Belo Corp. has asked a federal judge to dismiss a lawsuit related to overstatement of circulation at The Dallas Morning News, saying officials of the media company properly investigated the fraud allegations.
But investors suing Belo say top executives defrauded advertisers and investors by lying about newspaper sales for more than a year before disclosing the problem.
They say supervisors forced distributors to take more papers than they could possibly sell, then told them to lie about the numbers. They claim that a former distributor taped incriminating conversations with supervisors and gave a copy to Belo Chairman and Chief Executive Robert Decherd in January 2003, but the overcirculation wasn’t disclosed until August 2004.
In asking the judge last week to drop the case, Belo lawyers didn’t directly dispute the plaintiffs’ account but said the allegations failed to prove fraud.
“The facts alleged show only a completely proper and thorough corporate response by Belo and The Morning News to a complaint by one contractor of an instance of misconduct by one or two bottom-level circulation supervisors,” the lawyers said in their brief filed in federal district court in Dallas.
The Morning News is one of several newspapers to recently acknowledge overstating circulation. Others include Tribune Co.’s Newsday and Spanish-language Hoy newspaper, and the Chicago Sun-Times, owned by Hollinger International Inc.
The Securities and Exchange Commission and Dallas County District Attorney’s Office are looking into the Morning News circulation. Belo said in a regulatory filing Tuesday that the district attorney, who is considering a criminal investigation, last month served a second subpoena.
Meanwhile, lawyers for several shareholders sued Belo last August and updated their lawsuit in April, adding the charge by the unnamed distributor, a 15-year employee who secretly recorded conversations with his managers.
The man said when he wrote to Decherd he included a copy of an audio tape, one of a dozen he claimed to have.
He said over the next few weeks he was contacted repeatedly by Belo’s general counsel and four other officials, “each of whom begged the distributor to turn over the tape recordings of voice mails and conversations containing damning evidence” that managers pressured employees to fabricate sales numbers.
The distributor said he lost his job in December 2004.
Decherd was among six current and former Belo executives named in the lawsuit. He said in a recent letter to employees that he turned over the man’s letter and tape to Belo’s legal department and an investigation led to the firing of several managers.
The circulation overstatement was largely responsible for a decline in Morning News circulation of 13.2% on Sundays and 9.6% other days for the October-March period, compared to figures reported a year earlier. The newspaper accounts for nearly one-third of revenue at Belo, which owns three other newspapers and 19 television stations.
The plaintiffs, represented by prominent class-action lawyer William S. Lerach and other attorneys, said company officials carefully “walked down” the price of Belo stock by warning of earnings shortfalls before disclosing the circulation irregularities in August 2004.
The plaintiffs allege that the executives personally gained from the circulation overstatement because it increased the value of their stock, noting that Decherd sold $3.3 million worth of Belo stock from November 2003 to May 2004, when the stock was near its peak at about 30 cents a share. Decherd said the sales were part of a trading plan disclosed in 2001.
Belo’s stock closed at $23.94 on the New York Stock Exchange Tuesday.