Dinner at Rupert's

What happened on the fateful evening last May when Rupert Murdoch decided how News Corp. would manage its phone-hacking scandal?

Red wine in hand, Rupert Murdoch chatted with guests at his London townhouse on what would be one of the most important nights to the future of his company. Gathered for cocktails were Rupert’s son James, heir apparent to the family media empire; Rebekah Brooks, the chief­executive of News Corp.’s U.K. unit; and Chase Carey, the New York-based president and chief operating officer. Joining the executives were a pair of legal heavyweights: Joel Klein, former New York City schools chancellor, and Brendan Sullivan Jr., the well-connected Washington lawyer brought into the Murdoch fold at Klein’s request.

It was May 19, 2011. The senior Murdoch had flown in two days earlier for a whirlwind of meetings with his top London executives. He had called the dinner party to hash out once and for all how to handle the phone-hacking scandal that had been hanging over the company for months and was suddenly spinning out of control. A lawsuit filed by actress Sienna Miller—charging that a senior editor at the company’s British Sunday tabloid, News of the World, was behind a campaign to hack into her phone—sparked a police investigation, producing a steady drip of disclosures about repeated incidents of phone hacking at Murdoch’s British tabloids.

In the weeks leading up to the dinner, Murdoch had been presented with two opposing strategies for dealing with the mess. None of the people present at the dinner was willing to speak on the record. The events reconstructed in this story are based on interviews with four at the dinner who spoke on the condition that they not be identified. (A News Corp. spokeswoman declined to comment on the record for this article. Bloomberg L.P. competes with several units of News Corp.)

Klein, Brooks, and James Murdoch recommended that Brooks continue to manage the company’s response from London. Doing so could reduce any chance of the scandal ensnaring Rupert Murdoch or James, who had recently been posted to the U.S. as deputy chief operating officer of the parent company, a move that positioned him as his father’s probable successor. Over the previous five years, Brooks and her predecessors at the U.K. unit, News International, had successfully stymied similar police investigations. There was no reason, the executives argued, for a radical shift now.

Lon Jacobs, News Corp.’s general counsel, disagreed. For weeks he had urged Murdoch to get out in front of the widening scandal and launch an independent investigation into wrongdoing at News of the World. Jacobs had joined News Corp. 15 years earlier from the company’s primary outside law firm and rose to general counsel in 2004. With an office two doors down from Murdoch, he had been the chairman’s most trusted legal adviser. Jacobs wanted headquarters—New York—to take control of the matter instead of letting the London operation run what amounted to an investigation of itself. Murdoch, however, did not want another arm of his own empire to potentially expose Brooks and James. Rejecting Jacobs’s advice, Murdoch chose that evening to stick to the London-based containment strategy, with Brooks supervising it.

Nine months later, the consequences of that decision still reverberate. Though none gathered at Murdoch’s home that evening could have foreseen the slew of allegations, arrests, and public outrage that loomed, by sticking with London’s effort to quarantine the scandal, Brooks and James Murdoch were, in particular, suspected of a coverup. In retrospect, Rupert Murdoch’s instinct to be loyal to his son that night may end up doing more than anything to prevent James from inheriting control of News Corp.

Murdoch’s multimillion-dollar, multistory townhouse sits at the end of a cul-de-sac not far from Buckingham Palace. As Murdoch discussed legal strategy with his top executives over drinks, there was a notable absence: Jacobs. He and three lower-ranking advisers—Jeff Palker, William Lewis, and Simon Greenberg—had been told to stay away until right before the dinner began. They shared a drink at the Stafford Hotel nearby and then walked over at the appointed hour. Once Jacobs joined the gathering, the chemistry abruptly changed. In the month leading up to the dinner, he had chafed at Klein’s recommendation of Sullivan as outside counsel and sparred with the powerhouse defense attorney over his approach to the case.

The far side of the living room opened onto a balcony with a stunning view of Green Park. Off in another direction was the dining room with a large rectangular table. The assembled executives fragmented into smaller groups, cradling their drinks and wandering around the room and onto the balcony to take in the fresh air.

Brooks was typically at the center of any small gathering involving Murdoch, but as the other executives mingled, she and Sullivan migrated to a corner of the balcony. According to one observer, Sullivan spoke to her sternly, reminding her not to hold anything back from him. Brooks returned from the tête-à-tête looking slightly shaken.

When it was time to sit down for the meal, everyone took assigned positions. Murdoch sat in the middle of the long table, flanked by Klein and Sullivan. Directly across from him was Brooks, and next to her was James. At one end of the table sat Jacobs, Palker, and Carey. At the other end sat Lewis, Greenberg, and John Villa, Sullivan’s right-hand man from Williams & Connolly. Before the group could settle into their chairs, Brooks expressed mild embarrassment at being in the prime position, even though she had arranged the seating personally. She turned to Carey and coyly insisted that he switch seats with her. Carey demurred. She made the same offer to Jacobs, who also declined.

As the meal began, Murdoch laid out the ground rules for the company’s legal strategy, according to people at the dinner. “This is going to be handled by Joel and Brendan,” Murdoch said. “I will handle the board.” Then, in a growl, he added: “Everyone else stay out of it.”

Over steak, Klein introduced Sullivan. “Rebekah is innocent,” Sullivan told the guests. The attorney, who rose to fame by defending Lieutenant Colonel Oliver North in the Iran-Contra hearings in the 1980s, cited his long experience dealing with individuals accused of wrongdoing. Based on his conversations with Brooks and his preliminary review of the evidence at hand, he continued, criminal charges against her would not be warranted. Sullivan outlined the game plan he was recommending to the company. The most important aspect was that Rupert and James Murdoch be kept at arm’s length from the scandal, he said. The matter would be run by the News International team in London, an effort headed by Brooks.

