News Corp's GC Doubles Down on Inhouse Challenges

7/10/13 Corporate Counsel: News Corp s GC Doubles Down on In House Challenges

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News Corp's GC Doubles Down on InHouse Challenges

Sue Reisinger

Corporate Counsel

20130709 00:00:00.0

It wasn't the best of times to leave a comfortable career as a Big Law partner to take over the law department at News Corporation. Legal tremors had been buffeting Rupert Murdoch's media empire over a London newspaper's phone hacking scandal. Then, in early 2011, what had been tremors exploded into a fullblown earthquake. One hacking incident involving a rogue reporter had suddenly escalated into many claims, not only of hacking but of alleged bribing of police officers and of coverups. And the allegations scaled the corporate hierarchy to include editors and executives as well.

News Corp. had much at stake. Besides newspapers in the United Kingdom and Australia, it was the parent company of, among others, the Fox television network, the 20th Century Fox film studio, and Dow Jones & Company, including The Wall Street Journal. And in short order, the scandal began to damage its properties. In the U.K., Murdoch shuttered a newspaper and lost an opportunity to expand his company's stake in the largest payTV broadcaster in Britain. Also, shareholder suits attacked News Corp. for its alleged sweetheart acquisition of a television production company belonging to Murdoch's daughter.

By June 2011, News Corp. general counsel Lawrence "Lon" Jacobs, one of Murdoch's most trusted advisers, resigned "to pursue other interests"—just before Parliament opened hearings on the hacking scandal. That was when the besieged company turned to Gerson Zweifach, a highly regarded partner at Williams & Connolly, to lead its law department.

The 60yearold Zweifach seemed at first like a strange choice. Even if he was interested in giving up his comfortable perch, he had never worked inhouse before. And, though he had served as outside counsel for other media companies, he hadn't done work for News Corp.

But he was known and admired by some prominent people in the business world. One was Kenneth Langone, founder and CEO of Invemed Associates Inc. and cofounder of The Home Depot. Langone spent time with Zweifach when the lawyer was defending former New York Stock Exchange CEO Richard Grasso against New York Attorney General Eliot Spitzer's suit claiming that Grasso was overpaid. Langone was on the NYSE board and chaired its compensation committee when Zweifach won the case. "He is a great tactician and strategist, with an enormous reservoir of common sense and street smarts," Langone says.

He cites Zweifach's questioning of former NYSE board member Henry Paulson Jr. to illustrate. In his testimony, Paulson was effusive about Grasso's qualities and performance, Langone says. "Then why did you vote to fire him?" Zweifach asked. "The best answer Paulson could come up with," Langone recalls, "was 'I don't know.' And that was the guts of the case right there."

Even some former opponents admire Zweifach. Sean Johnston, general counsel of Genentech Inc., recalls meeting Zweifach when the litigator was representing the opposing side in a patent litigation. Johnston was so impressed that when the case ended, he hired Zweifach to represent Genentech on new matters. "It's not just the quality of his lawyering," Johnston says, "but also the principled, thoughtful, professional way he and his team act."

After 30 years in litigation, Zweifach was indeed ready for a change—and he was intrigued by the inhouse idea. The situation wasn't all that different from one he'd often encountered as a trial lawyer: A company was coming to him with a problem it couldn't handle. "I saw a chance here to allow these people who built this incredible global company—to allow them not be distracted by this," he says.

Zweifach recalls his job interviews with Rupert Murdoch, his son James, and chief operating officer Chase Carey. He wanted them to understand what they'd be getting. "I have no investment in the past, no agenda," Zweifach recalls saying. "What I www.law.com/corporatecounsel/PubArticleFriendlyCC.jsp?id=1202609891450 1/4 7/10/13 Corporate Counsel: News Corp s GC Doubles Down on In House Challenges would be coming here to do is telling you candidly and frankly what you need to do to get through this, and to make sure nothing like this ever happens again."

The executives must have liked what the lawyer was pitching. They made him senior executive vice president and group general counsel, negotiating a threeyear contract that paid Zweifach a total 2012 compensation of nearly $7.3 million, including bonus and stock awards.

Zweifach's first year, which concluded last February, sped at a breathless pace as he focused on three key issues. The first was to manage and resolve the hacking scandal. Six months into the job, he added the title of chief compliance officer, and set out to create what he calls a worldclass compliance program. At the same time he began legal maneuvers to split off the print business as an independent entity, explicitly protecting the parent from any criminal liability in the scandal. For most lawyers, any one would have been more than a fulltime job.

One of Zweifach's first acts as GC was to take over the company's management standards committee. Called the MSC, the group was formed by News Corp.'s Joel Klein to address the burgeoning hacking scandal at News of the World, part of the London subsidiary News International Ltd. Klein, also a lawyer, is the former chancellor of the New York City Department of Education and now heads News Corp.'s education unit. But he temporarily played a key legal role after he reportedly clashed with then–general counsel Jacobs on how to handle the crisis. Those clashes hastened Jacobs's departure. (Jacobs declined to comment for this story.)

