Tapes show News Corp. subsidiary tactics
07:21 - Source: CNN

Story highlights

UK phone-hacking scandal raised questions about business practices of News Corp.

U.S.-based subsidiary drawing attention with allegations of corporate espionage

Floorgraphics lawsuit alleged "illegal, anti-competitive, and unfair business practices"

News America Marketing moves sought to put Floorgraphics out of business, suit alleges

CNN  — 

The far-reaching News of the World phone-hacking scandal that toppled the 168-year-old British newspaper this summer, led to the resignation of Britain’s top police official and threatened Rupert Murdoch’s global media empire continues to raise questions about the business practices of parent company News Corp.

The company, helmed by Murdoch, has been at the center of controversy since allegations that News of the World illegally eavesdropped on the telephone messages of celebrities, politicians and a young murder victim. The accusations set off a frenzy of high-profile revelations that included tense testimony from both Murdoch and his son James in front of a parliamentary committee investigating the accusations.

As News Corp. shareholders prepare to meet later this month, fallout continues. This week, a top executive resigned amid allegations that The Wall Street Journal’s European edition used underhanded methods to increase circulation.

Now, one of News Corp.’s U.S.-based subsidiaries is drawing attention with allegations of corporate espionage, computer hacking and threats to destroy its competition.

When former News Corp. competitor Antonia DeMatto heard news of the British newspaper phone-hacking allegations, she said she thought it was all too familiar.

“It was a little bit like reliving it. It brought back to mind all the times that we’d been through, trying to compete and finding ourselves competing with someone who was competing completely unfairly,” DeMatto told CNN.

DeMatto was vice president of marketing for a New Jersey start-up called Floorgraphics, which placed ads on the floors of supermarkets and retail outlets. The company was competing against News America Marketing, a subsidiary of News Corp., which handles consumer advertising and promotions in the United States.

“The idea was that, when you go into a store, one of the biggest blank surfaces in a store is the floor, and the floor could be used to tell shoppers about the products in that aisle,” DeMatto said. “It was a way of speaking to the consumer, the shopper right at the point where they were making decisions about what they wanted to buy. So we thought it was an incredibly powerful form of advertising.”

Her bosses, George and Richard Rebh, founders of Floorgraphics, thought their company was poised for major success. So the Rebh brothers, and one of their sales executives, Gary Henderson, met with News America CEO Paul Carlucci and Dominick Porco, then company’s president.

In a videotaped deposition obtained by CNN, George Rebh recounts the meeting, which took place in July 1999 at the Dish of Salt restaurant in Manhattan. He said Henderson set up the meeting.

“It was a get-to-know-you-meeting, whereby we would meet and perhaps go to the next step and explore how we might do joint programs and we had some, you know, ideas in that regard,” Rebh said in the deposition.

But that never happened, Rebh recalled.

“At a certain point, Mr. Carlucci turned to us, but primarily Richard, and said so you are here to sell your company. And that, because that was not the purpose we were there, that kind of took us a little by surprise, and Richard said, no, that’s not why we came. And said something to the effect, you know, we thought that, you know, you all primarily being in the promotion business, and we now having developed this floor advertising program, perhaps for the benefit of consumer packaged goods companies there would be an occasion for us, to you know, (be) cooperative, or do joint programs.”

Rebh said Carlucci’s response was that “I have always liked floor advertising, so from this point on, consider us your competitor. And he said again, words to the effect, and you should know that I work for a man who wants it all and doesn’t understand anyone telling him he can’t have it all. And know this, if you ever get into any of our business, I/we will destroy you.”

Carlucci worked for News Corp. CEO Rupert Murdoch.

After a few seconds, Rebh said, according to his deposition, “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 will destroy us. And he said, that’s right. … At that point, the meeting came to a rather abrupt and quick end, where I think everyone realized what had been said and the gauntlet that had been put down.”

A News America spokeswoman turned down CNN’s request for an interview with Carlucci.