As the flinty, spectacled Washington lawyer spoke, Brooks watched him intently, appearing to follow his every word. At the far end of the table, Jacobs slumped in his chair. Despite his history advising Murdoch, his counsel in this matter had been ignored. The next day, Murdoch boarded his corporate Boeing 737, along with his New York team and the Williams & Connolly lawyers, for the trip back home. Jacobs later lamented to a friend that he felt like someone who was made of “cellophane” during the trans-Atlantic flight. Klein, Sullivan, and others kept passing back and forth in front of him discussing legal issues as if he weren’t there. Two weeks later, Jacobs resigned his post with News Corp.

Over the next month, Brooks led the efforts of an internal “management and standards committee,” comprising Lewis, Greenberg, and Palker, which would respond to specific police requests for information while not actively searching for any evidence of wrongdoing. The short-term goal following the dinner was for the committee to reconstruct a file of some 2,500 internal e-mails gathered in 2007 and have them reviewed by an outside expert, presented to News Corp.’s board of directors, and then handed over to Scotland Yard.

On June 16, Murdoch hosted a party at the Orangery in Kensington Gardens, an annual affair that he usually scheduled around News Corp.’s London board meeting, and attended by Prime Minister David Cameron and opposition leader Ed Miliband. It also seemed like a pre-party for News Corp.’s bid for 100 percent control of BSkyB, or British Sky Broadcasting Group, the largest pay-TV company in the U.K. and Ireland—a deal that was mere days from final approval. (News Corp. already held—and still holds—a 39 percent controlling stake in BSkyB, which has a market capitalization of approximately $20 billion.) A sudden lightning storm drove the revelers inside at one point, the only blemish on a splendid evening.

Two weeks later lightning struck again. On July 4, the Guardian reported that phone hacking at News of the World extended beyond eavesdropping on celebrities and sports stars to Milly Dowler, a 13-year-old girl who disappeared in April 2002 and was eventually found murdered. Over the next week, News Corp. withdrew its BSkyB proposal, closed its racy Sunday tabloid, and Rupert Murdoch apologized in person to the Dowlers.

On July 15, Brooks resigned. Two days later, she was arrested, questioned, and released without charges. Two days after that, Rupert and James Murdoch appeared before the British Parliament’s Culture, Media, and Sport Committee, and James had to answer for his own role in signing a lucrative settlement with a phone-hacking victim in 2008. He insisted he had no idea that phone hacking was rife at News of the World and said he signed off on the million-dollar legal settlement on the recommendation of his lawyers. (Days after his testimony, two former subordinates challenged that claim, and James was called back to testify again in November.) With Brooks out, meanwhile, the role of running the management and standards committee fell to Klein.

Under Klein’s direction, the committee began a thorough housecleaning managed out of New York and driven by an outside law firm in London. Since last summer, the internal committee has extended full cooperation to the police, spooking current and former employees of Murdoch’s British newspapers. As for James Murdoch, his stature at News Corp. slipped in August when his father assured investors that Carey was ready to take over the top job. That pledge has appealed to investors, who have bid up the company’s share price by 44 percent, to $19.62, since the announcement.

James continues to put up a brave front, even as his situation deteriorates. In December an e-mail emerged that backed up his subordinates’ version of events and undercut his claims of ignorance of the phone hacking’s scope. Worse, the e-mail—a hard copy of which was discovered in a crate belonging to one of the former subordinates and volunteered to Parliament by News Corp.’s outside attorneys—had been erased from a server in January 2011 after News International had been made aware that the police were interested in any new evidence of phone hacking at the company.

As of Feb. 8, 2012, News Corp. settled 54 phone-hacking civil cases, paying more than $7.9 million in damages, even though the company did not admit to any wrongdoing. Another civil trial is set to begin on Feb. 27. In coming weeks, the British parliamentary committee is expected to issue a report that will censure the management of News International, including James Murdoch, for misleading Parliament.

If Rupert Murdoch had chosen a different path at that dinner in London, the company might have dodged the worst consequences of the Milly Dowler revelations. It’s rarely the crimes of subordinates that threaten executives; it’s the coverups that reach the highest ranks of an organization. James would still have suffered in the short term for heading News International at a time when it was obscuring the extent of phone hacking, but he could have avoided the embarrassment of making firm claims before a parliamentary committee that were eventually contradicted by e-mail evidence. (James has written to Parliament to explain that he has never been deliberately misleading and never read the damning e-mail to the end.)

For veteran Murdoch watchers, meanwhile, last month’s announcement of the impending departure of Matthew Anderson is proof that James’s star has faded. Anderson, James Murdoch’s top strategist, was his boss’s most ardent defender within News Corp., a role that generated friction between him and the elder Murdoch’s management team in New York.

Klein is moving in the opposite direction from James. Though he came in last year as head of News Corp.’s education division, in the course of the phone-hacking scandal he has emerged as Murdoch’s consigliere. Empowered to eradicate, root and branch, any bad behavior at the British newspapers’ offices in Wapping, East London, Klein has also built his own power base in the executive suite at News Corp. headquarters in New York. The company hired Gerson Zweifach from Williams & Connolly—the firm recommended by Klein last year—to be its new general counsel, replacing Jacobs. Natalie Ravitz, who worked for Klein when he served as New York schools chancellor, is joining News Corp. as Rupert Murdoch’s chief of staff. Klein has also moved into a new office beside Carey and one door down from Murdoch, in the space formerly occupied by Jacobs. As for Rupert Murdoch, he seems to have absorbed a painful lesson from the events of the past year. In January he included this in a Twitter message: “No excuses for phone hacking. No argument.”

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