Witch-Hunt or Whitewash?

There are three ways of trying to make sense of the Federal Communications Commission’s much-publicized probe into whether Rupert Murdoch’s Fox television network gulled the FCC, for nearly nine years, into overlooking the fact that 99 percent of Fox’s equity was foreign-owned, possibly in violation of federal law:

(1) The multi-lawyered Murdoch team cleverly (or perhaps unwittingly) has hidden the ball since 1985 by stressing that Murdoch (who became a U.S. citizen in 1985) would control Fox – while burying, in the moral equivalent of fine print, and in documents filed at different times that were unlikely to be read with care, some fragmentary disclosures from which a careful reader would have inferred that most of Fox’s equity would be owned by Murdoch’s Australia-based News Corp.

(2) The FCC was really dumb – or so eager to help the politically connected Murdoch crack the ABC-CBS-NBC oligopoly that it averted its eyes from awkward details-when it found in 1985 that Fox’s proposed $1.6 billion purchase of six big-city television stations complied with a stature restricting foreign ownership or control of over 25 percent of any broadcaster.

(3) The FCC is being really dumb now – if not grinding Clintonite political axes against the archconservative Murdoch and his Clinton-bashing New York Post – by harassing Murdoch for no good reason, and thereby stalling, at a critical time, his Fox network’s remarkable push toward parity with ABC, CBS and NBC.

Murdoch, Fox, their current FCC lawyers at Washington’s Hogan & Hartson, and some others are pushing hypothesis three – a theory that also draws some credence from the FCC’s peculiar handling of this investigation. “All this is another way of [FCC staffers] saying, ‘If we screwed up, it must be because you misled us,’ ” says a source familiar with the investigation.

But on balance, the still incomplete evidence seems to point tentatively toward a combination of the first two hypotheses: that the Murdoch legal team put the information from which Fox’s foreign equity could be inferred just deep enough in its 1985 application and subsequent filings to escape notice, while disclosing just enough to negate any claim of overt deception. As for the FCC, “they winked-or they blinked-and it’s hard to know which,” in the words of a lawyer familiar with the case.

Three points emerge with some clarity as one looks through the window that this episode provides into regulatory lawyering in Washington: Murdoch’s shifting squadrons of lawyers have resorted to ever-more-deliberate dodges since 1985 to let sleeping dogs lie; they have sprinkled some misleading assertions of fact and law through their defenses of Fox’s candor over the past year (while their attackers have committed similar sins); and the FCC’s investigative procedures, including an egregiously overbroad gag order, have created at least an appearance of unfairness to Fox.

The FCC is expected to issue some sort of ruling in April (or possibly late March) on the two issues it has been investigating: whether News Corp.’s ownership of over 99 percent of Fox’s equity violates the foreign ownership statute (which might require a costly restructuring); and whether there is enough evidence to warrant a full-dress, trial-type hearing into alleged violations by Fox and its lawyers of the extraordinarily exacting “duty of candor” that every licensee theoretically owes the FCC (which could paralyze Fox in the marketplace while the hearing unfolds, and could conceivably lead to sanctions as serious as revocation of licenses). Whatever the FCC does, an appeal to the D.C. Circuit seems assured.

The controversy has a large cast of characters: four law firms that have done work for Murdoch; the FCC; two lawyers who first challenged Fox on the foreign ownership issue in 1993 on behalf of NAACP branches in New York City, New Jersey, and Pennsylvania, and who have now urged the FCC (in hundreds of pages of briefs filed by NAACP counsel David Honig and Laura Blackhurne) to find Fox in violation of the duty of candor and to revoke all its broadcast licenses; and NBC, which put the dispute in the media spotlight – some say spurring the FCC to toughen its posture towards Fox – by loudly attacking Fox’s foreign ownership last November 30, only to back our of the fight on February 17 in pursuit of business deals with the Murdoch empire.

Then there is House speaker Newt Gingrich, whose now-famous book deal with Murdoch’s Harper Collins publishing house, together with a series of grudgingly incremental disclosures that Murdoch had met with Gingrich last November 28, that he had mentioned Fox’s FCC problem, and that Fox in-house lobbyist and executive Preston Padden had been there too – brought a flurry of rather implausible front-page charges, especially from House Democratic whip David Bonior (who was shocked! shocked! that Murdoch had had his lobbyist along), that Murdoch might be buying the new King of the Hill, the better to swat aside the FCC.

At the center of the storm, of course, is the 64-year-old billionaire who may be the world’s most successful self-made media baron – the visionary, world-beating, quietly combative, yellow-journalism-peddling, union-busting, Australian-born entrepreneur who has built the world’s first global print and broadcast empire. Murdoch has also done at least two things since becoming a New Yorker (around 1974) that no native-born American could do: get a fourth television network off the ground (with indispensable help from Barry Diller) and keep the New York Post alive (with indispensable help from the FCC).

In a February 27 press conference, Murdoch alerted that “we have been fully candid with the government”; complained that “this whole sorry episode simply shows how the regulatory process can be abused and how lawyers and lobbyists can be employed in Washington to attack unwanted competition”; and said that if the FCC hearing “turns into a kangaroo court, we would get it out into a proper court where we would win.”

Murdoch and his troops have on occasion floated, and on occasion backed away from, innuendos suggesting that the FCC probe is driven by sinister motivations.

“Either your people can’t read, don’t understand English, don’t understand the damned structure [of Fox’s ownership], or you have a witch-hunt in this,” Murdoch said in a January 27 deposition taken by two FCC lawyers. “And I would speculate that the [FCC] people who knew that [Fox would be part of News Corp.] in 1985 were the same intelligent people who are there today, and that they understood it, whatever they’ve been told to misunderstand today.”

Murdoch’s apparent implication was that somebody may have told the FCC lawyers to lie. Was he referring to their boss, FCC chairman Reed Hundt? Murdoch didn’t say, and Fox’s Padden suggests no. But other Murdoch supporters, stressing Hundt’s close relationship with Vice-President Albert Gore, Jr., and Clintonite displeasure at the regular savaging of the president and the First Lady by Murdoch’s New York Post, suggest that political considerations may have given the FCC investigation a harder edge than the facts would warrant. Still others suggest the hard edge is a sham – a prelude to a Hundt-directed whitewash.

Hundt, through a spokeswoman, declines to comment. FCC general counsel William Kennard, a Hundt appointee, asserts: “Any suggestion that the investigation was motivated by political or other inappropriate considerations is preposterous.”

1985: FOURTH NETWORK DREAMS

It was exactly ten years ago, in early April 1985, that Murdoch seized his chance to enter the U.S. television market, and in a very big way.

Murdoch started his brilliant career with a family-owned newspaper in Adelaide, Australia, which he built into a powerhouse of tabloid publications before making the move to London’s Fleet Street in 1969 by buying the salacious weekly News of the World. By 1985 Murdoch and his News Corp. had already gobbled up a huge collection of media companies in Britain, including The Sun, the nation’s largest-circulation daily, and the prestigious Times of London, and had begun laying the groundwork for a satellite television service called the Sky Channel, which now beams programs to cable systems throughout Europe.

In America, he had the New York Post, the Boston Herald, the Chicago Sun-Times, The Village Voice, and New York magazine (all of which he later sold, while buying back his beloved Post in 1993 and acquiring other publications including TV Guide). And in early 1985 Murdoch’s News Corp. bought half (and eventually all) of Twentieth Century Fox Film Corp., with its rich film library.

It was also in early 1985, fortuitously, that Murdoch’s friend and fellow self-made billionaire John Kluge, who owned Metromedia Radio & Television, Inc., told Murdoch he wanted to sell six of his company’s seven big-city television stations, in New York, Los Angeles, Chicago, Dallas, Houston, and Washington, D.C. (Kluge had committed to sell Metromedia’s Boston station to the Hearst Corp.) Murdoch saw a huge opportunity to lay the foundation stones of a fourth major television network-a dream widely dismissed at the time as quixotic.

With some very costly financial help from Michael Milken of Drexel Burnham Lambert, Murdoch and Kluge worked out a deal totaling over $2 billion, in which a new Murdoch company (originally named News America Television, Inc., and now named Fox Television Stations, Inc.) would buy the seven Metromedia stations, resell the Boston station to Hearst Corp. for $450 million, refinance over $1 billion in Metromedia junk bonds, and pay an estimated $600 million in cash, financed by News Corp. borrowings from major banks.

LEGAL COMPLICATIONS

Murdoch and Kluge would need FCC approval for the transfer of the stations. I t was clear from the start that this could present at least two serious problems: Murdoch would need a temporary FCC waiver (pending divestiture) of the rule barring cross-ownership of newspapers and television stations in the same city, and would need to change his citizenship from Australian to U.S. in a hurry, to comply with the statutory requirement that broadcasters be controlled by U.S. citizens. He did both with ease, as it turned out, although the citizenship-switch angered a lot of people in Australia, and forced divestment of News Corp.’s two television stations there.

There was another possible legal problem with the deal, however, one that seems somehow to have escaped the notice of the FCC and nearly everyone else (with the exception of the Murdoch legal team) for more than eight years: Fox’s ownership structure arguably did not then, and does not now, comply with the foreign ownership restrictions in the Communications Act of 1934.

The legal questions at the heart of this issue, and of the current lack-of-candor FCC investigation, are these:

(1) Whether the statutory presumption (as the FCC has long construed it) against ownership of broadcasters by holding companies of which “more than one-fourth of the capital stock is owned of record or voted by aliens” (emphasis added) absent a special finding by the FCC that an exception would serve the public interest – applies to a holding company that (like Fox’s) has less than 25 percent foreign-owned voting stock, but more than 25 percent foreign equity contributions and other!r attributes of ownership; and

(2) Whether Fox’s lawyers should have understood in 1985 that the FCC staff would want to be told if the percentage of foreign equity were likely to exceed 25 percent, so that Fox’s duty of candor required it to specify this in so many words, or at least to make it clear and conspicuous.

