News Corp. Directors Should Face Investors’ Lawsuits

News Corp. directors failed to stop illegal conduct at the media company, including phone hacking, and should face lawsuits by shareholders seeking to hold them accountable, a lawyer for investors told a judge.

Board members knew the newspaper publisher’s reporters routinely hacked into phones and bribed British police officers for stories, yet turned a blind eye to their misdeeds, Jay Eisenhofer, a lawyer for a New York Bank and an Illinois pension fund, told Delaware Chancery Judge John Noble. Eisenhofer urged Noble to reject company officials’ calls to dismiss the case.

“Directors’ failure to act led to substantial harm to the company,” Eisenhofer said today at a hearing in Dover. Noble said he’d rule later on whether the suit can proceed.

News Corp., the New York-based company controlled by Rupert Murdoch, has tried to move past the controversy sparked by the exposure of illegal reporting tactics and alleged cover-up. About 80 people have been arrested in connection with criminal probes, including Rebekah Brooks, the former top executive of News Corp.’s U.K. publisher.

British lawmakers concluded earlier this year Murdoch was not “a fit person” to lead a major international company after News Corp. officials misled Parliament about the extent of phone hacking at the News of the World. The tabloid paper was closed because of the scandal.

‘Blind Eye’

Murdoch “turned a blind eye and exhibited willful blindness to what was going on in his companies,” the House of Commons Culture Committee said in a report. News Corp. directors announced in May they had “full confidence” in Murdoch’s ability to lead the media company.

Lawyers for News Corp. directors today disputed investors’ claims that board members participated in a cover-up of wrongdoing because they were beholden to Murdoch and his family.

“Rather than ignoring and covering up these matters, the evidence shows the board” moved to address the scandal quickly and openly, Gregory Varallo, one of the company’s attorneys, told Noble.

Directors’ willingness to back Murdoch despite the phone-hacking scandal and to approve questionable transactions involving members of his family shows they can’t be relied on to act in shareholders’ best interests, lawyers for New York-based Amalgamated Bank and Jacksonville, Illinois-based Central Laborers Pension Fund said in court papers.

Dominates Board

Investors pointed to News Corp.’s decision in 2011 to pay $675 million to acquire a U.K.-based television production company owned by Murdoch’s daughter, Elizabeth, as example of how the company’s founder dominates its board.

Mark Lebovitch, a lawyer representing News Corp. shareholders, said that Delaware judges have taken a skeptical view in the past of buyout deals involving family members.

“Human nature is to protect your children” and that raises questions about the fairness of such conflicted transactions, he said.

News Corp. directors also knew by 2009 that some of the company’s journalists had hacked into celebrities’ phones to get scoops because of an expose by London’s Guardian newspaper, attorneys for disgruntled investors said in the filings.

News Corp. is facing suits from more than 130 people whose phones were hacked by the tabloid’s reporters, including British actor Hugh Grant; Sarah Ferguson, the Duchess of York; and U.S. actors Brad Pitt and Angelina Jolie.

Wrongdoing Limited

Instead of investigating the allegations and halting the conduct, board members accepted explanations from Murdoch and his family that the wrongdoing was limited to a single reporter who’d been fired, shareholders’ lawyers said.

“The board’s bad-faith abdication of its duties, despite years of warning signs that employees reporting directly to Rupert and James Murdoch have engaged in pervasive and systematic violations of applicable laws, has left News Corp. in an ever-worsening series of related scandals,” the attorneys said in an Aug. 8 filing.

The investors’ so-called derivative lawsuit would return any recovery from insurance covering Dynegy officers and directors to the company’s coffers.

Illogical Theory

News Corp.’s lawyers counter investors’ theory that directors were willing to cover up illegal acts by company employees is “illogical.”

Investors’ attorneys have leveled numerous allegations in court filings in a bid “to create a cover-up that just does not exist,” the company’s lawyers said in an Aug. 22 filing.

“They have nothing to demonstrate that a majority of the director defendants intentionally acted in bad faith” in evaluating and responding to allegations of internal wrongdoing, the company’s lawyers added.

On the question of whether News Corp. directors should have agreed to buy Elizabeth Murdoch’s company, Varallo said the firm had produced such hit TV series as “The Office” and “Ugly Betty.” A board committee weighed the value of those entertainment properties in agreeing to the deal, he added.

“This isn’t a case of daddy looking out for a favored child,” Varallo told Noble at today’s hearing.

The case is In re News Corp. Shareholder Derivative Litigation, CA 6285, Delaware Chancery Court (Wilmington).

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