Carlucci is still the CEO and chairman of News America Marketing, and in 2005, was also given additional responsibilities as the publisher of the News Corp.-owned New York Post.

In another videotaped deposition obtained by CNN, Carlucci was asked about that meeting with the Rebh brothers. He denied saying that he worked “for a guy who has to have it all.” And he also repeatedly denied ever having a “luncheon meeting” with the Rebhs until he eventually conceded there was a “very brief meeting,” but no lunch was ever served.

A series of moves designed to put Floorgraphics out of business followed that meeting, according to a lawsuit the company filed against News America Marketing in 2006.

The suit said News America Marketing had “employed numerous illicit tactics in a prolonged and concerted effort to destroy (Floorgraphics) through illegal, anti-competitive, and unfair business practices.”

The suit claimed that News America Marketing had hired away the company’s top sales employees, sent a letter to clients questioning the number of floor ads that it actually had placed and mailed a series of press releases to the homes of all its employees. The press releases touted the company’s success in competing with the floor ad business.

“I found an envelope from News America Marketing. I was a little surprised because it’s not an address I use as a business mailing address,” DeMatto told CNN. “The real shocker was when I called the Floorgraphics office in New Jersey and asked them about this. They said I wasn’t the only one who received it and, in fact, it appeared that all of the employees in the company had received it, not just the executives.”

She said sending press releases to the employees’ homes crossed the line.

“I think the creepy part of it is how they got the information. How did they get the information? The anger-inducing unethical part is how they used it. And the absolutely infuriating part is that apparently this happened many times with no one stopping to say, ‘Should we be mailing this out to the people in graphics? To the receptionist?’ ” DeMatto said.

A year after the Dish of Salt meeting, Henderson left Floorgraphics to work for News America Marketing, first as a consultant, then as a sales vice president.

In an e-mail to CNN, News America Marketing spokeswoman Suzanne Halpin stated, “Gary Henderson worked at Floorgraphics before he worked at NAM and made many personal contacts there. The contact information for his friends and former co-workers came from his own contact lists and address book, and company directories made available to all employees. This was the same contact information he used to send cards at holiday time. Former co-workers at Floorgraphics also kept in touch with him, in the same way. Gary Henderson also sent these former co-workers announcements he prepared about his and NAM’s successful negotiations for contracts.”

Asked whether Carlucci was aware that the press releases were being sent out, the company said he “had no involvement in any personal communications from Gary Henderson to his friends and former co-workers.”

A former News America Marketing account coordinator, who worked for Henderson, said in a sworn affidavit taken in 2002, that she mailed the press releases to the homes of Floorgraphics’ employees at Henderson’s direction.

“I remember that on at least one occasion, Gary asked me to send certain press releases to Floorgraphics’ employees, and that I did so,” states the affidavit by Winnie Yaecker.

CNN was unable to reach Henderson through a phone number listed for him as well as a letter sent to his home.

Even more serious, according to the Floorgraphics lawsuit and an internal investigation, Floorgraphics discovered someone at News America Marketing had accessed its password protected website 11 times between October 2003 and January 2004. The site contained confidential information meant only for clients.

“As I recall, I was in the Floorgraphics’ offices over the weekend, and the CEO Richard Rebh, told me they found some evidence that the computers had been hacked into,” DeMatto said.

Floorgraphics commissioned an investigation into the hacking, which concluded “the primary activities of the intruders was to view images of product advertisements, both floor ads and other types of ads – which Floorgraphics had installed in retail customers’ stores in the past, as well as the images, instructions, and schedules for ads it was preparing to install in the coming months.”

The report said News America Marketing’s investigation into the hacking “falls far short of any standards in this area.”

When asked in court during the Floorgraphics lawsuit against News America, Henderson denied that he had accessed the Floorgraphics’ password protected website.

News America Marketing’s attorney, Lee Abrams, in his opening statement to jurors, said the website “wasn’t very well protected.”

“Floorgraphics gave a user name and a password to retailers,” Abrams said in court. “It used the same user name and password for all the retailers in the country, and that user name and password was in effect for a year so that Floorgraphics sent hundreds of notifications to all of the retailers with which it had contracts, saying use the following user name and password and they sent this by e-mail.”

