Federal authorities yesterday arrested three former employees of Newsday on charges of fraud for inflating circulation figures at the paper and its sister publication, the Spanish-language daily Hoy.
Former circulation executives Edward Smith, 65, Robert Garcia, 42, and Richard Czark, 53, could face up to 20 years in prison if convicted of using fake customers, shell companies and other tactics to overstate the papers' circulation and thus boost the rates charged to advertisers.
The schemes uncovered at Newsday and Hoy "cheated advertisers out of millions of dollars paid for ads in papers that were dumped or never paid for," Roslynn R. Mauskopf, U.S. attorney for the Eastern District of New York, said in a press release.
The arrests are the first in a broader federal probe of newspaper circulation that comes after Long Island-based Newsday and two other major dailies admitted last year that they had given inflated figures to the Audit Bureau of Circulations. The ABC, a membership organization, is relied on by advertisers to monitor newspaper sales.
Authorities are expected to make several more arrests in the coming weeks, according to a source close to the investigation who spoke on the condition of anonymity because the probe is ongoing. Court documents associated with yesterday's arrests show authorities are expecting others involved in the fraud at Newsday and Hoy to plead guilty.
Garcia and Czark were fired last fall, according to Newsday spokesman Stuart Vincent. He said Smith's contract was not renewed.
Several calls made yesterday to the homes of Smith, Czark, and Garcia were not returned.
Vincent said the charges were consistent with the findings of an internal investigation conducted by Newsday and its parent, Chicago-based Tribune Co., in 2004. The results were shared with authorities last summer, Vincent said. The court documents filed after the arrests did not indicate what might have motivated the three men to commit the alleged fraud; Vincent said the newspapers set goals for the circulation department but added he was not sure whether they were linked to bonuses or other compensation.
"We will continue cooperating with the ongoing investigations and welcome the prosecution of any individual who has defrauded Newsday and injured our relationship with our readers, advertisers and employees," Vincent said in a statement.
Tribune Co. set aside $90 million for costs related to lawsuits filed by Newsday and Hoy advertisers. To date, Newsday has settled with more than 30,000 advertisers, Vincent said.
In 2004, the Chicago Sun-Times and the Dallas Morning News admitted to overstating the number of papers they sold the previous year.
Federal authorities from the U.S. Postal Inspection Service, the Internal Revenue Service and other agencies continue to investigate allegations of circulation fraud at other publications. In November, authorities subpoenaed the New York Daily News and the New York Post about how they account for the number of papers they sell. Several Daily News distributors are suing the paper for $12.5 million for allegedly forcing them to deliver papers to non-subscribers. The Securities and Exchange Commission requested circulation information from six other newspaper companies, including the New York Times Co. and The Washington Post Co. as part of a broad industry "sweep."
Newspapers, which have been losing readers for nearly two decades, are struggling to compete with cable television and the Internet. Many newspaper companies have diversified their businesses, but sales of the flagship ink-on-paper product are still critical to the bottom line.
Investigators so far have uncovered evidence of fraud at Newsday and Hoy dating back to 2000, court papers show. That year, Garcia allegedly directed about $50,000 in kickbacks to a distributor who helped inflate Hoy's circulation figures and instructed the distributor to hide the illegal payments by billing the newspaper for fake trucking expenses.
In 2002, Newsday managers allegedly launched a separate scheme in which they persuaded a home delivery distributor to begin dumping thousands of newspapers while reporting them as sold.
When the Tribune Co. began looking into allegations of circulation fraud two years later, Smith allegedly tried to cover up by proposing that Newsday trick ABC auditors into thinking the paper was being distributed legitimately. Newsday managers then allegedly posted about 100 hawkers across Long Island and recruited bogus customers, including Newsday employees, to buy papers while ABC auditors looked on.
Staff writer Sari Horwitz contributed to this report.