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Beyond Sexual Harassment, Lesser Known Scandals Could Cost The Murdochs A $14B Deal

Rupert Murdoch (center) and his sons Lachlan (left) and James attend the 2014 Television Academy Hall of Fame in Beverly Hills, Calif.

In forcing out its top-rated star, Bill O'Reilly, the Fox News Channel sought to contain the damage inflicted by a spreading sexual harassment scandal less than a year after the network's chairman was ousted in the face of similar accusations.

For Rupert Murdoch and his sons, who together control Fox News as part of a larger media empire, getting rid of O'Reilly is part of an effort to shore up its long-standing drive to regain full control of the European broadcasting giant Sky in a $14.6 billion deal. The broadcaster has a major presence in the U.K., Germany, Italy, Ireland and Austria.

And yet, there is a quieter scandal hiding in plain sight — rife with allegations of computer hacking, accusations of fraud, questions of political interference and payouts totaling more than $900 million — all which centered on a relatively anonymous Murdoch enterprise called News America Marketing.

The episode that kicked off that controversy was a small one, involving a rival company that stuck advertising decals on the floor of supermarket aisles. Yet the case stirred members of Congress to demand investigations and cast an unwelcome glare on the actions of rising Republican star Chris Christie while he was a top prosecutor. The case also appears to have influenced former Fox News Chairman Roger Ailes' decision in fall 2011 to hire a Democratic strategist as an on-air commentator for Fox News.

Earlier this month, the commentator, Julie Roginsky, became the latest female employee to sue Ailes and the network itself for sexual harassment.

In London, the independent British media regulator Ofcom has delayed until June 20 its deadline to determine whether the Murdochs are "fit and proper" owners for Sky. The Murdochs' entertainment and television conglomerate, 21st Century Fox, already owns 39 percent of Sky.

The family's last bid to take over Sky imploded nearly six years ago as outrage built over revelations of widespread bribery and phone hacking by the Murdochs' London tabloids. Over time, that scandal caused a parliamentary inquiry, the closing of their big Sunday tabloid, more than 100 civil lawsuits and the criminal convictions of several former Murdoch journalists, including an editor-in-chief.

This time, several consumer groups and anti-Murdoch politicians have pushed British regulators in official submissions to take the Fox scandals into account when gauging whether the Murdochs would be "fit and proper" owners of Sky.

News America Marketing is a division of News Corp., the Murdochs' newspaper and publishing arm. News Corp. was split apart from their television and entertainment holdings in 2013 as a consequence of the British tabloid scandal.

The actions of News America have triggered a far higher cost to the Murdochs' shareholders than the Fox News sexual harassment scandals: settlements exceeding $900 million to head off a series of lawsuits filed over the past 12 years. That sum includes $280 million in payments announced in early 2016 to cut short an ongoing class-action lawsuit filed by some of its biggest clients.

The fight over decals

As the origins of this tale stretch back two decades, some key figures have died. Others cannot talk owing to legal restrictions. This story is based on interviews with more than 20 people with direct knowledge of relevant events, as well as a review of legal documents, corporate papers and correspondence involving members of Congress and their staff. NPR has also reviewed testimony from News America executives and expert witnesses that gives a flavor of the company's operations.

The story opens with the aspiration of two brothers, George and Richard Rebh. The late George Rebh was a federal disaster preparedness planner and presidential portraitist who became a salesman; Richard Rebh is a former management consultant for Bain & Co.

In the 1990s, the Rebhs and their partners founded Floorgraphics Inc., based in Princeton, N.J. The idea, basically, was to market products for shoppers on the floor. It was new, a niche carved out among larger players in supermarket advertising who controlled coupons in newspapers and direct mailing, ads on shopping carts, signs on the shelves.

Murdoch's News America Marketing was and is one of the titans of the trade, reaching millions of consumers each day in stores on top of the 60 million households that received its Sunday newspaper inserts. Direct advertising to consumers in retail stores and pharmacies proved a growing area of interest as the newspaper industry started its slide.

The marketing division was led by Paul V. Carlucci, a former department store executive and bon vivant who also invested in racehorses and a pair of restaurants near the racetrack in Saratoga Springs, N.Y., and in New York City. Former associates described Carlucci as charismatic, gregarious and well-liked by employees. They also said he often played rough.