An analysis of the legislative language, history, and FCC and judicial precedents suggests that the answer to the both questions is probably yes: The case law indicates that Fox’s lawyers should have understood in 1985 – and the documents indicate that some of them did understand by 1988 – that the FCC might well ‘perceive News Corp. ownership of more than 25 (let alone 99) percent of Fox’s equity as posing a major problem [see sidebar].

SEPARATING EQUITY FROM CONTROL

It was against this legal background that Murdoch and his team went about structuring the Metromedia deal and trying to sell it to the FCC in 1985.

In order to comply with the foreign ownership law (as they construed it), Murdoch’s lawyers devised an unusual arrangement for ownership of Fox’s holding company, Twentieth Holdings Corp.: The 7,600 shares of preferred stock, all of which would go to Murdoch, would have 76 percent of the voting control, even though he would end up contributing less than one-eight-hundredth of the equity capital when the deal ultimately closed in 1986, and would get only a commensurately small fixed return and percentage of any assets on liquidation. The other 24 percent of the voting control would go to the 2,400 shares of common stock, all to be indirectly owned (through four tiers of wholly owned subsidiaries) by News Corp., in exchange for what turned out to be over 99 percent of the equity contributions.

The main purpose of this structure was to satisfy the FCC on the foreign ownership front by showing that Murdoch (a soon-to-be U.S. citizen) would have 76 percent voting control over Fox (which he ended up sharing with Diller). And Fox makes a convincing case that Murdoch did (and does) have de jure control of Fox, as well as de facto control of News Corp. itself.

Combining this with Murdoch’s desire not to contribute a significant amount of capital led to a peculiar, not to say artificial, Fox ownership structure. As of 1986, when the deal was consummated, each of Murdoch’s 7,600 shares of “$100 par value” preferred stock represented $100 in equity, while each of News Corp.’s 2,400 shares of “$1 par value” common stock represented over $250,000 in equity. (Actually, when the deal closed in 1986, Murdoch bought 5,100 and Barry Diller bought 2,500 of the 7,600 preferred shares; Diller sold his shares to Murdoch when he left Fox in 1992.)

News Corp.’s contribution and indirect ownership of more than 99 percent of Fox’s equity has three principal manifestations: the Australian company got common stock valued at over 99 percent of Fox’s fair market value; it got the right to over 99 percent of Fox’s profits (and a commensurate risk of loss); and it got the right to over 99 percent of any assets distributed on liquidation.

(Another possible incident of News Corp.’s ownership, on which the FCC has apparently never focused, is the possibility that when Murdoch dies, control over News Corp., and whatever influence it may have over Fox, might end up in the hands of Australians.)

A MURDOCH-FCC LOVEFEST – AND A MYSTERY

Something mysterious happened between Murdoch’s legal team and the FCC in 1985, and the record developed in the FCC’s investigation so far doesn’t resolve all the mysteries.

Murdoch and Kluge presented the proposed sale to then-FCC chairman Mark Fowler, veteran commissioner James Quello (who is still at the FCC), and others, in visits to the agency’s drab quarters in late April and early May 1985. Among those Murdoch met with were Roy Stewart, a career FCC lawyer who was then head of the video services division, which handled the Fox application.

“It was a pretty cordial afternoon,” Murdoch recalled in his deposition this past January. “They said, that sounds fine. I’m not saying he’s giving his formal approval, but we left very confident that everything would be – that it could be worked out by the lawyers.” Murdoch stressed that “I do distinctly remember the meetings with Mr. Stewart,” and deriving “quite a strong impression … that I would be welcomed into the television industry.” Most important, Murdoch swore that he told Stewart “that News Corporation would be buying the Metromedia stations.”

That’s not what Stewart remembers, however.

In a February 24 declaration, the lawyer swore: “At no time was I aware that News Corporation would own 99 percent of the licensee’s equity or any percentage above 25 percent. Had I been aware of that fact, I would have requested further information.”

Stewart is both the most important witness against Fox in the current lack-of-candor investigation and the head of the FCC’s Mass Media Bureau – which has been conducting the investigation under the leadership of Stewart’s deputy, Renee Licht, since he recused himself last year.

The second most important witness against Fox is Stephen Sewell, who was Stewart’s deputy in 1985 and has since retired. Sewell swore in a January 12 declaration: “If I had known [in 1985] that 25 percent or more of the equity … was indirectly held by News Corp., I would have recommended that the applications not be granted unless News Corp.’s equity Interest in [Fox] was reduced to 25 percent or less.

No one was sounding such sour notes in 1985, however. “Everybody seemed to be eager to see this transaction happen,” recalled Howard Squadron, of New York’s Squadron, Ellenoff, Plesent & Sorkin, who has been Murdoch’s main outside counsel in the U.S. since the early 1970s, in his January 24 deposition.

Chairman Fowler, commissioner Quello (a Democrat originally appointed in 1974), and others were publicly enthusiastic about Murdoch’s proposed entry into the television industry. The prospect of building a fourth major network to compete with ABC, CBS, and NBC had been a major FCC policy objective for decades, and Murdoch seemed as good a bet as anyone to pull it off. Fowler was a fervent advocate of deregulation and unfettered competition, and a Reaganite soulmate of Murdoch, who later praised Fowler as “one of the great pioneers of the communications revolution” and “perhaps the most successful of any Reagan appointee.”

“The buzz at the time was that Mark Fowler had made it absolutely clear to everybody at the commission that he wanted Murdoch in, that he thought it was good, it would create the fourth network, and the general idea around the commission was to help this guy get what he wanted,” recalls Andrew Jay Schwartzman, head of the Washington-based nonprofit Media Access Project.

Adds another veteran communications lawyer: “In an agency like that, it’s hard for the worker bees to go back to the emperor and say, ‘Gee, you really can’t do this.’ … The outcome was determined and the staff had to get there.”

Fowler did not respond to four telephone messages seeking an interview.

Given Murdoch’s plan to become a U.S. citizen, his de jure control of Fox, his de facto control of News Corp. and his almost unique command of his own empire – all of which negated any real danger of the kind of foreign propagandizing against which the foreign ownership statute was principally designed to guard – it might have been especially hard for worker bees at the FCC in 1985 to spoil the party. Especially by raising such nettlesome questions as whether News Corp.’s financing would come in the form of equity or debt – which Fox left very unclear in 1985, and which happens to be one of the issues at the center of the pending FCC investigation.

Perhaps there was a kind of “don’t ask, don’t tell” understanding between Murdoch’s lawyers and FCC staffers: “If you’ll be kind enough not to ask us, we’ll be good enough not to tell you, and our bosses will all be pleased.”

But still, the law is the law, and (as NBC stressed when it jumped into the Fox fight last November) the FCC is supposed either to enforce it across the board or to change it for everyone. And broadcast licensees, and their lawyers, are supposed to tell the FCC everything it might want to know – and to put the important stuff right under its nose – so that the agency can fairly enforce the law according to its own interpretation, technicalities and all.

“IT’S ALL SEMANTICS”

Murdoch said in his FCC deposition that “it didn’t seem to matter to me,” or to anyone else, how much of the money that News Corp. borrowed from the banks to finance the deal would be downstreamed to Fox as debt and how much as equity. “We had a company here which we stated from day one was to be parr of News Corporation, he said, “and it didn’t matter whether you called it bank-guaranteed debt, equity, shares, you know. You can get a bunch of accountants to give any names to this. It’s all semantics …. If we had any inkling that you would have preferred debt, we would have done it with debt.”

In any event, asserted Murdoch, he hires lawyers to worry about details like that. Lots of lawyers.

Howard Squadron headed the Murdoch legal team in 1985 (and now), but he was not an FCC specialist. On that front, in April 1985 the Murdoch team turned to Joel Levy of Washington, D.C’s Cohn and Marks, whom they had previously retained for another FCC matter, and he helped develop the 76-24 preferred-common voting stock structure described above.

But at the suggestion of Murdoch’s politically attuned friend Robert Strauss, the Democratic potentate and senior partner at Akin, Gump, Strauss, Hauer & Feld, Murdoch also brought in Michael “Mickey” Gardner, who then headed the firm’s communications practice in Washington. Gardner had chaired the 1980 Reagan transition team for the FCC, and had the right Republican connections. (Gardner says he also had a track record showing that he could be effective at “highlighting the competitive benefits” of the deal.) Gardner became “the point person at the commission,” as he put it in his deposition, for the 1985 application.

This co-counsel arrangement was a formula for rivalry. Levy and Gardner each hoped for a long and lucrative legal relationship with Murdoch and his companies. “There were lots of things I’ve learned in retrospect – or there were some things that I’ve learned in retrospect – that Akin, Gump did that I was unaware of at the time that bore on [our] responsibility” to advise the client how “to comply with all of the requirements of the FCC” Levy recalled in his January 23 deposition. Levy’s two FCC interrogators inexplicably failed to pursue this intriguing tidbit, and Levy declines elaborate.

In any event, Gardner was ultimately to get the inside track with Murdoch, and by early 1986, according to Levy’s testimony, he was told by Howard Squadron that “the client had determined that it didn’t need two Washington counsel, and it preferred to … keep the representation with Akin, Gump, and therefore, we were superfluous.”

Murdoch and his legal team, including Squadron, Levy, and four other lawyers who worked on the 1985 application for FCC approval, all swore – with one striking exception – in FCC depositions early this year that in 1985 it had been clear to everybody, on both sides, that News Corp.’s 24 percent of Fox’s voting shares put it below the statute’s 25 percent benchmark, and that News Corp.’s percentage of Fox’s equity was irrelevant to analysis of the foreign ownership issue.

“There was a time when there was a discussion of presenting the application on two bases, including a public interest basis,” Squadron said in his January 24 deposition, “but … we discarded that notion because we had gotten a very clear signal from the FCC staff that as long as Rupert became a citizen and as long as he exercised as an American citizen the voting control of [Fox and] de facto control of the parent company in Australia … that that would be satisfactory.”

