3 Third Consolidated Amended Class Action Complaint 09/13/2006

IN III) UNITED STATES DISTRICT COUR T

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In Re HOLLINGER INTERNATIONAL, INC, )SECURITIES LITIGATION, )

This Document Relates To : )

)ALL ACTIONS, )

Cons, Civil Action No . 04-C-083 4

JUDGE DAVID H . COAR

CLASS ACTION

THIRD CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Carol V, GildenKatrina BlumenkrantsMUCH SHELIST FREED DENENBERGAMENT & RUBENSTEIN, P .C .191 North Wacker Drive - Suite 1800Chicago, Illinois 60606-1615Telephone : (312) 521-2000Facsimile : (312) 521-2100

Jay W. EisenhoferJohn C. KairlsGRANT & EISENHOPER P .A .Chase Manhattan Centr e1201 North Market StreetWilmington, Delaware 19801Telephone: (302) 622-7000Facsimile: (302) 622-7100

Liaison Counsel for the Plaintiff Clas s

Darren J. RobbinsTravis E. Downs, IIIScott PI . SaharaLERACH COUGHLIN STOIA & ROBBINS LLP401 B . Street, Suite 1700San Diego, CA 92101Telephone : (619) 231-1058Facsimile : (619) 231-7423

Attorneys for Lead PlaintiffTeachers' Retirement System of Louisiana,Class Representative Cardinal Mid-Cap ValueEquity Partners, L,P . andCo-Lead Counsel for the Plaintiff Clas s

Attorneys for Plaintiff Washington Area CarpentersPension and Retirement Fund, .Clas sRepresentative Cardinal Mid-Cap Value Equity Partners, L,P .and Co-Lead Counsel for the Plaintiff Class

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TABLE OF CONTENTS

SUMMARY OF THE ACTION................................................................................................................... 3

THE PARTIES.............................................................................................................................................. 8

NATURE OF ACTION AND JURISDICTION ........................................................................................ 18

FACTUAL BACKGROUND..................................................................................................................... 19

A. LORD BLACK THE KING ............................................................................................. 19

B. PAYMENTS RECEIVED FROM NON-COMPETITION AGREEMENTS .................. 23

1. Sales of U.S. Community Newspapers ................................................................ 24

2. Sales to CanWest Global Communications Corp. ............................................... 38

3. Sales to Osprey Media Group Inc........................................................................ 47

C. RAVELSTON MANAGEMENT SERVICES AGREEMENTS ..................................... 50

D. ASSET SALES TO AFFILIATED ENTITIES ................................................................ 62

1. Horizon Publications Inc. .................................................................................... 62

a. Horizon’s Acquisition of Hollinger’s Community Newspapers............. 64

b. Horizon’s Asset Exchange With Hollinger............................................. 68

c. Hollinger Pays Horizon To Take Newspaper Assets From Hollinger.... 70

d. Hollinger’s Sale of Additional Community Newspapers toHorizon ................................................................................................... 73

e. Horizon’s $1 Acquisition of Hollinger’s Mammouth Times Newspaper................................................................................................................ 75

2. Bradford Publishing Company ............................................................................ 79

E. CANWEST’S MANAGEMENT SERVICES AGREEMENT WITH RAVELSTON .... 84

F. UNDISCLOSED COMPENSATION .............................................................................. 88

G. UNDISCLOSED PERQUISITES AND OTHER COMPENSATION............................. 90

1. The Improper Swap Of Company And Lord Black Apartments ......................... 90

2. Staff, Housing And Other Personal Expenses Paid By The Company................ 91

Case 1:04-cv-00834 Document 346 Filed 09/13/2006 Page 2 of 195

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3. Black’s And Radler’s Personal Use Of Corporate Jets........................................ 93

4. The Company Pays For Lord Black’s Purchases Of FDR Memorabilia ............. 94

5. Charitable Gifts By Hollinger On Behalf of Black And Radler .......................... 95

6. SEC Disclosures Relating To Perquisites And Compensation ............................ 96

H. THE TELEGRAPH GROUP AND OTHER SELF-DEALING TRANSACTIONS ............................................................................................................ 99

