Hearst seeks firms' records of dealings with Times Co.

Papers filed this summer in King County Superior Court provide the first, sparse hints of what's going on behind closed doors in the binding arbitration proceedings that may decide the fate of one — or both — of Seattle's daily newspapers.

The documents reveal the Seattle Post-Intelligencer's owner, The Hearst Corp., is seeking records from now-defunct Knight Ridder, which until recently held a minority stake in the rival Seattle Times Co., and five companies that have loaned money or done business with The Times in recent years.

Hearst presumably believes those records could help it undermine The Times' contention that it lost money for the past six years under the joint-operating agreement (JOA) that binds the two papers and that, as a result, the JOA should be dissolved, or the P-I closed, or both.

But the court papers provide no details on what Hearst is after, or why. The private arbitration proceedings are cloaked in secrecy; even the specifics of the two newspaper companies' claims against each other haven't been made public.

Anne Bremner, co-chairwoman of the Committee for a Two-Newspaper Town, a group that wants both papers to survive, said Hearst probably is looking for potentially questionable Times expenditures so that it can raise questions about the validity of The Times' reported losses.

"The P-I wants to say to The Times, 'You can make it [under the JOA],' " said Bremner, a high-profile Seattle attorney.

Fishing expedition?

Rick Edmonds, who researches and writes about the business side of journalism at the Poynter Institute for Media Studies in St. Petersburg, Fla., said Hearst may be on a fishing expedition.

"Who knows what's in those documents?" he said. "I don't know if Hearst knows either."

In addition to Knight Ridder, the companies from which Hearst wants to subpoena records are:

• Two global management-consulting firms: Towers, Perrin, Forster & Crosby, and Watson Wyatt.

• Copacino + Fujikado, a Seattle advertising agency.

Hearst attorney Guy Michelson wouldn't discuss the document requests. Times spokeswoman Jill Mackie also declined comment.

While it isn't reflected in court files, Hearst also has served The Times itself with written questions and requests for documents.

"The number of documents we've been required to produce by Hearst is staggering and has created enormous work for many folks," Times President Carolyn Kelly said in an e-mail to employees last month.

All this is part of what lawyers call "discovery" — the process of ferreting out information from others before a trial or, in this case, an arbitration hearing.

Both sides are expected to present their evidence and arguments to arbitrator Larry Jordan, a former judge, at a climactic — but secret — hearing early next year.

His ruling, expected by May 31, will be final. Both companies have agreed not to appeal, concluding a dispute between the two that began more than three years ago.

Under the federally sanctioned JOA, the two papers maintain separate news and editorial operations, but The Times handles the business side and collects advertising and circulation revenue for both.

In return, it gets 60 percent, Hearst 40 percent of what remains after accounting for non-news expenses it incurs in producing both newspapers.

In April 2003, The Times triggered an escape clause in the JOA, notifying Hearst the 60 percent hadn't been enough to cover news and editorial costs in 2000, 2001 and 2002.

Under the contract, that "loss notice" required Hearst to negotiate a date to close the P-I within 18 months. After that, Hearst would get 32 percent of The Times' profits until 2083, when the JOA expires. If no deal were struck, the JOA would dissolve.

Hearst, which maintains the smaller P-I can't survive outside the JOA, challenged the validity of The Times' losses in court. The Times accused much-wealthier Hearst of using the P-I to bleed The Times into insolvency and force its majority owners, the local Blethen family, to sell to Hearst.

While the dispute dragged on in court, The Times served Hearst with two more three-year loss notices, contending it also lost money under the JOA in 2003, 2004 and 2005.

Shift to arbitration

In March, the companies announced their agreement to resolve their differences through binding arbitration. They hailed it as a path to a quicker resolution that, unlike a court battle, would allow sensitive corporate information to remain confidential.

King County Superior Court Judge Greg Canova agreed in April to put court proceedings between the two companies on hold. But, at their request, he retained jurisdiction to assist Jordan in compelling third parties to provide evidence for the arbitration.

That's how Hearst's bid for documents from the six companies ended up in open court files.

Of the six, Hearst's interest in Knight Ridder is easiest to understand. The company owned a 49.5 percent interest in The Times for nearly 80 years, held seats on The Times' board, and had a sour, contentious relationship with the Blethens.

Knight Ridder CEO Tony Ridder complained on numerous occasions that the Blethens mismanaged the company and didn't make enough money. In 2000, Ridder said he was "certain Knight Ridder could run [The Times] far more profitably than is currently the case."

Knight Ridder's critical view of Times management could dovetail with Hearst's interests.

Dispute over spending

Hearst has argued, for instance, that The Times lost money under the JOA formula in 2002 only because the newspaper spent unreasonably on news and editorial operations.

Times executives contend the expenditures were necessary to remain competitive.

Knight Ridder, once the nation's second-largest newspaper publisher, ceased to exist June 27, after unhappy shareholders forced it to sell to Sacramento, Calif.-based McClatchy, which now holds the 49.5 percent interest in The Times. A McClatchy spokeswoman declined comment.

Just what Hearst wants from the management-consulting firms and the advertising agency is more difficult to discern.

But all did work for The Times, and court records from 2003 suggest Hearst may be challenging the legitimacy of some expenses The Times Co. charged to both papers that had the effect of reducing the 60-percent "remainder."

Jim Copacino, co-founder of Copacino + Fujikado, said Hearst has asked for documents concerning his firm's TV, radio and print advertising work for both The Times and the joint Sunday newspaper, which carries the mastheads of The Times and P-I but is produced almost entirely by The Times.

Vendor records

"Apparently Hearst is subpoenaing records from a number of vendors of The Seattle Times, and we are one," he said. The agency is compiling the requested information, he said.

Joseph Conway, a spokesman for Towers, Perrin, Forster & Crosby in Valhalla, N.Y., said Hearst is seeking documents on compensation consulting work Towers Perrin did for The Times from 2001 to 2003. The firm's legal department is preparing a response, he said.

A spokeswoman for Watson Wyatt, the other consulting firm, confirmed it had received a subpoena but would provide no details or discuss the firm's work with The Times.

Citigroup, through its Citibank subsidiary, and the Bank of New York have loaned money to The Times. In 2003, Times executives identified Citibank as the company's "lead lender." Neither bank would comment.

Edmonds of the Poynter Institute said the banks may resist Hearst's bid. "There conceivably could be financial information that hasn't come out before," he said.

Edmonds and Bremner of the Committee for a Two-Newspaper Town said Hearst may be looking for information on how The Times portrayed its financial condition to potential lenders when it was trying to borrow money.

"They probably put themselves in the best possible light," Bremner said. "Hearst wants to know: Are they really in that dire straits?"

Bremner's committee is not a participant in the arbitration, but is an intervenor in the underlying lawsuit.

She said she has heard from a "good source" that Hearst and The Times plan to depose witnesses from September to January in preparation for the arbitration hearing.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com