GARDNER OFF THE RESERVATION

The exception was Mickey Gardner:

Q: “Was it your understanding that the 25 percent benchmark was complied with by the transaction?”

A: “No, clearly not. We were exceeding 25 percent. [There] was no mystery to that.”

In addition to that testimony in his January 30 deposition, Gardner also said that News Corp.’s relative contribution to Fox’s capital was “always relevant,” because it meant that News Corp.’s “projected ownership would be far in excess of 25 percent.” His testimony clashes not only with that of his co-counsel, but also with Fox’s current position and with the apparent premise of the FCC’s finding of compliance with the foreign ownership statute.

Gardner’s testimony did back up Fox’s fundamental claim that it fully disclosed all relevant facts to FCC staffers, both orally and in writing. But his unqualified assertions that Fox “clearly” was above the 25 percent benchmark, because equity counts, point toward two possible inferences:

Either Gardner, Fox’s “point person at the commission” in 1985 (who was dropped as Fox’s FCC counsel in 1990) did not know what he was talking about when he gave his deposition, or the Murdoch legal team in 1985 must have seen the foreign equity issue as posing a far more serious potential “benchmark” problem than Fox or any of its other lawyers have ever acknowledged. Since the second inference could pose a severe “lack of candor” problem, Fox is pushing the first.

Under Gardner’s analysis, the only basis on which the FCC could have approved Fox’s purchase of the Metromedia stations was by making the kind of special “public interest” finding that has been made in only one case (in 1966) in the 61-year history of the Communications Act. According to Gardner, the FCC did just that, finding the deal in the public interest both because of Murdoch’s de facto control of News Corp. and because of the competition Murdoch could bring to the three networks. Murdoch’s hope of creating a fourth network was, Gardner testified, “the dominant consideration” in overcoming the foreign ownership hurdle, and “the commission, in granting the license, determined it was greatly in the public interest to have a fourth network.”

It would have made perfect sense for the FCC to have decided the case on this basis. But nobody besides Gardner, either on the Murdoch team or (apparently) at the FCC, recalls the FCC doing that. Nor does Fox’s bulky June 24, 1985, application, or the FCC’s lengthy November 14, 1985, opinion approving Fox’s acquisition of the six Metromedia stations, rely on Gardner’s “above-the-benchmarkbut-in-the-public-interest” rationale for finding compliance with the statute. Rather, both the Fox application and the FCC opinion read as though the possibility that Fox’s foreign ownership would be above 25 percent-let alone above 99 percent had never crossed anyone’s mind.

(Gardner says he sees no real inconsistency between his testimony and that of his former co-counsel, and insists that his rationale is implicit in the FCC’s opinion.)

HOW FCC STAFFERS COULD HAVE MISSED IT

Murdoch’s lawyers filed their formal application for transfer of the six stations on June 24, 1985. And now he and his current lawyers claim that the application provides inescapable, documentary evidence that Fox fully disclosed to the FCC that News Corp. would own almost all of Fox’s equity.

At Murdoch’s February 27 press conference, he triumphantly unveiled a letter that professor Marvin Chirelstein of Columbia Law School had sent to the FCC (for a fee that he will not disclose), concluding that “the fact that News Corp. would supply and own all but a tiny fraction of [Fox’s] equity capital was clear and unmistakable” from “a plain reading of the 1985 applications and related documents.”

Problem was, Chirelstein – to whom Murdoch’s lawyers had given only a carefully culled subset of relevant materials – gave a misleading account of some highly material facts in his letter, which current Fox FCC counsel William Reyner, Jr., of Hogan & Hanson quoted with approval and without qualification in his 95-page brief that day. He also attached Chirelstein’s letter as Appendix A. (On which more below.)

Reyner and Chirelstein point to two exhibits buried in the application – which fills a three-inch thick binder – as clinching their view that Fox fully disclosed that News Corp. would supply almost all of the equity. And the first time one reads through the two exhibits – especially the one that says all $600 million to finance the deal is coming from News Corp. – it’s tempting to agree with them, at least with the benefit of hindsight.

But the Fox-Chirelstein thesis leads almost ineluctably to the deduction that Roy Stewart and Stephen Sewell, the two FCC lawyers who have sworn they never knew that News Corp. would have over 25 percent of the equity, must be idiots or liars. And that deduction collides with the consensus view of seven Washington communications lawyers who have dealt with the two, including some who were on the Murdoch team in 1985. In fact, Stewart is widely respected (albeit known for a choleric personality), and the now-retired Sewell was among the most highly regarded career lawyers the FCC has ever had. Former Fox counsel Gardner, for one, testified in his deposition that Sewell “is the most thorough … regulatory attorney I’ve dealt with.”

So how could Stewart and Sewell (who aren’t talking to the press these days) have missed it?

Here’s how:

Stewart stressed in an interview with The Washington Post last June: “They [Fox] certified that they were financially qualified to make the purchase and would comply with the [alien ownership] statute”; he added that the FCC did not know in 1985 what percentage of the equity would come from News Corp. because Murdoch and his team had not yet settled on the financing.

The Fox certification was on FCC Form 314, which Fox filled out as part of its June 24, 1985, application. Fox put an “X” in the “yes” box opposite the following question: “Is the applicant in compliance with the provisions of Section 310 of the Communications Act of 1934, as amended, relating to interests of aliens and foreign governments?” Fox also added a cross-reference: “See Exhibit I.”

Stewart’s implication to The Washington Post was that this “yes” would have been regarded by the FCC staff as tantamount to a representation that Fox (including its equity) would be less than 25 percent foreign-owned. Two other communications lawyers say the same, even though the statutory language hardly compels such an inference.

If these lawyers are right (and Fox suggests they’re wrong, at least about the equity part), then the FCC staff could reasonably have assumed that News Corp. would end up owning under 25 percent of the equity in Fox unless Fox said otherwise, clearly and conspicuously, in the cross-referenced…

Murdoch and his troops have on occasion floated, and on occasion backed away from, innuendos suggesting that the FCC probe is driven by sinister motivations.

1985: FOURTH NETWORK DREAMS

It was exactly ten years ago, in early April 1985, that Murdoch seized his chance to enter the U.S. television market, and in a very big way.

LEGAL COMPLICATIONS

The legal questions at the heart of this issue, and of the current lack-of-candor FCC investigation, are these:

(1) Whether the statutory presumption (as the FCC has long construed it) against ownership of broadcasters by holding companies of which “more than one-fourth of the capital stock is owned of record or voted by aliens” (emphasis added) absent a special finding by the FCC that an exception would serve the public interest – applies to a holding company that (like Fox’s) has less than 25 percent foreign-owned voting stock, but more than 25 percent foreign equity contributions and other!r attributes of ownership; and

SEPARATING EQUITY FROM CONTROL

It was against this legal background that Murdoch and his team went about structuring the Metromedia deal and trying to sell it to the FCC in 1985.

A MURDOCH-FCC LOVEFEST – AND A MYSTERY

Something mysterious happened between Murdoch’s legal team and the FCC in 1985, and the record developed in the FCC’s investigation so far doesn’t resolve all the mysteries.

That’s not what Stewart remembers, however.

Fowler did not respond to four telephone messages seeking an interview.

“IT’S ALL SEMANTICS”

In any event, asserted Murdoch, he hires lawyers to worry about details like that. Lots of lawyers.

GARDNER OFF THE RESERVATION

The exception was Mickey Gardner:

Q: “Was it your understanding that the 25 percent benchmark was complied with by the transaction?”

A: “No, clearly not. We were exceeding 25 percent. [There] was no mystery to that.”

(Gardner says he sees no real inconsistency between his testimony and that of his former co-counsel, and insists that his rationale is implicit in the FCC’s opinion.)

HOW FCC STAFFERS COULD HAVE MISSED IT

So how could Stewart and Sewell (who aren’t talking to the press these days) have missed it?

Here’s how:

Fox didn’t do that. Instead, Exhibit 1 stressed that Murdoch would become a U.S. citizen; that he would own all of the preferred stock; that control of Fox would be limited to Murdoch and other U.S. citizens; that the common stock would be owned (through several intermediate corporations) by Australia-based News Corp., of which Murdoch had de facto voting control; and that: ‘The preferred stock will exercise 76 percent of the vote on all matters; and the remaining 24 percent of the vote will be exercised by the common stock. The holders of the preferred shares will be entitled to a fIXed return on capital investment. All other profits and losses of the corporation will be attributed to the common shares.”

An FCC lawyer reading Exhibit I might think this an unusual arrangement, with the preferred stock having 76 percent of the vote and the foreign-owned common shares getting all profits and losses above the preferred’s unspecified “fixed return.” But nothing in Exhibit 1 would necessarily have tipped this hypothetical FCC lawyer off to the fact that each foreign-owned common share would have almost three thousand times as much equity as each Murdoch-owned preferred share.

If our FCC lawyer had kept paging through the fat application, to Exhibit 2, and had read it closely-a questionable assumption-he might have begun to suspect that more than 25 percent of the equity would be foreign-owned. Headed “Source of Funds,” Exhibit 2’s three short paragraphs begin:

“To complete the proposed transaction, [Fox] will be required to have available approximately $600 million above the assumption of existing debt. These funds will be provided through open credit lines in favor of News Corporation Limited … and its subsidiaries now available with American, European, and Australian banks.” Exhibit 2 goes on to say that this $600 million would be “contributed as capital or loaned,” or some of each; there was no debt-equity breakdown.

Reading this “Source of Funds” exhibit now, Reyner and Chirelstein contend that any inquiring reader (to which Chirelstein adds the qualification, “with a modicum of financial and corporate experience”) should have been able to infer that all of the equity capital was coming from News Corp., and that its common stock “represented virtually all of the equity value of the company,” in Reyner’s words.

WHERE’S WALDO?

But Fox’s (and Chirelstein’s) claims that anyone paging through Fox’s 1985 application should easily have spotted this in the “Source of Funds” exhibit is a bit like someone who has been shown where Waldo is hidden in a child’s “Where’s Waldo” picture saying that any fool should spot Waldo with ease. It helps if you know where to look. Especially if only part of Waldo is there.

