 20,000-30,000 papers daily .
239 . According to a former Hollinger Account Executive, I-Iollinger also manipulated th e
circulation results of other Hollinger-owned papers . This internal source worked for newspapers
acquired by Hollinger and then worked for Hollinger after those acquisitions . She said that after
acquiring the Aurora Beacon, Naperville Sun, Elgin Courier and Waukegan News Sun from Copley
in 2002, Hollinger caused the newspapers to artificially inflate their circulation and readership
through a variety of improper accounting tricks . For example, after Hollinger acquired the Elgin
Courier in 2000, it started asking advertisers to print more inserts for its paper . According to the
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former Account Executive, after this increase in printing, "there were so many inserts left over, [the
advertisers] were being charged for inserts for papers that did not exist" or were not sold .
240 . Several sources described Radler's role in the circulation scheme . The former
national account manager said that an editor in the editorial department named Mark Hornung was
fired for plagiarism but was rehired by Radler as the vice president of circulation, though the former
national account manager believed Hornung was "shady ." A former Sun-Times circulations
promotions coordinator at Hollinger from 1992 to 1998 confirmed that Hornung was fired for
plagiarism. She also said that Radler was the individual who re-hired Hornung and placed him in
a top position in the circulation department. Hornung even went to Hollinger's headquarters, where
Radler worked, for a "training session" before commencing his duties as vice president of
circulation . According to the former Sun-Times circulation promotion manager, Hornung under
direction from Radler set a new tone for the circulation department - the fraudulent counting and
reporting of'circulation figures .
241 . Radler maintained his tight control ofthe circulation department, with in-person visits
and through Hornung. As stated by the former Sun-Times circulation promotions coordinator,
Radler attended all the sales meetings and "gave all the big speeches . "
242. The discovery of Hollinger's inflation of its circulation figures has prompted
advertisers to sue the Company . As reported by United Press International on June 17, 2004, various
"businesses that bought thousands of dollars in advertising in the Sun-Times filed class-action
lawsuits charging fraud, deceptive trade practices and unjust enrichment . Newspaper and magazine
advertising rates are based on circulation, and settlements could cost financially ailing Hollinger
International millions in refunds . "
H. THE TRUTH BEGINS TO EMERGE AND THE SPECIA LCOMMITTEE AND THE SEC COMMENCE THEIR INVESTIGATIONS .
243. The Company's disclosures regarding self-dealing and misappropriation of Company
money by Lord Black and his accomplices began part-way through the Class period and, with respect
to the Company's circulation figures, continued beyond the end of the Class Period . During the
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Class Period, the Company began to dribble out some information regarding the secret payments o f
non-compete fees and the Company's deals with entities owned and controlled by Black and Radler .
For instance, the Company disclosed in its 2001 Proxy Statement that Horizon was owned by certain
unnamed Directors and senior management of Hollinger, and a year later in its 2002 Proxy Statement
added the information that those unnamed individuals actually controlled Horizon .
244. Institutional shareholders gradually learned that Lord Black had operated Hollinger
as if it were his own piggy bank . Investors grew increasingly outraged and ultimately (in or about
May and June 2003) demanded an investigation and finally forced the Board to act like the public
watchdog it was supposed to be.
245 . Following the Company's disclosures that non-competes had been paid out of th e
proceeds of the Company's asset sales, the Company's debt was downgraded (it bordered on being
"junk") as was the debt of Hollinger Inc . The long term credit rating of Hollinger Inc . was lowered
to SD by Standard & Poors on May 22, 200.3 . Later, on June 26, 2003, Dominion Bond Rating
Service Limited ("DBRS"), a credit rating agency, announced that the debt rating on Hollinger's
Senior Unsecured notes would be held at "DB low . "
246. On or about June 17, 2003, the Board established a Special Conu-nittee to conduct a n
investigation into the allegations of self-dealing, The Company announced that Gordon A, Paris
("Paris") was appointed Chairman of the Special Committee and initially as its sole member .
Richard Breeden, former Chairman of the SEC, was retained by the corrunittee to head the
investigation-
247. On or about July 24, 2003, the Company announced that Graham W . Savage
("Savage") and Raymond G . H. Seitz ("Seitz") were named to the Board of Directors and both were
appointed as purported independent Dizectors as members of the Special Committee of the Board .
However, Seitz has been a member of the Telegraph Group's advisory body, of'which Lord Black
is the chairman and defendant Colson is chief executive . Savage sits on the board of Canadian Tire
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Corp .. with defendant Atkinson . Atkinson is also one of the executives alleged to have receive d
improper payments from Hollinger.
.248. In mid-November 200.3, Colson publicly admitted that Hollinger was the subject o f
an SEC investigation . As reported in the November 20, 2003 issue of CFO . .com, the SEC ' s probe
includes "Hollinger's star-studded board of'directors ." The Ontario Securities Commission and the
Federal Bureau of Investigation also at that time began investigating Hollinger .
249. On or about November 19, 2003, the SEC issued subpoenas to Hollinger, Hollinge r
Inc. and KPMG for documents .
250. On November 21, 200.3, the members of audit committee of Hollinger's parent
company, Hollinger- Inc., Maureen Sabia, Fredrik Eaton, Allan Gotlieb and Douglas Bassett, each
recommended that Black, Radler, Boultbee and Atkinson resign from Hollinger Inc . However, when
that proposal was rejected, all of these independent directors on Hollinger Inc . resigned from the
board of that company, putting Hollinger Inc, in violation of Canadian securities laws requiring
Canadian companies to maintain an audit committee comprised only of independent directors .
251 . As a result of the Company's concessions that non-compete payments had bee n
secretly paid to Black and Radler, and the mass exodus of independent directors from Hollinger Inc .,
and the enormous pressure put on Black and Radler from institutional investors, Lord Black and
Radler abruptly resigned their executive posts only days before Black would have to certify as CEO
the Company's quarterly SEC filing ; however, Lord Black remained at that time as the Chairman
of the Company and its controlling shareholder. Boultbee was fired . The Company named Paris
interim President and CEO . Although Lord Black and Radler have each agreed to repay Hollinger
a portion of the non-competition payments they received at Hollinger's expense, the amount of
restitution they intend to pay is far less than the hundreds of millions that Lord Black, Ravelston and
Radler siphoned off from the Company . Additionally, Lord Black has reneged on his original
promise and now refuses to repay any of the amounts he stole from the Company .
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1. TIDE SEC AND SPECIAL COMMITTEE FILE COMPLAINTSAGAINST THE COMPANY AND LORD BLACK.
252. On December 22, 200 .3, Lord Black appeared in response to an SEC subpoena for his
testimony. Rather than providing any explanation for his actions, Lord Black refused to testify,
invoking his tight, under the Fifth Amendment of the U .S . Constitution .
253 . On Friday, January 16, 2004, the SEC filed an action against Hollinger and Lord
Black in the United States District Court for the Northern District of Illinois alleging that the
Company issued filings in 1999 through 2001 that contained "misstatements and omitted to state
material facts regarding transfers of corporate assets to certain of Hollinger International's insiders
and related entities ." In that complaint, the SEC identified the various asset sale transactions
described above and the non-compete payments that were made out of the proceeds of those
transactions but (as alleged by the SEC) not disclosed by the Company in its public filings . In
addition to not disclosing those payments, the SEC alleged that Hollinger employees "falsified" and
improperly altered the Company's books and records "in order to rnischaracterize certain payments
as non-competition payments" and also alleged that the Company "failed to have adequate internal
controls in order to ensure that payments were properly approved before they were made and that
public filings were accurate," The SEC also alleged that corporate insiders had tried "to thwart and
obstruct the efforts" of the Board's Special Committee which was investigating the conduct of and
payments to Lord Black and others .
254. In that action, the SEC obtained an order preserving Hollinger's assets and barring
any interference with Hollinger's internal investigation . Hollinger consented to the entry of the
order, which also permanently enjoins the Company from violating the reporting and internal control
provisions of the federal securities laws .
255. Under the order, Hollinger is required to maintain its Special Committee to continue
its investigation of alleged misconduct and to recover and maintain corporate assets . If that
con mittee's authority is impaired in any way, including through a change of control i n the Company ,
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Richard Breeden, the current counsel to the Special Cozrunit-tee, would serve as a court-ordere d
Special Monitor to protect the interests of Hollinger 's shareholders .
256. Also on January 16, 2004, the Special Committee filed its complaint in the U .S.
District Court for the Southern District of New York to recover damages and disgorgement of over
$200 million, plus prejudgment interest, costs and fees, against Lord Black, Radler, Raveiston and
others. The Special Committee Complaint charges that the defendants (including Lord Black,
Radler, Ravelston and Hollinger Inc ..) directed and usurped the Company's assets and opportunities
through systematic breaches of fiduciary duties owed to the Company . The Special Committee
Complaint describes in detail the payments made to Lord Black and others purportedly pursuant to
"non-competition agreements" and the excessive management fees through which the Company was
damaged, The Special Committee filed a parallel action in the U .S. District Court for the Northern
District of Illinois against Lord Black, Radler, Ravelston, Boultbee and Hollinger Inc . where it also
sought over $200 million in damages from the Company's payments of unauthorized non-compete
payments and excessive management services fees . The Special Committee amended its Illinois
Complaint on May 7, 2004 and now seeks over $380 million in damages, together with over $103
million in interest, from various defendants . The Special Committee added as new defendants
various entities owned and controlled by Lord Black and Radler- (such as Horizon and Bradford) and
new individual defendants (including Lady Black and Colson) .
257. The Federal Bureau of Investigation ("FBI") has ,joined regulators at the SEC in
investigating the improprieties at Hollinger. As reported in the March 14, 2004 issue of the Times
Online and in the March 19, 2004 issue of the Chicago Tribune, Federal prosecutors in Chicago,
Illinois have launched their own criminal investigation into whether Black, Radler and others at the
Company illegally took tens of millions of dollars that should have gone to the Company's
shareholders . The FBI, working with the SEC, as served subpoenas to CNHI, PMG, Forum and
other companies that purchased Hollinger's assets, in order to determine whether there is any
evidence that those companies requested personal non-compete deals and earmarked funds from th e
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sales to Black and Radler . The FBI and SEC are also investigating the circumstances surrounding
the S6 million loan disguised as a non-compete payment, made by Hollinger to Black and other
executives at Bradford in 2000 .
J. LORD BLACK ATTEMPTS TO SELL THE COMPANY INAN ATTEMPT TO CONCEAL HIS FRAUD.
258. On January 17, 2004, the day a fter the Special Committee fi led its New York action,
Hollinger announced that Lord Black "has been removed as non -executive chairman of the company,
effective immediately . "
259. As reported in a January 19, 2004 article in the FT Investor, in a letter to Hollinger' s
Board Sunday night, January 18, 2004, Lord Black stated that he did not accept the validity of his
removal . Also on Sunday, Lord Black agreed to sell a controlling interest in Hollinger to a company
owned by David and Frederick Barclay, two British brothers, for about $178 million- As reported
in a January 19, 2004 issue of the New York Times :
The sale amounted to an end run around Hollinger's boardorchestrated by Lord Black. The deal with the Barclays wasnegotiated in secret from the board, further enraging members of thecompany's special committee, which sued Lord Black on Friday, andof the executive committee, which removed him as nonexecutivechairman on Saturday, according to executives close to the company .Those same executives said that Hollinger's lawyers, who hadsuspected that such a deal might be made, were exploring ways toblock it on Sunday evening .
260. On Monday, January 19 , 2004, Lord Black issued a preemptive strike against any
effort to stop his attempt to sell the Company . Lord Black filed suit in the Superior Court of Justice
in Ontario, Canada seeking an injunction to prevent the Hollinger Board from blocking his sale of
the Company and seeking a declaration that the deal he reached with the Barclays was "effective,
valid and binding. ." Additionally, as reported in the January 27, 2004 issue of the Chicago Tribune,
Lord Black had the Board change its bylaws to reduce the power of the Board's Special Committee
constituted of purportedly outside directors . The change substantially limits the power of directors
lined up against Black by invoking a rule that all transactions must be approved by the full Board .
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261- On January 2.3, 2004, the New York Post reported that I-lollinger and its investment
bank began a formal auction process for the Company's major properties, a move designed to block
Lord Black from selling his controlling stake in the Company . According to that article, Hollinger' s
bankers denied the Barclay brothers a book detailing Hollinger's finances .
K. HOLLINGER BRINGS SUIT IN DELAWARE TOENJOIN BLACK'S PROPOSED SALE OF THE COMPANY .
262. On January 26, 2004, Hollinger filed suit in Delaware Chancery Court to block Lord
Black's planned sale ofhis voting control of the Company . Hollinger contends in that suit that Lord
Black's sale of the Company to the Barclays impairs the Company's ability to seek higher bids for
some of its individual newspaper assets- Hollinger is asking the court to undo Black's changes to
the bylaws. The suit seeks the implementation of a poison pill and the eradication of special voting
shares that would enable the Barclays to control Hollinger (as does Black) while owning only 30%
of the Company's equity .
263. Following expedited discovery and a three-day trial, the Delaware Chancery Court
issued its decision on February 26, 2004, preliminarily enjoining the proposed sale to the Barclays
and declaring the bylaw amendments ineffective, Hollinger International . Inc . v. Black, 844 A.2d
1022, 1092 (Del . Ch. 2004), The court also found that Black "misrepresented facts" to the
Company's Board and "breached his fiduciary and contractual duties persistently and seriously" by,
infer alia, attempting to sell the Company without review and approval of that transaction by the
Board or audit committee and by paying himself and others non-compete payments out of the
proceeds of the Company's asset sales, without any review or approval by the Board or audit
committee. Id. at 1030. The court also ruled that Black (arid the Company) made materially false
statements in the Company's public findings by "fail[ing] to identify millions of dollars in non-
compete payments" and by "wrongly describ[ing] when the payments were made and why they were
made." Id. at 1069 . The court's decision was based on a "very extensive" record . Id. at 1058, n.76.
As noted by the court, "[i]n addition to six trial witnesses, many deposition excerpts were entered
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into evidence, as were nearly one thousand exhibits . The parties' total briefing alone approached
500 pages in total ." Id .
L. PLAINTIFFS OBTAIN COPIES OF THE TRIAL EXHIBITS AND OTHERDOCUMENTS PREVIOUSLY UNDER SEAL IN THE DELAWARE ACTION .
264_ following the Delaware Chancery Court's decision, PlaintiQs' counsel attempted to
obtain copies of the exhibits and other documents from the parties in that action, but they refused,
and the clerk of court stated that the court's set of the documents would not be available until the
time for any appeal had run on the court's February 26, 2004 opinion .
265 . Accordingly, on May 21, 2004, Plaintiffs moved to lift the seal on the trial exhibit s
and other documents filed under seal . The Delaware Chancery Court granted that motion on June
29, 2004, and Hollinger's Delaware counsel provided Plaintiffs with copies of the trial exhibits
(about 1,000 separate documents) on ,July 12, 2004.
M. HOLLINGER DISCLOSES THAT ITSCIRCULATION FIGURES WERE OVERSTATED .
266. It was not until over a year after the Company filed its 200 .2 10-K on March 31, 200 3
(at the end of the Class Period) containing disclosures regarding the non-compete payments to Black
and others that the Company finally began disclosing another facet of its fraudulent scheme -- on
June 15, 2004, Hollinger announced that it was investigating internal practices that resulted in an
overstatement of its circulation figures . Subsequent reports revealed that Hollinger had overstated
its circulation figures at the Sun-Times and other newspapers by at least 25% for at least two years
and possibly longer . In response, advertisers filed class action lawsuits against the Company seeking
partial refund of advertising payments made to Hollinger .
N . THE FALL IN THE COMPANY'S STOCK PRICEFOLLOWING DISCLOSURE OF THE FRAUD .
267 . The defendants' fraud caused the Company's stock to trade during the Class Period
at artificially inflated prices . .
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268 . The price of Hollinger's stock was at $10 .08 on the first day of the Class Perio d
(August 1 .3, 1999) . As a result of the dissemination of materially false and misleading information
and/or defendant's failure to disclose material facts, as set forth herein, the price steadily rose and
stayed in the low to mid teens for much of the Class Period - reaching a Class Period high of $17 .06
on August 24, 2000. In May of 2001, there was disclosure (for the first time) of some of the non-
compete payments, and from May 15, 2001 (the filing of the May 2001 10-Q) to August 14, 2001
(the filing of the August 2001 10-Q) the Company's stock trice fell from $15-66 to $12 .86. In late
2001, bolstered by the Company's misrepresentations and omissions regarding the non-competes and
management services fees, the false circulation figures, and, in particular, the misleading statements
in the November 14, 2001 10-Q regarding the sale of two Canadian newspapers to Osprey Media
Group, the stock climbed again to $13 .75 on April 1, 2002 . On April 1, 2002 Hollinger filed its
2001 10-K, and disclosed the existence of non-competes relating to the CanWest and Osprey
transactions . In response, Hollinger's stock fell from $13 .40 on April 2, 2002 to $11 .77 on May 23,
2002, the date of the Company's shareholder meeting . However, the stock price ultimately began
to climb again, in response to Black's public and false statements at the 2002 annual shareholder's
meeting that neither he nor any of the other interested directors had a role in allocating the non-
compete payments, and in response to the continued false inflation of the Company's circulation
figures. On March 3 1, 200.3, when the Company filed its 2002 10-K, the Company disclosed that
non-competes had been paid out of the proceeds of its asset sales to Black and "three senior
executives" and admitted that the Ravelston management services may have been drafted in favor
of Ravelston and thus may be unreasonable and unfair to Hollinger . The Company's stock, which
had closed at $8 .21 the previous trading day (a Friday), dropped to $7 .90 on March 31, 2003 .