I. HOLLINGER’S INFLATION OF CIRCULATION FIGURES .................................... 100

J. THE TRUTH BEGINS TO EMERGE AND THE SPECIAL COMMITTEE AND THE SEC COMMENCE THEIR INVESTIGATIONS........................................ 108

K. THE SEC AND SPECIAL COMMITTEE FILE COMPLAINTS AGAINST THE COMPANY AND LORD BLACK........................................................................ 110

L. LORD BLACK ATTEMPTS TO SELL THE COMPANY IN AN ATTEMPT TO CONCEAL HIS FRAUD...................................................................... 112

M. HOLLINGER BRINGS SUIT IN DELAWARE TO ENJOIN BLACK’S PROPOSED SALE OF THE COMPANY........................................................................................... 113

N. PLAINTIFFS OBTAIN COPIES OF THE TRIAL EXHIBITS AND OTHER DOCUMENTS PREVIOUSLY UNDER SEAL IN THE DELAWARE ACTION.................................................................................................. 114

O. HOLLINGER DISCLOSES THAT ITS CIRCULATION FIGURES WERE OVERSTATED.................................................................................................. 114

P. HOLLINGER PLANS TO RESTATE AND BLACK LEAVES HOLLINGER INC.......................................................................................................... 115

Q. THE FALL IN THE COMPANY’S STOCK PRICE FOLLOWING DISCLOSURE OF THE FRAUD .................................................................................................................. 115

HOLLINGER’S FRAUDULENT ACCOUNTING PRACTICES........................................................... 117

KPMG’S PARTICIPATION IN THE FRAUD........................................................................................ 132

INDIVIDUAL DEFENDANTS’ SCIENTER .......................................................................................... 151

INAPPLICABILITY OF STATUTORY SAFE HARBOR ..................................................................... 158

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE ................................................................................. 160

CLASS ACTION ALLEGATIONS ......................................................................................................... 160


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COUNT I VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER ............................................................ 163

COUNT II VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED THEREUNDER ............................................................ 167

COUNT III VIOLATION OF SECTION 18 OF THE EXCHANGE ACT.................................................... 171

COUNT IV VIOLATION OF SECTION 18 OF THE EXCHANGE ACT.................................................... 172

COUNT V VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT ............................................... 173

COUNT VI BREACH OF FIDUCIARY DUTY FOR INDUCING RETENTION OF HOLLINGER STOCK .............................................................. 175

COUNT VII ASSERTED UNDER § 12(F), (G) & (I) OF THE ILLINOIS SECURITIES LAW OF 1953, 815 ILCS § 5/12 ......................................................................... 177

COUNT VIII AIDING AND ABETTING BREACH OF FIDUCIARY DUTY WHICH INDUCED RETENTION OF HOLLINGER STOCK...................................... 178

PRAYER FOR RELIEF ........................................................................................................................... 180


Lead Plaintiff, Teachers’ Retirement System of Louisiana (“Teachers”), and plaintiffs

Washington Area Carpenters Pension and Retirement Fund (“Washington Carpenters”), Cardinal Mid-

Cap Value Equity Partners, L.P. (“Cardinal”) and E. Dean Carlson (“Carlson”) on behalf of themselves

and all other purchasers of Hollinger International, Inc. (“Hollinger” or the “Company”) securities

(hereinafter collectively the “Plaintiffs”) between and including August 13, 1999 and December 11, 2002

(the “Class Period”), allege in this Consolidated Amended Class Action Complaint (“Complaint”) the

following upon information and belief, except as to those allegations concerning Plaintiffs, which are

based upon personal knowledge. Plaintiffs’ information and belief are based upon, among other things:

(a) an investigation conducted by and through their attorneys; (b) review and analysis of filings made by

Hollinger with the Securities and Exchange Commission (“SEC”); (c) review and analysis of filings made

by companies affiliated with Hollinger such as Hollinger Inc., among others; (d) the complaint filed by

the SEC against Hollinger in the United States District Court for the Northern District of Illinois,

docketed as No. 04C 0336 (the “SEC Complaint”); (e) the subsequent SEC complaint and enforcement

action filed on November 15, 2004 by the SEC against Lord Conrad M. Black (“Lord Black” or “Black”),