Imagine what our by-now-somewhat-drowsy, hypothetical FCC staff lawyer might have been thinking as he read the “Source ofFunds” exhibit (if any FCC lawyer did read it) in that sultry Washington summer of 1985:

“Hmm. Looks like the money’s coming from News Corp. And some of it might be ‘contributed as capital’ -sounds like equity. Gee, could they be thinking of having more than 25 percent foreign equity? Nah, they wouldn’t open that can of worms.

“Who knows? Maybe Murdoch is throwing in another $76 million or so of his own money somewhere for his 7,600 preferred shares; after all, he’s a billionaire. Maybe that $600 million from News Corp. will be almost all debt, with, say, $24 million in equity. That would come out below the benchmark.”

That would also have been consistent with Fox’s statements in 1985 that “there would be a total of $670 million of shareholder equity” (emphasis added), to quote from a footnote in Reyner’s February 27 brief for Fox. This number, which appeared in a widely circulated SEC registration statement that was mentioned in a November 4, 1985, FCC filing by Fox, seems hard to square with a suggestion that Reyner makes nine pages later in his brief: that the “Source of Funds” exhibit should have made it clear to the FCC “that News Corp. would be the source of all the funding for the transaction,” which would total” ‘approximately $600 million.’ “) (Emphasis in original.)

“Or maybe,” our FCC staffer might have thought, “maybe their financial wizards in New York will rig the other aspects of this $2 billion deal to keep the foreign equity below 25 percent. Who knows? That’s for Murdoch’s guys to figure out. If they wanted us to approve over 25 percent foreign equity, they’d have told us up front.”

But Murdoch’s lawyers didn’t tell them up front. Not in the 1985 application, at least. And not at all, according to a highly pregnant footnote in a 1988 opinion letter from Mickey Gardner to Fox: “There was no explicit discussion [with the FCC] of the relative contributions to capital of the holders of the [Murdoch-owned] voting preferred and the [News Corp.-owned] common stock.”

MURDOCH’S PROFESSOR FUMBLES SOME FACTS

Significantly – and unfortunately for their credibility – Professor Chirelstein, in his letter to the FCC, and Fox counsel Reyner, in his brief, did not rely on the “Source of Funds” exhibit alone for the proposition the FCC was told in 1985 that News Corp. would be supplying almost all of the equity.

Both also stressed that (in Chirelstein’s words) “[a] fair reading of the 1985 applications” showed that (among other things) “the capital funds to be received by [Fox’s holding company] on issuance of the preferred stock would not exceed the aggregate par value of the preferred shares actually issued, to wit, $760,000 (the par value of the total authorized preferred stock being only $1 million), and would therefore almost certainly constitute a very small fraction ofTHC’s aggregate equity funding.”

False.

The professor also asserted that “the annual income participation of the preferred … would be limited to $12 per share, or $91 ,200 in total for the issued shares ($120.000 for the maximum authorized shares),” with all other income going to the foreign-owned common. “Since the matter is now at issue,” he added, “I should emphasize that [these and other] conclusions … are perfectly evident on a plain reading of the 1985 applications and related documents. ”

False again.

In fact none of the numbers on which Chirelstein relied to show that Fox had told the FCC that Murdoch’s preferred stock would have only a tiny percentage of Fox’s equity appeared in Fox’s 1985 application, or in the amendments thereto, or in any other document filed with the FCC until after the FCC had approved the fox application on November 14, 1985.

Similarly misleading was Reyner’s quotation in his February 27 brief of Chirelstein’s assertion that the “1985 application and related documents” showed Murdoch contributing only $760,000 for the preferred.

(Chirelstein responded to detailed questions on this by sending me two letters, in which he wrote that “maybe I could have made myself clearer” about when the FCC got the numbers disclosing how much equity Murdoch would own, but that they were not essential to his conclusion and thaI the 1985 application “would have made it perfectly clear to me” that News Corp. was supplying all the funding, “with much or all of il going in as equity.” Both letters were appended to Fox’s March 9 reply brief, with the explanation: “Professor Chirelstein subsequently amplified on his letter in exchanges of correspondence with a reporter. In the interest of a complete record, copies of Professor Chirelstein’s letters are being provided to the commission.”)

(Reyner says: “I do not believe it was misleading, and I do not believe we implied that that … information was available to the commission before it acted. It clearly was not.”)

The bottom line is that Fox’s 1985 application neither specified in so many words that more than 25 percent (let alone 99 percent) of its equity would be foreign-owned nor disclosed enough information about News Corp.’s financing to lead even a careful reader ineluctably to that conclusion.

This may help explain a dog-that-didn’t-bark anomaly about Fox’s foreign ownership problem:

Several capable lawyers (such as Schwartzman of the Media Access Project) and groups filed objections to various aspects of the 1985 Fox application, and although Murdoch had plenty of enemies who would like to have torpedoed his Metromedia deal, nobody seized the opportunity to file a challenge based on Fox’s more-than-25-percent-foreign equity until the NAACP lawyers did so in 1993. Fox says that’s because in 1985, nobody dreamed that Fox’s foreign equity mattered. Schwartzman says nobody knew about it.

FOX’S BETTER WITNESSES

Fortunately for Fox, it has more effective (and, one imagines, less expensive) witnesses than Chirelstein: three lawyers who worked at the FCC in 1985 on the Fox application, and who have sworn in declarations for Reyner that Exhibits I and 2 to the Fox application made it clear enough that News Corp. would own most of Fox’s equity.

Most telling – especially for perspective on the unfairness of the FCC’s investigative procedure are the two successive declarations of Alan Glasser, a retired FCC staffer who had the most hands-on role in processing the 1985 application, as a subordinate of FCC lawyers Roy Stewart and Stephen Sewell.

On January 12 Glasser signed a statement for FCC investigators with a punchline almost identical to Stewart’s and Sewell’s: “At no time during the processing of the applications was I aware that News Corp. would own 99 percent of [Fox’s] equity or any perce mage above 25 percent. Had I been aware of that fact, I would not have have recommended [approval].”

But Glasser did a 180-degree turn after Fox counsel Reyner had the opportunity to show him Exhibits I and 2 to the 1985 application. In a January 31 supplemental declaration, Glasser swore: “When I provided the earlier declaration, I did not have the benefit of having the opportunity to review the applications in question …. The application clearly showed that control was to rest with Mr. Murdoch and that News Corp. would have all the equity benefits and risks in exchange for purring up all the money. I believe that this structure met the requirements in effect in 1985. Any change in the manner of News Corp.’s funding for [Fox] (e.g., debt vs. equity) would have made no material difference in this case because News Corp. would continue to receive the profits and losses ….

“It is my view that there was no deception or intent to deceive or withhold information from the commission by [Fox].” Glasser swore. Jerald Fritz, who was chairman Fowler’s chief of staff in 1985, made a similar declaration in favor of Fox, based on the same documents. So did Alan Aronowitz, who is still at the FCC.

Especially in light of Glasser’s turnaround, Fox is clearly right to complain that it should not be hammered on the basis of Stewart’s and Sewell’s cryptic, apparently unrefreshed recollections without at least getting a chance to cross-examine them – a chance that Fox (and the NAACP lawyers) have so far been denied under the FCC’s peculiar investigative procedures.

(Would Stewart and Sewell, like Glasser, come around to Fox’s point of view if Reyner had a chance to refresh their memories too? Don’t bet on it. For one thing, it was not as clear in 1985 that News Corp. was “putting up all the money” as Glasser’s-second declaration says it was.)

THE DUTY OF CANDOR

Particularly given the split among FCC lawyers as to what they knew (or could have known) – in 1985, Murdoch rang true when he told his FCC interrogators that ”I’d have to be mad” to try a bold deception on an agency with as much power over his company as the FCC, and that “we’ve got very great assets here and we sure as hell aren’t going to risk them For breaking the law.”

Nothing in Fox’s application can be called false or overtly deceptive, and it did include enough information to suggest that any careful FCC lawyer reading it should at least have wondered whether News Corp. would end up with over 25 percent of Fox’s equity, and should have asked Fox some questions to pin it down.

But precedents construing the duty of candor to the FCC suggest that an applicant who has managed to gull the agency without overt deception cannot establish its candor by showing that the agency was “as easily gulled as asses are,” to borrow from Shakespeare.

In 1986, in Kas v. Financial General Bankshares, Inc., a case involving the analogous issue of proxy disclosures, the D.C Circuit said: “A full and fair disclosure cannot be achieved through piecemeal release of subsidiary facts which if stated together might provide a sufficient statement of the ultimate fact,” at least not if there is “some conceivable danger that the reasonable (reader] would fail to realize the correlation and overall import of the various facts interspersed throughout” a document.

The question whether Fox violated its duty of candor in 1985 comes down to whether Fox or its lawyers consciously avoided telling the FCC straightforwardly that Fox would have over 25 percent foreign equity, and deliberately buried some of the facts (while delaying disclosure of the rest) from which that might have been inferred, in the hope that it would go unnoticed-as it apparently did. And the ultimate issue is whether the evidence supports an inference of intent to deceive.

While the NAACP’s Honig and Blackburne say Fox’s deceptive intent is clear, another Fox critic concedes that “I don’t see any blood on the door,” at least not in 1985. One wonders whether more telling evidence of Fox’s intent may still be secreted in the files of Fox and its law firms; their highly selective waivers of attorney-client privilege and work product protections left loopholes big enough for a few trucks to drive through.

The bottom line is that-on the existing record-it would be difficult to find convincing evidence that Fox violated its duty of candor in 1985. But that doesn’t end the matter, because some damaging documents and testimony indicate that in the ensuing years, at least, Fox, other News Corp. subsidiaries, and their lawyers were concerned that the FCC might find a violation of the foreign ownership statute if it reexamined Fox’s ownership structure, and finally figured our that News Corp. had a 99-percent-plus equity interest; they responded to this concern by taking pains to avoid any such reexamination, while continuing to assure the FCC without qualification that Fox was in compliance with the statute.