269. Thus, in reaction to the increasing amount of disclosures regarding the non -competes
and failures of the Board to approve related party transactions, Hollinger's stock dropped to $7 .90
a share, a $2 .18 decline from the beginning of the Class Period and a $9 .16 decline from the Clas s
Period high on August 24, 2000 . The post-Class Period disclosures about the Company's circulation
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figures show that the $7 .90 price at the end of the Class Period was still inflated . Following
disclosure of the artificial inflation of the Company's circulation f gures, the stock dropped, going
from $17 .82 on June 15, 2004 to $16 .10 on June 16, 2004, and further dropping to $15 .71 on July
26, 2004, following additional news articles about the circulation figure scheme .
270. The post-Class Period increases in Hollinger ' s stock prices are attributed to the
market belief that Black and Radler would be permanently ousted from the Company.
HOLLINGER'S FRAUDULENT ACCOUNTING PRACTICE S
271 . GAAP consists of those principles recognized by the accounting profession as the
conventions, rules, and procedures necessary to define accepted accounting practice- Those
principles are the official standards adopted by the American Institute of Certified Public
Accountants (the "AICPA"), a private professional association, through three successor groups it
established : the Committee on Accounting Procedure, the Accounting Principles Board (the "APB"),
and the Financial Accounting Standards Board (the "FASB") . GAAP includes the following
authoritative literature and pronouncements : Statements of Financial Accounting Standards
("FAS"), APB Opinions, FASB Interpretations ("FIN"), AICPA Accounting Research Bulletins
("ARB"), AICPA Statements of Position ("SOP"), FASB Technical Bulletins ("FTB"), Consensus
Positions of the FASB Emerging Issues Task Force ("EITF"), Statements of Financial Accounting
Concepts ("CON") and Staff Accounting Bulletins ("SAB") .
272_ SEC Regulation S-X, to which the Company is subject as a registrant under the
Exchange Act, requires that financial statements filed with the SEC conform with GAAP . As set
forth in SEC Rule 4-01 (a) of SEC Regulation S-X, "financial statements filed with the [SEC] which
are not prepared in accordance with [GAAP] will be presumed to be misleading or inaccurate ." 17
C .F.R. § 210.4.01(a) (1) ,
273- Management is responsible for preparing financial statements that conform to GAAP .
As noted by the AICPA Auditing Standards ("AU"), Section 110 .03 :
Management is responsible for adopting sound accounting policiesand for establishing and maintaining internal controls that will ,
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among other things, record, process, summarize, and reporttransactions (as well as events and conditions) consistent withmanagement's assertions embodied in the financial statements . Theentity's transactions and the related assets, liabilities and equity arewithin the direct knowledge and control of management ., . Thus, thefair presentation of financial statements in conformity with GenerallyAccepted Accounting Principles is an implicit and integral part ofmanagement's responsibility .
274. The SEC regulates statements by companies "that can reasonably be expected t o
reach investors and the trading markets, whoever the intended primary audience ." SEC ReleaseNo .
33-6504, 3 Fed. Sec. L, Rep. (CCH) ¶ 23,120, at 17,095-3, 17 C_F R. § 241 .20560 (Jan . 13, 1984),
In addition to the periodic reports required under the Exchange Act, management of a public
company has a duty promptly "to make full and prompt announcements of material facts regarding
the company's financial condition ." SEC Release No, 34-8995, 3 Fed . Sec. L. Rep . (CCH)
¶ 23,120A, at 17,095, 17 C .F.R. § 241 .8995 (October. 15, 1970) . The SEC has emphasized that
"[i]nvestors have legitimate expectations that public companies are making, and will continue to
make, prompt disclosure of significant corporate developments." SEC Release No . 18271,
[1981-1982 Transfer Binder] Fed . Sec. L. Rep. (CCH) 1183,049, at 84,618 (November . 19, 1981) .
275 . Defendants caused Hollinger's financial statement disclosures to be materially fals e
and misleading during the Class Period because they failed to disclose Hollinger's related-party
transactions as required by GAAP . Defendants knew that if they properly disclosed Hollinger's
related -party transactions as alleged herein , it would uncover the massive scheme by Lord Black and
others to misappropriate millions of dollars of Hollinger 's income and assets for their own personal
benefit .
276. Pursuant to GAAP, as set forth in FAS No . 57, "Related Party Disclosures ," financial
statements are required to include disclosures of material related-party transactions . FAS No . 57
defines related parties to include the principal owner of an enterprise and its management, as well
as their affiliates- FAS No . 57 requires that companies disclose the following about material related
party transactions :
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(a) the nature of the relationship(s) involved ; (b) a description of thetransactions .. .. . for each of the periods for which income statementsare presented, and such other, information deemed necessary to anunderstanding of the effects of the transactions on the financialstatements ; (c) the dollar amounts of transactions for each of theperiods for which income statements are presented ; and (d) amountsdue from or to related parties as of the date of each balance sheetpresented and, if not otherwise apparent, the terns and manner ofsettlement .
277 . Related-party transactions are not and cannot be presumed to be carried out on an
arm's-length basis . Representations that a related-party transaction was carried out on an arm's-
length basis should only be made if such representations can be verified. FAS No. 57, ¶3 .
278. SEC regulation S-X, rules 4-08(k)(l) sets forth the following additional requirement
concerning related party transactions :
Related party transactions, which affect the financial statements . (1)Related party transactions should be identified and the amounts statedon the face of the balance sheet, income statement, or statement ofcash flows .
279. Item 404 of SEC Regulation S-K also sets out the requirements for disclosing related-
party transactions in the non-financial statement portions of SEC filings, including proxy statements
and the annual reports on Form 10-K. Item 404(a) requires disclosure of, among other things ,
transactions exceeding $60,000 in which an executive officer of the company has a material interest ,
naming such person and indicating the person's relationship to theregistrant, the nature of such person's interest in the transaction(s),the amount of such transaction(s) and, where practicable, the amountof such person's interest in the transaction(s) .
The instructions to this section provide :
The materiality of any interest is to be determined on the basis of thesignificance of the information to investors in light of all thecircumstances of the particular case- The importance of the interestto the person having the interest, the relationship of the parties to thetransaction with each other and the amount involved in thetransactions are among the factors to be considered in determining thesignificance of the information to investors .
280 . According to GAAP, financial statements are complete only when they contain all
material information necessary to represent validly the underlying events and conditions . See
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Statement of Financial Accounting Concepts 2,179 . Financial statements must disclose the financial
effects of transactions and events that already have happened . See Statement of Financial
Accounting Concepts 1, 121 ,
281 . During the Class Period, defendants caused Hollinger to engage in various related-
party transactions which were used by Lord Black and others to improperly misappropriate millions
of dollars of income and assets from Hollinger for their own benefit . In order to continue their
misappropriation scheme, defendants failed to disclose the true nature and effect of certain non-
competition payments, service agreements and other related-party transactions in violation ofGAAP .
282. One type of related-party transaction in which Hollinger engaged but which was
improperly accounted for involved non-competition payments . During the Class Period, portions
of the proceeds generated in Hollinger's sales of certain of its newspaper assets were secretly
diverted to Lord Black, Radler, Boultbee and Atkinson pursuant to purported "non-compete"
agreements with the companies purchasing Hollinger' s assets . At least $88 million was diverted
from Hollinger and paid directly to Lord Black and his associates .
283. During the Class Period, Hollinger's disclosures of these non-compete payments were
incomplete and inadequate . Originally, Hollinger failed to even mention many of these non-compete
payments in Hollinger's financial statements, in violation of GAAP . When Hollinger finally did
eventually disclose some of these non-complete payments, Hollinger falsely claimed that the
payments had been approved by the Company's independent directors and were required by the
purchasers as a condition of the transaction (when they were not), and the disclosures were
intentionally misleading in their failure to disclose that the size of the non-compete payments and
their distribution were decided entirely by Lord Black and his associates . (See trial exhibits
submitted in the Delaware Chancery Court action - JX 634, 667-668 . )
284 . Among other related party transactions involving secret diversions of purported non-
compete payments, Hollinger sold its US. community newspapers to various third parties, and some
of its newspaper assets in separate transactions to CanWest and Osprey. In connection with th e
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Can W est transaction alone, over $52 million of the sale proceeds was secretly diverted to Lord Black
and his cronies, and not received by Hollinger, the seller of the assets, The $52 million was paid in
the form ofpurported non-compete payments as follows : Defendant Black - $11,896,736, Defendant.
Radler - $11,896,736, Defendant Boultbee - $1,321,859 and Defendant Ravelston - $26,437,193 .
(JX 615 .)
285. While the Company in its 2000 10-K and other SEC filings discussed the CanWest
transaction at length, there is no mention of the non-compete payments- The Company then
belatedly disclosed in its May 2001 10-Q that the non-compete payments had been paid, but falsely
stated that the fees were in addition to the purchase price paid by CanWest (when they were not), that
CanWest required the non-compete agreements as part of the transaction (when it did not), and that
CanWest determined the amount of those payments (when in fact the fees were dictated by Lord
Black and his associates) .
286. The Company's disclosures regarding its sales to its American Publishing Compan y
subsidiary are equally false and misleading . According to the Company's own documents, in
connection with a sale to American Publishing Company in February of 2001, a total of $5 .5 million
was diverted to four individuals for non-compete payments, rather than being paid to Hollinger in
connection with this sale. The $5.5 million was distributed as follows : Defendant Black -
$2,612,500, Defendant Radler - $2,612,500, Defendant Boultbee - $13 7,500 and Defendant Atkinson
- $137,500 . (See Delaware Chancery Court trial exhibits -- JX 004 and JX 016 .) However, in the
Company's 2002 10-K filing, there is no mention of this sale or the non-compete payments to the
defendants . In fact, in that filing, Hollinger mentions only those non-compete payments paid in
connection with two sales in 2001 - both to Osprey - when in fact there were four sales in 2001 that
involved non-compete payments being paid to individuals rather than to Hollinger (the other one not
mentioned involved a sale to PMG/Forum with approximately $600,000 being paid to Black, Radler
and Boultbee) .
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287. Add itionally, according to Company documents, $2 million was paid to Hollinger Inc .
as a non-compete payment in connection with a transaction between Hollinger and Internee in o r
about 1998 . (See Delaware Chancery Court trial exhibits -- .IX 002, 615 .) Again there is no mention
of this payment to Hollinger Inc . in Hollinger's 1999 10-K filed in March of 2000 .
288. Another type of related-party transaction engaged in and improperly accounted fo r
by Hollinger involved management services agreements between the Company and Defendant
Ravelston and its affiliates . Pursuant to these agreements, Ravelston charged Hollinger millions of
dollars a year in "management fees" for management advisory and similarly vaguely defined
services. Hollinger disclosed that the fees paid were a fair value for the cost to Ravelston of
providing services, but no such management or advisory services were ever provided by Ravelston
in exchange for these fees, so the payments could not be fair value for any services. In fact, the
Audit Committee never conducted any meaningful review, analysis or valuation of the proposed fee
amounts under the management services agreements, and the Company did not fully deduct the
management fees on its tax returns, as it knew it could not defend the reasonableness ofthose fees-
289. A third type of related-party transaction which was not properly disclosed or
accounted for by Hollinger involved the transferring of Hollinger's assets to companies owned or
controlled by Black and his associates -- Horizon and its various subsidiaries and affiliates, and
Bradford . In these transactions, Hollinger sold its assets at below market prices ; in some cases,
Hollinger even paid Black-affiliated and controlled companies to take assets from Hollinger . During
the Class Period, Hollinger engaged in at least six newspaper asset sales to companies owned or
controlled by Black and his associates . These included the following sales: (i) 16 properties
throughout the U.S . comprising 3 .3 publications in March of 1999 to Horizon ; (ii) three properties
in Colvill and Deer Park, Washington and in Valley City, North Dakota in April 2000 to Horizon ;
(iii) the Skagit Valley Argus in Washington and the Journal of San Juan Islands in May 2000 to
Horizon ; (iv) the sale of four publications - the Bradford Era in Pennsylvania, the Salamanca Press,
the Salamanca Pennysaver and the Olean Times I-leiald in New York - in July 2000 to Bradford ;
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(v) Bishop, CA, Blackfoot ID in September 2000 to Horizon ; and (vi) the Mammoth Times i n
August 2001 to Horizon . (See Delaware Chancery Court trial exhibit - JX 634 .)
290. Lord Black and his associates unilaterally determined the assets Hollinger woul d
transfer to the Horizon and Bradford and the unfair terms of those transfers . The Company's Board
and Audit Committee failed to conduct any review or analysis of the value of the assets being sold
and also failed to give prior approval of these transactions . In a few instances, defendants even
rejected better offers received from independent third-parties for the assets .
291 . In the Company's SEC filings during the Class Period, Hollinger failed to disclos e
the true nature and amount of these purported asset sales in violation of GAAP . For example, with
respect to the Mammoth Times sale in 2001, the 2001 10-K filed in April of 2002 contains only the
brief statement that "[d]uring 2001, the Company sold its last remaining United States community
newspaper ." There is no mention that the Mammoth Times was sold to a related party . In the
Company's 2002 Proxy Statement and 2002 10-K, Hollinger provided a little more detail, but more
falsehoods . The 2002 10-K stated in pertinent part :
During 2001, we transferred two publications to Horizon PublicationsInc, in exchange for net working capital . Horizon Publications Inc . ismanaged by former Community Group executives and controlled bycertain officers of the Company. The terms of this transaction wereapproved by our independent directors .
This disclosure is incomplete and inaccurate, because according to the Asset Purchase Agreement,
the Mammoth Times was not sold for "net working capita]" but rather it was sold for $1 with "no
working capital adjustment ." Furthermore, the Audit Committee's purported approval of this
transaction was an after-the-fact ratification based upon false and misleading information .
291 Hollinger's disclosures involving the sales of its other assets to related parties wer e
similarly incomplete and inaccurate and thus were false and misleading . Contrary to the defendants '
representations, Hollinger's transactions with its related parties were not fairto Hollinger or on term s
representative of those that could be obtained in arm's-length transactions with third parties .
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293 . Hollinger's financial statements for the fiscal years 2000 through 2003 (including th e
related quarterly periods) violated SEC Regulations and GAAP, in that they failed to (i) disclose
facts necessary to present a fair and truthful representation of' the Company's asset sales,
management services agreements, financial position and operations, (ii) provide those disclosures
which were required by GAAP, and (iii) identify and address those key variables and other
qualitative and quantitative factors which were peculiar to and necessary for an understanding and
evaluation of the Company . Consequently, the overall impression created by the financial statements
was not consistent with the business realities of the Company's reported financial position and
operations .