F. David Radler (“Radler”) and Hollinger, Inc., in the United States District Court for the Northern

District of Illinois, docketed as 1:04-CV-7377 (the “SEC Enforcement Action”); (f) the complaint filed in

the United States District Court for the Southern District of New York by the Special Committee of the

board of directors of Hollinger (“Board”), on Hollinger’s behalf, against Lord Conrad M. Black (“Lord

Black” or “Black”) and others, docketed as No. 04 Civ 00408 (the “New York Special Committee

Complaint”); (h) the First Amended Complaint filed in the United States District Court for the Northern

District of Illinois by Hollinger International Inc. against Hollinger Inc. and others, docketed as Case No.

04C-0698 (the “Illinois Special Committee Complaint”); (g) the complaint filed by Cardinal Value Equity

Partners, L.P. against Lord Black, Hollinger and others, in the Delaware Chancery Court, docketed as

C.A. No. 20406 (the “Cardinal Complaint”); (i) the report filed on or about August 31, 2004 by the

Special Committee of Hollinger’s Board with the SEC and the court in the SEC’s Illinois action against


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Hollinger (the “Special Committee Report”); (j) press releases, public statements, news articles, securities

analysts’ reports and other publications disseminated by or concerning Hollinger; and (k) other publicly

available information about Hollinger.

In particular, the Special Committee Report contains (in 511 pages) the results of the Special

Committee’s investigation of misconduct at Hollinger by Lord Black and others. That Report chronicles

“how Hollinger was systematically manipulated and used by its controlling shareholders for their sole

benefit” as “on dozens of occasions ... they transferred to themselves and their affiliates more than $400

million in the last seven years.” The Report “includes a detailed review of dozens of individual payments

and transactions during the period 1997-2003.” The Special Committee explained that it had

“interviewed more than 60 witnesses in depth, and reviewed nearly 750,000 pages of documents as

background for [its] analysis.” Based upon this analysis, the Special Committee concluded that “[t]he

record of Hollinger’s disclosures under Black and Radler’s leadership shows repeated instances of

incomplete, inaccurate or nonexistent disclosures . . . .”

Additionally, the SEC in its Enforcement Action alleged that from 1999 to at least 2003, Black

and Radler “engaged in a fraudulent and deceptive scheme to direct cash and assets from Hollinger

International...and to conceal their self-dealing from Hollinger International’s public shareholders.” As

quoted in the SEC Release No. 2004-155 announcing the filing of the Enforcement Action, Steven M.

Cutler, Director of the SEC’s Division of Enforcement, said:

Black and Radler abused their control of a public company and treated it as their personal piggy bank. Instead of carrying out their responsibilities to protect the interest of public shareholders, the defendants cheated and defrauded these shareholders through a series of deceptive schemes and misstatements.

Plaintiffs have also obtained copies of approximately 1,000 separate documents, including

minutes and resolutions of Hollinger’s Board of Directors (“Board”), copies of internal emails sent to and

from Lord Black and other individual defendants, copies of asset sale agreements and other documents

relating to Hollinger’s sales of its newspapers and other assets to entities owned and controlled by Lord


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Black and other individual defendants, copies of non-compete agreements and draft non-compete

agreements purportedly entered by Hollinger and/or certain of the individual defendants, and other

documents that were submitted as trial exhibits or were otherwise part of the judicial record in an action

filed by Hollinger against Lord Black and others in the Delaware Chancery Court, docketed as C.A. No.

183-N. These trial exhibits and other documents were filed by Hollinger, Lord Black and others in the

Delaware Chancery Court action under seal. Hollinger, Lord Black and other parties to that action

refused to provide Plaintiffs with copies of or access to such documents, forcing Plaintiffs to file a motion

to lift the protective seal on those documents, which the Delaware Chancery Court granted on June 29,

2004. Plaintiffs obtained copies of the documents in that action on July 12, 2440. Plaintiffs’ claims in

this action are based in part on those documents, the transcript of the trial in the Delaware Chancery Court

action, and on the pleadings and the court’s decision, following trial, issued on February 26, 2004 and

reported at 844 A.2d 1022. In that decision, the Delaware Chancery Court made numerous factual

findings regarding certain of the Defendants’ wrongdoing which support Plaintiffs’ claims in this action.