In this regard, it is “the responsibility [of] the applicant to come forth with all the information needed to keep its file accurate and complete, not on the commission to infer significant additional information from the less-than-complete information it receives,” the D.C Circuit held in WADECO, Inc. v. FCC, in 1980. The court added: “It is entirely reasonable for the commission to require that when circumstances change an applicant notify it of all the changed details, and not leave significant information, even if logically inferable, to inference.”

It was apparently not until April 1986, when Fox filed its initial ownership reports shortly after closing the Metromedia deal, that Fox gave the FCC documents from which one could infer with certainty that Fox would be over 25 percent (and over 99 percent) foreign-owned. These documents disclosed that the hundreds of millions of News Corp. dollars were coming in as equity capital, not debt, and that Murdoch’s (and Diller’s) capital contributions for their 7,600 shares of preferred stock (with its 76 percent of the vote) were only $760,000, with the fixed return set at $12 a share.

But the 1986 ownership report was hardly a model of clarity. For example, Fox did not put a number in the space provided for ”total consideration paid” by the common stockholder (News Corp.). Rather, it cross-referenced to some incomplete and outdated documents that themselves did not specifY News Corp.’s equity contribution. When questioned about this in his January 26 deposition, Thomas Herwitz, the in-house Fox lawyer who prepared the report and ushered it through the FCC staff, explained that he did not think the consideration paid in this complex deal could be reduced to a single number. He added that he had discussed the ownership forms with FCC staffers, and chat “what was paid, et cetera, was not something the commission cared about … I’d just left the commission. I know what the commission was concerned about.”

Although a close reading of the April 1986 Fox ownership report would have indicated that its equity was overwhelmingly foreign-owned, it’s unclear whether anyone at the FCC read it closely. And by that time, any FCC lawyer who suddenly pieced it all together. and realized for the first time that Fox must have more than 25 percent foreign equity, would then have had to decide whether (1) to go tell his bosses that he (and everyone else) had missed a very big problem, and that the FCC needed to get busy unscrambling a lot of eggs, which would have made chairman Fowler (among others) very unhappy, or (2) to put it out of mind.

Interestingly, the same Thomas Herwitz had just left a job as legal assistant to the same chairman. Fowler, and was in his first week on the job as Fox’s new vice-president of corporate and legal affairs.

DAMAGING DOCUMENTS

Despite the recent assertions by Murdoch. and by past and current Fox lawyers, that Fox’s foreign ownership had been fully disclosed to and approved by the FCC in 1985, and despite the fact that Fox’s Herwitz had certified its compliance with the foreign ownership statute in connection with various transactions since 1985, Herwitz found it necessary in March 1988, for reasons on which he could shed little light in his deposition, to request a formal opinion letter from Mickey Gardner.

Herwitz explained ill his deposition that he felt he needed the advice of outside counsel to know whether Fox could certify again, in connection with a pending matter, that it was in compliance with the foreign ownership statute. And Gardner found it necessary to hedge, rather saliently, his advice in his March 30, 1988, opinion letter to Herwirz that Fox “can in good faith” certify its compliance.

Citing three FCC actions in 1985 and 1986- including two declaratory rulings in June 1985 and October 1986 in a case called Wilner & Scheiner. which had been well known to Murdoch’s legal team in 1985 [see sidebar] – Gardner said that (I) News Corp.’s ownership of “greater than 25 percent of the equity capital of [Fox] … could be construed as exceeding the 25 percent benchmark” in the foreign ownership statute, and (2) in 1985, “there was no explicit discussion [with the FCC] of the relative contributions to capital” to be made by News Corp. and by Murdoch.

Herwitz, who comes across in his deposition transcript as a most incurious and forgetful fellow, testified that Gardner’s opinion letter did not cause him any concern whatsoever about Fox’s compliance with the statute, which he had certified in reliance on the letter. He explained that he disagreed with Gardner’s view that foreign capital contributions might be relevant under the statute, but had felt no need either to discuss that disagreement with the lawyer whose opinion letter he had sought or to read the authorities Gardner had cited. Herwitz dismissed Gardner’s analysis of these authorities as “immaterial sort of speculation.”

But as the NAACP’s David Honig and Laura Blackburne stress in their February 27 brief, Gardner’s 1988 opinion letter is remarkable because it “explicitly informed Fox of the materiality of relative capital contributions, told Fox that its ownership structure exceeded the benchmarks in [the foreign ownership statute]’ and informed Fox that its 1985 assignment applications had not provided the commission with all material facts.”

Two other documents that the FCC obtained from Fox, dating from 1989 and 1990, also indicate that some people on the Murdoch team were more concerned than any have ever admitted that Fox was vulnerable to challenge under the foreign ownership statute – concerned enough to take pains to deep-six suggestions for restructuring, which had been floated for the sake of simplicity or of tax savings, lest any such restructuring focus FCC attention on Fox’s vulnerability under the foreign ownership statute.

In his deposition, Herwitz initially said he could not recall any discussion, ever, of a possible restructuring of Fox’s holding company. Then he was shown an October 2, 1989. memo that he had sent to David Handelman, a vice-president of Fox’s holding company, about “the possibility of eliminating Twentieth Holdings Corporation [the holding company] or Fox Television Stations, Inc., from [Fox’s] ownership structure.” This Herwitz memo said that the “issue will come down to the stock we place in the Communications Acts’ [sic] distinction between voting stock and capital stock”; it went on to warn that the possible restructuring under consideration “may be the ‘straw that broke the camel’s back’ if it heightens concerns about” the influence of limited-voting capital stock.”

Herwitz admitted that this memo bore his handwritten initials, but swore that “I don’t recall the document at all,” and that he could recall nothing about the circumstances surrounding it. When asked to explain his memo’s discussion of “voting stock and capital stock;” Herwitz swore, ”I’m not sure I understand what this sentence means, frankly.” Nor could he recall why he would have spoken of a straw breaking a camel’s back, or of “heightened concerns.”

Still more striking is a June 5, 1990, memorandum headed “CLIENT CONFIDENTIAL,” addressed from Akin, Gump’s Gardner and James Denvir to Daniel Brennan, an in-house tax lawyer for a News Corp. subsidiary in New York, with a copy to Larry Kessler, the subsidiary’s general counsel. The memorandum followed up on a meeting in Gardner’s office the week before to discuss Brennan’s suggestions that News Corp. might be able to reap huge tax savings by making some changes in Fox’s ownership structure.

“As we have discussed,” the Akin, Gump memorandum states, “Fox TV’s ownership structure is arguably vulnerable to challenge” under the foreign ownership law, because the 1985 and 1986 Wilner & Scheiner declaratory rulings “explicitly hold that in evaluating compliance with the Communications Act restrictions on alien ownership, the relative ‘equity’ interests held by aliens must be considered as ‘capital stock.’ ” Accordingly, the memorandum suggests, News Corp.’s equity interest in Fox “may exceed [the statute’s] restriction on alien ownership of the ‘capital stock’ of a corporation controlling an FCC licensee.”

While noting that the FCC could still find Fox in compliance based on Murdoch’s control of News Corp., the 1990 memorandum warned: “Because of the uncertainty, however, of the outcome of a challenge to Fox TV’s ownership structure, we have been in agreement that it is paramount to avoid any corporate restructuring which would potentially invite reexamination of Fox TV’s ownership structure by the commission.” Any restructuring, the memorandum said, must be arranged so that it “avoids the need to obtain the prior approval of the FCC.”

In other words: If the FCC reexamines the claim that Fox complies with the foreign ownership Structure, it may find the whole thing illegal. So keep quiet, and let sleeping dogs lie.

Kessler did just that, according to his deposition testimony: He satisfied himself “that there was a theory under which everything was all right,” and saw the memorandum as “just, you know, advice not to, you know, don’t rock the boat.”

“POMPOUS LAWYERING”

So embarrassing is the 1990 Gardner-Denvir memorandum on the “candor” front that almost everyone who has ever touched it appears almost comically eager to disown it.

Fox counsel Reyner even dismissed the memorandum (in his February 27 brief) as having been “ostensibly prepared at Akin, Gump.” Was this intended to suggest that the 1990 memorandum – on Akin, Gump letterheard, and bearing names of Akin, Gump partners Gardner and Denvir – was a forgery? No, says Reyner.

Mickey Gardner, for his part, swore in his deposition that the 1990 memorandum bearing his name “is not my work product,” that “whoever drafted this memo was not as close to the real law as they should have been,” that it “is unartfully written” and “wooden,” and that it reflects “sloppy lawyering … totally inconsistent with the law.” Gardner dumped special scorn on the 1990 memorandum’s use of the phrase “it is our studied view,” which he derided as “pompous lawyering.”

Yet when the same phrase, in the same memorandum, was shown to Gardner’s former partner, James Denvir, in a February 3 deposition, the following exchange occurred:

Q: “I noticed you chuckled a little bit.”
A: “I just saw a Mickeyism.”
Q: “And what would that be?”
A: ” ‘It is our studied view.’ … I can’t say he wrote that, but that sounds like Mickey.”

Gardner, who stressed in his testimony that he was busy moving out of Akin, Gump and into his own new law offices when the 1990 memorandum was written, did say that he agreed with its advice that the Murdoch team should avoid any move than might “invite reexamination of Fox TV’s ownership structure by the commission.”

Gardner explained that this warning reflected legitimate concern about the “unpredictability of any regulatory body getting into a dogfight.” The FCC’s membership had changed since 1985, and it “arguably could have had a different view” on the foreign ownership issue. And, Gardner testified, Fox’s remarkable success in the marketplace, and its push for regulatory changes to allow it to compete with the Hollywood studios (including one of Gardner’s clients), as ‘well as the networks, had stirred up powerful enemies who would have jumped at a chance to challenge Fox on foreign ownership grounds.