Klein paved the way for Zweifach in other ways as well. He hired Zweifach's firm, Williams & Connolly, as outside counsel to respond to the scandal in the United States. He also replaced outside counsel in London with Linklaters. He chose highly respected corporate lawyer Lord Grabiner QC to be an independent chairman for the MSC and to lead the internal investigation of News International. And, finally, Klein recommended hiring Zweifach to take over the battered legal department, including overseeing the MSC.

Klein knew a thing or two about how federal prosecutors think. He headed the U.S. Department of Justice's antitrust division under President Bill Clinton that brought the landmark lawsuit against Microsoft Corporation. Klein's insider knowledge was important once the Federal Bureau of Investigation opened its own probe of News Corp. The Justice Department has said that it's examining whether the company accessed voicemails of 9/11 victims, as well as whether it violated the Foreign Corrupt Practices Act, which prohibits bribing foreign officials. The company says it is cooperating with all government investigations.

Klein and Zweifach have known each other for years, and Klein says the new GC has more than fulfilled his expectations. "He is an extraordinary lawyer, one of a handful of top litigators in the United States in terms of judgment and experience," Klein says. He also notes that Zweifach's barbed wit is legendary in courtroom circles. Klein recounts an instance in which Zweifach was deftly crossexamining an expert witness when the witness turned to the judge and complained, "Your Honor, the counsel is making me look like an idiot." Before the judge could reply, Klein says, Zweifach quipped: "Well, Your Honor, I don't deserve all the credit."

Jumping into the hot seat, Zweifach quickly took charge. The scandal began with allegations in 2005 that News of the World employees had hacked into voicemails and bribed police in the pursuit of stories. Zweifach's take: "The way the hacking matter was handled—by local managers and local lawyers—was in keeping with News Corp.'s policy. The hallmark of the company is that it is nonbureaucratic, highly decentralized, and moves very nimbly." But the local approach didn't work this time. "We now know they didn't get to the bottom of it," he says. "And where we ended up was, this thing festered until in 2011 it exploded."

That's when it was revealed that the hacking went far beyond one reporter (who was prosecuted and imprisoned). The inquiries led to the resignations of Dow Jones chief executive Les Hinton; News International's legal manager, Tom Crone, and chief executive, Rebekah Brooks; and a London metro police commissioner—all of whom were accused of a coverup. Devoid of advertising, the paper closed.

Some 10 journalists were arrested. Several were then charged with crimes, including a former News of the World managing editor, a former executive editor, and Brooks. Their trials are pending. No criminal charges have been brought against the company, but a parliamentary inquiry released a report condemning Rupert Murdoch as "not a fit person" to run a major international company. The report accused Murdoch, his son James, and News Corporation of either failing to address allegations of "widespread criminality within the organization" or, if they didn't know about it, of a "significant failure in corporate governance." The scandal forced Murdoch to give up his bid to buy a bigger stake in the British Sky Broadcasting Group, a major financial blow.

Murdoch apologized to Parliament and shouldered the civil liabilities for the scandal. No wonder the media tycoon, according to Zweifach, told the GC: "I want you to help us get through this and to do whatever it takes so none of us has to go through something like this again."

And Zweifach is trying to do just that. He says the MSC conducted an internal investigation at three other News International publications in the U.K., where "they have literally turned the place upside down." All news policies about investigative techniques and paying sources—especially if they are government officials—are being changed. "I think we've done www.law.com/corporatecounsel/PubArticleFriendlyCC.jsp?id=1202609891450 2/4 7/10/13 Corporate Counsel: News Corp s GC Doubles Down on In House Challenges everything one can do to demonstrate that what went on is unacceptable and will not continue," he adds.

Meanwhile, Zweifach has made progress on settling the hacking suits. According to an April 30 filing with the Securities and Exchange Commission, from July 2010 through December 2012 News Corp. incurred legal and professional fees "related to the U.K. newspaper matters" of $250 million, and has paid $25 million to claimants so far for civil settlements. In addition, the company said it has accrued another $70 million for other claims not yet settled. A May filing added that News Corp. expects to record a pretax noncash impairment charge (goodwill and intangible assets related to its publishing business) in the range of $1.2–1.4 billion in the quarter ending June 30.

In April Zweifach negotiated a settlement (subject to court approval) in another suit. Besides accusing the company of mishandling the newspaper scandal, the shareholders' derivative suit challenged News Corp. over the purchase of a television production company belonging to Murdoch's daughter. Under the terms of the settlement, News Corp.'s insurance will pay $139 million and the company agrees to undergo extensive corporate governance reforms. It is believed to be one of the largest cash settlements ever in a derivative suit, where the funds go to the company on behalf of the shareholders.

One key to settling this case was News Corp.'s new compliance program. A commitment to the program is included in the settlement document. The program seeks a more centralized approach to managing risk while still allowing for local autonomy, Zweifach says.

