Fraudulent Circulation Figures Cost Advertisers Millions of Dollars in Inflated Advertising Fees

ROSLYNN R. MAUSKOPF, United States Attorney for the Eastern District of New York, RONALD C. WALKER, Inspector-in-Charge, United States Postal Inspection Service, New York Division, and MICHAEL J. THOMAS, Special Agent-in-Charge, Internal Revenue Service, Criminal Investigation, announced the arrest of three former employees of Newsday and Hoy, subsidiary companies owned and operated by the Tribune Company, for their participation in multiple schemes to overstate paid circulation data in order to induce advertisers to pay millions of dollars in inflated prices for advertising fees between 2002 and 2004.¹ Today's arrests are the first in the government's ongoing investigation into fraudulent circulation schemes by executives and employees at Newsday and Hoy.²

The defendants EDWARD SMITH and ROBERT GARCIA were arrested in New York earlier today, and their initial appearances are scheduled later this afternoon before United States Magistrate Judge Steven M. Gold at the U. S. Courthouse, 225 Cadman Plaza East, Brooklyn, New York. The defendant RICHARD CZARK was arrested in South Carolina this morning, and the government will seek his removal to the Eastern District of New York.

THE DEFENDANTS

SMITH began employment at Newsday in November 1972, and retired in May 2002 from his position as administrative manager of circulation. According to the complaint, from May 2002 until approximately May 2004, he worked as a consultant to both Newsday and Hoy, serving as their liaison to Audit Bureau of Circulation. CZARK was employed by Newsday in its circulation and advertising units from 1972 until 2003, and from 2003 until August 2004 as the national circulation manager of Hoy. GARCIA was employed from the late 1990s until September 2004 as Newsday's circulation manager for New York City, and from 1998 until September 2004 as sales and distribution manager for Hoy. The defendants were discharged from their most recent positions at Newsday and Hoy following an internal investigation by the Tribune Company.

THE AUDIT BUREAU OF CIRCULATION

The Audit Bureau of Circulation ("ABC") is a not-for-profit organization whose membership includes newspaper and magazine publishers and their advertisers. ABC conducts annual audits of circulation numbers that publishers certify to ABC bi-annually, and functions as an industry watchdog to insure the integrity of data that publishers provide to advertisers. In order to qualify for membership in ABC, a newspaper or magazine must meet a paid circulation threshold that ABC establishes and thereafter confirms by audit. Membership in ABC earns publishers credibility with advertisers, who rely on ABC-audited paid circulation data to negotiate advertising rates with the publishers.

THE FRAUD SCHEMES

The Faiella Scheme. According to the complaint, Richard and John Faiella operated an agency that, beginning in 2000, delivered Newsday to home subscribers.³ In April 2002, Richard Faiella was recruited by Newsday employees to help inflate paid circulation. At the direction of those employees, the Faiellas made sham purchases of large quantities of Newsday, and then simply dumped most of them. Newsday nevertheless reported to ABC that the Faiellas were selling up to 30,000 Newsday papers every weekday, and up to 50,000 papers every Sunday, when in fact, they never sold more than 7,000 newspapers per weekday, or more than 10,000 papers on a Sunday. The Newsday employees compensated the Faiellas for their assistance by paying for expenses that had not actually been incurred.

In early 2004, after the Tribune began an internal investigation into allegations of circulation fraud and ABC reopened an audit of the paid circulation that had been reported to it by Newsday and Hoy, SMITH and other Newsday employees arranged for ABC to observe Faiella's distribution program. Unbeknownst to ABC auditors and pursuant to SMITH's scheme, Newsday managers invited ABC to observe salespersons, or "hawkers," whom the managers had stationed at more than 100 locations around Long Island, then recruited numerous bogus customers, including Newsday employees, to buy multiple copies of the newspaper every day for a period of several days. Through the scheme, SMITH and others at Newsday intended to trick ABC into concluding that the Faiella distribution program was legitimate.

