Washington, D.C., May 30, 2006 – LAWFUEL – Press Release Service – The Securities and Exchange Commission today charged publisher Tribune Company with reporting falsified circulation figures from at least January 2002 to March 2004 for two of its newspapers in New York, Newsday and the Spanish-language Hoy. The Commission issued an order finding that Tribune failed to uncover Newsday and Hoy’s inflated circulation figures because it lacked sufficient internal controls to detect the schemes at those papers.
In a separate proceeding, nine former employees and contractors of Newsday and Hoy pleaded guilty to various criminal charges in the United States District Court for the Eastern District of New York in connection with the same scheme.
The Commission’s order finds that from January 2002 through March 2004, Tribune disseminated inflated circulation figures for Newsday and Hoy in reports it filed with the Commission and in press releases and at earnings conferences. In addition, Tribune misstated its accounts receivable and payable, as well as its circulation revenues and expenses, because the company did not have sufficient internal controls to detect the circulation inflation schemes at Newsday and Hoy.
Newsday and Hoy generated fictitious newspaper sales in order to inflate their circulation figures. Circulation figures are a metric used by publishers and advertisers to negotiate advertising rates and newspapers that report higher circulation figures are likely to receive greater revenue from advertisement sales. In 2004, after acknowledging that Newsday and Hoy had inflated their circulation figures, Tribune recognized $90 million in pre-tax charges to settle advertisers’ anticipated claims related to the inflated figures.
Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement, said, “Circulation figures are a key measure used by publishers and advertisers to establish advertising rates. Because publishers typically generate the majority of their revenues from advertising sales, they must ensure that the circulation figures they report to the public are accurate so as not to mislead investors about the profitability of their most significant business operation.”
David Nelson, Director of the Commission’s Southeast Regional Office in Miami, said, “Circulation figures are important because they are one of the most reliable indicators of a publishing company’s current financial condition and its future prospects. As a public company, Tribune had an obligation to establish internal mechanisms to assure that the circulation figures and related financial information was reported to the public accurately.”
Glenn S. Gordon, Associate Regional Director of the Commission’s Miami office, said, “Accurately reporting paid circulation figures is even more material to investors as competition with the Internet and other electronic media builds. Publishers must be certain that they have internal controls in place to facilitate accurate reporting of circulation information.”
According to the Commission’s order, Newsday and Hoy’s publishers set ambitious circulation goals for their newspapers. In order to meet those goals, circulation personnel generated fictitious newspaper sales by, among other means, entering into various sham agreements with dealers and distributors and by shifting the accounting for unsold newspapers to days that did not affect the calculation for the newspapers’ circulation. The Commission’s order finds that Newsday and Hoy’s circulation personnel falsified certain records in connection with these fictitious sales.
The Commission’s order also finds that Tribune failed to uncover Newsday and Hoy’s inflated circulation figures because it did not have sufficient internal controls to detect the schemes used by the circulation personnel. Tribune’s failure to detect the schemes led it to report inflated circulation figures and trends and misstate its circulation revenues and expenses in annual and quarterly reports it filed with the Commission from January 2002 to March 2004. Relying on the inflated figures, Tribune also reported in press releases, earnings conferences and other public statements that Newsday was successfully competing against other daily newspapers in its market and that Hoy was the largest Spanish-language newspaper in New York.
The Commission’s order directs Tribune to cease-and-desist from committing or causing any violations or any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13, thereunder. Tribune consented to the issuance of the order without admitting or denying any of the Commission’s findings. In determining to accept its offer of settlement, the Commission considered remedial acts promptly undertaken by Tribune and the cooperation that Tribune afforded the Commission’s staff.
This proceeding is the result of an investigation conducted in coordination with the United States Attorney for the Eastern District of New York. Today, the United States Attorney separately announced guilty pleas by nine former employees and contractors of Newsday and Hoy. The former employees and contractors pleaded guilty to participating in a fraudulent scheme to inflate Newsday and Hoy’s paid circulation figures in order to induce advertisers to buy advertising space in both newspapers.
The Commission acknowledges the assistance and cooperation of the United States Attorney for the Eastern District of New York, United States Postal Inspection Service, Criminal Investigation Division of the Internal Revenue Service and Nassau County, New York Police Department in this matter.