294. The financial statements that were issued by Hollinger during the Class Period di d
not fairly and accurately represent the Company' s financial position and operations . Among othe r
reasons , they violated the following principles of GAAP:
a) that financial reporting should provide information about the economicresources of an enterprise, the claims to those resources, and the effects oftransactions, events, and circumstances that change resources and claims tothose resources (CON No. 1, Objectives of Financial Reporting by BusinessEnterprises, 1 40) ;
b) that interim financial reporting should be based upon the same accountingprinciples and practices used to prepare annual financial statements (APB No .28, 11 10) ;
c) that financial reporting should provide information that is useful to presentand potential investors and creditors in making rational investment, credit andsimilar decisions (CON No . 1, 0bj ectives of Financial Reporting by BusinessEnterprises, T 34) ;
d) that financial reporting should provide information about how managementof an enterprise has discharged its stewardship responsibility to stockholdersfor the use of enterprise resources entrusted to it (CON No . 1, 150) ;
e) that financial reporting should disclose material related party transactions,such as transactions between a company "and its principal owners,management, or members of their immediate families," and includingguarantees (FAS No . 57, "Related Party Disclosures") ;
f) that the costs of services be matched with, i . e , recognizedcontemporaneously with, the recognition of revenues that resulted from thesame transactions (CON No . 6, Elements of Financial Statements, 1145) ;
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g) that financial reporting should provide accurate information about anenterprise's financial performance during a certain time period (CON No_ 1,Objectives of Financial Reporting by Business Enterprises , 142) ;
h) that financial reporting should be reliable in that it represents what itpurports to represent -- that information should be reliable as well as relevantis a central principle of accounting (CON No . 2, Qualitative Characteristicsof Accounting Information , l1I 58-59) ;
i) that financial information be presented in a conservative fashion to t ry toensure that uncertainties and risks inherent in business situations areadequately considered (CON No, 2,1195, 97);
j) that information is complete and nothing is left out that may be necessa ry toinsure that it validly represents underlying events and conditions (CON No,2, Qualitative Characteristics of Accounting Information , ¶¶ 79, 80) ;
k) that Management ' s Discussion and Analysis (MD&A) requires a discussionof liquidity , capital resources , results of operations and other informationnecessary to gain an understanding of a registrant's financial condition,changes in financial condition and results of operations . This includesunusual or infrequent transactions , known trends or uncertainties that havehad, or might reasonably be expected to have, a favorable or unfavorablematerial effect on revenue , operating income or net income and therelationship between revenue and the costs of the revenue , . , . TheCommission stated in Financial Reporting Release (FRR) 36 that MD&Ashould "give investors an opportunity to look at the registrant through theeyes of management by providing a historical and prospective analysis of theregistrant 's financial condition and results of operations , with a particularemphasis on the registrant 's prospects for the future" (SAB No . 101, RevenueRecognition in Financial Statements , Section B ( 1)); and
1) that the meaning of Present Fairly in Conformity with GAAP recognizes theimportance of repo rt ing transactions in accordance with their substance andthe substance of a reported transaction should not differ materially from itsform (AU Section 411 .06) .
295 . Hollinger violated the foregoing GAAP pronouncements by failing to disclose the
existence of the non-compete payments at the time it announced pending sales of its assets or the
consummation of such sales, by misrepresenting the amount of such payments when they were
ultimately disclosed, by failing to disclose that Ravelston was not providing any services to Hollinger
pursuant to the managements services agreements, and by falsely stating that the Board and Audit
Committee had approved the terms of the asset sale transactions, the non-compete payments and the
management services agreements .
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296_ Hollinger also violated Accounting Principles Board Statements ("APS") No . 4, Basi c
Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises ,
paragraph 106, which states :
Financial information that meets the qualitative objectives offinancial accounting also meets the reporting standard of adequatedisclosure . Adequate disclosure relates particularly to objectives ofrelevance, neutrality, completeness, and understandability .Information should be presented in a way that facilitatesunderstanding and avoids erroneous implications . The headings,captions, and amounts must be supplemented by enough additionaldata so that their meaning is clear but no by so much information thatimportant matters are buried in a mass of trivia .
Additionally paragraph 199 of APS No. 4 states :
In addition to informative classifications and segregation of data,financial statements should disclose all additional information that isnecessary for fair presentation in conformity with generally acceptedaccounting principles. Notes that are necessary for adequatedisclosure are an integral part of the financial statements .
297. Hollinger violated SEC Staff Accounting Bulletin ("SAB") 4E, which require s
disclosure and recording of'deferred compensation, and provides that "all amounts receivable from
officers and directors resulting from other transactions [e-g ., not involving compensation arising
from the issuance of capital stock at below market prices] . . . should be separately stated in the
balance sheet irrespective of whether such amounts may be shown as assets or are required to be
reported as deductions from stockholders' equity . "
298. By failing to disclose the non-compete payments, by later misrepresenting th e
amounts of those payments, by failing to disclose that the management services fees were paid for
services which were never provided, and by falsely stating that the non -compete payments and
management services agreements were approved by the Board and Audit Committee, Hollinger
violated paragraphs 106 and 199 of APS No .. 4 . By failing to disclose the dividends paid to Black
by the Telegraph Group, Hollinger violated SAB 4E .
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299_ The fact that Hollinger admitted in its November 2003 10-Q that it will be require d
to restate its previously issued financial statements due to inaccuracies the Special Co mm i ttee
discovered involving the amount , authorization and purpose of payments characterized as non-
compete payments made by the Company to related parties is an admission that the financial
statements originally issued were false - Pursuant to GAAP, as set fo rth in Accounting Principles
Board ("APB") Opinion No- 20, the type of restatement announced by Hollinger was to correct for
material errors in its previously issued financial statements .. See APB Opinion No . 20, I¶7-13_ The
restatement of past financial statements is a disfavored method of recognizing an accounting change
as it dilutes confidence by investors in the financial statements , makes it difficult to compare
financial statements , and it is o ften difficult , if not impossible , to generate the numbers when
restatement occurs . See APB OpinionNo . 20, ~ 14. Thus, GAAP provides that financial statements
should only be restated in limited circumstances, such as when there is a change in the repo rting
entity , when there is a change in accounting principles used , or to correct an error in previously
issued financial statements . Hollinger ' s restatement was not due to a change in the repo rting entity
or a change in any accounting principle but was required due to e rrors in previously issued financial
statements . Thus, the restatement is an admission by Hollinger that the previously issued fi nancial
results were false and misleading .
300. Additionally, the undisclosed adverse information concealed by defend an ts during
the Class Period is the type of information which, because of SEC regulations, regulations of the
national stock exchanges and customary business practices, is expected by investors and securities
analysts to be disclosed and is known by corporate gffieials and their legal and financial advisors to
be the type of information which is expected to be and must be disclosed ..
301 . Hollinger's financial statements were also in violation of the requirement to keep
accurate books and records . Section 13(b)(2) of the Exchange Act states, in pertinent part, that every
reporting company must : "(A) make and keep books, records, and accounts which, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [and]
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t.- . .
(B) devise and maintain a system of internal controls sufficient to provide reasonable assurances that
._ . transactions are recorded as necessary . . . to permit preparation of financial statements in
conformity with [GAAP] ." These provisions require an issuer to employ and supervise reliable
personnel, to maintain reasonable assurances that transactions are executed as authorized , to properly
record transactions on an issuer 's books and, at reasonable intervals , to compare accounting records
with physical assets.
302. In Hollinger's 2002 10-K filed on March 31, 2003, the Company stated :
Item 14. Controls and Procedure s
(a) Evaluation of Disclosure Controls and Procedures . .
Our Chief Executive Officer and Chief Financial Officer havereviewed our disclosure controls and procedures within 90 days priorto the filing of this report . Based upon this review, these officersbelieve that our disclosure controls and procedures are effective inensuring that material information related to the Company is madeknown to them by others within the Company .
(b) Changes in Internal Controls .
There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls since the date ofour most recent evaluation .
303 . This representation was false as Hollinger ' s disclosure controls and procedures were
completely ineffective . During the Class Period, Hollinger violated §13(b)(2)(A) of the Exchange
Act by failing to maintain adequate internal controls designed to insure that payments were properly
approved before they were made and that public filings were accurate .. In the SEC's action against
Hollinger, the SEC alleged that "{fjrom at least 1999 through at least 2001, Hollinger failed to devise
and maintain a system of internal accounting controls sufficient to provide reasonable assurances that
transactions were recorded as necessary to permit preparation of financial statements in conformity
with GAAP .., ." The SEC obtained an order in that action permanently enjoining the Company from
violating the reporting and internal control provisions of the federal securities laws .
304_ Hollinger's lack of adequate internal controls rendered the Company's financial
reporting during the Class Period inherently unreliable and precluded the Company from preparin g
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financial statements that complied with GAAP. Nonetheless , throughout the Class Period, the
Company regularly issued quarterly and annual financ ial statements without ever disclosing the
existence of the significant and material deficiencies in its internal accounting controls and falsel y
asserted that its financial statements complied with GAAP .
305 . Hollinger's financial statements were also in violation of the requirement to disclos e
trends and unce rtainties that would effect its revenues . Item 7 of Form 10-K and Item 2 of Fonn
10-Q, Management ' s Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"), require the issuer to furnish information required by Item 303 of Regulation S-K, 17
C.F_R. §229 .30 .3 . Item 30.3 of Regulation S-K requires the registrant , in discussing results of
operations, to :
Describe any known trends or uncertainties that have had or that theregistrant reasonably expects will have a material favorable orunfavorable impact on net sales or revenues or income fromcontinuing operations .
The instructions to paragraph .303(a) further state :
The discussion and analysis shall focus specifically on material eventsand uncertainties known to management that would cause reportedfinancial information not to be necessarily indicative of futureoperating results . . . .
306. In addition, the SEC, in its May 18, 1989 Interpretive Release No . 34-26831, has
indicated that registrants should employ the following two-step analysis in determining when a
known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item 30 3
of Regulation S-K :
A disclosure duty exists where a trend, demand, commitment, eventor uncertainty is both presently known to management and reasonablylikely to have a material effect on the registrant's financial conditionor results of operation .
307 . The MD&A requirements are intended to provide , in one section of a filing, materia l
historical and prospective textual disclosure enabling investors and otherusers to assess the financial
condition and results of operations of the registrant, with particular emphasis on the registrant' s
prospects for the future, As Securities Act Release No . 33-6711 states :
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The Commission has long recognized the need for a narrativeexplanation of the financial statements , because a numericalpresentation and brief accompanying footnotes alone may beinsufficient for an investor to judge the quality of earnings and thelikelihood that past performance is indicative of future performance :.MD&A is intended to give the investor an opportunity to look at thecompany through the eyes of management by providing both a shortand long-term analysis of the business of the company .
308 . Thus, there is a duty to disclose in periodic repo rt s filed with the SEC "known trend s
or any known, demands, commitments , events or unce rtainties" that are reasonably likely to have a
material impact on a company 's sales revenues , income or liquidity, or cause previously reported
financial information not to be indicative of future operating results . 17 C.F.R. § 229.303(a)(1)-(3)
and Instruction 3 .
309. Section 229.303 (Item 303) Management's discussion and analysis of financia l
condition and results of operations states :
To the extent that the financial statements disclose material increasesin net sales or revenues, provide a narrative discussion of the extentto which such increases are attributable to increases in prices or toincreases in the volume or amount of goods or services being sold orto the introduction of new products or services .
Additionally, in Securities Act Release No . 33-6349 ( September 8, 1981), the SEC stated :
[I]t is the responsibility of management to identify and address thosekey variables and other qualitative and quantitative factors which arepeculiar to and necessary for an understanding and evaluation of theindividual company .
310. In Accounting Series Release 173, the SEC reiterated the duty of management t o
present a true representation of a company 's operations :
[I]t is important that the overall impression created by the financialstatements be consistent with the business realities of the company'sfinancial position and operations .
311 . Hollinger's financial statements during the Class Period were in violation of thes e
SEC regulations because the Company failed to properly record (or disclose) the true nature an d
effect of non-competition payments, management services agreements and other related-party
transactions and further failed to maintain adequate internal controls in order to insure that payment s
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were properly approved before they were made and that public filings were accurate . The payments
of the non-competition payments and management service fees were reasonably likely to have, and
did have, a material adverse effect on Hollinger's operating results, and thus disclosure of these
payments was necessary for a proper understanding and evaluation of the Company's operating
performance and an informed investment decision .
312. Hollinger also violated GAAP and SEC regulations by reporting artificially inflated
circulation figures . As explained above, Hollinger and Radler and other defendants employed a
massive and widespread scheme at Hollinger to engage in a variety of illicit practices designed to
artificially pump up the Company's circulation figures, in order to obtain higher rates for
advertisements placed in Hollinger's Company's report revenue and the marlcet price of the
Company's stock .
313. A principal source of Hollinger' s revenue is based upon its advertising revenue - the
amount it charges its advertisers for space purchased in the Company's newspapers . According to
Hollinger's 2002 10-K, the Company recognizes advertising revenue "upon publication of the
advertisements-" The rate Hollinger is able to charge to advertisers is based upon its circulation,
Advertisers pay higher rates as the circulation figures increase, as the advertisers reach more
consumers . However, the rates Hollinger charged to its advertisers were based upon intentionally
over-inflated circulation numbers and thus, Hollinger was not entitled to the full amount of the fees
it charged to its advertisers. Hollinger's recognition of advertising revenue was improper and in
violation of the basic GAAP concept that revenue must be earned and realizable in order for it to be
recognized . See FASB Statement of Concepts ("FASCON") No. 5, 1183-84 .
314. Advertisers have recently brought suit against Hollinger to obtain refunds based upo n
the difference between the arnount Hollinger charged advertisers based upon the false circulation
numbers and the amount it should have charged advertisers based upon the Company's actua l
circulation numbers .
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.315 . Hollinger's recognition of revenue based upon the false circulation numbers wa s
improper as the revenue was not earned or realizable and accordingly , violated GAAP .
KPMG'S PARTICIPATION IN THE FRAU D
316 . KPMG is one of the largest international firms of certified public accountants and a
member of the AICPA_ The Company engaged KPMG to provide auditing and accounting services
as well as tax and consulting services throughout the Class Period . To ensure KPMG' s steadfast
loyalty, defendants repeatedly agreed that KPMG would be paid millions of dollars to provide
accounting , auditing and/or consulting services to the Company .
.317 . As stated in the Company 's 2001 Proxy Statement , during fiscal 2000, KPMG bille d
Hollinger $1 ,274,316 "for professional services rendered for the audit of the Company 's annual
financial statements and the reviews of financial statements included in the Company's forms 10-Q "
along with $5,517,206 " for all other non-audit professional se rv ices," or a total of $6,791,522 .
318 . KPMG was paid similarly exhorbitant amounts for audit and non-audit services i n
fiscal 2001 and 2002 . The Company reported in its 2002 Proxy Statement that KPMG billed
Hollinger in fiscal 2001 $672,301 for audit services and $6 ,680,148 for all other non-audi t
professional se rv ices , or a total of $7,352,449 .
319 . The Company reported in its 2003 Proxy Statement that KPMG billed Hollinger the
following in fiscal 2002 : $1,528,036 in audit fees, $133,004 in "audit related" fees, $3,832,018 in
tax fees, and $46 .3,282 in "all other fees", for a total of $5,956,340 . As Hollinger has not yet filed
any proxy statement this year, the fees paid to KPMU for services rendered during fiscal 200 .3 are
not publicly available .
320. KPMG also served during the Class Period as auditors for Hollinger , Inc ., through
the amount of fees KMPG earned for services rendered to Hollinger Inc . has not been publicly
disclosed- However, what is known is that Hollinger Inc . has no real assets other than its Hollinger
stockholdings and that Lord Black controlled (and still controls) Hollinger Inc . Thus, when KPMG
was retained by Hollinger Inc-, it was essentially hired by Black . At the time KPMG was serving
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as auditors for Hollinger, it was also beholden to and serving Black through its work for Hollinger
Inc_ There was a very apparent and real conflict in having KPMG serve as auditor of Hollinger Inc .,
hired and paid by Black, while also serving as the auditor and "public watchdog" for Hollinger,
where it would be charged with, among other things, ensuring the integrity and accuracy of the
Company's financials and internal controls,. As investors later discovered, this inherent conflict
resulted in KPMG's utter failure to discharge its duties as the Company's independent auditors .
.321 . In return for the millions of fees paid by Hollinger and Hollinger Inc . to KPMG eac h
year during the Class Period, KPMG participated in the fraud perpetrated by Lord Black, Radler an d
the other defendants . In fact, KPMG had a significant role in defendants ' fraud and the maintenance
of Hollinger stock at artificially inflated prices .
322 .. During the Class Period in which Lord Black, Ravelston and other Hollinger insider s
helped themselves to hundreds of millions of dollars in improper payments at the Company's
expense , KPMG purportedly audited Hollinger 's books and records (as well as the books and records
of Hollinger Inc.) . Rather than doing so , KPMG helped Lord Black and his associates raid the
Company 's coffers and then conceal this the ft from the shareholders .
323 . From at leastAugust 13,1999, KPMG has served as purpo rtedly independent auditors
for Hollinger and had, since that time, certified the Company's financial statements as fairly an d
accurately reflecting the financial condition of the Company .
324. KPMG assisted in the preparation of Hollinger' s annual and quarterly statements ,
reviewed the quarterly financial statements and the text that accompanied them in the Company' s
Fonn 10-Qs, an d audited the Company' s annual financial statements and the text that accompanie d
them in the Company's Form 10-Ks .
325. KPMG was required to perform its audit services according to generally accepte d
auditing standards ("GARS"), and to issue an unqualified opinion only if the Company 's annual
financial statements were fairly presented in accordance with generally accepted accountin g
principles ("GAAP") ..