"Paul Carlucci is smart, he's charming, but he's ruthless," said Steve Marquis, a former vice president for retail sales development at News America Marketing.

"Paul was take-no-prisoners, win-at-all-costs. Rupert loved that," says Ken Chandler, the former publisher of Murdoch's New York Post.

And Carlucci delivered results at News America Marketing, Chandler said: "This was like a faucet that was spewing dollar bills." (Carlucci did not respond to detailed questions submitted through his son, Paul Carlucci Jr., a sales director at Murdoch's Wall Street Journal.)

In 1999, the Rebh brothers set up a meeting with Carlucci to discuss the industry, in an account they later set out in a lawsuit against News America Marketing. They maintained that they did not see their business model as in direct competition with News America, but living alongside it.

Carlucci picked a high-end Chinese restaurant in Manhattan for the meeting, wrongly believing the brothers were preparing to sell their company to him, according to George Rebh's later sworn testimony. The proceeding was first obtained and broadcast by CNN in 2011.

"He said words to the effect: 'You should know I work for a man who wants it all and doesn't understand anyone telling him he can't have it all,' " George Rebh testified. " 'And know this: If you ever get into any of our businesses, I — we — will destroy you.' "

Rebh testified that he took that to be a reference to Rupert Murdoch and his sons. "So, after a couple of seconds, I said to Mr. Carlucci, 'So let me see if I understand this. You can get into our business and compete with us. But if we were to get into yours, you would destroy us,' " Rebh told the court. "And he said, 'That's right.' "

(In his own testimony, Carlucci denied saying he would destroy Floorgraphics.)

Late that year, Marquis told NPR, he witnessed the moment when Floorgraphics graduated to being a full-fledged adversary.

In December 1999, Marquis attended a meeting with executives from the A&P supermarket chain. News America paid A&P for the right to put up ads, coupons and signs within grocery carts inside the store for its clients, which manufactured such consumer packaged goods as toothpaste, toilet paper and the like. Marquis had prepared A&P for unwelcome news: It would have to accept less money from News America.

Instead, the chain's executives told him they had selected Floorgraphics. A&P gave Floorgraphics exclusive rights to mount advertising signage throughout its roughly 600 stores.

For the first time, little Floorgraphics had poached News America's bread and butter.

Marquis sped back to New York City with the bad news, hustling to News America's holiday party held at a restaurant overlooking the ice rink at Rockefeller Center — just a block from parent company News Corp.'s headquarters. "I made a beeline to Carlucci," Marquis recalled, "and said, 'You'll never believe what happened.' "

Carlucci and other senior executives proved surprisingly cheery, Marquis said. "Paul told me, 'Not only are we going to kick their asses and crush these guys, but I can go to the boss and get the money I need to put them out of business.' "

"I was getting hugs and high-fives and being told, 'Let's get a drink!' " Marquis recalled. "They knew they were going to get Murdoch to kick in some dollars to go get these guys."

Marquis left News America for Floorgraphics a few months later.

Floorgraphics in a jam

In early 2005, a salesman for the Rebh brothers was taken aback. Account executives for one of their clients, the Smucker's jam company, dressed him down, demanding to know, according to documents Floorgraphics later filed in court, how News Corp. knew the terms of the contracts they had.

That information was proprietary.

Floorgraphics officials searched the gateway to their computer system and their own mainframe. Someone using an IP address associated with News America Marketing in Connecticut had accessed their internal servers and files a dozen times from October 2003 to January 2004, according to information the Rebhs provided to members of Congress and later put into court records.

They had been hacked. And whoever hacked them had gained access to the smaller company's contracts and future deals.

Lawyers for News Corp. ultimately acknowledged in court that the hack had come from inside News America Marketing but said they could not determine who had committed or commissioned it.

For nearly two years, News America sent press releases of their big announcements, new contracts and recent hires to the homes of Floorgraphics staffers to erode morale. News Corp. hired away a significant swath of the smaller company's sales force, according to former Floorgraphics employees who spoke to NPR.

People at the smaller company wondered if the addresses had been part of what had been hacked. In court proceedings, the Rebhs accused Gary Henderson, a former Floorgraphics executive hired away by News America, of playing the key role. Later they accused Henderson of perjuring himself during his testimony. Lawyers for News Corp. countered that he could have gotten addresses from a holiday card database. Henderson did not respond to four messages by phone and email seeking comment for this story.

