U.K. Report: Murdoch Showed 'Willful Blindness'

A narrow majority of U.K. lawmakers said today that Rupert Murdoch is unfit to lead News Corp, partly because he showed 'willful blindness' to illegal activity happening in the company.

Murdoch, 81, testified to Parliament that he didn't know phone hacking and local bribery were widespread at the now closed News of The World. His subordinates concealed it from him, he said.

If that was true, the U.K. panel said, “he turned a blind eye and exhibited willful blindness to what was going on in his companies,” according to an account in the Washington Post.

The paper said 'legislators accused Murdoch and his son James of overseeing a corporate culture that sought “to cover up rather than seek out wrongdoing.”'

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The FBI is reportedly investigating whether News Corp's payments to police in the U.K. violated the FCPA. Indications of 'willful blindness' won't help News Corp and its top execs deal with potential U.S. charges.

During Frederic Bourke's FCPA trial, prosecutors told the jury that instead of doing adequate due diligence for his investment in Viktor Kozeny's Azerbaijan privatization scheme, Bourke had 'stuck his head in the sand.'

The 'head-in-the-sand' phrase appears prominently in the FCPA's legislative history.

The Congressional Research Service said this in its report to Congress about enactment of the FCPA and its 1988 and 1998 amendments:

The "knowing" requirement . . . is intended to encompass the "conscious disregard" and "willful blindness" standards, including a conscious purpose to avoid learning the truth. The Conferees agreed that "simple negligence" or "mere foolishness" should not be the basis for liability.

However, the Conferees also agreed that the so-called "head-in-the-sand" problem-- variously described in the pertinent authorities as "conscious disregard," "willful blindness" or "deliberate ignorance"--should be covered so that management officials could not take refuge from the Act's prohibitions by their unwarranted obliviousness to any action (or inaction), language or other "signaling device" that should reasonably alert them of the "high probability" of an FCPA violation.

Bourke was sentenced to a year and a day in prison after a jury convicted him in 2009 of conspiracy to violate the FCPA. He's now free pending his appeals.

Neither News Corp nor any of its executives have been charged for FCPA violations.

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In a commentary today on CBS Money Watch, author Margaret Heffernan said 'willful blindness isn't just a character flaw; it is a structural trap that lies in wait for anyone in power.'

She continued:

My book, "Willful Blindness: Why We Ignore the Obvious at our Peril" shows that willful blindness has been with us for a long time. It emerged in Victorian time as a legal concept that argues that when there is information we could have, and should have, but somehow manage not to have, we are nonetheless responsible. While most often used to prosecute cases of money laundering and drug trafficking, it was used most sensationally in the government's case against Enron CEO Jeff Skilling and Chairman Ken Lay. The phone hacking scandal is the media's Enron moment.

Dark Clouds Over News Corp

The News Corp scandal started with phone hacking in the U.K., and alleged bribes to police there that could have violated U.K. laws and the FCPA.

Now it's spreading.

The BBC's Panorama reported allegations this week that a News Corp subsidiary hacked pay-TV access codes and pirated rival satellite channels in Europe.

A day later, the Australian Financial Review said News Corp also pirated rivals in Australia, and that a subsidiary had a special account for making payments to British police and informants. It posted a company email that purportedly identified the budget code for the payments.

With smoking-gun evidence of police bribery in the U.K., criminal prosecutions there against News Corp executives seem likely.

The expanding allegations will also complicate things for News Corp in the U.S.

The SEC, for example, will be asking if the company has been keeping accurate books and records, as the FCPA requires issuers to do. Are there more 'special accounts?' If the new piracy allegations are true, who paid for the black ops? What about internal controls to prevent bribery and other illegal activity?

No one knows where the News Corp scandal is going.

But here's what media mogul Ted Turner said about it back in September, just a couple of months after the first reports of trouble.

News Corp's Path Forward

News Corp chief Rupert Murdoch and his wife, Wendi. Photo from Wiki CommonsForbes' Nathan Vardi yesterday lined up some facts that may point to a planned self disclosure by News Corp to the DOJ and SEC.

In his article, 'News Corp. May Be On Its Way To Voluntarily Disclosing Its Worst Secrets To The U.S. Government,' Vardi said the company has now hired Mark Mendelsohn, former chief of the DOJ's FCPA unit.

Last week we talked about why a self disclosure is likely.

Journalists at News Corp's U.K. paper, The News of the World, allegedly bribed London police officials for access to non-public information. News Corp shut down the paper after the scandal broke.