Schemes to Falsify Hoy's Circulation in Chicago, New Jersey and Los Angeles. According to the complaint, in 2003, GARCIA met with a representative of a company distributing Hoy in Chicago who confirmed to GARCIA that the distributor was reporting 3,000 in daily paid circulation, but actually selling only 2,000 copies per day. GARCIA approved the distributor's false reporting, emphasizing that the circulation falsely reported was a "good number" for Hoy. Later in 2003, CZARK met with a distributor and proposed that the distributor report daily sales of 15,000 copies of Hoy in Chicago at a time when the actual sales were 5,000 daily. As compensation, CZARK agreed to lower the amount Hoy charged the distributor to buy and distribute the paper. CZARK also directed the distributor to do "home sampling" of Hoy in the Chicago suburbs, that is, deliver free copies for a period of time to attract new paid subscribers. Subsequently, when the distributor requested payment of the promised fees for sampling, CZARK instructed the distributor to bill Hoy for fictitious distribution costs in an amount equal to the home sampling fees. Thereafter, when Tribune auditors were reviewing the paid circulation figures in Chicago, SMITH directed the distributor to fabricate bills from fictitious distributors. The distributor then set up phony accounts in the names of non-existent distributors to substantiate the inflated circulation numbers.

In January 2004, CZARK and SMITH met with a distributor to discuss an ongoing audit by ABC of circulation numbers in New Jersey. At that time, the distributor was reporting daily sales of 6,000 in New Jersey, but actually selling only 3,000 and destroying the rest. The complaint charges that SMITH instructed the distributor to fabricate records to substantiate the sale of the additional 3,000 copies. The distributor complied and falsely reported the phony figures to ABC.

After Hoy distribution began in Los Angeles in late 2003, CZARK approved a distributor's fictitious reports to ABC claiming that daily paid circulation had risen to 15,000 copies, when in fact, the circulation was only about 5,000. To conceal the inflated circulation numbers, CZARK directed the distributor to bill Hoy for non-existent distribution expenses.

Distributors Coached to Lie to ABC. The complaint alleges that SMITH repeatedly coached distributors to lie to ABC auditors about paid circulation information. For example, when the auditors began to question the Faiella account, SMITH told a distributor to misrepresent the number of papers sold, as well as the location where they were sold. In addition, SMITH and Newsday employees provided a list of questions to distributors, called an "agent interview questionnaire," prior to an ABC audit interview. SMITH then instructed the distributors how to answer the questions in order to disguise the fabricated circulation data they intended to submit to ABC.

"The schemes uncovered to date cheated advertisers out of millions of dollars paid for ads in papers that were dumped or never paid for," stated United States Attorney MAUSKOPF. "Today's arrests of three former employees of Newsday and Hoy are intended to restore transparency and fairness to the newspaper and magazine advertising marketplace." Ms. MAUSKOPF also thanked the Nassau County Police Department and the Office of the Inspector General, Port Authority of New York & New Jersey, for their assistance and emphasized that the investigation was continuing.

Postal Inspector-in-Charge WALKER stated, "The defendants' selfish acts caused numerous companies to waste millions of dollars in excessive advertising costs. Those costs are always passed down to the average consumer - the ultimate victim in this case. Our mission is to protect the U. S. mail from those who misuse it to defraud the American public. I applaud the Postal Inspectors assigned to this case and their law enforcement partners whose hard work and determination led to today's arrests."

Internal Revenue Service Special Agent-in-Charge THOMAS stated, "This investigation is about money and the greed of those who break the law to get it. In financial investigations money flows, often illegally, from one person to the next. We are following the flow of that money."

If convicted, each defendant faces a maximum sentence of 20 years' incarceration, a $250,000 fine, and five years of supervised release.

The government's case is being prosecuted by Assistant United States Attorneys Elaine Banar and Jed Davis.

The Defendants:

Name: EDWARD SMITH
DOB: 9/7/39
Address: 77 Moeller Street, Hicksville, New York

Name: ROBERT GARCIA
DOB: 11/16/62
Address: 9274 224^th Street, Queens Village, New York

Name: RICHARD CZARK
DOB: 3/5/52
Address: 44 Waterford Drive, Bluffton, South Carolina

 

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¹ In October 2004, the Tribune established a reserve fund of more than $90 million to cover settlements for overcharging hundreds of its advertisers through the fraudulent schemes described below.

² The charges contained in the indictments are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

³Richard Faiella died in 2003; thereafter John Faiella ran the business.

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