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.326 . Additionally, KPMG was required to review the information in Hollinger's public
filings that was outside the financial statements . AU § 550, "Other Information in Documents
Containing Audited Financial Information ," states that the auditor "should read the other [non-
financial] information and consider whether such information , or the manner of its presentation, is
materially inconsistent with information , or the manner of its presentation , in the financial
statements -" If the auditor determines that such other information is either inconsistent with the
information contained in the financial statements or is aware of a material misstatement of fact
contained in the other information, then the auditor should withhold the use of the audit report from
the document containing the inconsistency or misstatement . AU § 550 at f1 .04-06_ Thus, KPMG
was required to review the non-financial disclosures in Hollinger's public filings to determine
whether there was any inconsistency with the financial information presented in those filings and,
if so, KPMG was required to withhold its certification of the financials .
3 27. KPMG issued unqualified audit opinions on Hollinger's annual financial statement s
from at least 1999 through 2003, stating that it had "conducted [its] audits with generally accepted
auditing standards," and that Hollinger's "consolidated financial statements . . . present fairly, in all
material respects, the financial position of Hollinger International Inc . and its subsidiaries in
conformity with generally accepted accounting principles . "
.328 . However, KPMG's audit opinions were materially false and misleading, and KPMG's
audits represent an extreme departure from GAAS_ In addition, the manner in which the Company's
financial results were reported in Holliiiger's f nwncial statements represent an extreme departure
from GAAS and applicable SEC regulations .
329 . KPMG purportedly conducted audit examinations and participated in investigation s
of the business, operations , financial , accounting and management control systems of Hollinger. But
because KPMG did not conduct its audits in accordance with GAAS , and because it acted with
extreme recklessness and consciously disregarded and ignored numerous warning signs that the
Company 's financial statements and other public statements were materially false and misleading ,
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KPMG did not discover-, or actually ignored and disregarded, the massive fraud being perpetrated
by Lord Black, Radler and the other defendants and the fact that the Company's financial statements
were not prepared in accordance with GAAP.
.330 . KPMG performed timely reviews of the quarterly financial statements of the
Company throughout this period. KPMG was aware of facts and/or recklessly disregarded facts that
precluded KPMG from stating that Hollinger's financials were prepared in accordance with GAAP
or that KPMG had audited those financials in accordance with GAAS . However, the Company's
financial statements and KPMG's opinion on them were used by the Company with KPMG's
knowledge and consent to publicly disseminate its financial results in its annual Forms 10-K filed
with the SEC during the Class Period .
331 . KPMG's certification of Hollinger financial statements which KPMG knew, or was
reckless in not knowing, were materially false and misleading, assisted or allowed the Individual
Defendants to succeed in their fraudulent scheme, and the price of Hollinger stock continued to trade
at artificially inflated prices . As the long-time auditor of Hollinger and Hollinger Inc ., KPMG was
aware not only of the Company's financial condition, but also of the byzantine corporate network
through which money flowed to Lord Black and/or Black-owned and controlled entities . Thus,
KPMG was aware, or was reckless in not knowing, of each instance in which Hollinger engaged in
business, or transferred money or assets, to Black-owned entities . As KPMG assisted in the
preparation ofHollinger's annual and quarterly financial statements and public filings, KPMG knew,
or was reckless in not knowing, that those documents did not disclose Black's involvement, either
personally or through entities he owned and controlled, in the related party transactions ..
332. KPMG knew, or was reckless in not knowing, that the Company's financia l
statements and public filings contained material misrepresentations and omissions regarding the
Company's related party transactions and Black's outright misappropriation of Company monies .
However, KPMG knowingly (or recklessly) participated, and aided and abetted in, the Individual
Defendants' failure to completely and accurately disclose these facts .
PON
333. KPMG knew, or was reckless in not knowing, that non-compete fees were being pai d
to others (such as Hollinger, Inc ., for whom KPMG served as auditors), but knew that those fees
were not disclosed in I-Iollinger's financial statements. KPMG knew about the fraudulent nature of
the management services fees as : (i) it advised the Company and Boultbee that Hollinger could not
fully deduct those fees because they were not reasonable, and (ii) Hollinger Inc ., a KPMG audit
client, was also paid the management services fees purportedly for services rendered to the
Company.
.3 34 . KPMG also knew, at least by March 27, 2001 (the date the 2001 Proxy Statement wa s
filed with the SEC), that the disclosures regarding the Company's transactions with Horizon were
false and misleading, as the Company disclosed in the 2001 Proxy Statement that Horizon was
owned by certain unnamed Hollinger Directors and executives, when in fact Black and Radler owned
and controlled Horizon and were using that company to take advantage of-Hollinger . KPMG was
on notice by at least that filing that the terms of the Company's transactions with Horizon may not
be fair to the Company, and that certain Hollinger Directors could not exercise independent business
judgment in renewing and approving the transactions with Horizon because those directors also
owned Horizon . KPMG had the duty to determine if the Company's prior- disclosures regarding its
transactions with Horizon were false and misleading or accurate and complete, and also was obliged
to investigate the Company's other transactions to determine if they, too, were with entities (such
as Bradford) owned and controlled or otherwise affiliated with Black and other Hollinger Directors
and executives .
335_ By the 2002 Proxy Statement, where the Company disclosed that certain unname d
Hollinger Directors and Management controlled Horizon, KPMG knew that the Company's prio r
disclosures were false . KPMG knew that the Company' s representations about various transaction s
(such as those with Horizon and Bradford) being approved by independent directors were all false ,
as KPMG knew that the directors purportedly providing approval stood on both sides of thos e
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. transactions and so were not independent. KPMG also knew, or was reckless in not knowing, tha t
Black and Radler owned and controlled Horizon and Bradford .
:336 . As a result of KPMG' s knowing part icipation in the fraud , or its reckless ignorance
or disregard of fraudulent acts or "red flags" that put KPMG and any reasonable person on notice
ofthe fraud , Plaintiffs and other Class Members were deliberately misled and misinformed regarding
the nature and scope of Black 's the ft of Company money and the Company ' s related party
transactions , and Class members made investment decisions and cast votes on the election of
directors , including Lord Black , Radler and other Individual Defendants , based on the Company's
false and misleading public filings .
337_ At no time du ring the Class Period , however , did KPMG ever reveal that the related-
party transactions engaged in by Hollinger were merely a scheme to allow the defendants to raid the
Company's coffers at the expense of public shareholders or that there were material deficiencies in
the Company's internal controls . Hollinger recently disclosed that it will be required to restate
previously issued financial statements due to inaccuracies discovered involving the amount,
authorization and purpose of payments characterized as non-compete payments made by the
Company to related parties .
338. In connection with Hollinger ' s operations, KPMG had virtually limitless access to
information concerning the Company's true operations as :
• KPMG had been Hollinger ' s auditor since at least 1996 .
KPMG was present at Hollinger ' s headquarters and divisions frequently during theClass Period .
• KPMG regularly communicated with the Individual Defendants, including themembers of the Company's Audit Committee , in face -to-face meetings and telephonecalls .
• KPMG provided auditing , review and other services to the Individual Defendants .
• KPMG had frequent conversations with Hollinger management and employees aboutthe Company' s operations and financial statements .
• KPMG had access to Ravelston ' s offices in Toronto .
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KPMG reviewed Hollin;er ' s financial statements during the Class Period and knewor was reckless in not knowing that Hollinger ' s financial statements were notaccurate or prepared in compliance with GAAP or GAAS ..
Drafting of disclosures concerning related-party transactions was a collaborativeeffort between KPMG officials and senior management of Hollinger . (See DelawareChancery Court trial exhibits - JX 667-668 . .)
339. KPMG also served as Hollinger Inc .' s auditor during the Class Period . In describing
the role of Hollinger Inc .'s Audit Commi ttee in its Form 20F fi ling with the SEC on June 27, 2003 ,
Hollinger Inc . stated :
The majority of the Company's revenue in the last financial yearrepresents dividends from International . The outside auditor ofInternational is KPMG who is also the outside auditor of theCorarpany. In addition, management services are provided toInternational by RMI and RMI's parent, Raveiston, which alsoprovides management services to the Company. The AuditCommittee of the Company relies in good fait!: on the financialstatements of International in considering and reviewing thefinancial statements of the Company. In doing so, the AuditCorrmrittee takes steps, in order to be satisfied that such reliance isreasonable and appropriate. Such steps include meeting with timerepresentatives of KPMG who have carried out the audit ofInternational in order to satisfy the Audit Committee of theCompany that International 's financial statements have beenprepared in accordance with generally accepted accountingprinciples in the U.S., that an appropriate system of internalcontrols and procedures is in place at Intern ational, that theAuditCorturzrttee understands the key accounting principles applied inpreparing thefrnancial statements ofInternational and the effectof alternative presentations, and that .KPMG is independent andobjective for purposes of that audit . The Audit Committee of theCompany meets with the members of management of Ravelstonresponsible for providing through RMI financial and accountingservices to International . The Audit Committee of the Company alsoreviews the management letter prepared by KPMG and sent tomanagement of International in connection with the audit of thefinancial statements of International as well as other material writtencommunications from KPMG to management of International or itsaudit committee in connection with financial or internal controlmatters .
With respect to the financial results of the Company's operationsunrelated to International, the Audit Committee is responsible formonitoring and reviewing the matters referred to above in accordancewith its Audit Committee charter . In that connection, the AuditCommittee has direct communication channels with the externalauditors of the Company and has oversight responsibility for
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1
management reporting on internal control . In carrying out thes eresponsibilities, the Audit Committee meets regularly with KPMGand the individuals atRavelston respoirsible for providing throughRMI fnarzciar and accounting services to the Company.
340_ KPMG resigned as Hollinger Inc-'s auditor on December 23, 2003 .
341 . KPMG recklessly failed to provide proper and adequate p rofessional accounting and
auditing services for Hollinger . KPMG reviewed Hollinger 's quarterly and year-end results , advised
and/or opined upon the veracity of Hollinger's SEC filings and had intimate knowledge of the nature
of'Hollinger 's business and the intricacies of the myriad of related-party transactions that occurred
during this time. KPMG also attended the meetings and advised the members of the Audit
Committee of Hollinger's Board of Directors .
342. As a result ofits intimate knowledge of Hollinger and its executives , KPMG knew ,
or was reckless in not knowing, about the accounting irregularities and improprieties at Hollinger
as alleged herein . KPMG consented to the inclusion of its unqualified report on Hollinger's year-end
financial statements throughout the Class Period, which reports it knew, or was reckless in not
knowing, were materially false at the time they were issued . Despite KPMG's extreme recklessness
and failure to exercise reasonable care and competence in performing its services to Hollinger by
allowing the Company to misreport many related-party transactions, Hollinger's Board, including
the members of the Audit Committee, refused to terminate KPMG as the Company's "independent"
auditors .
343 . Nevertheless, throughout the Class Period, KPMG provided an unequivocal opinio n
that Hollinger's year-end financial statements were valid and accurate and thereby violated federa l
securities laws by falsely reporting the Company' s financial results and financial statements-
344. KPMG enjoyed a lucrative, long-standing business relationship with Hollinger' s
senior management, particularly Lord Black, for which it has received tens of millions of dollars-
KPMG partners responsible for the Hollinger engagement were particularly motivated to appeas e
defendant Black and the other Individual Defendants because their remuneration was closely tied t o
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the fees generated from Hollinger . Maintaining the client relationship was highly dependent on th e
Individual Defendants, particularly Hollinger's CEO Black, and KPMG compromised itself to d o
so. By engaging in the unlawful conduct alleged herein, KPMG injured Hollinger's shareholders .
345 . KPMG was required to perform its audits in accordance with GAAS. GAAS provides
that an audit is to be adequately planned . Audit planning involves developing an overall strategy for
the expected conduct and the scope of.the audit . In planning an audit, the auditor must obtain
knowledge of the matters which relate to the nature of the entity's business, its organization, and
operating characteristics (AU 311). The auditor is required to design the audit with professional
skepticism in order to provide reasonable assurance of detecting errors and irregularities (AU 316),
material misstatements (AU 312) or fraud (AU 316) .
346. KPMG failed to comply with GAAS because it failed to design its audit plan t o
provide reasonable assurance of detecting material error as required by Statement of Auditin g
Standards No . 82, The Auditor's Respon.sibilily to Defect and Report Errors and Irregularities (AU
316)-
347. In particular, KPMG also failed to observe the following provisions of (HAAS :
(a) AICPA Audit Risk Alert - 1998/99, which provides that auditors should bealert for significant unusual or complex transactions ;
(b) AU 316, Consideration of Fraud in a Financial Statement Audit, whichrequires an auditor to specifically assess the risk of material misstatement ofthe financial statements due to fraud and consider that assessment indesigning the audit procedures to be performed ;
(c) AU 326, Evidential Matter, which requires a a auditor to obtain sufficientevidence to provide reasonable assurances that the financial statements arefree from material misstatements;
(d) AU 220.01, which provides that in all ma tters relating to the assignment, anindependence in mental att itude is to be maintained by the auditor or auditors ;and
(e) AU 220 .03, which requires that auditor's maintain the utmost professionalism,and remain independent, intellectually honest, and free from any obligationor interest in the client, its management or its owners .
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348. There was a substantial risk ofmaterial misstatement and fraud due to the complet e
lack of financial or accounting expertise on Hollinger's Audit Committee . At all relevant times
during the Class Period, the Audit Committee was composed of Defendant Thompson, Chairman,
Defendant Burt and Defendant Kravis . In the 2001 Proxy Statement filed on March 27, 2001, the
following was disclosed about obligations and responsibilities of the Audit Committee and its
findings with regard to the fiscal year 2000 financial statements :
The Audit Committee's duties include reviewing internal financial information,monitoring cash flow, budget variances and credit arrangements, reviewing the auditprogram, reviewing with the Company's accountants the results of all audits upontheir completion, annually selecting and recommending independent publicaccountants, overseeing the quarterly unaudited reporting process and taking suchother action as may be necessary to assure the adequacy and integrity of all financialinformation distributed by the Company . Each member of the Audit Committee isindependent in the judgment of the Company's Board of Directors and as requiredby the listing standards of the New York Stock Exchange .
In addition, pursuant to the Services Agreements, the Audit Committee is responsiblefor reviewing the cost of services charged by Ravelston, and monitoring theCompany's decisions with respect to related party acquisition opportunities and theexercise of the Company's rights under its Business Opportunities Agreement withHollinger Inc. See "Certain Relationships and Related Transactions ." The AuditCommittee also has authority to recommend to the Board policies and procedures fordealing with conflicts of interest and to review the application of such policies andprocedures .
The Audit Committee reports that it has : (i) reviewed and discussed the auditedfinancial statements with management ; (ii) discussed with the independent auditorsthe matters required to be discussed by Statement on Auditing Standards No. 61 ; and(iii) received certain disclosures from the auditors regarding the auditors'independence as required by the Independence Standards Board Standard No . 1, anddiscussed with the auditors the auditors' independence. Based on such review anddiscussions, the Audit Committee has recommended to the Board of Directors thatthe audited financial statements be included in the Company's Annual Report onForm 10-K for 2000 for filing with the Commission. On May 5, 1999, the AuditCommittee adopted, and the Board of Directors ratified, the Hollinger InternationalInc. Audit Committee Charter (a copy of which was attached to the Company's ProxyStatement filed in March of 2000).
Similar disclosures were made in the Company's earlier Proxy Statements-
349. The Company' s later Proxy Statements contained similar disclosures , along with a
startling new fact .. In the 2002 Proxy Statement filed on April 2, 2002, the Company included th e
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pow-. .RIBA POW" __7
following admission regarding the quali fications (actually, the lack of qualifications ) of the Audit
Committee ;
Management is responsible for the financial reporting process, the preparation ofconsolidated financial statements in accordance with generally accepted accountingprinciples, the system of internal controls and procedures designed to ensurecompliance with accounting standards and applicable laws and regulations . KPMGLLP is responsible for auditing the financial statements . The Audit Committee'sresponsibility is to monitor and review these processes and procedure . The metttbers
of the Audit Contntitte are notprofessionally engaged itt. the practice of accounting
or auditing and are not experts in thefields of accounting or auditing, includingevaluating auditor independence. The Audit Continittee relies, withoutindependent verification, on the information provided to it and on therepresentations made by manabetrrent and time independent auditors that the
financial statentettts have been prepared with integrity and objectivity and inconformity with generally accepted accoutztingprinciples. Accordingly, (he AuditCommittee 's oversight does not provide all independent basis to determine thatmanagement has maintained appropriate accounting and financial reportingprinciples or appropriate internal controls and procedures designed to assurecompliance with accounting standards and applicable Imv and regulations .
350. Thus, KPMG was on notice by at least Ap ri l 2, 2002 that the Audit Cozn.nii tte lacked
any capacity to structure or implement internal controls or verify the propriety or accuracy of the
Company's accounting and financial reporting . KPMG was obligated upon its receipt of this
information to scrutinize the terms, accounting and reporting of the Company's significant
transactions, most of which involved asset transfers to related parties, and all of which involved
secret payments of non-compete payments to Black, Radler and others . The Audit Committee's
complete lack of accounting or financial reporting expertise required KPMG to review the
Company's management services agreements as well, and the Company's prior disclosures regarding
those agreements and asset sales ..