The brothers complained to anyone they could commandeer on Capitol Hill and in the U.S. Justice Department. Scott Christie, who headed hacking prosecutions in the U.S. attorney's office for New Jersey, gave the green light for an investigation. When Christie departed the office for a job in the private sector, his replacement, Kevin O'Dowd, took over the case.

Then Sens. Frank Lautenberg and Jon Corzine, both New Jersey Democrats, weighed in on behalf of the Rebhs. So did then-Rep. Rush Holt, D-N.J. "I rarely write to a U.S. attorney," Holt recently told NPR. "I listened and looked at what [Floorgraphics] brought and said, 'Yeah, there's some smoke here.' "

The U.S. attorney for New Jersey at the time was Chris Christie, a Republican harboring greater political ambitions (and no relation to Scott Christie).

O'Dowd soon stopped returning calls, according to an account the Rebhs later shared with congressional staffers. The Rebhs told others an assistant U.S. attorney had informed them the harm done by the hacking did not exceed $5,000 so there would be no prosecution. The two Rebhs seethed.

A spokesman for New Jersey Gov. Christie told NPR that the case was handled "in the normal course of business," evaluated by two assistant U.S. attorneys with their supervisors. "The United States attorney and his front-office staff played no role in the investigation or the decision to decline prosecution," said the spokesman, Brian Murray.

One lawsuit follows another

The Rebhs and Floorgraphics instead filed a civil lawsuit against News America Marketing.

In that suit, the Rebhs alleged that News America account executives undercut Floorgraphics' prices by paying grocery stores more for contracts than they were worth. They accused the News Corp. marketing division of engaging in anti-competitive practices such as demanding exclusivity in floor advertising even in stores where they weren't offering such advertising.

A few days into trial, News Corp. settled with the Rebhs and Floorgraphics for $29.5 million. As part of the settlement Floorgraphics sold its floor advertising in-store business to News America. Their case was the smallest and just the first in what became a series of cases that had big-dollar price tags.

Later lawsuits from competitors and clients of News America similarly alleged fraud, tortious interference, false claims and anti-competitive practices.

News Corp.'s lawyers included some of the best litigators in the country at such firms as Paul, Weiss. They played hardball, according to several lawyers; in one case, News America Marketing's suit against a fired executive, Bob Emmel, caused him to enter into bankruptcy, according to Emmel's bankruptcy lawyer, Danny Coleman. Emmel would have been unable to pay the damages the company sought.

News America contended Emmel had taken records unlawfully that he produced at his deposition for the Floorgraphics suit against the company (a claim he disputed); Emmel also had been acting as a whistleblower to tell congressional investigators about what he believed were illegal actions by the company, though News America had not known that when it fired him. Emmel later served as a witness in several other lawsuits against the Murdoch company as well — despite efforts of News Corp. to complicate his ability to participate. (Emmel referred all questions from NPR to his lawyers, as he is under court order not to comment.)

In a separate case, according to one of Marquis' former colleagues, News America's lawyers briefly threatened to compel Marquis' young son to testify against his father in an attempt to challenge his story. Marquis confirmed the threat, though he said that nothing came of it.

Testimony in the cases offers insights into News America's reach and successes. The Murdoch company argued that its dominance was overstated, even if it controlled 90 percent of the market by some measures. Yet executives conceded under oath it had developed a strategy to lock in major retail stores for long-term contracts with staggered expiration dates to make it harder for other companies to get a foothold in the field.

In a November 2004 letter that became part of a court record a decade later, then-News America Executive Vice President Martin Garofalo pleaded with Jeffrey Noddle, the executive chairman of SuperValu, not to drop its agreements with News America. Garofalo promised a 400 percent annual increase in payments to keep the chain out of the embrace of a competitor.

In April 2015, a News America executive named Christina Bedell acknowledged under oath that the company lost more than $4.2 million a year on its deal with Kmart placing ads in its stores. Another executive, Dominic Hansa, testified that the company sought to extend a long-term contract with Safeway — a major grocery retailer — simply to avoid a competitive bidding process that could have allowed others to pitch for the contract. Bedell and Hansa are now senior vice presidents; Garofalo is now News America's CEO.