Abrams said that “some person accessing through a firewall at News America Marketing headquarters” accessed the site, but “we don’t know who did the access.”

Laura Richards, vice president of corporate communications for News America Marketing, stated in an e-mail to CNN, “When the company was alerted to the access, it conducted a thorough investigation in order to identify who was responsible, including a system analysis and follow up with staff. Floorgraphics had provided News America Marketing with a dynamic IP address that it claimed was where the unauthorized access emanated from. That address, however, was not pegged to a specific employee’s computer, and thus there was no way for the company to determine, based on the information given, who had engaged in the access.”

The Rebh brothers turned over evidence of the hacking to the FBI and the U.S. attorney’s office in New Jersey, according to e-mails examined by CNN.

But, the criminal investigation went nowhere.

Michael Drewniak, a spokesman for New Jersey Gov. Chris Christie, who was then U.S. attorney, said in a statement to CNN, “The U.S. Attorney’s Office receives (and received then) thousands of referrals each year from parties seeking criminal investigations. Any decision to prosecute or not prosecute is based strictly on the strength of evidence or lack thereof, and allegations with critical weaknesses simply do not go further. Prosecutors are ethically obliged not to bring cases that have defenses that are judged insurmountable.”

“While the U.S. Attorney would not personally review these types of referrals, the office had a system in place to ensure they are thoroughly and appropriately evaluated based on the merits by experienced prosecutors and supervisors. In fact, this matter in particular was never brought to his attention at any point during his tenure as United States Attorney.”

Rebekah Carmichael, public affairs officer for the U.S. attorney’s office in New Jersey, said, “It is our office policy neither to confirm nor deny the existence of investigations.”

Sen. Frank Lautenberg, D- New Jersey, who tried to get the attention of the Justice Department in 2005 about the hacking, wrote a letter in July to FBI Director Robert Mueller and Attorney General Eric Holder, calling their attention to the Floorgraphics case. A spokesman for Lautenberg said there has been no response to the letter.

In the wake of the hacking scandal in the United Kingdom, the FBI confirmed to CNN in July that it was taking a new look at the allegations of corporate espionage in the United States.

“We are aware of all the allegations against News Corp. including those publicized by public officials and we are looking into all of them,” FBI spokesman Peter Donald told CNN.

As far as Floorgraphics lawsuit, News America Marketing paid $29.5 million in 2009 to acquire the assets of Floorgraphics, which ended the case. Two other cases filed against News America Marketing, each claiming similar unethical conduct, were settled. The company settled a suit filed by Valassis Communications for $500 million and a third one by Insignia Systems Inc. for $125 million. As part of the Floorgraphics case, the Rebh brothers are prohibited from criticizing News America Marketing.

“A number of our competitors have been unable to compete with NAM on a level playing field – in the marketplace,” Halpin told CNN in an e-mail. “So they resorted to litigation as a business strategy rather than compete. NAM continues to vigorously disagree with the claims that were made against it in these cases.”

The litigation was “resolved between NAM and Floorgraphics in a brief civil proceeding between the two companies in 2009. It’s worth noting that prior to making any legal claims, Floorgraphics had approached NAM about buying the company,” Richards told CNN in an e-mail.

Greg Curtner, an attorney for Valassis Communications, told CNN that the corporate culture at News America is clear from all the litigation.

“I think the best answer to that question is out of Mr. Carlucci’s mouth: ‘I work for a man who has to have it all and does not understand being told that he can’t have it all.’ That’s the culture shown time after time after time in business activity after business activity, lawsuit after lawsuit.”

For Antonia Dematto, what’s happened is even more clear.

“I think the story here is a lesson that anyone who has children or has raised a pet knows,” DeMatto said. “That if you reward bad behavior or if you ignore bad behavior, if the authorities ignore it, you’ll get more bad behavior.”

CNN’s Susan Candiotti con