351 . KPMG failed to perform its audit in conformity with the Statement of Accounting
Standard ("SAS") No . 82, "Consideration of Fraud in a Financial Statement Audit," which includes
auditing for misstatements ari sing from the misappropriation of assets . During the course of its audit
of Hollinger's financial statements during the Class Period, KPMG knew, deliberately ignored or
was reckless in not knowing, of the irregularities which caused Hollinger's earnings to be misstated
over a minimum of four fiscal years . The substantial risk of fraud was a potential reportabl e
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condition which should have been reported to the Audit Committee and senior management . KPMG
not only failed to report a substantial risk of fraud - as stated herein, KPMG knew that fraud had
occurred .
352 . KPMG also knew that the Company's internal controls were seriously deficient, if
they existed at all .. KPMG knew that Lord Black dominated and controlled the Board and the
Company, through his hand-picked directors and through his ownership and control of HollingerInc .
and Ravelston,. KPMG knew that the Company was paying exhorbitant personal expenses of Lord
Black and his wife, though their expenses did not relate to the business of Hollinger .
353 . KMPG knew that non-competes were being paid and not reported, that managemen t
fees were being paid but were not properly earned, and that transactions were being consummated
and payments being made without proper disclosure or any Board oversight, review or approval .
Based upon all these facts, KPMG knew that Lord Black dominated and controlled all of Hollinger's
operations, and that all decisions were made because Lord Black decided that they should be made,
and that the Company's public filings were materially false and misleading .
354. KPMG either deliberately ignored the facts showing that the Company had made
materially false and misleading public statements, including those in its SEC filings, or KPMG
recklessly disregarded such facts, and failed to exercise due professional care in the performance of
its audits ofHollinger's financial statements . KPMG either did the math and calculated the amount
Hollinger received in selling various assets, and learned that Lord Black and others were taking part
of the sale proceeds themselves, and that the Company was being shorted by tens of millions of
dollars in its sales of its newspaper assets, or KPMG deliberately and recklessly failed to do the math
thus shirking a basic and important obligation and duty of an outside auditor . KPMG either
deliberately ignored or recklessly failed to investigate the transactions in which Hollinger was selling
its assets to Black and Radler-controlled entities at fire sale prices in transactions designed to thwart
any competing bids from being made for Hollinger's assets, and transactions in which Hollinger
actually paid the Black and Radler-controlled entities to take Hollinger's assets-
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355 . KPMG also violated GAAS by failing to recognize or investigate "red flags" or
warnings or other possibilities that Hollinger's financial statements were materially false and
misleading . GAAS sets out a list of such red flags that auditors should look out for in determining
audit risk relating to misstatements arising from fraudulent financial reporting . (AU Section .316.16-
17) . One such "red flag" involves related party transactions .
356 . AU §316, Fraud in a Financial Statement Audit, lists various red flags that an audito r
such as KPMG must consider, including :
• Specific indicators as to include a motivation for management to engage infraudulent financial reporting-
Domination of management by a single person or small group withoutcompensating controls such as effective oversight by the board of directorsor audit committee .
• Management displaying a significant disregard for regulatory authorities .
• Management failing to display an appropriate attitude towards internalcontrols and the financial reporting process .
• Claims against the entity or its senior management alleging fraud orviolations of securities laws .
- Significant related-party transactions not in the ordinary course of businessor with related entities not audited or audited by another firm .
357. However, KPMG ignored or recklessly disregarded numerous red flags that mirrore d
those listed in AU §316 and that should have alerted KPMG to the possibility that Hollinger' s
financial statements were materially false and misleading, including the following :
- Due to the unique structure of the company, Hollinger was controlled by asmall group of people led by defendant Black .
• There was not effective oversight by the board of directors or the AuditCommittee .
• Defendant Black and his associates frequently overrode I lollinger's internalcontrols .
• Defendant Black and his associates maintained an opulent personal lifestylefinanced in large part by the Company . Hollinger paid for personal expensesfor many of the defendants, including paying for apartments, automobiles,aircrafts and personal staff for Defendant Black and his associates .
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• Defendant Black had an open disdain for corporate governance and an opendisregard for the sanctity of corporate assets .
There was an inordinate amount of related-party transactions with an unusualstructure and unusual terns, including tenns actually requiring Hollinger topay related parties to take the Company's assets .
There were numerous misrepresentations in the Company's financialstatements some of which the Company attempted to correct in subsequentfilings which were themselves false and misleading ; thus, KPMG knew thatthe Company's prior disclosures were false, and it was on notice that otherdisclosures could also be false ,
358 . The sheer number of the Company' s related-party transactions also required KPM G
to carefully evaluate each of these transactions . Pursuant to AU §334 .09 :
After identifying related party transactions, the auditor should applythe procedures he considers necessary to obtain satisfactionconcerning the purpose, nature, and extent of these transactions andtheir effect on the financial statements. The procedures should bedirected toward obtaining and evaluating sufficient competentevidential matter and should extend beyond inquiry of management .Procedures that should be considered include the following :
a. Obtain an understanding of the business purpose of thetransaction .
b . Examine invoices, executed copies of agreements, contracts,and other pertinent documents, such as receiving reports andshipping documents .
c. Determine whether the transaction has been approved by theboard of directors or other appropriate officials .
d . Test for reasonableness the compilation of amounts to bedisclosed, or considered for disclosure, in the financialstatements ,
e. Arrange for the audits of intercompany account balances to beperfon ned as of concurrent dates, even if the fiscal yearsdiffer, and for the examination of specified, important, andrepresentative related party transactions by the auditors foreach of the parties, with appropriate exchange of relevantinformation .
Inspect or confirm and obtain satisfaction concerning thetransferability and value of collateral .
359. The SEC has emphasized the requirement that auditors carefully review related-pa rty
transactions in an audit . In a recent SEC action, styled as hire Grant Thornton LLP, SEC, Admin.
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P&W
Proc. File No. 3-I1 .377, 1/20/04), the SEC filed administrative charges against auditors Grant
Thornton LLP and Doeren Mayhew & Co . P .C. over allegations of misconduct stemming from their
inadequate audit concerning disclosure of related party transactions . The SEC contends that the
auditors ignored the use of related-party transactions by MCA Financial Corp . to inflate and
mischaracterize income, assets and equity . . Timothy L . Warren, Associate Regional Director of the
Commission's Midwest Regional Office, stated in the SEC's press release :
The abysmal failure by the Grant Thornton and Doeren Mayhewauditors in this matter contributed to the loss of millions of dollars bypublic investors . The auditors were staring at related partytransactions that were not disclosed by MCA and failed to takeappropriate actions . This proceeding demonstrates that the Divisionof Enforcement will act vigorously to seek sanctions for suchconduct .
360 . . KPMG ignored the professional literature, which required that KPMG understand th e
transactions and the business purpose for the transactions, and failed to insist that Hollinger make
adequate disclosure and proper accounting for its related party transactions. Here, the sheer volume
of the related party transactions at the Company was a red flag that each of these transactions should
be carefully examined. For years, Hollinger had been engaging in nuanerous related party
transactions, including (i) payments of millions of dollars of the proceeds from sales offHollinger's
assets in the form of non-compete payments to Black and his associates, (ii) payments of millions
of dollars in management service fees by Hollinger to Ravelston for advisory and other services, (iii)
sales of Hollinger's assets to entities owned and companies controlled by Black to Ravelston, a
company owned and controlled by Black and Radler, at below-market prices, and (iv) the Company's
payments of millions of dollars of personal expenses of Lord Black and his associates . Additionally,
the failure of the Board and the Audit Committee to properly examine and approve these related
party transactions put KPMG on notice that these transactions needed to be more closely examined
by the outside auditors .
3 61 . The nature of the Company's disclosures (such as disclosures that the Company was
dealing with entities in which Company Directors and executives were shareholders) also served a s
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Oro." MOW&A
a warning to KPMG that the underlying transactions required greater scrutiny . KPMG knew that
these disclosures were false and misleading, since they gave the impression that executives other
than Black and Radler were the owners . Moreover KPMG knew that Black and Radler were far
more than shareholders in these companies with which Hollinger was dealing-- they owned them . .
362. In fact, Hollinger 's Joint Audit Committee and Compensation Commi ttee noted at
a February 25, 2002 meeting that of the "key areas of audit focus " of KPMG' s audit of the 2001
financial statements one was "related party transactions, including management fees and noncompete
payments ." (See Delaware Chancery Court trial exhibit - .IX 615 .) However, KPMG issued
unqualified opinions year a fter year even though Hollinger did not accurately disclose the related
party transactions.
36 .3 . Additionally, as an auditor, KPMG was obligated to assess the Hollinger's interna l
disclosure, financial and accounting cgntrols and whether such controls had been placed in operation,
were effective and complied with Sarbanes-Oxley, including controls to provide assurance about the
safeguarding of assets, financial reporting, operations and compliance with regulations . KPMG was
required to evaluate whether poor controls might lead to or contribute to the risk that fraud might
not be detected,
364, Internal controls are essential to a company's financial reporting as adequatel y
designed internal controls provide a company with reasonabl e assurance of the reliability of financial
reporting, the effectiveness and efficiency of'operations, and compliance with applicable laws and
regulations . Auditing Standard ("AU") §319 .06. Section 319 .02 provides as follows with respect
to auditing standards :
In all audits, the auditor should obtain an understanding of internalcontrol sufficient to plan the audit by performing procedures tounderstand the design of controls relevant to an audit of financialstatements, and whether they have been in operation .
365. The original SAS which forded the basis for AU §319 was SAS No . 55,
"Consideration of Internal Control in a Financial Statement Audit," issued in 1988 . AU §319 was
amended in 1995 by SAS No . 78 which applies to audits of financial statements of periods beginnin g
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after 1/1197, This standard applies to KPMG' s audits conducted prior to June 30, 2001 . AU §31 9
was further amended by SAS No .94 issued in May 2001 for audits of financial statements for periods
beginning after June 30, 2001 . This standard applies to KPMG's audits conducted in 2002 and
thereafter,. A key requirement under both standards is that an auditor is obligated to assess the
company's internal controls .
366 . if the auditor identifies any material weaknesses in the company's internal control s
during the audit, the auditor must communicate these weaknesses to the company's audit committee .
AU §325 . Further, the auditor should identify any limitations related to the internal control
weaknesses in his or her audit opinion in accordance with the procedures proscribed by the
professional standards .
367 . Here, Hollinger•'s internal controls were completely deficient. In the SEC's action
against Hollinger, the SEC alleged that "[fjrom at least 1999 through at least 2001, Hollinger failed
to devise and maintain a system of internal accounting controls sufficient to provide reasonable
assurances that transactions were recorded as necessary to permit preparation of fin ancial statements
in conformity with GAAP . . ." The SEC obtained an order in this action permanently enjoining the
Company from violating the repo rting and internal control provisions of the federal securities laws .
368. In failing to adequately plan and perform its audit, and in deliberately or recklessly
ignoring the numerous red fl ags identified above , KPMG violated the following provisions of
GAAS .
(a) KPMG violated the first general standard , which provides that the audit is to
be performed by a person or persons having adequate technical training and proficiency as an
auditor. Given the pervasiveness and complexity of Hollinger's related-party transactions and risk
of self-dealing, it was incumbent upon KPMG to ensure that the individuals who performed the audit
had the requisite technical proficiency in those areas and had familiarity with the those transactions
so that any improper self dealing by Lord Black and other senior executives would be detected .
KPMG failed to do so .
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(b) KPMG violated the second general standard , which provides the auditors
should maintain an independence in mental attitude in all matters relating to the engagement .
(c) KPMG violated the third general standard, which provides that due
professional care is to be exercised in the planning and performance of the audit and the preparation
of the report. Due professional care concerns what the independent auditor does and how well he
or she does it . KPMG violated this standard by not recognizing the questionable nature of'the sales
of Hollinger assets to entities owned and/or controlled by Lord Black and Radler (and the non-
compete payments), and the management services agreements with Ravelston, all of which required
audit procedures sufficient to confirm the full nature and intent of the transactions .
(d) KPMG violated the first standard of reporting which, requires the report to
state whether the financial statements are presented in accordance with GAAP .
(e) KPMG violated the second standard of reporting, which requires the report
to identify circumstances in which GAAP has not been consistently observed .
(f) KPMG violated the third standard of reporting, which states that informative
disclosures are regarded as reasonably adequate unless otherwise stated in the report ,
(g) KPMG violated the fourth standard of reporting, which states the report to
contain an expression of opinion or the reasons why an opinion cannot be expressed .
(h) KPMG violated the first standard of field work, which provides that the wor k
is to be adequately planned and assistants, if any, are to be properly supervised, This standard
requires the nature, timing and extent of planning to be based in part on the auditor's experience with
the entity and his or her knowledge of the entity's business . KPMG violated this standard, because
had KPMG adequately planned and supervised its audit efforts, it would have investigated the related
party transactions and discovered that the Company's disclosures regarding the non-compete
payments, the sales of its assets, and the management services agreements were all false and
misleading .
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? ' tom" rM !! . . . +► R-~ """"~ '" :: . . "v`~ POW". ~.s r • . r--.
(i) KPMG violated the second standard of field work, which provides that a
sufficient understanding of internal control is to be obtained to plan the audit and to determine the
nature, timing, and extent of tests to be performed . This standard requires the auditor to make a
proper study of existing internal controls, including accounting, financial and managerial controls,
to determine whether reliance thereon was justified, and if such controls are not reliable, to expand
the nature and scope of the auditing procedures to be applied . In the course of auditing Hollinger's
financial statements, KPMG either knew or recklessly disregarded facts that evidenced that KPMG
failed to sufficiently understand Hollinger's internal control structure and/or it disregarded
weaknesses and deficiencies in Hollinger's internal control structure, and failed to adequately plan
its audit or expand its auditing procedures-
(j) KPMG violated the third standard of field work, which provides that sufficien t
competent evidential ma tter is to be obtained through inspection , observation , inquiries, and
con firmations to afford a reasonable basis for an opinion regarding the fin ancial statements under
audit . Given the widespread use of inappropriate non-compete payments and transactions with
related part ies , it is apparent that KPMG failed to require proper evidentiary support for Hollinger's
financial statements .
(k) KPMG violated SAS No . 82, which provides that an auditor must hav e
considered the following factors in assessing audit risk : (a) whether management compensation
creates a motivation to engage in fraudulent financial reporting ; (b) domination of management by
a small group; (c) actions which are not supported by proper documentation or are not appropriately
authorized ; (d) reporting records or files that should be, but are not, readily available and are not
promptly produced when requested; and (e) lack of timely inappropriate documentation for
transactions .
(1) KPMG violated SAS No. 55, which provides that the auditor' s understanding
of internal controls may sometimes raise doubts about the auditability of an entity's financia l
statements, either by failing to adequately understand Hollinger's internal controls (and lack thereof)
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and/or by failing to acknowledge and report to the audit committee that Hollinger's lack of internal
controls made an appropriate and thorough audit impossible .
369. Throughout the Class Period, KPMG knew or was reckless in not knowing of the
possibility of fraud due to Hollinger ' s dealings with related entities , and/orentities owned , controlled
by or affiliated with Lord Black , but KPMG failed to investigate Hollinger 's related party
transactions to determine whether they were accurately represented by the Company .
370. Defendant KPMG owed Hollinger's shareholders the obligation to act with
reasonable care and competence in the performance of its accounting and auditing services for
Hollinger and not to allow the Company's officers or directors to accept any improper monetary
benefit in his or her capacity as an officer and/or director or to engage in any active or deliberate
dishonesty . KPMG was required to exercise professional skepticism, an attitude that includes a
questioning mind, including an increased recognition of the need to corroborate management
representations and explanations concerning mutual matters . Here, KPMG completely failed in its
duties by issuing "clean" or unqualified opinions in connection with its deficient audits and reviews
of Hollinger's financial statements .
INDIVIDUAL DEFENDANTS' SCIENTE R
371 . The Individual Defendants personally and directly or indirectly (through their
ownership of Ravelston and other coznpanips af fi liated with or doing business with Hollinger)
profited from the fraud alleged herein , or are liable as a result of their complicity and/or reckless
disregard of numerous instances of improper conduct which were rubber-stamped by the Board and
Audit Commi ttee without inquiry or evaluation .
372. Lord Black, Radler, Boultbee and Atkinson were motivated to misrepresent and
conceal material facts from the shareholders so that these defendants could successfully pay
themselves millions of dollars in purported non-compete payments as part of the Company's sales
of its newspaper assets, and pay themselves additional millions of dollars through the Company' s
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payments to Ravelston (which they owned) for purported management services which Ravelsto n
never provided .