Plaintiffs believe that further substantial evidentiary support will exist for the allegations in this

Complaint after a reasonable opportunity for discovery. Additional facts supporting the allegations

contained herein are known only to Defendants or are within their control.

SUMMARY OF THE ACTION

1. Throughout the Class Period, Defendants failed to disclose the transfer of millions of

dollars of Hollinger funds into their own pockets, falsified the Company’s financial results, and materially

misrepresented Hollinger’s sales of Company assets and its dealings with related parties. Defendants

compounded their fraud by falsely claiming that the Company’s related-party transactions were approved

by the Board and the Audit Committee of the Board, when they were not. Defendants also artificially

inflated the Company’s circulation figures in a pervasive scheme to generate advertising dollars, and

thereby portray the Company as reaching growing numbers of consumers, when it was not.


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2. The chief architect of this fraud is Lord Conrad N. Black (“Lord Black” or “Black”),

Hollinger’s controlling shareholder and former Chief Executive, who raided the Company’s coffers to

finance his extravagant lifestyle but failed to disclose this piracy to shareholders. Lord Black and his

acolytes surreptitiously pocketed millions of dollars generated from sales of Hollinger assets – money that

belonged to Hollinger – without disclosure to the shareholders and without being challenged by

Hollinger’s Board or the Board’s Audit Committee which knew or were reckless in not knowing that such

theft was taking place. When some of these self-dealing transactions were called to the Board’s attention,

the directors simply rubber-stamped the transactions and failed to correct prior misrepresentations about

the transactions which the Board and Audit Committee knew were false.

3. The amount of money improperly diverted to Lord Black, Lady Black, Radler, Colson,

Boultbee and Atkinson is astounding. The Special Committee in its Report stated that from 1997-2003,

“[p]ayments to Black and his crew ... represented approximately 95% of Hollinger’s pre-Black Group net

income.”1

4. Defendants accomplished their fraud by misrepresenting to the shareholders the terms of

Hollinger’s asset sales to third party publishers. During the Class Period, Hollinger reported proceeds

from the sales of its newspaper assets, and a reduction of its debt and strengthening of its balance sheet

through the use of proceeds from such sales. However, unbeknownst to investors, significant portions of

those proceeds were diverted to Lord Black and his lieutenants under the guise of “non-compete

payments.” The payments to Lord Black and his lieutenants were concealed from investors, and the

Company’s independent directors failed to review or negotiate the asset sale transactions or the non-

compete payments or assess their fairness to the Company and its shareholders.

1 The Report states that the “pre-Black Group net income equals an estimate of what net income would have been had the Company not paid the total compensation to the Black Group.”


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5. Hollinger’s shareholders were deceived in several ways. First, they were told that only

Hollinger was profiting from the sales of its assets and that the independent directors had approved the

Company’s asset sales, when that was untrue. Investors who purchased Hollinger stock based upon the

Company’s ability to raise funds through divestitures and other transactions were misled into believing

that all the money obtained through the Company’s sales of its own assets went into the Company’s

coffers, when in fact millions of dollars were transferred to Lord Black and his associates. Investors who

purchased Hollinger stock based upon the Company’s representations that its independent directors had

approved the Company’s asset sales and related party transactions were also deceived.

6. The shareholders were also deceived by the Company’s misrepresentations that it was

receiving services pursuant to management services agreements with The Ravelston Corporation Limited

(“Ravelston”), a Lord Black controlled company, and Ravelston’s subsidiaries, Ravelston Management

Inc. (“RMI”), Argus Corporation Ltd. (“Argus”), Moffat Management (“Moffat”) and Black-Amiel

Management (“Black-Amiel”) (owned, controlled and managed by Lord Black’s wife, Barbara Amiel

Black). Through Ravelston and its subsidiaries, and through a complex system of intertwining

ownerships and payments between various companies controlled by Lord Black, Lord Black

surreptitiously funneled additional Hollinger funds to himself and his associates but concealed this from

the shareholders.

