According to an article dated April 4, 2008, a federal appeals court panel has affirmed the dismissal of a securities class action and an ERISA class action brought in the wake of the circulation scandal at two of the Tribune Co.'s New York newspapers. The U.S. Court of Appeals for the Seventh Circuit ruled Wednesday that the inflated circulation figures at Newsday and Hoy may not have been so obvious to the company's senior management and that the plaintiffs failed to allege any unusual or suspicious trading of stock during the class period. The Seventh Circuit also pointed out that Tribune began an internal investigation directly after the first lawsuits came in and that it was entitled to a “reasonable amount of time to investigate until it had a full story to disclose.” “In sum, the plaintiffs fail to establish the primary liability of any individual defendant, and the alleged misconduct is not imputable to Tribune by the doctrine of respondeat superior,” Judge Terence T. Evans wrote for the court. The court dismissed the Employee Retirement Income Security Act suit for similar reasons, pointing out that the retirement plan fiduciaries did not actually know about the circulation fraud being perpetrated by Newsday and Hoy employees.
On October 13, 2005, U.S. District Judge William T. Hart granted the motion to appoint the City of Philadelphia Board of Pensions and Retirement as lead plaintiff and approved lead plaintiff’s selection of Pomerantz Haudek Block Grossman & Gross LLP and Berger & Montague, P.C., as co-lead counsel. On November 15, 2005, the lead plaintiff filed an Amended Consolidated Class Action Complaint and the defendants responded by filing a motion to dismiss the Amended Consolidated Class Action Complaint on December 15, 2005. On September 29, 2006, the Judge Hart granted the defendants’ motion to dismiss and judgment was entered in favor of the defendants and against lead plaintiff, dismissing lead plaintiff's cause of action with prejudice. The civil case was terminated. On October 27, 2006, the plaintiff filed a Notice of Appeal in the U.S. Court of Appeals for the Seventh Circuit from the order dismissing the Amended Consolidated Class Action Complaint.
The original complaint alleges that defendants intentionally overstated the circulation of several of Tribune's publications, including Hoy and Newsday, in order to fraudulently extract higher incentive payments from the papers' advertisers. These inflated circulation numbers were reported to investors and the market on a regular basis and artificially inflated Tribune's financial results.
In June 2004, Tribune reported that two of its papers, Newsday and Spanish-language publication Hoy, had inflated circulation figures since 2001. As alleged in the complaint, this announcement set off a wave of increased scrutiny throughout the publishing industry, with advertisers keen to ensure that they were not being similarly duped. Tribune also came under increased scrutiny with the Audit Bureau of Circulations, a non-profit, private entity charged with monitoring the accuracy of circulation numbers for publications nationwide. As a result of this increasing pressure, Tribune admitted on July 15, 2004 that its reported circulation numbers for Hoy and Newsday were overstated. Tribune eventually announced it was conducting an internal investigation and that it may refund to advertisers all amounts that they had been overcharged. In response to this announcement, Tribune's stock price fell to $41 at the close of business on July 15, 2004, and has never recovered.
According to the complaint, the true facts, which were known by defendants but concealed from the investing public during the Class Period, were as follows: (a) since at least FY 2001, defendants were inflating the circulation of Tribune's Hoy and Newsday publications; (b) as a result of said inflation, the Company's financial results during the Class Period were artificially inflated (including revenue, earnings per share ("EPS") and accounts receivables) and the Company's liabilities were understated; (c) the Company's revenue and income was grossly overstated by millions of dollars; (d) defendants had knowingly established extremely weak, if not purposeless, circulation controls which allowed for the circulation overstatements and did not require that circulation managers certify the claimed circulation; and (e) as a result, defendants' ability to continue to achieve future EPS and revenue growth would be severely threatened and would and did result in $95 million in costs, fines, refunds and investigation expenditures.