Phone Hacking, What Phone Hacking? – News Corporation and “wilful blindness”: Kirsten Sjøvoll

19 02 2012

If nothing else, the phone hacking furore is keeping lawyers on both sides of the Atlantic busy. This time, it is the turn of the New Yorkers, as it was announced this week that the FBI, the Department of Justice (“DOJ”), and the Security Exchange Commission (“SEC”) are stepping up their investigations into allegations of bribery and corruption at the New York-based News Corp.

The investigation has been on the cards since July 2011 but with the arrests this weekend of five Sun journalists as part of Operation Elveden, the interest on the other side of the Atlantic into what senior executives knew or should have known about the corrupt acts of their employees has intensified. Substantial penalties or a maximum of five years in prison face those convicted under the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”). The crux of the matter may lie in the “wilful blindness” provision contained in the statute– but just what is it and how worried should Murdoch et al. be?

The FCPA is a piece of legislation with broad reach. The relevant enforcement agencies are the DOJ and the SEC. It applies to U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the United States, from corruptly paying or offering to pay directly or indirectly, money or anything of value to a foreign official to obtain or retain business. Moreover, through a 1998 amendment to the FCPA the statute’s jurisdiction extends to any prohibited acts carried out by U.S. citizens or employees of a U.S. company overseas (i.e. with no territorial nexus with the U.S.). This is termed the “alternative nationality” provision.

The SEC and the DOJ tend to interpret the anti-bribery provisions extremely broadly. For example, under the act, “foreign official” is defined as

“…any officer or employee of a foreign government or any department, agency or instrumentality thereof […] or any person acting in an official capacity for or on behalf of any such government department, agency, or instrumentality…”

However, the enforcement agencies understand this as also applying to employees of state-owned or state controlled entities. In the context of payments by journalists to other sources, this raises some interesting questions about legitimacy. Similarly, to “obtain or retain business” has a wide meaning and is satisfied even if all that is acquired is an improper advantage over competitors. Of particular importance to News Corp are the wide reaching third-party payment provisions which cover the acts of foreign subsidiaries as well as agents, consultants or other third parties where they are engaged by the parent company. For example, if it can be shown that a subsidiary newspaper group, based in England, either engaged its staff directly or through its English-based staff engaged a third party “agent” to offer bribes to police officers in exchange for stories which, because they are “exclusives” offer the publishing paper an advantage over its competitors then at first sight, the chain of liability extends all the way to New York.

There are only two defences available under the FCPA. The first is where the payment to a foreign official is “lawful under the written laws and regulations of the foreign country”. The second is where the payment is a reasonable and bona fide expenditure directly related to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract. Arguments about payment of sources as a permissible journalistic practice aside, improper payment to police officers for information not otherwise in the public domain obviously fails to fall within either defence.

What it comes down to then, is knowledge. The standard which News Corp to which will be held is whether improper conduct on the part of its foreign subsidiaries, its employees or agents was certain or likely to occur. This is widened further by the fact that simply failing to take note of an event or being “wilfully blind” to its occurrence may also amount to knowledge.

“Wilful blindness” is a term put to the Murdochs by Adrian Sanders MP at their appearance before the House of Commons culture, media and sport select committee on 19 July 2011. Met with a blank expression from Murdoch Jr., Sanders explained it to mean “if there is knowledge that you could have had and should have had but chose not to have, you are still responsible.”

The question becomes how many “red flags” need to be present and be ignored before an individual can be said to be “wilfully blind”. We know of emails sent that copied in James Murdoch alerting him that the problem of hacking was more widespread than initially thought, although he claims not to have read the entire chain. We also know that the Operation Elvedon arrests were carried out on the basis of evidence provided by News Corp’s Management Standards Committee (“MSC”). Of course, timing will be key – when the information came to light and what steps were or could have been taken to prevent the corrupt practices are obviously relevant.

“Wilful blindness” is a problem inherent to large corporations with foreign subsidiaries. Moreover, the further up the chain of command, the larger the bubble that surrounds the executives. As an illustration, what Rupert Murdoch knew or could have known may be markedly different from that expected of his son. Margaret Heffernan has written an excellent piece on this as a cultural and systemic issue available here.

Of course, “wilful blindness” is a higher standard than simply a lack of good faith or a “reason to suspect” standard. In a September ruling, United States District Judge Jed S. Rakoff dismissed nine of the eleven counts brought by one of the Madoff trustees, Irving Picard against the owners of the Mets baseball team. The action was brought under the U.S. Bankruptcy Code, which also recognizes the “willful blindness” principle. The Judge rejected the trustee’s argument that he could recover all transfers made by the Madoff fund to the owners of the Mets, including those that constituted the return of invested principal, because of a lack of “good faith”, based on the so-called “red flags” that Picard believes gave them reason to suspect Madoff. Instead, Judge Rakoff held that the lack of good faith would have to amount to “wilful blindness” in order to succeed. This aspect of the ruling is not being appealed by Picard.

All may not be lost for News Corp. It will at least be of some comfort to The Sun that no trials are yet being held in Salem. However, the investigation should certainly give at least James Murdoch and other senior executives some serious cause for concern. It also raises some broader questions about the desirability of Big News. The debate in the UK has so far focused on the ethics of journalists and editors at the newspaper level. Yet, the bigger the monopoly a single corporation has over the news, the more difficult questions of regulation become. Serious consideration should be given to whether, like the banks before it news has become too big to regulate and too big to fail.

Kirsten Sjøvoll is a trainee barrister at Matrix Chambers

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20 02 2012
Law and Media Round Up – 20 February 2012 « Inforrm's Blog

[...] Phone Hacking, What Phone Hacking? – News Corporation and “wilful blindness”: Kirsten Sjøvoll [...]

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