Though News America disputed the claim, such payments were alleged to have been anti-competitive and illegal.

The ensuing settlements would make the size of the Floorgraphics case pale in comparison: $500 million for a major competitor called Valassis; an additional $125 million for Insignia, based in Minnesota. The latest, $280 million, was incurred just a year ago to cut short a class-action lawsuit filed by News America's own clients, such as the soap manufacturer Dial and the ketchup giant H.J. Heinz.

Executives at News Corp. and News America declined to respond to a series of specific questions for this story. Jim Kennedy, News Corp.'s chief communications officer, provided a single sentence in response: "These cases involve matters going back decades, were settled without any admission of wrongdoing and for a fraction of what was sought by claimants."

London hacking revives interest

The summer of 2011 resurrected the relevance of the Floorgraphics case, as its allegations echoed the mobile phone and computer hacking scandal in Murdoch's London tabloids. Celebrities, athletes, actors and politicians in the U.K. had been seen as fair game; the revelation that a dead girl's voicemail had been hacked by people on behalf of News Corp.'s Sunday tabloid News of the World turned what had been written off as sport into outrage. British politicians who had protected the Murdoch papers for years lined up to denounce them.

The late David Carr, the New York Times media columnist, refocused attention on the Floorgraphics investigation in a pair of edgy pieces.

In the U.S., Chris Christie was by this time no longer a prosecutor but a tough-talking governor who had emerged as a favorite figure on Fox News programs. O'Dowd, who led the abortive Floorgraphics inquiry, followed Christie to the governor's office and became his chief of staff. According to New York magazine's Gabriel Sherman, then-Fox News Chairman Roger Ailes twice beseeched Christie to run against Obama in the years leading up to the 2012 race.

Sparked by the London hacking scandal, Lautenberg once more sought to turn attention on Christie's earlier failure to prosecute the News Corp. division. According to then-congressional aides, Lautenberg also urged colleagues, including then-Sen. Jay Rockefeller, D-W.Va., to hold investigative hearings.

In late August and early September 2011, Ailes stepped up talks with Roginsky, the liberal political pundit. She was something of a Lautenberg protégé, a Democratic strategist in New Jersey who had briefly been a paid CNBC contributor and had appeared on Fox off and on, without pay, since 2004. In November 2011, Ailes hired her.

Roginsky told others that Ailes would periodically ask her to stop by his office on the second floor of the company's corporate headquarters. She described to associates one of her first such meetings with Ailes this way:

Ailes called over Murdoch and introduced Roginsky to his boss as a liberal, but added, "We still love her." She was struck that in talking to Murdoch, Ailes invoked her links to Lautenberg, as though that gave the network chief sway on Capitol Hill.

Roginsky was first introduced to viewers on the air as a Fox News contributor in February 2012, according to a review of transcripts in available databases.

She had worked for other New Jersey Democrats too, such as Jon Corzine and Rep. Frank Pallone, among others. Yet transcripts show Roginsky was identified as a former Lautenberg adviser 10 times more frequently than by ties to anyone else.

One of Ailes' former colleagues said Ailes was fixated on Roginsky's links to Lautenberg.

Every so often, Roginsky told others at the time, Ailes would call her over and ask whether News Corp. or he would be called up to testify on Capitol Hill. By her account to others, Ailes' requests mystified her: Roginsky had no insight to offer.

Ailes cited the Floorgraphics hacking case but, according to others, he was also anxious over a New York Times report that he might be indicted over allegations he had directed another Murdoch executive and Fox News host, Judith Regan, to lie under oath about having an affair with former New York City Police Commissioner Bernard Kerik. Concerns over that allegation may have played into Fox's decision to pay Regan $10.75 million to leave the network.

In addition, Fox News had in June 2011 also secretly arranged to pay another longtime employee more than $3 million. The network sought to keep quiet her allegations that Ailes had coerced sex from her for more than 20 years through promises of career advancement and threats to release sexually provocative videotape that Ailes had made of her. (Ailes denies the allegations of the woman, Laurie Luhn, while other Fox executives said they wrongly did not believe her at the time they arranged the settlement, according to Fox News.)

Finally, Sherman, the unauthorized biographer, was poking around his record. Ailes had a lot to be nervous about at the time.

