Hollinger Reveals Other Papers Inflated Circ, along with 'Chicago Sun-Times'

By: Mark Fitzgerald Hollinger International Inc. said Tuesday it has recorded a $27 million charge to compensate advertisers for fraudulently overstating circulation at its flagship Chicago Sun-Times by as many as 50,000 copies a day.

For the first time, Hollinger also said that circulation was improperly inflated at two other Chicago-area newspapers, The Daily Southtown and the weekly The Star, both in Tinley Park, Ill. In addition, it said The Jerusalem Post in Israel used improper circulation accounting methods.

A program to compensate Sun-Times advertisers will be implemented "immediately," Hollinger said. As E&P previously reported, Sun-Times sales personnel have been in discussions with advertisers on the issue of compensation for inflated circulation.

The Sun-Times was the last of four papers hit by circulation fraud scandals to announce its plan to compensate advertisers. Previously, Tribune Co., publisher of Newsday and the New York edition of Hoy, said it would set aside as much as $95 million to settle possible advertiser claims, while Belo Corp., publisher of The Dallas Morning News, said it would pay $23 million in compensation.

In an e-mail to newspaper staffers, Sun-Times Publisher John Cruickshank, who is also Hollinger's chief operating officer, said the circulation fraud was "instigated" by former Publisher F. David Radler, a Hollinger official who, along with former CEO Conrad Black and other top executives, has been accused by a special committee of the company of "looting" the chain of about $400 million in improper fees and payments.

The schemes were also reportedly carried out by former Sun-Times circulation chiefs Stephen Hastings and Mark Hornung, who was most recently president of the Daily Southtown and Star newspapers. Both men resigned their positions shortly after the circulation inflation was revealed this summer. Neither could be immediately contacted for comment. Both have declined to comment in published reports.

"Inflation of The Chicago Sun-Times single-copy circulation began modestly and increased over time," the Hollinger statement said.

Circulation began to be pumped up in the 12-month period ended March 31, 1997 with an overstatement of 2,814 copies on weekdays and 672 copies on Sundays. By March 2003, Hollinger said, the inflation in single-copy sales had grown to 50,191 copies on Mondays through Fridays, and to 17,318 on Sundays.

"The inflation of circulation continued and grew during the most recent twelve-month period ending March 28, 2004, but these circulation figures were never included in an ABC audit report," Hollinger said.

In its most recent report to the Audit Bureau of Circulations (ABC) this spring, the Sun-Times had claimed a daily circulation of 482,421. The Hollinger investigation indicates the real number is about 430,000.

Hollinger's internal investigation said circulation was inflated in three different ways at the Sun-Times.

The first two centered around manipulating the number of papers counted as unsold returns.

In one method, unsold returns would be "shifted" to so-called "elimination days," certain days, such as holidays or days with inclement weather, when the ABC rules permit newspapers to omit that day's results from average circulation. Returns were recorded on those days rather than on days when they occurred, and records were altered to make otherwise unqualified days appear as if they qualified as elimination days.

In the second scheme, the Sun-Times simply paid newspaper distributors not to return unsold papers. "Sun-Times personnel would advise distributors not to return some or all of their unsold newspapers at the end of a given day," Hollinger said. "Credits would then be processed internally to reimburse the distributors for their cost and to compensate them for these unsold papers."

In the third scheme, the Sun-Times applied funds from recycling sales into a charitable trust that bought and distributed newspapers for use in local schools. "This practice had the effect of having The Chicago Sun-Times purchase its own newspapers," Hollinger said.

This same Newspaper In Education (NIE) manipulation was used at the Daily Southtown and Star newspapers, Hollinger said. In addition, the papers altered records of their press runs to make it appear they were printing more copies than they actually were. The Hollinger investigation said the papers began to inflate their circulation in the middle of 2003.

The review by the Audit Committee also determined that certain circulation inflation practices were employed at the company's The Daily Southtown, The Star, and The Jerusalem Post. At The Daily Southtown, records were manipulated in order to increase the reported number of newspapers that were actually printed. At both The Daily Southtown and The Star, recycling proceeds were used to purchase newspapers in a manner similar to the practice employed at The Chicago Sun-Times. Since the inflation practices at The Daily Southtown and The Star began in mid-2003, and that the inflated circulation figures were never published in ABC audit reports.

At the Jerusalem Post, sales and marketing personnel simply misrepresented circulation figures to advertisers, Hollinger said. The company noted that there is no equivalent to ABC for Israeli newspapers. It also said it expects the overstatements at the Daily Southtown, Star and Jerusalem Post "will have no material impact" on the company.

The circulation investigation was conducted by the audit committee of the Hollinger board, assisted by the Chicago law firm of Gardner Carton & Douglas LLP, and the forensic-services practice of Deloitte & Touche LLP.