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May 31, 2006 / Toby Dayton

SEC Drops The Ball In Falsified Circulation Case Against Tribune Co.

Earlier this week, the SEC announced that it had settled its circulation inflation case against the Tribune Co. without issuing a fine. In a statement, the SEC cited the Tribune’s cooperation in the case and the newspaper’s prompt corrective actions. Despite the fact that the company neither admitted nor denied the allegations of the case as part of the settlement, Tribune Co. had set aside $90 million to reimburse advertisers for the inflated circulation numbers and the related rates that they were charged during the period of time in question, nearly 26 months from 2002 to 2004.

Newsday, one of the two Tribune papers under investigation, did acknowledge that the paper had inflated circulation by 100,000 copies on weekdays and Sundays, and federal prosecutors claimed that Hoy, the other Tribune paper in question, had falsely doubled its reported circulation. Nine former employees for Tribune, including 2 vice presidents, have pleaded guilty in the case and two employees of the distribution company contracted by Tribune face 4-20 years in prison as a result of the case.

So given all the facts, how is it that the SEC could possibly choose not to issue a substantial fine in such an obvious case of fraud? The commission said in its statement that it did charge the company with reporting falsified circulation figures but was simply ordering the company not to commit any such violations in the future. Admission of guilt, swift damage control, and promises that it won’t happen again are not at all sufficient by themselves in remedying the infractions, especially in such a period of high-profile corporate scandals (or any period for that matter). “Because publishers typically generate the majority of their revenues from advertising sales, they must ensure that the circulation figures they report to the public are accurate so as not to mislead investors about the profitability of their most significant business operation,” SEC Enforcement Director Linda Thomsen said in a statement. The Tribune Co. failed miserably in this regard, and a significant fine should have been issued by the SEC as a result of its findings in the case. In settling the case with weak slap on the wrist, the SEC has tacitly absolved the company of any wrongdoing and that sends a terrible signal to advertisers and the entire industry as a whole.

[tags]Tribune, Tribune Company, Tribune Co., SEC, Circulation Inflation, Corporate Fraud, Newsday, Linda Thomsen, Death of Newspapers, Corporate Malfeasance[/tags]