Begun in the spring of 2012, the program is still evolving. But for the most part, it's divided the company into five regions, with fulltime group chief compliance officers in each. Zweifach also formed a compliance steering committee with these five CCOs, plus members of senior management, to examine policies such as how entities handle cash, deal with third parties, or enter joint ventures. "But rather than just pump out a bunch of new policies, we want to customize them in a way that is sensitive to the differences among companies," he explains.

Zweifach chose experienced lawyers. Brian Michael, a former federal prosecutor in New York and Los Angeles, oversees compliance for the Fox Networks Group, which includes Fox sports and cable properties, plus broadcasting and international channels and the production business. "It's very appealing to join a company at this stage in its history, to play a role in creating something new," he says. "I was attracted to Gerson's clear commitment to doing things in a way that would be sustained for the long term."

Michael works closely with John McCoy, the group CCO for the company's film and television studios. McCoy is a former associate regional director of the Securities and Exchange Commission's enforcement division in Los Angeles. Other CCOs are Lisa Fleischman, News Corp.'s deputy CCO, who now oversees the company's New York–based news and information businesses, which includes Dow Jones; Candy Lawson, a former Morgan Stanley anticorruption counsel for Europe, the Middle East, and Africa, now watching News Corp.'s Europe and Asia business compliance; and Keith Wood, director of internal audit and risk for the company's Australian unit, who monitors the Australia Group.

The plan looks sound, but there may be one hitch. All the compliance officers report to Zweifach. While there are arguments both ways, Donna Boehme, a compliance consultant who also writes for Corporate Counsel's website, says that the reporting structure is a problem. "A compliance program that is viewed and managed through a strictly legal lens is destined to end in tears because the general counsel usually does not have a strong understanding or background in what constitutes best practices in compliance, and often has a very different view of what 'protecting the company' means," Boehme says.

Zweifach maintains that he understands the arguments on both sides of the issue. But under the difficult circumstances at News Corp., he chose to take on the title of chief compliance officer. "At another company, or under difference circumstances, I might have chosen differently," he says. "At some point in the future, we may decide to change it. But not until the compliance changes have taken root and are permanently ensconced."

If this job were not enough, Zweifach is about to double his pleasure. After working for a year to help News Corp. split into two distinct publicly traded companies—one for publishing and the other for entertainment and nonprint media—he agreed to serve as GC to both companies. (At press time it was on the verge of completion, barring lastsecond complications.) It was purely selfish, Zweifach confesses. "I love these businesses," he gushes. "Who doesn't want to have jurisdiction over the legal issues that come up from everything from this incredible film studio (Titanic), to a television network, to the fastestgrowing international cable business, to The Wall Street Journal and businesses in Australia? Who wants to give any of that up?"

Not Zweifach—at least not for a year, he says. The entertainment/media company is named TwentyFirst Century Fox Inc. The publications entity is called News Corp. It consists of the newspapers; information and integrated marketing services; digital real estate services; book publishing; digital education; and sports programming and payTV distribution in Australia, according to company filings.

Only Murdoch and Zweifach are officers in both companies, but some directors will serve both. Murdoch will be the News Corp. executive chairman while also serving as chairman and CEO of Fox. Zweifach will be News Corp.'s GC while serving as senior executive vice president and group general counsel for Fox. Murdoch and the Murdoch Family Trust still own a significant interest in both companies. In case of a conflict of interest, "officers and directors who serve at both companies will recuse themselves from decisions where conflicts arise," according to a recently filed proxy statement. That specifically www.law.com/corporatecounsel/PubArticleFriendlyCC.jsp?id=1202609891450 3/4 7/10/13 Corporate Counsel: News Corp s GC Doubles Down on In House Challenges includes Zweifach.

The GC credits his deputies with leading the reorganization. But he played a key role in directing the legal liabilities. He wanted to make sure, he says, that Fox controlled the civil litigation. To do that, Fox had to agree to indemnify News Corp. for continued civil suit costs of the hacking scandal. "This litigation can have a political effect, a reputational effect, a regulatory effect, and can spread across your business," he explains. "In my job now, I must look at litigation in a larger context to avoid the cascading effects."

Yet Fox will not pay criminal penalties related to the scandal. The proxy statement states that News Corp. will not be indemnified for criminal violations that result in fines or penalties. "Under the law," Zweifach says, "Fox can't agree to pay fines imposed on [another] company"—namely News Corp—"deemed by the government to be responsible."

In a year or so, Zweifach expects to pause and take a breath. The compliance program should be complete by then; the worst of the hacking scandal should be behind him; and the divided companies should be up and running. "The first thing I'll do is pour myself a beverage, maybe more than one," he jokes. Or maybe he'll engage in his favorite hobbies, which include "travel, downhill skiing, excessive amounts of sports on TV, and movies—including the same ones over and over, like The Godfather."

But will this adrenaline junkie still find enough excitement to remain inhouse? He doesn't think that will be a problem. He cites the legal challenges arising from future technology, and from the need to protect creative content from theft. Besides, Zweifach adds, "Rupert Murdoch has gone through life doing things people say are impossible, from building a publishing empire to successfully starting a new television network. It's hard to think of how any company where Murdoch is chairman would ever be a boring place to work."

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