CONTENTS JULY 28, 2000
Click. The Justice Department searched a criminal database for a lawyer from Attorney General Janet Reno's former Miami firm, Rebekah Posten, re: a Buddhist sect, and passed along the findings in a deviation from normal practice.
Click. JUDGE VAUGHN WALKER TWISTS THE LAW AGAIN AND USES THE FAILED BUSINESS DEFENSE TO UPHOLD AN ANTITRUST VIOLATION. Click.
Click.THE SEARCH FOR THE PERFECT SEARCH ENGINE.
WASHINGTON - The Justice Department searched a criminal database for a lawyer from Attorney General Janet Reno's former Miami firm and passed along the findings in a deviation from normal practice, current and former officials report.
The decision to access the database was made by then-Associate Attorney General John Schmidt, who overruled a subordinate when the case arose in 1995 and defended his judgment in an interview Wednesday. Reno had disqualified herself, telling aides in a memo not to contact her in the case because "a close personal friend" was involved.
Rebekah Poston, an acquaintance of Reno's, sought arrest records on a Japanese religious leader on behalf of a client. While Poston successfully worked around the normal practice, she didn't get the answer she wanted: She was informed there were no records on the individual.
Poston apparently was not the friend referred to in Reno's recusal, although it may have been a lawyer in the same firm.
House Government Reform Committee investigators, examining whether Poston received favored treatment, also questioned in an internal memo whether private investigators working for Poston broke the law by surreptitiously obtaining information from the database.
The private investigators told Poston they initially learned there was an entry about the religious leader but speculated that it was deleted following their inquiries.
Justice Department chief spokesman Myron Marlin confirmed that Reno and Poston worked for the same Miami law firm, Steel Hector & Davis, but said they were employed there at different times. He also confirmed that Poston's sister, Roberta Forrest, worked on Reno's successful campaign as Florida state attorney for Dade County.
"We have a practice of not providing information" from the database, Marlin said. "In this case, we believed it was appropriate to clear a person's name by indicating we had no criminal record on him."
Schmidt was associate attorney general and the third-ranking Justice Department official in 1995. He said he recalls the 1995 decision but does not remember Poston.
Schmidt overruled the department's freedom of information official, who initially turned Poston down because of the policy of neither confirming nor denying information from the National Crime Information Center database.
Now a private attorney in Chicago, Schmidt said in an interview, "I talked with anybody who wanted to complain about decisions made within parts of the Justice Department that were my responsibility.
"In this case we had no records. I concluded it made sense to disclose that and put the matter to rest, and avoid the need to litigate. I made exceptions in particular cases that did not undermine the policy."
Several attempts to reach Poston's lawyers were unsuccessful. Government Reform Committee investigators, speaking only on condition of anonymity, said Poston told them that she believed the department changed its practice in this case because of her strong legal arguments. She pointed out, correctly, that federal privacy law does not apply to foreign nationals.
She declined to discuss the work of the private investigators, the committee sources said.
Billing records indicate Poston was hired in 1994 by the Japanese Buddhist sect Soka Gakkai to obtain criminal justice records on Nobuo Abe, who led a rival Buddhist sect called Nichiren Shoshu. The lawyer was trying to confirm an account that Abe was once arrested in Seattle in 1963 - information that never was confirmed.
Straightforward Work on Tough Case. But judge managed to include some surprises.
by Reynolds Holding © 2000, San Francisco Examiner.
The outcome of Clint Reilly's lawsuit challenging the sale of The Chronicle to the Hearst Corp. prompted more speculation than George W. Bush's vice-presidential choice -- and still the famously unpredictable Judge Vaughn Walker managed a few surprises.
The greatest among them may have been what Walker did not do.
The judge did not upend a deal that at times seemed likely to topple under the relentless forces of political opposition, legal blunders and ``horse trading,'' the phrase used in testimony to describe suspended Examiner publisher Timothy O. White's attempts to elicit Mayor Willie Brown's support for the deal.
Ultimately, the judge, who as a lawyer defended corporations in antitrust lawsuits, took a remarkably straightforward and legally workmanlike approach to a complex case that broke new ground in antitrust law.
``This case was a first in so many ways,'' said San Francisco attorney Jesse Markham, an expert in antitrust law. ``It's easy to overlook what that guy (Walker) had on his shoulders.''
Walker acknowledged the difficulty of his task by noting in his opinion that ``precedent is scanty'' in the law governing newspaper mergers.
In essence, though, he decided that the sale of The Chronicle to Hearst would not create an illegal monopoly or reduce competition because ``the Examiner is a failing company'' whose demise would actually be ``economically efficient and otherwise in the public interest.''
But his path to that conclusion took some surprising twists.
Many antitrust experts expected the judge to rest his decision on an analysis showing that a Hearst- owned Chronicle could not monopolize a geographical area teaming with competing Web sites, radio and television stations and other newspapers.
And at first, Walker's opinion seemed ready to do just that.
``The presence and importance of non-newspaper media in the market for information has exploded,'' Walker wrote. But competition from weekly and daily newspapers is also strong: ``Perhaps most significantly . . . the San Jose Mercury- News poses a serious challenge to the market share of the San Francisco-based metropolitan dailies.''
But Walker then abruptly dropped that line of reasoning and based his approval of The Chronicle sale on an unorthodox interpretation of the so-called failing company defense.
