The Deal from Hell (27 page)

Although most people in the American newspaper industry don't like to admit it, lying about circulation is a time-honored tradition in publishers' suites. It's hard to say who started fudging the numbers, but one of the first times that the practice surfaced publicly was in 1876 when Victor Lawson took over the
Chicago Daily News
and said he would no longer conform to the industry's practice of treating circulation figures as trade secrets. With a fair amount of hubris, he
announced that he would document his actual circulation numbers in the
Daily News
front-page streamers claiming to have the largest circulation of any evening paper in Chicago, astonishing his red-faced ad manager who convinced him to back off until the numbers actually reached the level the paper was privately touting to advertisers.

Circulation fraud was so prevalent at the time that the
patent medicine industry
urged American publishers to create a credible system to measure circulation. In 1914, newspaper publishers endorsed the creation of the ABC, a board composed of representatives from the industry and advertisers to set common standards by which newspapers could be reliably measured and to hire and train auditors to keep papers honest. Over the ensuing decades, the system had its ups and downs but seemed to work fairly well until circulation started declining, particularly after 1990, when it became clear that real circulation growth had gone the way of the Linotype. That's when newspapers like
Newsday
got creative.

At first, the industry simply changed the yardstick. Each household that receives a paper typically has more than one reader. So newspapers claimed the real number to look at was readership—a much squishier number calculated by research firms that made the industry look better. But ABC continued to publish the circulation results for the nation's largest newspapers and reporters covering the industry continued to focus on them, prompting industry leaders to criticize coverage for focusing on negative circulation results. For their part, reporters didn't begin to detect that the industry played with the numbers until scandals erupted publicly at papers like
Newsday
. Had papers like
Newsday
dedicated the imagination and creativity they used to inflate circulation to their real problems, I doubt they would be in such trouble today.

Most advertisers that commit ad dollars to newspapers focus on paid circulation, particularly home-delivery customers, but also those who buy single copies. They don't like copies handed out for free. In fact, under ABC rules, newspapers aren't supposed to count papers that publishers give out free or discount deeply. But Sito and his team devised ingenious ways to circumvent the rules.
Newsday
sponsored
events like the popular hot-air balloon races on Long Island, a show that could draw tens of thousands of residents, most of whom needed a place to park their cars. Thinking fast, Sito's team helped line up parking for $2 and gave each driver a copy of
Newsday
, one of the benevolent sponsors of the races. Under ABC rules, free parking-lot papers couldn't be counted as paid circulation, but that didn't stop Sito. Anyone who looked closely at the tiny, fine print on the $2 parking ticket would discover that they had actually paid $1.25 to park and $.75 for
Newsday.
Under ABC rules, that was paid circulation.

The parking caper was one of
Newsday
's more benign practices, and Sito and his team didn't game that particular element of the system as well as some other papers. The next time you check into a hotel, take a look at the cardboard sleeve that houses your plastic keycard. Chances are, there will be some fine print telling you that included in your room charge is $.75 for a copy of
USA Today
, whether you want it or not. If you ask the hotel what is going on, you're likely to get the same response as did Jay Schiller, a former ABC auditor who questioned both the Marriott and Hyatt hotel chains about the practice. A Marriott vice president told him the paper really was complimentary. Pete Sears, a Hyatt vice president, explained: “By including this verbiage . . . the newspaper companies are able to include our daily newspaper spend in their circulation count. In exchange for [a] very favorable ‘subscription [rate],' we have agreed with our newspaper partners to refund any guest [the newsstand price] should he decline the paper. The cost of the paper in no way is added to the cost of your room.” Gannett, publisher of
USA Today
, has cut deals with hotel chains across the country for such arrangements. Something that was referred to vaguely as “other paid single copy” circulation at one point totaled an astonishing 35 percent of
USA Today
's paid circulation. If you add to the total the stacks of papers that sit in the lobby for the taking, the total comprised an even larger percentage of
USA Today
's circulation.