In other words: We wanted to keep quiet, and let sleeping dogs lie.

Candor?

Candor “requires that an applicant inform the commission of all facts, whether requested in [FCC forms) or not, that may be of decisional significance so that the commission can make a realistic decision based on all relevant factors,” the D.C. Circuit held in 1981 in RKO General, Inc. v. FCC, the leading case on the issue. The court added that an applicant who “fails to come forward with a candid statement of relevant facts” is guilty of “a lack of candor through omission.” And in 19H5, in WHW Enterprises, Inc. v. FCC, it held that “the ‘core’ of a finding of lack of candor is an omission … [a] failure to be completely forthcoming in the provision of information which could illuminate a decisional matter.”

The remarkable thing is that the FCC’s dogs slept so soundly, and for so long. And all the while, Fox was boldly building its fourth network, and growing so big that by May 1994, when Fox finally (and grudgingly) told the FCC that its equity was 99 percent foreign-owned-Fox qualified for favorable treatment under what one veteran communications lawyer calls the FCC’s unwritten “too big to fail” doctrine.

And all the while, in annual ownership reports and in applications to renew or acquire more licenses, Herwitz and his successors were filing unqualified certifications that Fox was “in compliance” with the foreign ownership statute.

THE NAACP’S ONE-MAN BAND

Meanwhile, CBS had caught on, by the spring of 1990, to its unwelcome new competitor’s vulnerability on the foreign ownership front. According to representatives of two major networks, CBS officials quietly tried to interest both the FCC and Representative John Dingell (D-Michigan), then the all-powerful chairman of the House Commerce Committee, which oversees the agency. They shopped around a memo suggesting that Fox was illegally owned. Nobody bit.

The sleeping dogs at the FCC were finally stirred up a bit, in late 1993, by one David Honig, an FCC specialist-cum-one-man-band who is the general counsel of the NAACP’s Miami-Dade branch, and who litigates all over the country in the cause of increasing minority influence in the media.

Honig and Laura Blackburne, the general counsel of the New York State Conference of Branches of the NAACP, whom Honig deferentially calls “my senior partner,” had been litigating in 1993 (unsuccessfully, it turned out) on behalf of NAACP branches in New York City, New Jersey, and Pennsylvania against the petition by Murdoch’s News Corp. for a permanent FCC waiver of the newspaper-broadcast cross-ownership rules, so he could repurchase the failing New York Post. (Murdoch had had to divest the Post in 1988 under the terms of the FCC’s 1985 approval of Fox’s purchase of the six Merromedia stations, including New York’s WNYW-TV)

Honig had heard rumors in the communications bar for years that Fox might be vulnerable under the foreign ownership law. To check them out, he spent a couple of months digging through files at the FCC, reading case law, and working the grapevine, while his paralegal burrowed through filings at the SEC.

From the FCC, Honig got the 1985 and 1986

Fox filings about its ownership structure and News Corp. ‘s financing of the Metromedia deal. From the SEC, his paralegal got documents showing that News Corp. treated Fox as a wholly owned subsidiary, and minimized the importance of Murdoch’s 76 percent of the voting stock, at least for financial reporting purposes. And from the grapevine, Honig got a copy of a Murdoch-approved 1992 press release in which Barry Diller explained his resignation as chairman and CEO of Fox by saying that “since Fox is a wholly owned unit of News Corp.,” Diller needed to go elsewhere to pursue his ambition “to become an actual principal.”

On November 19, 1993, the NAACP’s Honig and Blackburne filed papers at the FCC stressing that News Corp.’s SEC filings showed that it owned” ‘substantially all of the equity’ ” of’ Fox, and charging that this (and other things) amounred ro a “flagrant violation” of” the foreign ownership statute. The lawyers initially made these charges to supplement their previous arguments opposing Fox’s proposed purchase of WGBS-TV In Philadelphia; when the WCBS-TV deal fell through, Honig and Blackburne filed a new petition in April 1994 making the same foreign ownership and lack of candor objection, to Fox’s petition to renew its license for WNYW-TV in New York. And ever since then, the 45year-old Honig has besieged and bedeviled Fox by spending much of his time launching salvo after salvo of paper – combining highly cogent advocacy with hyperbolic and occasionally inaccurate assertions that drive his adversaries to apoplexy – from his cramped apartment in “The Woodner,” an old-fashioned, full-service apartment building in Washington that Honig doesn’t need to leave: even to buy his daily newspapers and food.

Honig’s combined home-away-from-home and law office is jam-packed with two computers, two printers, a fax machine, mountains of documents, masses of law books, and a motley collection of wall art. Next to his bed looms a full-size office copying machine. A visit to this apartment and a passing familiarity with Honig’s late-night working habits suggest that the NAACP is getting at least a million bucks a year worth of lawyering our of Honig. Maybe two million.

But why would a group of NAACP branches care so much about an Australian company’s ownership of Fox? Because, Honig says, if Murdoch can get away with using a foreign company to buy a bunch of big television stations and start a new network, it will create pressure to relax the restrictions on foreign investment in broadcasting properties generally; foreign investors would mainly be big companies unlikely to foster minority ownership; and foreign investment would therefore threaten the goal of increasing minority ownership in broadcasting.

Fox representatives scoff at this rationale for the NAACP groups’ attacks on its licenses. They suggest that the real reason Honig and Blackburne have spent so much time and energy attacking Fox is the animus of the NAACP (and of Blackburne in particular) against Murdoch’s conservative political views, and against the coverage of racially charged issues by his news organizations, especially the New York Post. Others say that the NAACP groups pursue such litigation to gain leverage in the hope of extracting unrelated concessions from broadcasters.

Honig and Blackburne responded to such gibes in their February 27 brief by detailing their contentions about the dangers of foreign investment, and adding: “Fox has a reputation as an ultraconservative media ‘speaker’ generally opposed to minority advancement – but the NAACP couldn’t care less. Its editorial viewpoint is irrelevant here.”

A SIMPLE QUESTION

Fox’s official response to the NAACP lawyers’ initial, November 1993 attack was to assert, in a December 2, 1993, letter to the FCC from Fox counsel Reyner, of Hogan & Hartson, that “the ownership of the predominant equity interest by News Corp. [was] previously described to the commission in 1985,” and was irrelevant to its compliance with the foreign ownership statute.

Reyner had been retained by Herwirz, a former Hogan & Hartson associate, to do some of Fox’s legal work starting in 1988, and had taken over as its FCC counsel in 1990, when Fox dropped Akin, Gump and Gardner (who left in June 1990 to start his own firm), partly because of conflicts of interest with Gardner’s representation of a Hollywood client.

With Honig incessantly biting at its ankles, Fox decided to ask the FCC, in a February 3, 1994, letter from Reyner, to “address” Fox’s status under the foreign ownership law.

The FCC’s Roy Stewart followed up with a March 4, 1994, letter, which began the FCC’s foreign ownership inquiry by asking Reyner (among other things) to “please state the percentage of equity ownership that [News Corp.] or other aliens have in [Fox] as of the date of this letter.” Stewart’s restriction of his inquiry to the present equity percentage seems to suggest lack of interest in exploring what was disclosed (and not disclosed) in the past – a line of inquiry that could, and later would, prove embarrassing to a number of people, including Roy Stewart.

But Reyner’s response was transparently unresponsive: a March 21, 1994, letter that managed to go on for ten pages without ever giving a percentage. Instead, Reyner stated that “the precise dollar value of News Corp.’s equity contribution at any given time would appear immaterial.”

Reyner’s letter did not hide anything of great legal relevance, since the cat was mostly out of the bag already: In Fox’s December 1993 response to Honig, Reyner had noted that most of its equity certainly more than 25 percent – was owned by News Corp. But if not misleading, Reyner’s letter does seem curiously evasive.

(Reyner disputes this characterization, saying that he and other Fox lawyers had trouble figuring our what the FCC meant by “percentage of equity ownership,” and why it would care to know an exact percentage, or about how much above 25 percent it might be.)

Reyner’s evasiveness may help to explain why Fox finds itself in such a pickle now. FCC officials should have been mightily annoyed by Reyner’s letter. And some were, according to two communications lawyers who say they have reliable secondhand information – especially Renee Licht, Stewart’s deputy, who later ended up in charge of rhe investigation into Fox’s alleged breach of its duty of candor. (Licht cannot comment, according to an FCC spokeswoman.)

Stewart wrote back to Reyner on May 1 I, 1994, complaining that his responses “were incomplete” and asking again for the “percentage of equity ownership” held by aliens. And Reyner finally came up with the number, which he said had been obvious all along, in a May 23, 1994, response: “[The] ‘percentage’ of alien equity in [Fox] … is the indirect approximately 99 percent economic/equity interest of News Corp.”

Why did Fox and Reyner delay for two months before giving the FCC a straight answer to a straight question? Why not just say “99 percent” right away? Indeed, why nor say it in Fox’s December 1993 response to the NAACP attack? Or in 1985 or 1986?

Did Fox stall, out of fear that a forthright acknowledgment that its equity was more than 99 percent foreign-owned might generate headlines, galvanize unwelcome FCC attention, and impede Fox’s efforts to acquire interests in more stations and snatch affiliates from ABC, CBS, and NBC – some of which, in fact, began to occur just ten days after Reyner’s “99 percent” letter?

It was on June 2, 1994, that the NAACP’s lonely attack on Fox hit The Washington Post front page for the first time, complete with a quote by the FCC’s Roy Stewart that” [if] we knew that equity control in excess of [25 percent] was in the hands of aliens, we would have raised the question in 1985.”

But in the meantime, in the six months since the initial NAACP attack, Fox had been on a tear in the marketplace, challenging the three established networks more boldly than ever. In December 1993 Murdoch had stunned the media world by outbidding CBS for the television rights 10 National Football Conference games for four years, paying a very pricey $1.6 billion as a kind of loss leader to strengthen Fox’s programming and pull viewers and affiliates from ABC, CBS, and NBC. Over the next few months, Fox expanded its affiliate base from 138 stations to 184.