In addition to News Corp's hiring of Mendelsohn, Vardi said the company's independent directors have retained former Manhattan U.S. Attorney Mary Jo White, and former U.S. Attorney General Michael Mukasey, to advise them.

News Corp's shares trade on Nasdaq under the symbol NWS.

In his story, Vardi cited our earlier post and said about the recent legal hires:

What would that mean? It could mean that Mendelsohn and his army of lawyers at Paul Weiss Rifkind Wharton & Garrison will get to go through whatever evidence they feel like at News Corp. while billing the company and then hand everything over to the feds. Why would News Corp. do that? Because it is listed on NASDAQ and subject to Sarbanes Oxley, which requires internal procedures at publicly traded companies to pump out disclosures of material events—like those that result in your chief executive being grilled before a British parliamentary committee.

Vardi also noted, as we have, that alleged bribes in London of local police officials for access to information don't appear on their own to be grist for an FCPA investigation. But the DOJ's hand might be forced by all the hullabaloo on Capitol Hill.

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According to News Corp's most recent annual report, current directors are:

Rupert Murdoch
Chairman and Chief Executive Officer
News Corporation

José María Aznar
President
Foundation for Social Studies and Analysis
Former President of Spain

Natalie Bancroft
Director, News Corporation

Peter L. Barnes
Chairman
Ansell Limited

Chase Carey
Deputy Chairman, President
and Chief Operating Officer
News Corporation

Kenneth E. Cowley
Chairman
R.M. Williams Holdings Pty Limited

David F. DeVoe
Chief Financial Officer, News Corporation

Viet Dinh
Professor of Law
Georgetown University Law Center

Sir Roderick I. Eddington
Non-Executive Chairman
Australia and New Zealand J.P. Morgan

Mark Hurd
Chairman, Chief Executive Officer and
President Hewlett-Packard Company

Andrew S.B. Knight
Chairman
J. Rothschild Capital Management Limited

James R. Murdoch
Chairman and Chief Executive
Europe and Asia, News Corporation

Lachlan K. Murdoch
Executive Chairman, Illyria Pty Ltd

Thomas J. Perkins
Partner
Kleiner Perkins Caufield & Byers

Arthur M. Siskind
Senior Advisor to the Chairman
News Corporation

John L. Thornton
Professor and Director of Global Leadership
Tsinghua University School of Economics
and Management

Stanley S. Shuman (Director Emeritus)
Managing Director
Allen & Company LLC

James Murdoch And The FCPA

The U.K.'s domestic antibribery laws are sturdy enough to handle a prosecution of Rupert Murdoch's son, James, if one is justified.

He allegedly approved £100,000 or more in bribes to U.K. police in exchange for information published in the Murdoch-controlled News of the World.

So if the U.K. has sturdy enough laws, why are news outlets in London and the U.S. so busy speculating whether James Murdoch could face an American criminal prosecution under the Foreign Corrupt Practices Act?

Has everyone lost confidence in the ability of other countries to bring their local defendants to justice? Must we all now depend instead on the U.S. to fight every land war, police action, kinetic military operation, and domestic corruption scandal that breaks out anywhere?

The press speculation about James Murdoch and the FCPA can't be healthy. Is it a sign that FCPA enforcement has gone too far? That the DOJ has been too active and vocal with enforcement and, like an overbearing father, has weakened his overshadowed offspring?

The U.K. is a sovereign nation with a legal system many centuries older than America itself. Britain has strong anti-corruption laws and a powerful motive in this case to enforce those laws.

James Murdoch's alleged crimes were apparently local -- bribes were paid from the till in the U.K. to police officials there for information used by a London newspaper, with the hope of increasing sales of that newspaper to people in the U.K.

It doesn't sound like a case of international public corruption that needs the American Justice Department to clean it up.

Even if there's FCPA jurisdiction over Murdoch's company and the alleged crimes -- and there probably is -- why speculate about a criminal FCPA prosecution? There's just no reason to go there.

For the record, we've heard no speculation from the DOJ itself, and we don't expect to. The folks there wouldn't insult their counterparts in London, who are more than able to handle this case on their own.

The SEC, on the other hand, may be wondering about some of News Corp's accounting, and how its London subsidiary recorded the alleged bribes. That's a fair question. An SEC enforcement action would be a civil matter, however, not a criminal prosecution. And it wouldn't lead to forfeiture of James Murdoch's assets, as one London paper speculated.