guardian.co.uk,
Nick Davies, Wednesday 12 October 2011
 |
| The Wall Street Journal used a controversial scheme to boost its European circulation by allowing sponsors to buy copies in bulk from as little as 1¢. Photograph: Mark Lennihan/AP |
One of
Rupert Murdoch's most senior European executives has resigned following
Guardian inquiries about a circulation scam at News Corporation's flagship
newspaper, the Wall Street Journal.
The
Guardian found evidence that the Journal had been channelling money through
European companies in order to secretly buy thousands of copies of its own
paper at a knock-down rate, misleading readers and advertisers about the
Journal's true circulation.
The bizarre
scheme included a formal, written contract in which the Journal persuaded one
company to co-operate by agreeing to publish articles that promoted its
activities, a move which led some staff to accuse the paper's management of
violating journalistic ethics and jeopardising its treasured reputation for
editorial quality.
Internal
emails and documents suggest the scam was promoted by Andrew Langhoff, the
European managing director of the Journal's parent company, Dow Jones and Co,
which was bought by Rupert Murdoch's News Corporation in July 2007. Langhoff resigned on Tuesday.
The highly
controversial activities were organised in London and focused on the Journal's
European edition, which circulates in the EU, Russia, and Africa. Senior
executives in New York, including Murdoch's right-hand man, Les Hinton, were
alerted to the problems last year by an internal whistleblower and apparently
chose to take no action. The whistleblower was then made redundant.
In what
appears to have been a damage limitation exercise following the Guardian's
inquiries, Langhoff resigned on Tuesday, citing only the complaints of
unethical interference in editorial coverage. Neither he nor an article
published last night in the Wall Street Journal made any reference to the
circulation scam nor to the fact that the senior management of Dow Jones in New
York failed to act when they were alerted last year.
The affair
will add weight to the fears of shareholders in Murdoch's parent company,
NewsCorp, that the business has become a 'rogue corporation', operating outside
normal rules. Some shareholders have launched a legal action in the US,
attacking the Murdoch family after the phone-hacking scandal at the News of the
World and following lawsuits in which NewsCorp subsidiaries have been accused
of hacking into competitors' computers and stealing their customers.
The
Journal's decision to secretly purchase its own papers began with an unusual
scheme to boost circulation, known as the Future Leadership Institute. Starting
in January 2008, the Journal linked up with European companies who sponsored
seminars for university students who were likely to be future leaders. The
Journal rewarded the sponsors by publishing their names in a special panel
published in the paper. The sponsors paid for that publicity by buying copies
of the Journal at a knock-down rate of no more than 5¢ each. Those papers were
then distributed to university students. At the bottom line, the sponsors
enjoyed a prestigious link to the Journal, and the Journal boosted its
circulation figures.
The scheme
was controversial. The sponsoring companies were not reading the papers they
were paying for; they were never even seeing them; and they were buying at
highly reduced rates. The students to whom they were distributed may or may not
have read them; none of the students paid for the papers they were being
offered. But the Audit Bureau of Circulation ruled that the scheme was
legitimate and by 2010, it was responsible for 41% of the European edition's
daily sales – 31,000 copies out of a total of 75,000.
In early
2010 the scheme began to run into trouble when the biggest single sponsor, a
Dutch company called Executive Learning Partnership, ELP, threatened to back
out. ELP alone were responsible for 16% of the Journal's European circulation,
sponsoring 12,000 copies a day for which they were paying only 1¢ per copy. For
the 259 publishing days in a year, they were sponsoring 3.1m copies at a cost
to them of €31,080 (£27,200). They complained that the publicity they were
receiving was not enough return on their investment.
On 9 April
2010, Andrew Langhoff emailed ELP to table a new deal, explaining that
"our clear goal is to add a new component to our partnership" and
offering to "provide a well-branded showcase for ELP's valuable
services". On 30 April, ELP agreed to continue to sponsor 12,000 copies at
the same rate. But that deal included a new eight-page addendum, which the
Guardian has seen.
The
addendum included a collection of side deals: the Journal would give ELP free
advertising and, in exchange, the ELP would produce "leadership
videos" for them; they would jointly organise more seminars and workshops
on themes connected to ELP's work; but, crucially, Langhoff agreed that the
Journal would publish "a minimum of three special reports" that would
be based on surveys of the European market which ELP would run with the
Journal's help.
It is this
agreement that is now being cited as the reason for Langhoff's resignation on
Tuesday. It led to the Journal publishing a full-page feature on 14 October
2010 that reported a survey conducted by ELP about the use of social media in
business, quoting ELP's chief executive at length. The story carried no warning
for readers that it was the result of a deal between the Journal and ELP, nor
that ELP were sponsoring 16% of the paper's European circulation. Similarly,
there were no warnings attached to a second story, published on 14 March 2011,
which consisted of an interview with one of ELP's senior partners, Ann de
Jaeger, about the role of women in company boardrooms.
The ELP
deal continued to cause more serious problems. Some Journal staff complained
the agreement to run stories promoting ELP was unethical. On 12 July 2010, one
London executive emailed that "some elements of the deal do not fit easily
within best practice, brand guidelines and company policy". Others warned
about the quality of the surveys on which the stories were to be based.
By the
autumn of 2010, ELP were complaining that the Journal was failing to deliver
its end of the agreement. They threatened not to make a payment of €15,000 that
was due at the end of December, for the copies of the Journal which they had
sponsored since April 30. Without the payment, the Journal could not officially
record the sales and their circulation figures would suddenly dive by 16%,
undermining the confidence of advertisers and readers.