373 . By virtue of these defendants' positions within the Hollinger, they not only had acces s
to undisclosed information about the terms of the Company's asset sale transactions and the
management services agreements, and the circumstances surrounding those agreements, these
defendants actually orchestrated the asset sales, structured the management service agreements, and
knew that those transactions and agreements were misrepresented in the Company's public filings .
Lord Black, Radler, Boultbee and Atkinson knew that they were (a) diverting significant portions
of the proceeds from the sales of certain Hollinger assets by causing the payment of purported
non-compete payments to themselves and/or entities with which they were affiliated, owned and/or
controlled ; (b) causing Hollinger to sell certain of its assets to entities, including Bradford and
Horizon, that they owned and/or controlled at below market prices (or Hollinger actually paid those
entities to take Hollinger's assets) for purposes of unjustly enriching themselves ; and (c) causing
Hollinger to enter into certain management services agreements that required Hollinger to pay
purported management services fees to themselves and/or entities they owned or with which they
were affiliated, owned and/or controlled without having those entities provide any services to
Hollinger . In addition, Radler knew that the Company was artificially inflating its circulation
figures . These defendants knew and had access to information concerning these self-dealing and
related-party transactions (and Radler had access to information concerning the Company's true
circulation figures) through Hollinger's internal corporate documents, conversations with other
corporate officers and directors, and affiliated companies, attendance at management and Board
meetings and committees thereof, and tlurough reports and other information provided to them in
connection with their roles and duties as Hollinger executives and/or directors .
374. Because oftheir knowledge of such information, lord Black, Radler, Boultbee an d
Atkinson knew or recklessly disregarded the fact that adverse facts specified herein had not bee n
disclosed to, and were being concealed from, the investing public .
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', f r'r- !--+,K► ~-~ .r - ` r---- $ 9 r(.^--r rte,
375 . The other individual defendants (Andreas, Lady Black, Burt, Chambers, Colson,
Kipnis, Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Weidenfeld and Wexner)
likewise knew or recklessly disregarded the facts regarding the self-dealing and related party
transactions described herein . Through Hollinger's internal corporate documents, conversations with
other Hollinger officers and directors, attendance at management, Board and committee meetings,
and through reports and other information provided to them in connection with their roles and duties
as Hollinger executives and/or directors, these defendants had access to undisclosed information
about the terms of the Company's asset sales (including the non-compete payments), the
management services agreements described herein, and the circumstances surrounding those
agreements . However, rather than conducting any review of the terms of the asset sales and
management service agreements, or the fairness of those deals and agreements to Hollinger, these
defendants simply rubber-stamped, often after-t] ie-fact, these deals and agreements in a complete
failure to exercise any independent review or oversight of the actions of Lord Black, Radler,
Boultbee or Atkinson . As the Delaware Chancery Court concluded after trial, these directors
conducted themselves in a "supine manner." Hollinger International. Inc. , 844 A.2d at 1033 .
376, Additionally, to the extent any of these individual defendants considered or deemed
themselves to be "independent directors," they knew, or were reckless in not knowing, that the
Company's representations (described herein) that certain transactions had been approved by the
independent directors were false . These purportedly independent directors knew, or were reckless
in not knowing, that no such approvals had been given, or that the independent directors' complete
failure to conduct any inquiry or investigation into the facts of the transactions or their fairness to
Hollinger prevented those directors from being sufficiently informed to "approve" the transactions .
.377. In particular, Thompson, But and Kravis, as members of the Audit Committee, had
a duty to review the Company's financial information, oversee the audit process and take steps
necessary to assure the adequacy, integrity and accuracy of the financial statements issued by
Hollinger and the propriety of the Company's accounting practices and financial reporting . The
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Audit Committee was also responsible for reviewing the management services agreements and the
amounts paid by Hollinger pursuant to those agreements, monitoring and reviewing the Company's
related party transactions, and reviewing and recommending, where necessary, policies and
procedures to address conflicts of interest . The Audit Committee completely failed to discharge
these duties and responsibilities and therefore acted with extreme recklessness . As described above,
these Directors signed the Company's public filings which represented that certain transactions and
non-compete payments had been approved by the Audit Committee when they had not, and
therefore, these Directors acted fraudulently, or at least with extreme recklessness .
.378. In fact, the Company an d its Board have admitted the falsity of Hollinger's prio r
disclosures, including representations that transactions and non-compete payments described herein
were approved by the Board, Audit Committee and independent directors- The Company, through
its Special Committee, has in its New York and Illinois federal actions against Lord Black, Radler,
Boultbee, Colson, Lady Black, Hollinger Inc ., Ravelston, Horizon and Bradford, admitted that
transactions with Horizon, Bradford and others and certain non-compete payments did not receive
prior approval by the Board, Audit Committee or independent directors . The Special Committee is
seeking to recover over $484 million in damages resulting from unauthorized transactions and
unauthorized transfers of money to Lord Black and his cronies and affiliated companies (such as
Hollinger Inc-, Ravelston, Horizon and Bradford) .
379. Defendant Perle was motivated to assist in the defendants' fraud because he serve d
as head of a Hollinger subsidiary, Hollinger Digital, for which he was paid approximately $300,000
per year. Additionally, Perle serves as a Board member of Trireme Partner L .P. and is managing
partner of an investment company known as Trireme Associates ("Trireme") in which Hollinger last
year invested $2 .5 million. Hollinger has invested over $14 million with other venture capital
companies operated by other partners of Trireme- Hollinger has a 25% ownership stake in Trireme
and is entitled to 20% of the Trireme Partner L .P.'s profits-
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380. Kissinger was motivated to assist in defendants' fraud because be serves on th e
Trireme Strategic Advisory Board .
381 . Thompson was motivated to assist in the fraud because he received substantial
political contributions from Lord Black .
382. It is appropriate to treat all the Individual Defendants as a group for pleading purpose s
and to presume that the materially false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications as alleged herein are the collective
actions of all of the Individual Defendants in this action- The Individual Defendants, by virtue of
their high-level positions within Hollinger, directly participated in the management of the Company,
were directly involved in the day-to-day operations of the . Company at the highest levels and were
privy to confidential information concerning the Company and its business, operations, finances,
asset sales (including the sales of Hollinger assets to related-parties), significant contracts (including
the management services agreements),and self deal transactions (including the illicit non-compete
payments), as alleged herein .
383 . The Individual Defendants were involved in drafting, producing, reviewing ,
approving and/or disseminating the materially false and misleading statements and information
alleged herein, including SEC filings, press releases, and other public documents, were aware of or
recklessly disregarded the fact that materially false and misleading statements were being issued
regarding the Company, and approved or ratified these statements, in violation of the federal
securities laws .
384- As officers and controlling persons of a publicly-held company whose common stoc k
was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the and was
traded on the NYSE, and governed by the provisions of the federal securities laws, the Individual
Defendants each had a duty to disseminate prompt, accurate and truthful information with respect
to the Company's financial condition, operations, financial statements, business, management,
proceeds from asset sales, significant contracts, related-party transactions and to correct an y
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previously- issued statements that had become materially misleading or untrue, so that the market
price of the Company's publicly traded common stock would be based upon truthful and accurat e
information . The Individual Defendants' material misrepresentations and omissions duringthe Clas s
Period violated these specific requirements and obligations.
385. The Individual Defendants, by virtue of their positions of control and authority a s
officers and/or directors of the Company, were able to and did control the content of the various SEC
filings, press releases and other public statements pertaining to the Company during the Class Period_
The Individual Defendants were provided with copies of the documents alleged herein to be
misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent
their issuance or cause them to be corrected . Accordingly, the Individual Defendants are responsible
for the accuracy of the public reports and releases detailed herein .
386 . Hollinger and the Individual Defendants had the responsibility to maintain sufficien t
controls to accurately repo rt the Company's results . The representations made by a company in its
financial statements and in other financial disclosures to the public are the representations of tha t
company' s management.
387. According to SEC rules, to accomplish the objectives of accurately recording ,
processing, summarizing and reporting financial data, a company must establish an internal contro l
structure . Pursuant to Section 13 (b)(2) of the Exchange Act, Hollinger was required to :
[M]ake and keep books, records, and accounts, which, in reasonabledetail, accurately and fairly reflect the transactions and dispositionsof the assets of the issuer ; and
(A) devise and maintain a system of internalaccounting controls sufficient to provide reasonableassurances that
(1) - transactions are executed inaccordance with management's generalor specific authorization ;
(ii) transactions arerecorded as necessary
(I) to permit preparation of financial statements inconformity with generally accepted accountingprinciples--,-
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388. To accomplish the objectives of accurately recording, processing, summarizing an d
reporting data, a company must establish an internal control structure . In the structure, according
to Appendix D to Statement on Auditing Standards No . 55, Consideration of the Internal Control
Structure in a Financial Statement Audit ("SAS 55"), management should consider, among other
things, such objectives as (i) making certain that "[transactions are recorded as necessary- to permit
presentation of financial statements in conformity with generally accepted accounting principles . .
. and to maintain accountability for assets," and (ii) making certain that "[t]he recorded
accountability for assets is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences ."
389. According to SAS 55 (AU § 319 A .37 & 38) :
Establishing and maintaining an internal control structure is animportant management responsibility . - To provide reasonableassurance that an entity's objectives will be achieved, the internalcontrol structure should be under ongoing supervision bymanagement to determine that it is operating as intended and that itis modified as appropriate for changes in conditions .
390. Hollinger and the Individual Defendants had repeatedly represented to investors th e
adequacy and strength of its inte rnal control systems . In each of the Company' s 10-Ks during the
Class Period , the Company represented that Lord Black and the Company 's CFO had "reviewed
[Hollinger ' s] disclosure controls and procedures " and therefore "believe that [Hollinger's] disclosure
controls and procedures are effective in ensuring that material information related to the Company
is made known to [Lord Black and the CFO] by others within the Company . "
391 . Contrary to the requirements of GAAP and SEC rules, Hollinger and the Individual
Defendants failed to implement and maintain an adequate internal accounting control system .
Hollinger management knowingly tolerated the existence of inadequate internal controls and/or
recklessly disregarded its obligation to implement adequate controls to ensure that proceeds from
its asset sales were properly represented and disclosed, to ensure that Hollinger received the
management services for which it was paying, and to ensure that the asset sales and management
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services agreements were properly presented to the Board and Audit Committee ; and reviewed and
approved by the Board and Audit Committee .
392. The Individual Defendants are liable as participants in a scheme to defraud or deceive
purchasers of Hollinger common stock by disseminating materially false and misleading statements
and/or concealing material adverse facts regarding Hollinger's asset sales and the management
services agreements, and the Company's financial condition, operations, financial statements,
business, earnings, proceeds from asset sales, significant contracts, related-party transactions and the
intrinsic value of Hollinger common stock .
INAPPLICABILITY OF STATUTORY SAFE HARBOR
393 . As alleged herein, the Individual Defendants acted with scienter in that the Individual
Defendants knew at the time they issued them that the public documents and statements issued or
disseminated in the name of the Company were materially false and misleading or omitted material
facts ; knew that such statements or documents would be issued or disseminated to the investing
public; knew that persons were likely to reasonably rely on those misrepresentations and omissions ;
and knowingly and substantially participated or were involved in the issuance or dissemination of
such statements or documents as primary violations of the federal securities law. As set forth
elsewhere herein in detail, the Individual Defendants, by virtue of their receipt of information
reflecting the true facts regarding Hollinger, their control over, and./or receipt of Hollinger' s allegedly
materially misleading misstatements and/or their association with the Company which made them
privy to confidential proprietary information concerning Hollinger which were used to inflate
financial results and which defendants caused or were informed of, participated in and knew of the
fraudulent scheme alleged herein . With respect to non-forward-looking statements and/or omissions,
defendants knew and/or recklessly disregarded the falsity and misleading nature of the information
which they caused to be disseminated to the investing public .
.394. Defendants' false and misleading statements and omissions do not constitute for'ward-
looking statements protected by any statutory safe harbor . The statements alleged to be false and
-1 .34-
f"-~ r'-~ : ~--~. :rte ~••.~ rte-, •~--.~ ~~
misleading herein all relate to facts and conditions existing at the time the statements were made, .
No statutory safe harbor applies to any of Hollinger' s material false or misleading statements-
395_ Alternatively, to the extent that any statutory safe harbor is intended to apply to an y
forward-looking statement pled herein, the Individual Defendants are liable for the false forward-
looking statement pled because, at the time each forward-looking statement was made, the speaker
knew or had actual knowledge that the forward-looking statement was materially false or misleading,
and the forward-looking statement was authorized and/or approved by a director and/or executive
officer of Hollinger who knew that the forward-looking statement was false or misleading . None
of the historic or present tense statements made by defendants was an assumption underlying or
relating to any plan, projection or statement of future economic performance, as they were not stated
to be such an assumption underlying or relating to any projection or statement of future economic
performance when made nor were any of the projections or forecasts made by the Individual
Defendants expressly related to or stated to be dependent on those historic or present tense
statements when made .
APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD ON THE MARKET DOCTRIN E
396- At all relevant times, the market for Hollinger 's stock was an open , well-developed
and efficient market at all relevant times for the following reasons, among others :
(a) Hollinger common stock net the requirements for listing, and was listed andactively traded on the NYSE, a highly efficient and automated market ;
(b) As a regulated issuer , Hollinger was required to file and did file periodicreports with the SEC ;
(c) Hollinger regularly communicated with public investors via establishedmarket communication mechanisms, including through regulardisseminations of press releases on the national and international circuits ofmajor newswire services and through other wide-ranging public disclosures,such as communications with the financial press and other similar reportingservices ;
(d) Hollinger was followed by several securities analysts employed by majorbrokerage firms who wrote reports which were distributed to the sales forceand certain customers of their respective brokerage firms, which reports wereeach publicly available and entered the public marketplace ; and
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(e} the trading volume of Hollinger stock was substantial during the ClassPeriod .
397. As a result, the market for Hollinger stock promptly digested current informatio n
regarding Hollinger from all publicly available sources and reflected such infonnation in Hollinger's
stock price . Under these circumstances, all persons in the Class who purchased Hollinger common
stock during the Class Period based on defendants' false and misleading statements suffered similar
injury through their purchase of shares of'suclh stock at artificially inflated prices and a presumption
of reliance applies .
CLASS ACTION ALLEGATIONS
.398 . Plaintiffs bring Counts I-VIII of this action as a class action pursuant to Rule 23 of
the Federal Rule of Civil Procedure on behalf of themselves and all persons who purchased , acquired
or owned common stock in Hollinger (the "Class") between August 13, 1999 , when Hollinger filed
its August 10-Q containing various false and misleading statements described herein , and March
31, 2003, and who were damaged thereby, Plaintiffs bring Count VI on behalf of themselves an d
members of a class comprised solely of other States, political subdivisions or State pension plans,
as defined in 15 U.S .C . § 77p, that have authorized participation in this action-
399 .. Excluded from the Class are defendants, their subsidiaries and affiliates, and the
officers and directors of Hollinger, members of their immediate families and their legal
representations, heirs, successors or assigns or any entity in which any of the foregoing has a
controlling interest .
400. All Counts are properly maintainable as a class action counts ..
401 . The Class is so numerous that joinder of all members is impractical . Throughoutthe
Class Period, Hollinger common shares were actively traded on the NYSE . As of May 5, 2004,
Hollinger had outstanding approximately 90 .13 million shares of its common stock . While the exact
number of Class members is unknown to Plaintiffs at this time and can only be ascertained through
discovery, Plaintiffs believe that there are thousands of members of the proposed class, including
individuals and entities too numerous to bring separate actions. It is reasonable to assume tha t
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holders of Hollinger common stock ale geographically dispersed throughout the United States o f
America .
402. Record owners and other members of the Class may be identified from record s
maintained by Hollinger or its transfer agent and may be notified of the pendency of this action b y
mail, using the form of notice similar to that customarily used in securities class actions-
403, There are questions of law and fact that are common to the Class which predominate
over any questions affecting only individual Class members . The common questions include :
(a) Whether the defendants publicly disseminated or caused the Company topublicly disseminate press releases, earnings pronouncements, regulatoryfilings and other public statements during the Class Period which containedmaterial misrepresentations or omitted to state material facts necessary tomake such statements not misleading in violation of the federal securitieslaws as alleged herein ;
(b) Whether defendants participated in a fraudulent scheme to artificially inflateand misrepresent the proceeds from Hollinger's asset sales and therebyartificially inflate Hollinger's stock price ;
(c) Whether the defendants acted intentionally with direct knowledge of thefalsity of such statements, or at least recklessly, in making such statements ;
(d) 'Whether the Individual Defendants, Hollinger Inc. and Ravelston are"controlling persons" as that term is defined in Section 20(a) of the ExchangeAct;
(e) Whether the market prices of Hollinger's common stock during the ClassPeriod were artificially inflated due to material misstatements and omissionscomplained of herein ;
(f) Whether the Individual Defendants concealed their breaches of fiduciaryduties in causing, directing and/or approving, or allowing or permitting,material misrepresentations and omissions in the Company's publicstatements and filings relating to certain related party transactions and theCompany's financial condition;
(g) Whether the individual Class members were improperly induced to hold theirHollinger shares ;
(h) Whether the individual Class members were improperly induced to purchasetheir Hollinger shares ; and
(i) Whether the members of the Class have sustained damages and, if'so, whatthe appropriate measure of damages should be .