Roginsky told associates she felt Ailes was trying to use her to send some sort of a signal, either to Lautenberg or to Murdoch.

Roginsky sued Ailes earlier this month, alleging he promised her a role as a host on one of Fox's more popular panel shows as he sought to take her out for drinks and as he conveyed the intention of a physical relationship. When she rejected his romantic overtures, the promise vanished.

Roginsky's lawyer, Nancy Erika Smith, says Roginsky never intervened in any way to aid News Corp. with Lautenberg or other lawmakers; two congressional aides who monitored the issue say there's no evidence she played any role at all.

Lautenberg continued trying to investigate the Murdoch company until his death in June 2013.

Ailes' attorney, Susan Estrich, who previously denied Roginsky's claims of harassment, now denies Ailes had any political interest in her. "I have never heard him say he was intrigued by her at all," Estrich wrote in an email. "Only that her claim is totally false." Fox News declined to comment for this story.

Chris Christie restrained his presidential ambitions until the 2016 cycle. Yet both Christie and O'Dowd saw their greater ambitions knocked off course by the Bridgegate scandal; Christie dropped out of the primaries after a sixth-place finish in New Hampshire last year, while O'Dowd's prior nomination to become state attorney general stalled. He is now a top executive at a major medical center and did not return messages seeking comment.

George Rebh died in 2015. His brother Richard declined to comment for this story because the deal they struck with News Corp. in 2009 included a nondisclosure clause.

Murdochs pay to make problems go away

In 2010, when the Valassis case was settled for $500 million, then News Corp. President Chase Carey said the company had been convinced "significant risks were developing in presenting this case to a jury." The agreement included no admission of wrongdoing and a decade-long shared distribution pact. News Corp. points to these elements, common in their settlements, to suggest these were business decisions rather than warnings of bad behavior.

Longtime Murdoch watchers and some former colleagues say they discern a pattern at News America that recurred at his other properties: Roguish executives beloved by Rupert Murdoch who are able to deliver desired results get away with otherwise unacceptable behavior until it becomes impossible to tolerate further. The Murdochs pay to make problems go away. And then, at a certain point, they promise to change the culture. Ailes is bought out. O'Reilly is ousted. A new day is heralded.

"There's a problem somewhere," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

"Commercial disputes happen all the time. But 900 million is a big number," Elson told NPR. "At some point, you have to ask yourself, 'Is there something going on in the culture of a place? ' "

Despite the promise of change, many women inside Fox News tell NPR they question whether the culture has changed at all. At Fox News, three outstanding lawsuits challenge the Murdochs' contention of change, from Roginsky, suspended Fox host Andrea Tantaros and a group of African-American employees.

A growing number of women are still coming forward with accusations against both Ailes and O'Reilly. Others accuse Fox News executives of ignoring their allegations. Federal prosecutors in New York City are investigating past secret payments to women who lodged complaints privately. People within Fox believe that inquiry may be broadening.

The Murdochs pointed to the process they set up since Ailes' departure, including the involvement of outside lawyers to evaluate complaints from women who allege harassment. Those lawyers work for Paul, Weiss — the longtime Murdoch law firm that handled many of the defense proceedings for News America.

In London, the executive atop the Murdochs' British newspaper wing is Rebekah Brooks, the former tabloid editor who had to resign from that same CEO position during the scandal in the summer of 2011. James Murdoch, who resigned as chairman of News Corp.'s U.K. division and of Sky during the scandal, is back as chairman of Sky.

According to two former News Corp. executives, Carlucci offered several times to resign during the height of the News America Marketing lawsuits. Murdoch said no. Carlucci finally departed in June 2014.

One footnote: Valassis, awarded a half-billion dollars in its settlement, has more recently returned to court. The new suit alleges that News Corp. violated their agreement by continuing to engage in aggressive, anti-competitive practices. News America is denying those claims, too.

For several years after the hacking and corruption scandal erupted in the U.K., the Murdochs feared the blowback might harm their ability to hold on to their American television licenses. Now, the question arises whether their American controversies — including one totaling close to $1 billion — might sink their ability to make a huge broadcasting acquisition in the U.K.

Copyright 2017 NPR. To see more, visit http://www.npr.org/.

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