And on May 23, 1994, Fox announced one of its biggest coups yet: For $500 million, it would buy 20 percent of the New World Communications Group, complete with affiliation agreements with 12 television stations; Fox grabbed eight of them from CBS, three from ABC, and one from NBC. As The Washington Post put it the next day, Murdoch’s raid “promises to vastly increase Fox’s audiences, advertising revenues, and status in the next several years.”

The New World deal was announced the very day that Reyner finally sent his “99 percent” letter. Reyner says this was entirely coincidental, and denies any stalling by Fox, for any reason, in its disclosures to the FCC.

ENTER NBC-AND THE MEDIA SPOTLIGHT

The Fox foreign ownership inquiry was pretty quiet through the summer of 1994, and into the fall. There may have been ample basis for an investigation into Fox’s compliance with its duty of candor, but there was no public sign that such an investigation was in the offing. Indeed, the FCC seemed “well on the way to sweeping it under the rug last fall,” says a broadcast industry official following the ‘matter (who is not on Fox’s side), until “along comes NBC, and suddenly the commission realizes the rug would be so lumpy that it’s impossible to sweep it under the rug.”

NBC, which had been opposing Fox’s efforts to buy interests in several television stations on other grounds, jumped into the foreign ownership fight in a big way on November 30. Richard Cotton, NBC’s executive vice-president and general counsel, filed a petition asserting that Fox’s television stations were all illegally foreign-owned, demanding that all Fox station acquisitions be frozen until the foreign ownership issue was resolved, and urging the FCC to conduct a rule-making proceeding – either to force Fox to cut News Corp.’s equity interest below 25 percent, or to open the way for all other networks to seek unlimited foreign investment [“NBC’s Fighting Peacock,” The American Lawyer’s Corporate Counsel Magazine, April].

NBC’s motives for this extraordinary attack on another network seemed fairly evident: It would certainly hobble (if not destroy) NBC’s most aggressive competitor. And it might prompt the FCC (or Congress) to change the foreign ownership policy in ways that would. open’ up to foreign companies the bidding for NBC itself, which its parent, General Electric Company, had been trying to sell, but which had a depressed market value in part because of competition from Fox.

NBC’s legal attack on Fox was a win-win proposition. Except that Rupert Murdoch is not one to take such affronts lying down. He hit back in a December 5 letter to FCC chairman Reed Hundt. Attacking NBC’s allegations as lies aimed at derailing a competitor, Murdoch recalled the 1993 episode in which the NBC News Dateline program aired misleading footage of a staged explosion of a General Motors pickup, and attacked GE for an unrelated “pattern of illegal activity,” including defense procurement fraud. “If they want to slug it out with us, we’ll slug it out with them,” Murdoch told The New York Times. “Two people can play hardball.”

Although NBC brought no new evidence to bear on the FCC inquiry, its size and clout suddenly made the Fox foreign ownership fight big news. The NAACP’s Honig, who had battled Fox in obscurity for a year, appreciated having an ally, but was amused by the media’s sudden discovery of the issue. “What are we,” he says, “potted plants?”

(In the end, NBC walked away on February 17, making a separate peace with Murdoch by dropping its foreign ownership challenges to pending Fox applications at the FCC; at the same time, Murdoch agreed to carry NBC programming on his Star Television system, which delivers programs by satellite to Asia. Business is business.)

DRAMATIC MOVES AT THE FCC

Suddenly, in early December, the FCC made some dramatic moves, spurring loud complaints from Fox and Murdoch’s Republican allies in Congress that the agency was showing unseemly bias against Fox. There also were, and are, crosscutting rumors of political motivation-either to persecute Fox or make a phony show of vigilance before letting Fox off easy, depending on the rumor.

On December 5 or 6, Fox counsel William Reyner got a call at News Corp.’s New York offices from William Kennard, the FCC’s general counsel, and Licht, the deputy chief of the Mass Media Bureau. They had heard (correctly, it turned out) that Fox planned to place newspaper advertisements relating to the foreign ownership dispute and expressed concern that this could impede the FCC’s process by stirring up activity in the press and Congress.

“They urged me not to proceed with those plans, that they were very disturbing regardless of what the contents would be, that the chairman [Hundt] would not view it favorably,” Reyner recalls. “And I explained to them that I would do what I could.” Reyner took the matter to Murdoch, he says, who decided they’d better pull the ads in light of “the strength with which [the FCC’s] message was conveyed.” (Kennard denies that he or Licht mentioned Hundt; through a spokeswoman, Licht declined to comment.)

This little exercise in governmental censorship was followed by a headline-making announcement on December 7: The FCC’s inquiry into the legal issue of whether Fox’s structure violated the foreign ownership statute had suddenly become a fact-finding investigation – complete with demands for documents, notices of depositions, and the like – into whether Fox had violated its duty of candor, from 1985 until May 23, 1994, by hiding relevant facts.

The FCC also slapped Fox and the two NAACP lawyers on December 7 with a grossly overbroad gag order barring public comments about the investigation – a gag order to which NBC was not subject because it was nor formally a party. This attracted so much outrage in Congress and elsewhere that the FCC narrowed it two weeks later to a limitation on things like witnesses’ discussing their testimony with one another.

The timing of all this seemed peculiar, to say the least. No significant new information bearing on the issues had come to light (at least publicly) since May. The public escalation of the FCC’s investigation came more than six months after The Washington Post had quoted unnamed FCC officials saying they were “close to completing their review” of the Fox foreign ownership issue. And it came just days after a November 30 front-page article in The New York Times reporting NBC’s planned legal attack on Fox that day. The same article noted that the FCC “has said since May that a ruling is imminent” on the Fox foreign ownership dispute, and that it had been “widely expected in the industry that Fox would prevail,” because of the FCC’s reluctance to punish the fourth network it had so assiduously nourished for almost a decade.

FCC-watchers have advanced three theories to explain the timing of the December 7 orders. Some speculate that, in the words of an anti-Fox lawyer, “it was NBC’s turning up the heat so much, and bringing it from page eleven to page one of the newspapers; they [the FCC] could no longer afford to bury it as quietly as they wanted to. It’s still going to be a whitewash.”

Some Fox defenders, on the other hand, conjecture that the December 7 orders may have been instigated by chairman Hundt because of Clinton administration animus against Murdoch and his New York Post.

Still others, including an FCC spokeswoman, say the timing was coincidental, and had nothing to do with NBC or with politics. Chairman Hundt has indicated the same. He also assured Senate Commerce Committee chairman Larry Pressler (R-South Dakota), in a December 29 letter, that he had “not discussed any such Fox matters with anyone at the White House or with any Democrats in the House or Senate,” presumably including his old school chum and political patron, Vice-President Gore.

Be that as it may, lawyers following the matter closely express confidence that Hundt “is very much involved in what the Mass Media Bureau is doing,” in the words of an FCC staffer. It is both Hundt’s prerogative as I:CC chairman and his personal style to oversee such sensitive staff activities. And this investigation is being conducted by Licht (a career FCC lawyer), with input from Kennard (a political appointee), both of whom Hundt put in their current jobs.

The Fox foreign ownership fight had an extended run on the front pages as the tail on a much bigger journalistic dog, the avalanche of stories about House speaker Newt Gingrich’s $4.5 million hook deal with Murdoch’s HarperCollins, which was made public December 21 and inspired several weeks of intense journalism as new facts dribbled out about Murdoch’s meeting with Gingrich.

WHY MURDOCH SUSPECTS A WITCH-HUNT

While Congress and the press were fixated on the Gingrich book flap, an intriguing little drama was playing itself out in relative obscurity at the FCC. [t involved the unhappiness of veteran Democratic commissioner James Quello at what he called “the ‘star-chamber’ public impression” caused by the staff’s early handling of the Fox investigation. Quello, who noted that he was “the only commissioner present during the 1985 Fox decision,” and who is regarded by many FCC watchers as Fox’s best friend at the-agency, also seemed to imply, rather coyly, that Reed Hundt was responsible for the tone of the proceedings.

These complaints came in a January 3 letter from Quello to Senator Pressler, whose Commerce Committee oversees the FCC, and who had himself expressed “my growing distress and dissatisfaction over the highly unusual and unprecedented procedures” being used in the Fox investigation in a December 23 letter to Hundt.

Specifically, Quello complained about the FCC staff’s “extraordinary” issuance of the original December 7 gag order “under the pretext of routine delegated authority,” and without consideration by all five commissioners about the “apparent wish to avoid public scrutiny I that I may have found expression” both in the gag order and in the warning to Fox nor to run advertisements about the staff’s “unprecedented” and “most irregular” refusal to give Quello some information he had sought, even after he had gone to Hundt “stressing my wish to be fully informed of the progress of this proceeding”; and about “the impression of bias generated by” by these and other actions.

Quello also deplored “the atmosphere of suppression that has unfortunately pervaded this proceeding.” He criticized especially the FCC staff’s invocation or attorney-client privilege and FCC rules to discourage former staffers from sharing with Fox their recollections about the handling of the 1985 application. This, Quello aptly said, was no way to conduct “a dispassionate attempt … to ascertain factually what Fox represented to the commission in 1985 and what the commission did or did not understand at that time.”

Three days later, however, Quello said that all the problems had been fixed. lIe joined in a vote by all live commissioners to send Fox a letter rejecting its complaints of unfairness, and expressing confidence that the FCC staff’s “current” procedures were “fair, objective, and impartial.” In a separate press statement, Quello explained that his concerns had been mer by “the good faith efforts the staff has now taken to correct the unfortunate impression previously created”: relaxing the gag order and the claims of attorney-client privilege – both of which had been done well before Quello’s January 3 letter – and, “perhaps most importantly,” giving Quello the information he wanted.