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404. Plaintiffs are committed to prosecuting the Class claims and have retained competent
counsel experienced in litigating claims of this nature . Plaintiffs' claims are typical of the claims
of other members ofthe Class . Accordingly, Plaintiffs are adequate representatives of the Class and
will fairly and adequately protect the interests of the Class .
405, Plaintiffs anticipate that there will be no difficulty in maintaining each and every
Count as a class action Count .
406 . The class action is an appropriate method for the fair and efficient adjudication of
those Counts .
407. Defendants have acted on grounds generally applicable to the Class with respect to
the matters complained of herein, thereby making appropriate the relief sought herein with respect
to the Class as a whole .
408. The prosecution of separate actions would create the risk of
a. Inconsistent or varying adjudications which would establish incompatiblestandards for conduct for the defendants ; and/or
b. Adjudications which would as a practical matter be dispositive of theinterests of other members of the Class .
Accordingly, a class action is superior to other available methods for the fair and efficient
adjudication ofthis controversy. Additionally, because the damages suffered by individual members
of the Class may in some circumstances be relatively small, the expense and burden of individual
litigation make it impossible for such class members individually redress the wrongs done to them .
COUNT I
VIOLATION OF SECTION 10(b) OF THE EXCHANGE ANDAND RULE 10b-5 PROMULGATED THEREUNDE R
(Individual And Class Claim Against All Individual Defendants , Hollinger and KPMG)
409. Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein .
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410. This Count is asse rted by Plaintiffs on behalf of themselves and the Class against al l
Individual Defendants, Hollinger and KPMC and is based upon Section 10(b) of the Exchange Act ,
15 U .S.C_ §78j(b), and Rule I Ob-5, §240 .1Ob-5, promulgated thereunder.
411 . During the Class Period, these defendants carried out a plan, scheme and course o f
conduct which was intended to and, throughout the Class Period, did : (a) deceive the investing
public, including Plaintiffs and other Class members, as alleged herein ; (b) artificially inflate and
maintain the market price of Hollinger's stock; and (c) caused Plaintiffs and other members of the
Class to purchase or otherwise acquire Hollinger's stock at artificially inflated prices . In furtherance
of this unlawful scheme, plan and course of conduct, the defendants took the actions set forth herein .
412 . In addition to the duties of full disclosure imposed on these defendants as a result o f
their making affirmative statements and repo rts , or participation in the making of affirmative
statements and repo rts to the investing p> p ae they had a duty to promptly disseminate truthful
information that would be material to investors , in compliance with GAAP and the integrated
disclosure provisions of the SEC as embodied in SEC Regulations S-X (17 C.F.R. § 210 . 01 et seq .)
and S-K (17 C.F_R. § 229 . 01 et seq .) and other SEC regulations , including truthful, complete and
accurate information with respect to the Company's operations and performance so that the market
prices of the Company ' s publicly traded securities would be based on truthful, complete and accurate
information .
413, The defendants named in this Count, individually and in concert, directly and
indirectly, by the use of means and instrumentalities of interstate commerce and/or the mails,
engaged and participated in a continuous course of conduct to conceal adverse material information
about the Company's financial results, businesses, operations, asset sales, material contracts and
business prospects as specified herein . These defendants employed devices, schemes, and artifices
to defraud, while in possession of material, adverse, non-public information, and engaged in acts,
practices, and a course of conduct as alleged herein, in an effort to assure investors of Hollinger's
earnings, assets, revenues, expenses, proceeds from asset sales and the accuracy of the Company' s
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financial reporting of performance, which included the making of, or the participation in the making
of, untrue statements of material facts and omissions, or to state the material facts necessary in order
to make the statements made about the Company's financial and business operations in light of the
circumstances raider which they were made, not misleading, as set forth particularly herein .
414. Specifically, as part of their scheme, the Individual Defendants, Hollinger and KPMG
failed to disclose or disclosed in a manner that was knowingly false and misleading, information
regarding certain self-dealing and related party transactions including : (a) the diversion of
significant portions of the proceeds from the sales of Hollinger's assets to Hollinger, Lord Black,
Radler, Boultbee and Atkinson under the guise of non-compete payments ; (b) Hollinger's asset sales
to entities, including Bradford and Horizon, that were owned and/or controlled by certain of the
defendants (including Lord Black and Radler) on terms unfavorable to Hollinger and at below
market prices for purposes of unjustly enriching themselves ; and (c) Hollinger's entry into certain
management services agreements that required Hollinger to pay purported management services fees
to defendants andlor entities they owned or controlled or with which they were affiliated, when no
such management services were provided . As a result of this unlawful scheme, plan and course of
conduct, Plaintiffs and other members of the Class were caused to purchase or otherwise acquire
Hollinger securities at artificially inflated prices . In furtherance of this unlawful scheme, plan and
course of conduct, these defendants, and each of them, engaged in the actions set forth herein .
415. The Individual Defendants' primary liability arises from the following facts : (i) they
were high-level executives and directors of the Company during the Class Period and were members
of the Company's management tearer ; (ii) by virtue of their responsibilities and activities as senior
officers of the Company, they were privy to and participated in the drafting, reviewing, and/or
approving the misleading statements, omissions, releases, reports, and other public representations
of and about Hollinger and/or signed the Company's public SEC filings, which public filings
contained the allegedly material misleading statements and omissions ; (iii) they knew or had access
to the material adverse non-public information about the financial results of Hollinger which wer e
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not disclosed ; and (iv) they were aware of the Company's dissemination of information to the
investing public which they knew or recklessly disregarded was materially false and misleading .
416. Each of the defendants named in this Court I had actual knowledge of the
misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard
for the truth in that they failed to ascertain and to disclose such facts, even though such facts were
available to them. These defendants' material misrepresentations and/or omissions were done
knowingly or recklessly and for the purpose and effect of concealing the following from the investing
public and supporting the artificially inflated price of its securities : (i) payments of non-compete
payments and management service fees (where no management services were provided) ; (ii) the
failure of the Board and Audit Committee to properly review and approve these agreements and the
Company's related party transactions ; and (iii) the Company's accounting irregularities and the
fraudulent use of other companies as participants in Hollinger's fraudulent schemes. As
demonstrated by these defendants' statements throughout the Class Period, if they did not have actual
knowledge of the misrepresentations and omissions alleged, they were reckless in failing to obtain
such knowledge by deliberately refraining from taking those steps necessary to discover whether
those statements were false or misleading.
417. As a result of the dissemination of the materially false and misleading information
and/or defendants' failure to disclose material facts, as set forth herein, the market price of
Hollinger's securities was at all times during the Class Period artificially inflated . In ignorance of
the fact that the market price of Hollinger's publicly-traded securities was artificially inflated, and
relying directly or indirectly on the materially false and misleading statements made by defendants,
or upon the integrity of the market in which the securities trade, and the truth ofany representations
made to appropriate agencies as to the investing public, at the times at which any statements were
made, and/or on the absence of material adverse information that was known to or recklessl y
disregarded by these defendants but not disclosed in public statements by such defendants duringth e
Class Period, Plaintiffs and the Class purchased or otherwise acquired for value Hollinger stoc k
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during the Class Period at artificially high prices and were damaged thereby . But for these
defendants' materially false and misleading statements and omissions alleged herein, Plaintiffs and
the Class would not have purchased or otherwise acquired for value Hollinger stock during the Class
Period at artificially high prices-
418 . At the time of such misstatements and omissions, Plaintiffs and the Class wer e
ignorant of their falsity, and believed them to be true . Had Plaintiffs, the Class and the marketplace
known of the non-compete payments, the payments for management services which were not
provided, the failure of the Board and Audit Committee to properly review and approve these
payments, the true financial condition of the Company, the true circulation figures for the Company's
newspapers, and the other facts described herein which were not disclosed by defendants, Plaintiff
and the Class would not have purchased or otherwise acquired Hollinger stock during the Class
Period, or, if they had purchased or otherwise acquired such securities during the Class Period, they
would not have done so at artificially inflated prices .
419. The market price of Hollinger securities declined materially upon the public
disclosure of the true facts which had been misrepresented or concealed as alleged herein-
420. As a direct and proximate cause of the wrongful conduct of the Individual
Defendants, Hollinger and KPMC, Plaintiffs and other members of the Class suffered damages in
connection with their respective purchases and sales of Hollinger securities during the Class Period .
421 . Therefore, by virtue of the foregoing, these defendants have violated Section 10(b)
of the 19.34 Act, and Rule I Ob-5 promulgated thereunder .
422. As a result of the defendants' conduct, Plaintiffs were damaged in an amount to be
proved at trial .
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COUNT 1 1
VIOLATION OF SECTION 10(b) OF THE EXCHANGE ANDAND RULE IOb-5 PROMULGATED THEREUNDER
(Individual And Class Claim Against Hollinger and Radler)
423, Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein .
424., This Count is asserted by Plaintiffs an behalf of themselves and the Class against
Hollinger- and Radler and is based upon Section 10(b) of the Exchange Act, 15 U.S .C. §78j(b), and
Rule I Ob-5 , §240.1Ob-5, promulgated thereunder .
425 . During the Class Period, these defendants carxied out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did : (a) deceive the investing
public, including Plaintiffs and other Class members, as alleged herein ; (b) artificially inflate and
maintain the market price of Hollinger's stock ; and (c) caused Plaintiffs and other members of the
Class to purchase or otherwise acquire Hollinger's stock at artificially inflated prices, In furtherance
of this unlawful scheme, plan and course of conduct, the defendants took the actions set forth herein .
426. In addition to the duties of full disclosure imposed on these defendants as a result o f
their making affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, they had a duty to promptly disseminate truthful
information that would be- material to investors, in compliance with GAAP and the integrated
disclosure provisions of the SEC as embodied in SEC Regulations S-X (17 C,F .R. § 210.01 et seq.)
and S-K (17 C.F.R. § 229 .01 et seq .) and other SEC regulations, including tnrthful, complete and
accurate information with respect to the Company's operations and performance so that the market
prices of the Company's publicly traded securities would be based on truthful, complete and accurate
information .
427. The defendants named in this Count, individually and in concert, directly an d
indirectly, by the use of means and instrumentalities of interstate commerce andlor the mails ,
engaged and participated in a continuous course of conduct to artificially inflate through imprope r
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means the Company's circulation figures . Hollinger and Radler reported false circulation figures
in a scheme to obtain higher payments from advertisers and to drive up the market price of the
Company's stock. Hollinger and Radler employed this fraudulent scheme while in possession of
material, adverse, non-public information about the Company's true circulation figures, and engaged
in acts, practices, and a course of conduct as alleged herein, in an effort to present to Hollinger's
investors a false presentation of the Company's circulation figures and financial and business
operations .. As a result of this unlawful scheme, plan and course of conduct, Plaintiffs and other
members of the Class were caused to purchase or otherwise acquire Hollinger securities at artificially
inflated prices . In furtherance of this unlawful scheme, plan and course of conduct, these defendants,
and each of them, engaged in the actions set forth herein .
428. Radler's primary liability arises from the following facts : (i) he was a high-level
executive and director of the Company during the Class Period and was a member of the Company's
management team, (ii) by virtue of his responsibilities and activities as a senior officer of the
Company, he was privy to and participated in the drafting, reviewing, and/or approving the
misleading statements, omissions, releases, reports, and other public representations of and about
Hollinger andlor signed the Company's public SEC filings, which public filings contained the
allegedly material misleading statements and omissions ; ( iii) he knew or had access to the true
circulation figures of Hollinger which were not disclosed ; and (iv) he was aware of the Company's
dissemination of information to the investing public which he knew or recklessly disregarded was
materially false and misleading .
429. Each of the defendants named in this Court 11 had actual knowledge of the
misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard
for the truth in that they failed to ascertain and to disclose such facts, even though such facts were
available to them. These defendants' material misrepresentations and/or omissions were done
knowingly or recklessly and for the purpose and effect of concealing the Company's true circulation
figures from the investing public and supporting the artificially inflated price of Hollinger' s
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securities. As demonstrated by these defendants' statements throughout the Class Period, if they did
not have actual knowledge of the misrepresentations and omissions alleged, they were reckless in
failing to obtain such knowledge by deliberately refraining from taking those steps necessary to
discover whether those statements were false or- misleading .
430 . As a result of the dissemination of the materially false and misleading informatio n
and/or defendants' failure to disclose material facts, as set forth herein, the market price of
Hollinger's securities was at all times during the Class Period (and beyond the Class Period)
artificially inflated . In ignorance of the fact that the market price of Hollinger's publicly-traded
securities was artificially inflated, and relying directly or indirectly on the materially false and
misleading statements made by defendants, or upon the integrity of the market in which the securities
trade, and the truth of any representations made to appropriate agencies as to the investing public,
at the times at which any statements were made, and/or on the absence of material adverse
information that was known to or recklessly disregarded by these defendants but not disclosed in
public statements by such defendants during the Class Period, Plaintiffs and the Class purchased or
otherwise acquired for value Hollinger stock during the Class Period at artificially high prices and
were damaged thereby. But for these defendants' materially false and misleading statements and
omissions alleged herein, Plaintiffs and the Class would not have purchased or otherwise acquired
for value Hollinger stock during the Class Period at artificially high prices .
431 . At the time of such misstatements and omissions , Plaintiffs and the Class wer e
ignorant of their falsity, and believed them to be true . Had Plaintiffs, the Class and the marketplace
known of the artificial inflation of the Company's circulation figures, and known of the true
circulation figures for the Company's newspapers, Plaintiff and the Class would not have purchased
or otherwise acquired Hollinger stock during the Class Period, or, if they had purchased or otherwise
acquired such securities during the Class Period, they would not have done so at artificially inflated
prices .
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432 . The market price of Hollinger securities declined materially upon the public
disclosure of the true circulation figures and related facts which had been misrepresented or
concealed as alleged herein .
433. As a direct and proximate cause of the wrongful conduct of Hollinger and Radler,
Plaintiffs and other members of the Class suffered damages in connection with their respective
purchases and sales of Hollinger securities during the Class Period .
4.34. Therefore, by virtue of the foregoing, these defendants have violated Section i 0(b)
of the 1934 Act, and Rule I Ob-5 promulgated thereunder .
435, As a result of the defendants' conduct, Plaintiffs were damaged in an amount to be
proved at trial .
COUNT IIIVIOLATION OF SECTION 18 OF THE EXCHANGE AC T
(Individual And Class Claim Against Hollinger , KPMG And The Individual Defendants)
436. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set
forth herein.
437. This Count is asserted by Plaintiffs on behalf of themselves and the Class pursuant
to Section 18 of the Exchange Act against Hollinger, KPMG and each of the Individual Defendants .
438. As set forth above, Hollinger, KPMG and the Individual Defendants made or cause d
to be made statements which were, at the time and in light of the circumstances under which they
were made, false or misleading with respect to material facts, in documents filed with the SEC,
Specifically, the Company's audited financial statements for the fiscal years 2000, 2001 and 2002
were included in the Company's Forms 10-K that were filed with the SEC . The Company has
already admitted that those financial statements are materially false and misleading and so they must
be withdrawn and restated which, by way of definition makes them false and misleading .
Additionally, the financial statements (and Hollinger's 2000-2003 10-Ks) were false and misleading
because, as stated in SEC Rule 4-01 (a) of Regulation S-X, "financial statements filed with the [SEC ]
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which are not prepared in accordance with [GAAPJ will be presumed to be misleading o r
inaccurate." 17 CT ,R. § 210.4-01(a)(1) ,
439. KPMG falsely certified in Hollinger's 2000 -2003 10-Ks that Hollinger's fin ancial
statements complied with GAAP and that KPMG had performed its audits in accordance wit h
GAAS .
440 .. Plaintiffs and other members of the Class read and relied upon each of the Forms 10-
K, and the fi nancial statements contained therein , not knowing that they were false and misleading .
441 . The Individual Defendants each signed the Company' s 2000 , 2001 and 2002 Forms
10-K and KPMG signed its certifications in those filings .
442. In connection with their purchases of Hollinger stock, Plaintiffs and other Clas s
members specifically read and relied on the false and misleading statements regarding the sales of
Hollinger assets to related parties, including Bradford and Horizon, the reported proceeds of those
asset sales (which improperly included non compete payments made to Lord Black, Radler,
Atkinson, Boultbee, Ravelston and Hollinger Inc .), the Ravelston management services agreements
in the Company's Forms 10-K, filed with the SEC, and the Company's reported circulation figures .