Since 1965, The Chronicle and Examiner have operated under a joint operating agreement, an exemption from antitrust laws that allows the papers to combine printing and other business operations and to share profits while maintaining editorial independence.
To dissolve the agreement and purchase The Chronicle, the judge said, Hearst had to show that the Examiner was a failing company, unable to survive outside the joint operating agreement. The judge concluded that Hearst was able to prove that the Examiner was failing by using financial projections and other evidence.
But his interpretation raises several questions, say legal experts.
First, the failing-company defense has only been used when the failing company is the one that is being acquired. In this case, the company that is being acquired -- The Chronicle -- is not failing.
Second, the Examiner is also clearly not failing when evaluated with its most valuable asset -- the 50 percent share of assets and profits under the joint operating agreement.
``To me,'' said Markham, ``the Examiner was never a failing company until Hearst wanted to buy The Chronicle. I've never seen the failing-firm defense used by a company that is not even thinking of going out of business until it wanted to buy its competitor.''
Walker's opinion was also surprisingly critical of the U.S. Justice Department.
The judge was particularly harsh in characterizing the department's apparent view that Hearst should offer the Examiner for sale with its share of the joint operating agreement.
He called that view ``inexplicable'' and its ``failure to provide legal analysis'' for supporting the Fang transaction ``similarly glaring.''
He even implied that the Justice Department took its position as the result of political pressure from Mayor Brown and other San Francisco politicians, rather than as a result of legal analysis.
``The undersigned is astonished and disappointed that DOJ would allow itself to be put in a position where the inference can be so easily drawn that its action or inaction in this case was political favoritism masquerading as law enforcement.''
But legal experts say the Justice Department simply might have disagreed with Walker's failing-company analysis and believed that the Examiner -- with its share of the joint operating agreement -- was far from failing.
``I can understand how the court drew the inferences it did,'' said an attorney involved early on in the Justice Department's discussions of the case. ``But at end of the day, once you end up with two different companies owning two newspapers, that's competition. And the fact is that the department didn't challenge a merger that the court upheld.''
Walker's final surprise involved his disapproving view of the Examiner's transfer to the Fangs. Although it appeared that the transaction would preserve competition by allowing a doomed newspaper to survive, Walker found that the deal -- under which Hearst would essentially give the Examiner to the Fangs, along with up to $66 million over three years -- was actually an impediment to competition.
He said the $66 million subsidy ``would appear to create a barrier to entry by non- subsidized competitors . . . by infusing that paper with cash untethered to performance.''
In a parting twist, though, Walker concluded that Reilly, as a Chronicle subscriber and occasional purchaser of the Examiner, did not have standing to challenge the Fang deal. And so the judge was able to say only that the transaction ``could constitute a violation of the antitrust laws'' and let the deal stand.
``Hearst has no economic reason or justification for the March 16 contract (to transfer ownership of the Examiner to the Fangs) except its belief that this transaction was necessary to shake loose political and regulatory approval of the August 6 transaction (sale of The Chronicle to Hearst).''
``On the merits of the deal, the evidence is clear: the Fang transaction is grossly inefficient and probably anticompetitive. Hearst's proposed subsidy would appear to create a barrier to entry by nonsubsidized competitors of the contemplated Examiner by infusing that paper with cash untethered to performance. Presence of an artificially strong Examiner in the market for daily and weekly newspapers with a San Francisco focus would impair the ability of established participants to compete in that localized market. Furthermore, Hearst undoubtedly will attempt to recover the subsidy it is obligated to pay the Fang group through higher advertising rates in the Chronicle. With these facts, a persuasive case might be made that the March 16 transaction violates the antitrust laws. But this conclusion cannot be predicated on the record of the present proceedings, and the court is presently unable to do more than identify the malodorous aspects of the Fang transaction.''
``The court is deeply troubled by DOJ's role in this case. Both of DOJ's key positions, that the Hearst/Chronicle merger created antitrust concerns and that the Fang transaction resolved those concerns, are unsupported by legal analysis and inconsistent with the evidence. DOJ has avoided explaining its apparent departure from its own approach in earlier JOA investigations, the legal basis for a burdensome and protracted investigation or the sudden approval of the Chronicle acquisition after Hearst agreed to provide a heavily-subsidized Examiner to political allies of the mayor of San Francisco.
These observations lead the court to the uneasy inference that the cronyism that fueled the Fang transaction at the local level also exerted influence over the DOJ investigation. At the very least, DOJ's sanction of the Fang transaction and the timing of that sanction, the now-abandoned characterization of the proposed Fang publication as ``fully competitive'' and DOJ's unwillingness to offer a legal analysis in support of its position significantly erodes the court's confidence in the impartiality and probity of DOJ's review of the transactions at bar. Hearst attributes the conduct of DOJ's investigation to lack of knowledge and inexperience in the newspaper industry of the DOJ personnel reviewing the transaction. While that explanation is troubling enough, less forgiving explanations come easily to mind. The undersigned is astonished and disappointed that DOJ would allow itself to be put in a position where the inference can be so easily drawn that its action or inaction in this case was political favoritism masquerading as law enforcement.''
``The arrangements between Hearst and ExIn (the Fang family) contemplated in the March 16 contract appear inimical to competition and could constitute a violation of the antitrust laws. . . . Closure of the Examiner may proceed without a sale to the Fang group or any other party unwilling to pay at least liquidation value for Examiner assets.''
E-mail Reynolds Holding at .