At
Newsday
, Sito also engaged in far more sinister plots, arranging kickbacks for dealers who dumped unsold copies rather than return them to be counted against paid circulation.
Newsday
was delivered to
homes that hadn't ordered the paper or to readers who were dead. Foley's FUDGE ABC software program was employed to create the illusion that the fake circulation was real. Ironically, Sito's house of cards wasn't exposed by his brazen disregard for the rules, but by the paper's desire to solidify its monopoly.

In March 1998, an arm of
Newsday
led by Sito acquired a Queens newspaper distribution company owned by Michael Pouchie and Anthony Orlacchio and folded it into United Media Distributions, Inc., which became the sole distributor of
Newsday
and
Hoy
in the greater New York metropolitan area. Pouchie knew the local newspaper distribution business cold from years of experience making sure readers on Long Island got their newspapers. And, as he would unabashedly reveal in an interview with me, back then he packed heat—in his case a .38 and a 9-millimeter. “I had a permit,” he explained, matter of factly, sitting in his Queen's office with posters of news delivery boys in baseball caps on his wall.

A lawsuit filed by Joe Giaimo laid out the details of a scheme that would unfold over the next couple of years: After
Newsday
bought their company, Pouchie and Orlacchio said they ended up with 47 percent of United Media Distributions, while
Newsday
's distribution arm, DSA, or Distribution Systems of America, owned 51 percent. As an independent agent, the suit said Pouchie had been distributing
Newsday
for years, and he knew what he was getting into—a few years earlier he'd begun meetings with people who worked for Sito to discuss the best ways to pad
Newsday
's circulation. Giaimo's suit exposed the sophistication of the setup: Those involved in the scheme would receive alerts when ABC auditors were due to show up. Ed Smith, a
Newsday
and
Hoy
circulation consultant who would later plead guilty to fraudulent circulation practices, had entertained the auditors to gather intelligence for
Newsday
and conducted tutorials on how to lie to the ABC about paid circulation information.

At first, things seemed okay at United. But things took a turn when it began distributing
Hoy
, which was Sito's baby. Months before, Sito had noticed how
Newsday
's penetration rate of 65 percent in several
Long Island communities started to plummet when Hispanic immigrants bypassed Manhattan for the suburbs. Sito had convinced Jansen he could turn adversity into opportunity with a Spanish language daily newspaper designed to capture this pocket of readers and recover some of the numbers lost on
Newsday
's end.

In November 1998,
Hoy
debuted with Sito, who had added the title of publisher of
Hoy
to his duties at
Newsday
. Judging from the spin,
Hoy
was an immediate hit. But it wasn't a hit with Pouchie, who distributed the paper, mainly to single-copy dealers, vending machines, and hawkers.

During the first week
Hoy
was on the market, United sold about 38,000 copies, or 7,600 copies for each of the five days the paper hit the streets. But Robert Garcia,
Hoy
's circulation director, who also would plead guilty to fraudulent circulation practices, ordered Pouchie to increase reported sales to 88,000 papers, or 17,600 copies a day for the reports that would form the basis of
Hoy
's ABC numbers. Those, in turn, were used to set ad rates. Giaimo's suit said the same thing happened the second week; United sold 40,000 papers, or 8,000 copies a day, but Garcia ordered up double that, or 16,000 copies daily. In week number three, Sito ordered Pouchie to rig the reports to show that United had sold 120,000 copies of
Hoy
, or 24,000 papers a day, when the legitimate daily sale really totaled only 8,000 papers. Giaimo said Pouchie refused. A week later at
Newsday
's Christmas party, Orlacchio got a message from Sito: “We'll screw you if Pouchie refuses to change the
Hoy
circulation volume.” Pouchie resisted the muscle, though, and a week later, discovered that the locks on United Media Distributions' doors had been changed. He and Orlacchio had also been locked out of the company's computer system. In other words, they'd been fired, even though they still owned 47 percent of the company.