Plaintiffs' reliance was reasonable, particularly given the clean opinions from the Company's
auditor, KPMG .
443 . When the truth began to emerge on or after March 31, 2003 about the false an d
misleading statements in the Company's documents and reports filed with the SEC, Plaintiffs an d
other Class members were significantly damaged by the resulting drop in the value of the Company' s
stock .
444. As a direct and proximate result of defendants ' wrongful conduct, Plaintiffs and other
Class members suffered damage in connection with their purchases of Hollinger stock ,
445 . By virtue of the foregoing, Hollinger, KPMG and the Individual Defendants hav e
violated Section 18 of the Exchange Act .
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446 . As a result of the Individual Defendants ' conduct described herein, Plaintiffs an d
other Class members were damaged in amounts to be proved at trial .
COUNT IVVIOLATION OF SECTION 18 OF THE EXCHANGE AC T
(Individual And Class Claim Against Hollinger and Radler )
447. Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein.
448_ This Count is asserted by Plaintiffs on behalf of themselves and the Class pursuant
to Section 18 of the Exchange Act against Hollinger and Radler.
449 . As set forth above, Hollinger, an d Radler made or caused to be made publi c
statements regarding the Company' s circulation figures which were, at the time and in light of the
circumstances under which they were made, false or misleading with respect to material facts, in
documents filed with the SEC . These false and misleading statements were included in the
Company's Forms IO-K that were filed with the SEC during the Class Period . The Company has
already admitted that its public statements in its Forms 10-K regarding its circulation figures are
materially false and misleading.
450. Plaintiffs and other members of the Class read and relied upon each of the Forms 10-
K, not knowing that they were false and misleading .
451 . Radler signed the Company's 2000, 2001 and 2002 Forms 10-K .
452. In connection with their purchases of Hollinger stock, Plaintiffs and other Clas s
members specifically read and relied on the false and misleading statements regarding th e
Company's reported circulation figures, and Plaintiffs' reliance was reasonable .
453 . When the truth began to emerge on or after rune 15, 2004 about the false an d
misleading statements in the Company ' s documents and reports filed with the SEC, Plaintiffs an d
other Class members were significantly damaged by the resulting drop in the value of the Company' s
stock.
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454. Asa direct and proximate result ofdefendants' wrongful conduct, Plaintiffs and other
Class members suffered damage in connection with their purchases of Hollinger stock .
455. By virtue of the foregoing, Hollinger and Radler have violated Section 18 of th e
Exchange Act .
456. As a result of the conduct of Hollinger and Radler described herein, Plaintiffs an d
other Class members were damaged in amounts to be proved at trial .
COUNT VVIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
(Individual And Class Claim Against The Individual Defendants,Hollinger Inc., Ravelston And Argus)
457. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set
forth herein .
458 . This Count is asserted by Plaintiffs on behalf of themselves and the Class against al l
the Individual Defendants, Hollinger Inc ., Ravelston and Argus under Section 20(a) of the Exchange
Act .
459. Each ofthese defendants acted as controlling persons of Hollinger within the meanin g
of Section 20(a) of the Exchange Act as alleged herein, By virtue of the Individual Defendants'
executive positions, Board membership and/or stock ownership, as alleged above, these defendants
had the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various statements
which Plaintiffs and other Class members contend are false and misleading- The Individual
Defendants were provided with orhad unlimited access to copies of the Company's internal reports,
press releases, public filings and other statements alleged by Plaintiffs and other Class members to
be misleading prior to and/or shortly after these statements were issued and had the ability and power
to direct or prevent the issuance of the statements or cause the statements to be corrected .
460 . In particular, Lord Black, Radler, Atkinson and Boultbee had direct involvement i n
and control over the day-to-day operations of the Company and also had the power to control o r
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influence the particular transactions (and statements and activities) giving rise to the securitie s
violations as alleged herein, and exercised the same ..
461 . As set forth above, the Individual Defendants committed primary violations o f
Section 10(b) and Rule I Ob-5 and Section 18 of the Exchange Act by the acts and omissions alleged
in this Complaint . By virtue of their positions as controlling persons of Hollinger, the Individua l
Defendants are liable pursuant to Section 20(a) of the Exchange Act ,
462. Hollinger Inc ., Ravelston and Argus also controlled Hollinger within the meaning o f
Section 20(a) of'the Exchange Act . Hollinger Inc ., controlled Hollinger through its ownership of
30.3% of Hollinger's shares and control of 73% of'Hollinger's overall voting power . Ravelston and
Angus controlled Hollinger because they controlled 78% of the shares of Hollinger Inc_ which, in
turn, controls Hollinger.
463 . As a direct and proximate result of the wrongful conduct of the Individua l
Defendants, Hollinger Inc., Ravelston and Argus, Plaintiffs and the other members of the Clas s
suffered damages in connection with their purchase or acquisition of Hollinger securities .
464. As a result of the conduct of the Individual Defendants , Hollinger Inc ., Ravelston an d
Argus, Plaintiffs and other Class members were damaged in amounts to be proved at trial .
COUNT V IBREACH OF FIDUCIARY DUTY FOR
INDUCING RETENTION OF HOLLINGER STOC K
(Individual And Class Claim Against Hollinger And All Individual Defendants )
465 . Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein-
466 . This claim is brought against Hollinger and all Individual Defendants for breach o f
fiduciary duty .
467. As alleged herein, Hollinger and the Individual Defendants employed a fraudulent
scheme, and made material misrepresentations or omitted to disclose material facts to Plaintiffs and
..150-
PRO" WON Ww"
the investing public regarding Hollinger's asset sales, management services agreements and the
Company's financial condition-
468. Hollinger and the Individual Defendants were required to present Hollinger's business
and financial condition in a fair and accurate manner in, among other documents, reports that it was
required to file with the SEC and in press releases .
469 . As described in greater detail above, the Individual Defendants, by virtue of thei r
positions at the Company, knew or were reckless in not knowing that the Company's public filings
and statements materially misrepresented the Company's asset sales (and the proceeds received from
such sales), the management services agreements, and the Board's and Audit Committee's review
and approval of the asset sales and management services agreements . Each of the Individual
Defendants knew or had access to material, adverse non-public information about I-Iollinger's
financial results and then- existing business condition which was not disclosed, Each of the
Individual Defendants participated in drafting, renewing and/or approving the misleading statements,
releases, reports and other public representations about Hollinger, and was responsible for
Hollinger's financial accounting system, internal controls, and the preparation and review of the
audited and unaudited financial statements prepared and published in the name of the Company and
contained in reports and other documents, including those filed with the SEC .
470. As alleged herein, the Company's documents contained untrue statements of material
facts and/or omitted material facts required to be stated therein to make the statements therein not
misleading . The Company has admitted that its financial statements for the fiscal years 1999-2002
were all materially false when issued ,
471 . The Individual Defendants, as present or former directors and/or officers of Hollinger,
at all times relevant to this Count, were fiduciaries of the Company's public shareholders . As such,
they owed Hollinger's shareholders the highest duties of good faith, due care, fair dealing and
loyalty .
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472. The Individual Defendants breached their fiduciary duties of care and loyalty b y
causing, directing and/or approving, or allowing or permitting, and/or failing to properly and fully
review, investigate and evaluate the terms and fairness to Hollinger of the self-dealing transactions
described herein, and by causing, directing or approving, or allowing or permitting the materially
misleading statements and omissions in the Company's public statements and SEC filings described
herein .
473 . The Individual Defendants ' breaches of fiduciary duty and their materially false an d
misleading statements were made in connection with the financial statements and public filings upo n
which Plaintiff relied in retaining its holdings of Hollinger stock .
474. The materially false and misleading statements by the defendants named in this Count
were made in connection with the public filings and financial statements upon which Plaintiffs relie d
in retaining its holdings of Hollinger stock .
475. At the time Plaintiffs and other members of the Class held Hollinger stock, they di d
not know of any of the false and/or misleading statements and omissions and breaches of fiduciary
duty, and relied upon the representations made by defendants in retaining such stock .
476. The aforesaid misrepresentations and omissions by these defendants induced
Plaintiffs and other members of the Class to retain their holdings of Hollinger stock .
477 . As a direct and proximate result of the breaches of fiduciary duty , Plaintiffs in
reliance on these defendants' misrepresentations and in ignorance of the material omitted facts ,
suffered damages in connection with retaining their holdings of Hollinger stock.
COUNT VII_12ff),1G) & (I) OF THE ILLINOIS SECURITIES LAW OF 1953, 815 ILCS § 5/1 2
(On Behalf Of Plaintiffs And Members Of A Class Comprised Solely Of States,Political Subdivisions Or State Pension Plans Against All Defendants )
478 . Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein , except to the extent such allegations charge the defendants with intentional misconduct
as it relates to this claim .
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479. This-Count is asserted by Plaintiffs on behalf of themselves and members of a class
comprised solely of other States, political subdivisions or State pension plans, as defined in 1 5
U.S .C . § 77p, that have authorized participation in this action (the "5 12 Plaintiffs") .
480. By filing this action, the § 12 Plaintiffs hereby elect to avoid sales of Hollinge r
securities and avail themselves of the remedy of recision, as provided in 815 ILLS § 5113 . The § 1 2
Plaintiffs aver that less than six months have elapsed between time they obtained knowledge tha t
sales were voidable and filing of this action .
481 . During the Class Period, defendants engaged in the transactions, practices and/or a
course of business in connection with the sale of Hollinger securities which worked or tended t o
work a fraud or deceit upon the purchasers of Hollinger securities .
482. The defendants made or caused to be made statements which were false and/o r
misleading with respect to material facts concerning Hollinger's business (including its asset sales,
the management services agreements, and the-Board's and Audit Committee's review and approval
of the asset sales and management services agreements), financial condition and related party
transactions .
483 . The defendants employed devices, schemes and/or artifices to defraud directly and
indirectly in connection with the sale of Hollinger securities .
484. The defendants signed and circulated statements pertaining to Hollinger securities
knowing or having reasonable grounds to know that such statements contained material
misrepresentations and omissions, including but not limited to statements regarding related party
transactions, compensation and other payments received by Hollinger officers and directors and other
false or misleading statements and omissions concerning the transactions described above .
485. As result of the defendants' fraudulent activity, the § 12 Plaintiffs purchase d
Hollinger securities that the § 12 Plaintiffs would not have purchased but for defend ants' fraud .
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486 . Asa direct and proximate cause of defendants' wrongful conduct, the § 12 Plainti ffs
suffered damages in connection with their respective purchases of Hollinger securities during th e
Class Period .
COUNT VIIIAIDING AND ABETTING BREACH OF FIDUCIARY
DUTY WHICH INDUCED RETENTION OF HOLLINGER STOC K
(Individual And Class Claim For Aiding And AbettingAgainst KPMG, Hollinger Inc . , Ravelston, RMI And Argus )
487 . Plaintiffs repeat and reallege each and every allegation set forth above as if fully se t
forth herein .
488. Plaintiffs bring this Count against KPMG, Hollinger Inc_, Ravelston, RMI and Argu s
for aiding and abetting the breaches of fiduciary duty by the Individual Defendants .
489. As alleged herein , KPMG knew of the self-dealing transactions perpetrated at
Hollinger by Lord Black and the Individual Defendants, and knew, or was reckless in not knowing,
that Lord Black and other Individual Defendants were diverting part of the proceeds of the
Company's asset sales to themselves, that the Company was paying for management services which
were never provided, and that the Company was materially misrepresenting the proceeds it received
from its asset sales, and other facts, in the Company's public filings and public statements . Hollinger
Inc. and Ravelston also knew these facts due to their control over Hollinger, and because Lord Black
owned and controlled Hollinger Inc .. and Ravelston as well as Hollinger .
490 . KPMG, Hollinger Inc ., Ravelston , RMI and Argus knew of the Company's materia l
misrepresentations and omissions of material facts in its public filings .
491 . KPMG failed to properly alert the investing public that Hollinger and the Individua l
Defendants were making mate rial misrepresentations and/or omissions when KPMG issued clean
audits of Hollinger .
492 . KPMG, Hollinger Inc .., Ravelston, RMI and Argus were aware of their role as part
ofHollinger's and the Individual Defendants' fraudulent scheme to conceal from the investing publi c
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Pon" FMM%
these improper self-dealing transactions at the time when KPMG was assisting Hollinger and the
Individual Defendants' in perpetrating this scheme .
493 . As a result of KPMG's professional negligence, and its certification of Hollinger's
financial statements which KPMG knew were materially false and misleading, and as a result of the
participation of Hollinger Inc . and Ravelston in the fraudulent scheme described herein, the
Individual Defendants succeeded in their fraudulent scheme, to the detriment of Hollinger
shareholders . Accordingly, Lord Black and the Individual Defendants were able to enter into the
transactions in which Hollinger sold assets to third parties, as described above, and divested millions
of dollars ofthe proceeds from such asset sales to themselves when these payments should have gone
to Hollinger. The Individual Defendants were also able to cause the Company to pay to entities
affiliated with the Individual Defendants for management services which were never provided to
Hollinger.
494. Additionally, as a result of KPMG's ]snowing and substantial assistance in preparin g
Hollinger's public filings which KPMG knew were materially false, misleading and incomplete in
their descriptions of the asset sales, management services agreements and related party transactions,
and as a result of'Hollinger Inc .'s and Ravelston's knowing and substantial assistance in preparing
the management services agreements, Plaintiff and other members of the Class were improperly
induced to retain their Hollinger shares based upon materially false and misleading statements and
omissions .
495 . By their actions, KPMG, Hollinger Inc .., Ravelston, RMI and Argus knowingly
participated in, and aided and abetted, the Individual Defendants' breaches of fiduciary duty and their
divestiture of hundreds of millions of dollars of the purchase prices from the sales of Hollinger
assets .
496. As a result of these defendants' aiding and abetting the improper actions of the
Individual Defendants, Hollinger and its shareholders have been and continue to be irreparably
damaged .
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497, At the time Plaintiff and other members of the Cass held Hollinger stock, they did
not know of any of the false and/or misleading statements and omissions and breaches of fiduciary
duty, and relied upon the representations made by defendants in retaining such stock .
49$. As a result of these defendants' knowing participation and substantial assistance in
aiding and abetting the Individual Defendants' breaches of fiduciary duty, Plaintiff and the Clas s
have suffered damages,.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment, as follows :
(a) Determining that this action is a proper class action, and certifying Plaintiffs
as class representatives under Rule 2.3 of the Federal Rules of Civil Procedure ;
(b) Awarding compensatory damages in favor of Plaintiffs and all other Class
members against all defendants, jointly and severally, for all damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
(c) Awarding extraordinary, equitable and/orinjunctive reliefas permitted by law
including but not limited to an order permanently enjoining the defendants from future violations
of the federal securities laws ;
(d) Awarding Plaintiffs and all Class members their costs and disbursements of
this suit, including reasonable attorneys' fees, accountants' fees and experts' fees ; and
(e) Awarding recision and such other and further relief as may be just and proper .
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JURY TRIAL DEMANDE D
Plaintiffs hereby demand a trial by jury on all claims so triable .
&,rj V
DATED: August 2, 2004Carol V. iI enConor R. CrowleyMUCH SHELIST FREED DENENBERGAMENT & RUBENSTEIN, P .C.191 Nordi Wacker Drive - Suite 1800Chicago , Illinois 60606-1615Telephone: (312) 521-2000Facsimile : (312) 521-210 0
Liason Counsel for the Plaintiff Clas s
Jay W. EisenhoferJohn C . Kairi sGRANT & EISENHOFER P .A.Chase Manha ttan Centr e1201 North Market StreetWilmington , Delaware 19801Telephone : (302) 622-7000Facsimile : (302) 622-710 0
Attorneys for PlaintiffTeachers' Retirement System of Louisiana andCo-Lead Counsel for the Plaintiff Clas s
Darren J. RobbinsTravis E . Downs, IIISco tt H . SabanLERACH COUG14LIN STOIA & ROBBINS LLP401 B . Street, Suite 170 0San Diego , CA 92101Telephone : (619) 231-1058Facsimile : (619) 231-742 3
Attorneys for Plaintiff Washington Area CarpentersPension and Retirement Fund and Co-Lead Counselfor the Plaintiff Clas s
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Of Counsel :
Richard S . SchiffrinRichard A. MariskasSCHIFFRIN & BARROWAY LLPThree Bala Plaza Fast, Suite 400Bala Cynwyd, PA 19004Telephone : (610) 667-7706Facsimile : (610) 667-705 6
.John T. DeCarl oDeCARLO, CONNOR & SELVO533 South Fremont Avenue, 9'h FloorLos Angeles , CA 90071-1706Telephone: (213) 488-4100Facsimile: (213) 488-4180
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