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Arrests latest turn in circulation probe

BY JAMES T. MADORE | STAFF WRITER

June 16, 2005

The first arrests in Newsday's circulation scandal represent a milestone in a yearlong saga, but experts said it would likely take many more months to fully unravel the complex fraud.

The specter of three former midlevel managers of Newsday and its Spanish-language sister Hoy being led away in handcuffs by police came just two days shy of the one-year anniversary of the papers' first public disclosure that circulation numbers had been inflated. Those arrested are among the nearly two dozen officials that have been fired or forced out because of the scandal.

Robert G. Heim, a former prosecutor at the Securities and Exchange Commission, said, "This is one phase of the case. It is likely other arrests or charges could be filed."

Other potential pitfalls exist as well. "There still is an element of uncertainty for the company. They have to be wondering what else is coming down the pike," he said.

Not all of the challenges are legal in nature.

Newsday and Hoy now are attempting to rebuild their distribution systems and placate angry advertisers. The papers have set a deadline of June 30 to conclude a $90-million rebate program; more than 30,000 advertisers out of an estimated 40,000 have accepted settlements so far, according to a spokesman. Meanwhile, the papers are still fighting two lawsuits, both seeking class action status.

Newsday publisher Timothy P. Knight said the circulation department "is being rebuilt to provide us with better control over billing and customer relations and with an emphasis on integrity and zero tolerance for unethical behavior." He added that employees have been "empowered to speak out" against improper conduct.

Stock analysts have generally given Newsday and Hoy parent Tribune Co. good marks for its handling of the circulation scandal, but the company's stock price remains depressed, for many reasons, including general malaise in the media industry. Shares fell 55 cents Wednesday to close at $35.25 in trading on the New York Stock Exchange, a drop of more than 1.5 percent.

Some experts said Tribune, Newsday and Hoy could escape federal charges stemming from the circulation scandal because of their co.operation with investigators. "Under federal sentencing guidelines, com.pany cooperation is a very important factor in whether criminal charges will be filed," Heim said.

Newsday spokesman Stu Vincent, speaking on behalf of Tribune and Hoy as well, said the papers had turned over to fed.eral and state officials the evidence gathered by internal investigators. "The results of this investigation, including information about Newsday's circulation programs and the identities of the individuals involved with them, were shared with the proper authorities last summer."

A group of small advertisers whose lawsuit in February 2004 originally drew attention to the circulation problems applauded the arrests. "I'm just thrilled that the people I worked with to put this to.gether have been vindicated," said lawyer Joseph O. Giaimo. "This is only the beginning ... and I have little doubt there will be several more indictments of personnel on a higher plane."

Industry analyst Miles Groves said he was relieved that prosecutors didn't appear to uncover new allegations in the Newsday-Hoy case, which has caused many papers to re-examine their circulation practices. "Newsday was hurt as much as advertisers by the malfeasance," he said. "I think has responded in a very positive way."

Speaking of the arrests, Groves said, "I think it's good theater, but I don't think they are cause for advertisers to pull their ads."

Heim and others speculated the arrests are intended to increase pressure on former top executives to cooperate with prosecutors.

"Today's event is a shot across the bow," he said, predicting additional charges in the future.