While Quello pronounced himself satisfied, the FCC’s revised procedures still blocked Fox (and the NAACP lawyers) from questioning FCC staffers and former staffers who would not cooperate voluntarily – notably Roy Stewart and Stephen Scwell – about their recollections of what happened in 1985. At the same time, the FCC pressured Fox into a partial waiver of its own attorney-client privilege so that the FCC could take the depositions of seven lawyers who had represented Fox in 1985. In itself appropriate, this contributed to an unfairly lopsided overall fact-finding process: You show us yours, but we won’t show you ours.

If you were Rupert Murdoch, how would you like it if the decision whether the fault in all this mess lies with the FCC or with your company were to be made by … the FCC? And if the main witness against you (Roy Stewart) were a senior FCC career lawyer with his reputation on the line? And if this same lawyer had initially been in charge of the inquiry? And if, when he recused himself, he had handed the matter off to his subordinate and longtime trusted colleague Renee Licht? And if he had sworn out a cryptic declaration implicitly contradicting your own sworn testimony that you had personally told him in 1985 that Fox would be foreign-owned? And if the FCC had released his declaration without giving your lawyers a chance to question him about some highly relevant documents, which indicate that he was either asleep on the job in 1985 or lying in his sworn declaration?

Murdoch doesn’t like it, as evidenced by his January 27 deposition testimony that “I’m a donkey” if News Corp.’s planned ownership of the Metromedia stations wasn’t clear on the face of the 1985 application, and that the FCC investigation must be either an exercise in stupidity or “a witch-hunt.”

THE FCC’S BEST EXCUSE: FLAWED LAW

Giving the FCC the benefit of the doubt, the best excuse for its lame procedures in the Fox probe is that they were clumsily conceived but with an honorable intention: to explore the facts in some depth without premature resort to the FCC equivalent of a capital murder trial.

That would be sending the case to an FCC administrative law judge for a full-dress hearing into whether Fox had violated its duty of candor. The NAACP’s Honig and Blackburne have been clamoring for just such a hearing, while claiming that the evidence already establishes that Fox “has repeatedly and egregiously violated its duty of candor in this case.” They will no doubt make the same arguments on appeal to the D.C. Circuit if the FCC rules in Fox’s favor on the candor issue. The NAACP lawyers also complain that the FCC’s quasi-hearing procedures are inadequate to dig out the facts, in part because they provide no opportunity for the NAACP (or Fox) to cross-examine Murdoch and the 16 current and former Murdoch employees and lawyers whose depositions were taken by FCC staff lawyers in January and February.

The problem with a full hearing would be that, with three layers of administrative and judicial review, it could take years to play itself out, all the while casting a dark cloud over Fox’s future with the possibility of sanctions as severe as revocation of all its broadcast licenses. The mere pendency of such a proceeding could inflict severe and irreparable harm on Fox, by “putting a hold on all our acquisitions and severely hindering our ability to sign up new affiliates,” in the words of Fox executive Preston Padden.

The FCC’s dilemma in dealing with the lack-of-candor issue is this: Either it drops a bomb on Murdoch by ordering an administrative law judge hearing that would have a strong flavor of “sentence first, verdict afterward,” or it must find that Fox’ complied with its duty of candor (although hardly with flying colors).

The reason the FCC faces such an impoverished range of choices is that the antiquated Communications Act of 1934 gives the agency precious little flexibility in fitting the punishment to the crime. Based on the notion that broadcast licenses are trusteeships over public airwaves, to be operated in the public interest, the statute restricts ownership of licenses to persons and companies of good character.

That’s a formula for nightmarish tangles of litigation, especially when we’re talking about multi-billion dollar companies like Fox, CBS, Capital Cities-ABC, and GE’s NBC, with closets capacious enough to accommodate multitudes of skeletons: defense procurement frauds, staged pickup explosions, trashy programming, smarmily misleading legal briefs, and much more.

In particular, since an FCC or judicial finding that Fox has violated its duty of candor to the agency would tarnish Fox’s claim to good character, any such finding would hand loaded guns to everyone in the world who might be motivated to challenge any or all of Fox’s broadcast licenses. Even if the FCC itself considered the breach of candor relatively venial, and wanted to limit the sanction to a stiff fine, and even if Fox might in the abstract be amenable to ending the matter with some kind of SEC-like consent decree, of the “we’ll-pay-the-damned-fine-but-we-deny-wrongdoing” variety, the statute precludes any such action, which would pave the road to the courtroom for competitors and others to attack Fox’s licenses.

This helps explain why “the long institutional view at the FCC is, the big boys almost never lose,” says an anti-Fox lawyer. “You’ve essentially got to catch a licensee committing murder in the presence of an enforcement official. They [the FCC] don’t want an ad hoc restructuring of the industry.”

One result is decisions upholding the “candor” of big licensees that haven’t been very candid. Another is cynicism about the whole notion that broadcast companies (or at least big ones) have any duty to be candid with the FCC – a duty that (except in the notorious case of RKO General, Inc.) the agency seems to enforce only against small-fry.

The FCC can’t fix the statutory flaws that underlie this sorry state of affairs. Congress should.

WHY FOX’S FOREIGN OWNERSHIP IS LEGAL

Regardless of how the FCC disposes of the lack-of-candor investigation, the agency has better options in deciding whether Fox is in violation of the foreign ownership statute. It can, and should, find that Fox’s 99 percent foreign equity puts it above the stature’s 25 percent benchmark, but that Fox’s purchase of the Metromedia stations should nonetheless nave been presented and approved in 1985, and should be upheld now, on the ground that “the public interest will be served” (in the words of the statute) by approving Fox as a broadcast licensee [see sidebar].

Such a finding would be almost unprecedented, but only because the agency has bent the statute’s language and purpose over the years by treating it as a flat ban on foreign ownership (or, at least, control) of more than 25 percent of any broadcaster. It’s time for the FCC to change its interpretation. And this is a good case in which to start, because Fox’s 1985 purchase of the Metromedia stations and subsequent expansion have clearly served the public interest, in several ways:

First, Murdoch has smashed the ABC-CBS-NBC oligopoly with admirable entrepreneurial verve, bringing more competition to the network marketplace than almost anyone had dreamed possible a decade ago. He has also revived the health of dozens of weak UHF stations by signing them up as Fox affiliates, forced the other networks to compensate their own affiliates more generously to forestall defections, and created and stimulated the creation of new TV programming.

In addition, Murdoch’s almost uniquely unfettered control of News Corp., along with his 76-percent voting control of Fox, and his obvious independence of any foreign potentate, negate any danger of Fox being used as an instrument of foreign propaganda, which is the main concern underlying the foreign-ownership statute.

And that concern seems quaint and attenuated these days: Since Congress passed the Communications Act and its foreign ownership restrictions in 1934, Hitler and Stalin have passed from the scene; World War II and the Cold War have come and gone; and the unique sway of broadcasters over public opinion, has been diluted by competition from cable, satellite, and other means of transmitting news and entertainment. If Japan, Inc. can buy two big Hollywood film studios, it’s hard to see why Murdoch, Inc. (News Corp.) – an Australian company, controlled by a U.S. citizen, with over 60 percent of its assets in the U.S. – shouldn’t be able to buy a passive equity interest in a bunch of TV stations.

To update U.S. policy in this area, Republicans in Congress, including Pressler, are already pressing for legislation to repeal or relax foreign-ownership restrictions, and FCC Chairman Hundt testified on March 3 that he would welcome a move in that direction. As Hundt noted, the issues are complicated by trade reciprocity considerations, since most of the world’s other nations have foreign-ownership restrictions at least as stringent as the U.S.; in Australia, for example, News Corp. had to divest its own two TV stations when Murdoch became a U.S. citizen. But the FCC should be pushing for reciprocal (if not unilateral) liberalization of foreign ownership restrictions both because it makes policy sense and because it would level the playing field by giving other U.S. broadcasters the same access to foreign capital that Fox has enjoyed.

WHAT THE FCC WILL DO

So what will the FCC do?

The smart money in Washington is betting that – given the drastic consequences of finding that the evidence warrants a full hearing on whether Fox violated its duty of candor – chairman Hundt and his four colleagues will shrink from any such finding, and will hold their noses and find Fox candid.

It would only be natural for FCC commissioners to want to zap Fox for things like its distortions of the record, even in its briefs defending its own candor. But any who are so inclined will have to think long and hard about whether to set in motion a chain of events that could well hobble the competitive vigor of the fourth network that the FCC has taken such care to encourage. Not to mention bringing the FCC a sound thrashing at the hands of Murdoch’s friends in Congress, where Murdoch might well be able to prevent reconfirmation of any commissioner who votes against Fox.

On the foreign ownership issue, while in principle the FCC probably should find Fox in compliance with the statute, that’s not to say that it will. Indeed, the path of least resistance might be to require Fox to restructure its ownership to get News Corp.’s equity interest below 25 percent, while deferring the broader question of whether to relax the foreign ownership policy until Congress passes a new statute.

Murdoch has said he could do such a restructuring. One way would be for Murdoch personally to make a multimillion-dollar investment of equity capital in Fox, and to refinance most or all of News Corp.’s current 99 percent equity interest as debt. That might well be a taxable event, costing Murdoch, and/or News Corp., millions-perhaps even hundreds of millions-of dollars in capital gains taxes.

On the one hand, it would be kind of silly for the FCC to require such a restructuring, which would apparently have no effect on control of Fox (at least during Murdoch’s lifetime), would therefore have only an attenuated connection to any purpose served by the foreign ownership policy, and would look like a hardening of that policy at a time when it should be relaxed.

On the other hand, such a resolution might provide a serendipitous, legally plausible pretext for giving Fox a good spanking for its cavalier treatment of its duty of candor, without exposing Fox to the excessive punishment that a formal breach-of-candor hearing would inevitably entail. (This assumes that the tax liability would be big enough to sting Murdoch, Inc., but not so big as to hobble it.) It might thus approximate the effect of the kind of consent decree that the FCC might well be able to extract from Murdoch if the Communications Act weren’t such a mess.

And that might not be such a bad idea.

Stuart Taylor, Jr.

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by Stuart Taylor, Jr