So Langhoff
set up a complex scheme to channel money to ELP to pay for the papers it had
agreed to buy – effectively buying the papers with the Journal's own cash. This
involved the use of other companies although it is not suggested that they were
aware they were taking part in a scam.
The
best-documented example involves an Indian technology company, HCL, who had
separately agreed to pay the Journal €16,000 to organise a special event at the
Grosvenor House hotel in London on 30 September 2010. Langhoff proposed that
instead of paying the Journal, HCL should pass some of this money to a
middleman – a Belgian publishing company – who would then pass it on to ELP.
Invoices and
emails seen by the Guardian show that in November 2010, ELP sent two invoices,
for €2,000 and €6,000, to the Belgian publishers of a magazine called Banking
and Finance. The Belgians duly paid €8,000 to ELP, even though ELP had not
provided any goods or services for which they owed this money. According to the
invoices, however, the magazine were paying ELP sponsorship money for an event
run by the Journal in the Belgian towns of Bree and Schilde in November 2010.
The Belgian
magazine was sent €2,000 by HCL. A second payment of €6,000 was never made
because HCL fell into dispute with the Journal. In December 2010, as part of an
attempt to persuade the Journal to pay them the missing €6,000, the Belgian
publishers' managing director, Michel Klompmaker, signed a formal letter that
"hereby states that there has never been a contract between us and ELP
regarding the sponsorship of a Wall Street Journal Bree/Schilde summit for
€6,000. We agreed to be a facilitator in a payment process between the Journal,
HCL and ELP per request of the Journal".
An email
from Andrew Langhoff on 26 November 2010 includes a diagram that indicates
money was channelled to ELP through two other middlemen. This suggests that
Langhoff wanted €15,000 sent to ELP via a Belgian company called Think Media,
which sells space on billboards. An invoice dated 2 December 2010, shows that
ELP invoiced Think Media for €15,000. An email from 20 December shows that
Think Media had paid the €15,000 to ELP. In a series of phone calls and emails
to Think Media, the Guardian put it to the company that ELP had provided no
goods or services in exchange for this payment, and that the payment was made
at the request of the Journal. Think Media declined to respond.
The same
diagram suggests Langhoff wanted a further €2,000 channelled to ELP through a
Belgian technology company, Nayan, which had occasionally sponsored Journal
events. Nayan confirmed to the Guardian that they had paid ELP €2,000 in
December 2010. They say they understood that ELP were owed this money by the
Journal because they had put in some work on a Journal event, and that Nayan
paid it as part of their agreement to sponsor the event. A Journal source with
direct knowledge of the event says that Nayan were misled by the paper, and
that ELP provided no services at the event for which they were due to be paid.
While these
payments were being made, a whistleblower from the Journal in Europe contacted
the management of Dow Jones in New York and alerted them to the circulation
scam and to the controversial agreement to publish articles promoting ELP.
Emails seen by the Guardian indicate that the whistleblower's complaint was
seen by New York executives, including Les Hinton – then the chief executive of
Dow Jones and a close confidant of Rupert Murdoch. Hinton resigned in July in
the wake of the phone-hacking scandal at the News of the World.
The emails
show that the chief human resources officer for Dow Jones, Gregory Giangrande,
organised a meeting in London on 14 December at which the whistleblower
detailed his allegations to a Dow Jones lawyer from New York, Tom Maher, and
Dow Jones' European human resources executive Carol Bosack.
After the
meeting, Bosack emailed the whistleblower: "You are expected to keep
details and your reaction or beliefs about the recent events confidential and
not shared with anyone external or internal to the business. This matter is to
be kept between us, Andrew [Langhoff], Internal Audit and Corporate
Legal." No action was apparently taken at that time on the whistleblower's
allegations. The whistleblower, who had worked for Dow Jones for 9 years, was
made redundant in January.
According
to one source, recent Guardian inquiries among former Journal staff and
companies who were involved in the payments to ELP "caused a panic"
at Dow Jones, resulting in Andrew Langhoff's resignation on Tuesday.
The Wall
Street Journal last night reported that Langhoff's resignation "following
an internal investigation into two articles published in the Wall Street
Journal Europe that featured a company with a contractual link to the paper's
circulation department."
It quoted
an email sent to staff yesterday by Langhoff about the agreement to publish the
ELP stories: "Because the agreement could leave the impression that news
coverage can be influenced by commercial relationships, as publisher with
executive oversight, I believe that my resignation is now the most honorable
course." Disclaimers have now been added to the two stories, warning
readers that the "impetus" for the stories was an agreement between
the Journal's circulation department and ELP.
Asked about
the payments from the Journal to ELP via the various middlemen, the chairman of
ELP, Nick van Heck, said it was the company's policy not to make public comment
on their contracts. He added: "I am confident that every member of our
staff is fully aware of the European norms, which are very rigid when it comes
to accounting. I'm pretty confident that what we did was in line with the
law."
On Tuesday
afternoon Dow Jones issued a statement saying said it initiated the original
investigation into the deals in question and the employees involved in late
2010. "The circulation programs and the copies associated with ELP were
legitimate and appropriate, and the agreement was shared with ABC UK before the
deal was signed," the statement said. "All circulation periods during
the ELP arrangement have been certified."
"We
came to the conclusion that ELP was only compensated for valid services;
however, we were uncomfortable with the appearance of these programs and the
manner in which they were arranged. We subsequently eliminated the position of
one of the employees responsible for those deals in January 2011.
"At
this point, we no longer have relationships with the employees or third parties
directly involved in these agreements, and we continue to believe that these
deals were valid. They were however of poor appearance. We were not fully aware
of the details of the editorial component of the relationship until last week,
when we immediately took action."
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