Not to be outdone, Pouchie and his partner formed a new distribution company and took one of Pouchie's old clients, a Puerto Rican newspaper called
El Vocero de Puerto Rico
, with him.
El Vocero
continued to be printed and delivered to Pouchie's old office at United, where he would pick them up and distribute them. But a couple of
months after he'd been locked out, United refused to give Pouchie his papers and he went to the facility to demand them. “The cops told me a
Newsday
employee called them and said some mad man was inside waving a gun around,” Pouchie said, adding that he had asked for his papers and when they said no, he started to leave: “When I got outside, there were like fourteen police cars with cops pointing guns at me. They told me to give up my guns and lay down on the concrete. I did and then they handcuffed me.”

Elisabeth Vreeburg, a Queens lawyer, took the call from Pouchie, who she'd been representing in divorce proceedings. He was in a Queens jail, on a charge of trespassing, something about
Newsday
, fraud, guns, and his Puerto Rican paper. Two days later when Pouchie showed up at Vreeburg's office, she asked her partner Joe Giaimo, who had more experience as a litigator, to sit in. When Pouchie sat down, Giaimo recalled, “he wants to sue them for false arrest, and I hear his story about all of this circulation fraud, and I tell him, ‘You got more than a false arrest suit here, brother.'” In truth,
Newsday
probably could have settled the whole controversy for $500,000 to $1 million at the time. “I'd probably have settled for a million,” Giaimo later said, and none of the industry's shady practices would have been exposed in court.

But Sito said Jansen got his back up. After the dust-up over the Puerto Rican papers, in April 1999,
Newsday
had acquired Pouchie and Orlacchio's interests in United. When Sito later came to Jansen and told him that the duo, now represented by Giaimo, wanted some more money, Sito said Jansen told him, “Tell them we'll see 'em in court.”

Sitting in his cluttered office across the street from a Chicken House restaurant near the Kew Gardens subway stop in Queens, Giaimo is as Queens as St. John's Law School, his alma mater. He once worked as legislative staff for New York City Mayor Robert F. Wager in Manhattan and as counsel to Moses “Mo” Weinstein, a legendary majority leader in Albany. Short, with thinning gray hair and a raspy voice, he walks fast and always seems to have misplaced something in the banker boxes stuffed with files scattered everywhere over the fraying blue carpet.

But Giaimo is always ready for a fight, and, within months, he'd lined up several companies that had advertised in the Long Island paper as clients and had a road map from Pouchie on the gritty details of the paper's circulation scam: “Look, they're dumping papers, they're dumping them everywhere and they want to threaten me? Ok. You want to be an animal,” Giaimo said. “I'll be an animal. You want to be a prick, I'll be a prick.” After Jansen and
Newsday
refused to engage him or his clients for the next few years, he finally filed suit in early 2004.

The charges of massive circulation fraud at
Newsday
caught Timothy Knight off guard. About a year earlier, Knight had dropped by to visit Jack Fuller at his rustic cabin in Michigan and learned that Long Island was in his future. A former Skadden & Arps corporate lawyer, Knight had joined Tribune in 1996 and had become one of Fuller's fair-haired boys, assuming a variety of jobs in the publishing group until Fuller told him to head east:

A boyish-looking man with a bright smile, freckles, and a receding hairline, Knight arrived at
Newsday
in March 2003 as the paper's general manager and went to work learning the paper and Long Island. Tribune had put Jansen in charge of all East Coast papers, and Knight soon discovered Jansen ran the place like a fiefdom. When Giaimo filed his suit, Jansen's folks told Knight not to worry: “It appeared at first it was some lawyer who was trying to gin up some clients because
[someone] who supported the lawsuit . . . was an ex-employee or vendor who . . . had something that
Newsday
had taken over and the guy was unhappy; it was a disgruntled somebody, a vendor or distributor or something like that. They were small advertisers, out in the boroughs,” Knight said. But Giaimo's suit got publicity, a lot of it, including stories in
Newsday
and other New York papers: “I'm in all the papers,” said Giaimo. “I got former sales agents calling me, telling me stuff. I'm on CNN. Everywhere! I got people from all over the country calling me and saying they worked for papers and the same thing is going on in their city, Chicago, Milwaukee, Baltimore, Philly, you name it. From all over the country!”