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Sunday 6 May 2007

The mystery of how three auditors all missed same telling paragraphs

'WELL, pawdon me, but am I missing something here?" Sorry, I'm in Virginia in the good ole US of A this weekend, and the lingo is catching. What I'm trying to say is that I am more and more mystified by the prosecution case against Conrad Black.

What happens every week is that I read the evidence against him, sometimes it sounds damaging (though never damning enough to justify his being prosecuted for racketeering), but then it rarely holds up convincingly after cross-examination of witnesses.

Last week, it was all about the conduct of the three-person Audit Committee. The previous week, Richard Burt, the committee's smoothy-chops ex-ambassador, had been given an easy ride over his contention that when he signed documents approving payments to Black and other executives, he had been hoodwinked because vital information in various documents had not been brought to his attention by management.

Marie-Josee Kravis, a distinguished economist, followed and took the identical line, but was roughed up considerably more by a defence that had obviously concluded that it had wimped out with Burt. There had been 11 documents sent to the audit committee between 2000 to 2003 that contained paragraphs describing the contentious payments, it emerged, and the defence attorney was contemptuous when she claimed she had missed them. "We just can't rely on your memory for anything," he pronounced, and she left the court a rather diminished figure.

But then came the prize witness, Big Jim Thompson, four times Governor of Illinois and chairman of the Audit Committee. Big Jim, it emerged, had also missed the 11 relevant paragraphs. He was a conscientious chairman, he explained, but he missed detail because he "skimmed" documents. But Thompson should understand small print: he made his reputation fighting corruption as a chief prosecutor in Chicago. And with a retainer of $60,000 a year for his work for Hollinger to run three or four short meetings, he was being paid plenty to read thoroughly the documents they sent him.

Here are some perplexing questions that would be seriously bothering me if I were a juror. Firstly, if Black intended to defraud his shareholders, why did he appoint to the audit committee three people noted for their intelligence, their experience, and 'He was smug, defiant and arrogant in his answers . . . Years of political campaigning brings out the best in people'

their ability to read between the lines? Secondly, why mysteriously did all three of them overlook 11 paragraphs describing activities that in retrospect each claims they would never have approved?

Here are some relevant facts that have emerged in the last few weeks that might suggest some answers. When the Black regime at Hollinger hit trouble with the authorities and was overthrown, his successors set up a committee of investigation headed by Richard Breedon, a former chairman of the US Securities and Exchange Committee, which accused Black and co. of running "a corporate kleptocracy". Black and his chums, said Breedon and his, had "looted" over $400m, a figure later reduced to $60m.

The two-year investigation cost $57m, of which Breedon (who once said that those guilty of white-collar crime should be left "naked, homeless and without wheels") is alleged to have received $25m. Late in 2005, we now learn, after conversations with the investigatory committee, Burt, Kravis and Thompson were sent what are known as Wells notices from the SEC telling them that their conduct on the audit committee might make them liable for enforcement proceedings which would mean they could be fined, and banned from sitting on the boards of public companies - something which would cause all of them great grief. Uncharitable observers suggest it is unsurprising therefore that all of them are now in complete agreement that that they didn't notice the 11 paragraphs that told them of the contentious payments. In Kravis's case, for instance, she has contradicted some of the evidence she gave the investigators months before the Wells notice landed on her mat.

Because of the nature of their evidence in the trial, the threat of proceedings against them all has been lifted.

Ex-Governor Thompson (whose directorships include Jefferson Smurfit) was expected to be devastatingly effective, but he did the defence little good. "Thompson impresses me," said one legal analyst, "as one of the most unsavoury and untruthful witnesses observed in a courtroom. He was smug, defiant and arrogant in his answers in cross-examination. Years of political campaigning brings out the best in people." What may also have interested the jury is that this paragon of financial virtue took his wife to London for a business-related jaunt, where they stayed at Claridge's and cost Hollinger in the region of $24,000.

The friend of Black's I met for lunch on Friday was looking decidedly cheerful. He went so far as to suggest that the wrong people are in the dock. "Where is the evidence that Conrad did anything illegal?" he asked. I had to agree that so far, the prosecution hasn't produced any that seems to stand up under scrutiny. But they'll be trying again this week.

Ruth Dudley Edwards

© Ruth Dudley Edwards