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News of the World and the US justice system

News of the World and the US justice system

Could News Corp be the next Enron? It's unlikely, writes Edward Andrew, but the US Department of Justice is relentless.


It is early days in the News of the World scandal but momentum seems to be growing and unless Rupert Murdoch and his family can contain the unrest then there are likely to be far more widespread repercussions aside from the closing of a 168 year old newspaper.


I found interesting reports this week that a group of News Corp shareholders in the US had filed a claim suggesting that the board was mismanaging the Group.  Apparently the family owns 12 per cent of News Corporation but controls 40 per cent of the voting rights.  I imagine that it will be very difficult for the Murdoch family to distance themselves from the company when the inevitable fallout occurs.  If you run a public company as your own empire then you forget at your peril that you are personally responsible to the regulators and more importantly to the shareholders.


So why the comparison to Enron?  In my opinion the NOW affair is far more heinous than anything a few accountants at Arthur Andersen did while shredding Enron documents, albeit there had been long term corruption at Enron.  What has happened at NOW is not just criminal in its nature, some have been jailed already, but it also offends morality at about every level.


I find it hard to believe that this story is going to disappear quickly. The British Government has been slow to react and the Murdoch clan are fairly well entrenched in the Establishment. However, the tide is definitely turning and Gordon Brown, the former British Prime Minister, has been personally attacked and he is not a man to leave sleeping dogs lie regardless of the surrounding circumstances.  


Ultimately, the scenario will be played out in the US courts. I do not really think that what happens in the UK courts and in Parliament will bring down News Corp, though News International is in the direct firing line. News Corp is too large and is involved in too many healthy businesses across the globe whereas at Enron corruption was endemic and Arthur Andersen as a partnership could not withstand the financial liabilities.


The most interesting debate will be around the US Foreign Corrupt Practices Act and there has already been some speculation that this could be News Corp’s downfall.  The financial penalties themselves are not prohibitive but they would be on a Government blacklist and the perpetrators would face jail. When Rupert Murdoch moved his business headquarters and his citizenship from Australia to the US I doubt he imagined the far reaching consequences the FCPA could have if News Corp falls foul of this legislation.


I am not a practising lawyer and I am sure that the experts will have their say but the FCPA has two main provisions.  Payments from US business (Parents have vicarious responsibility for foreign subsidiaries) to Foreign government officials to facilitate an unlawful act are prohibited.  The only exception is for payments which would facilitate an otherwise lawful act in that country and this relates really to payments to officials in third world countries where petty bribes are commonplace but the act must be lawful.


In the NOW case the question is whether a payment to a police officer from News International could fall within FCPA, definitely an unlawful act but the status of a police officer is where the debate would be.

   

This should also be a wake up call to any business that works with US companies or has a US subsidiary. The DOJ extends its jurisdiction to foreign companies also acting with US businesses.  


Will News Corp be the next Enron? I honestly do not think so but I certainly feel that if the might of the US Justice system wants to turn its full attention on News Corp it is going to very unpleasant.  I suppose when the stakes are this high it becomes a political battle.


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