CHICAGO (CN) - The 7th Circuit dismissed two class actions against the Tribune Co., its executives, and employees at two newspapers over an alleged scheme to defraud advertisers by falsely boosting the circulations of Newsday and the Spanish-language Hoy. more
Alarmed by a growing number of lawsuits from advertisers in 2004, Tribune and the Securities and Exchange Commission launched investigations and discovered that circulation numbers had, in fact, been fudged.
When the news broke, Tribune reported $90 million in losses and the value of its stock dropped significantly.
Shareholders and participants in Tribune's pension plans filed separate class actions against the company, executives and employees at Newsday and Hoy, accusing them of knowingly or recklessly allowing the circulation fraud.
Shareholders claimed that individual Tribune defendants had been recklessly indifferent, as it would have been "a relatively easy task" to verify newspaper sales.
But there is a big difference between knowing about the reports and knowing that the reports are false, the appeals court ruled. Further, the court pointed out that the defendants were never accused of selling their stock at the inflated prices, a logical action for anyone savvy to the scheme, as they stood to lose a lot of money if the value of Tribune's stock fell.
The Newsday-Hoy defendants cannot be held liable because they did not participate in preparing the false financial statements, the court ruled, adding that even the alleged "mastermind" of the fraudulent scheme had no role in preparing the financial statements or press releases.
Likewise, Tribune was probably ignorant of the fraud, "because the perpetrators allegedly took pains to conceal the scheme from Tribune, and the Newsday and Hoy employees running the scheme are alleged to have bilked the newspapers to pay off vendors and hawkers with whom they colluded," the ruling states.
In the retirement case, the court found flaws in the plaintiffs' claims for breach of fiduciary duty and ERISA violations. It affirmed dismissal of both class actions.
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