7. As Lord Black admitted in his answer filed in the Delaware Chancery Court action,

Toronto-based Hollinger Inc. owns 30% of Hollinger’s shares but controls 72.8% of its voting shares.

Lord Black controls the Toronto parent through Ravelston and other holding companies owned by Black

which are paid to manage Hollinger. From 1995 to 2003, Lord Black and his cronies have used this

byzantine corporate network to divert additional hundreds of millions of dollars from Hollinger to

themselves, this time under the guise of purported “advisory and consulting fees” provided by Ravelston

pursuant to management services agreements. However, unbeknownst to the shareholders, no such

management, advisory or consulting services were provided by Ravelston to Hollinger – the management


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services agreements were simply a ruse to funnel monies to Lord Black. These facts were concealed from

the shareholders. Additionally, defendants falsely represented that the service agreements were

negotiated at arms’ length and approved by the Board and Audit Committee, when they were not.

8. Lord Black also misrepresented the Company’s dealings with related parties. Hollinger

sold numerous newspaper assets to third parties that were secretly controlled by Lord Black in deals

structured to prevent competing bids from emerging. While this prevented Hollinger from receiving

higher values for its assets, it enabled the Black-owned and controlled parties to purchase Hollinger assets

at fire-sale prices. Hollinger did not disclose that the deals precluded competitive bids and that the

purchasers of Hollinger’s assets were companies owned and controlled by Lord Black and Radler, his first

lieutenant at Hollinger. Hollinger also failed to disclose that these deals were consummated only because

Hollinger provided the financing needed by the Black-owned companies to close the deals with Hollinger.

9. Lord Black never disclosed the diversion of Company funds to himself, his acolytes and

the companies he controlled. The reason is that he had utter disdain for shareholders who he considered

lacking any right to basic information about how he “compensated” himself and paid for his personal

expenses out of Company funds. Lord Black considered himself the “proprietor” of Hollinger who could

take Company funds without the disclosure which would arouse what he characterized as the “agitations

of shareholders.” Although Lord Black was previously found by the SEC to have violated federal

securities laws through misrepresentations to shareholders, Lord Black continued to treat outsiders with

contempt, referring to activist investors as “corporate governance zealots” and “terrorists.”

10. When Hollinger finally dribbled out to the shareholders some information about the self-

dealing transactions and non-compete payments, it misrepresented the amount of the non-compete

payments; it falsely stated that those payments were “required” to close the Company’s asset sales, and it

falsely claimed that the Company’s independent directors had approved the payments. The first

disclosures about any aspects of the fraud were made on May 15, 2001 in the Company’s Form 10-Q and

continued in subsequent filings during, and beyond, the Class Period.


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11. Investors were also deceived regarding the amount of subscribers to Hollinger’s various

newspapers. Throughout the Class Period, the Company reported increasing numbers of subscribers to its

flagship United States newspaper, the Chicago Sun Times, as well as other newspapers, trumpeting to

advertisers the ability of Hollinger to reach more and more consumers. Advertisers paid handsome sums

to place their ads in Hollinger’s newspapers, and investors purchased Hollinger’s stock based upon their

belief that the Company was more valuable due in part to its success in growing its subscriber base. As

the Company reported ever larger numbers of subscribers, its stock price rose in tandem.

12. However, unbeknownst to investors (and the Company’s advertisers), Lord Black, Radler

and other defendants had engaged in a scheme to artificially inflate the Company’s reported number of

subscribers, in order to generate additional advertising revenue and give a false appearance of value. As

later disclosed by a rival newspaper, Hollinger had inflated its number of subscribers by at least 25%

through a pervasive fraudulent scheme implemented throughout the Company.

13. Hollinger and the Individual Defendants could not have implemented and concealed their

fraudulent scheme without the substantial assistance, or extreme recklessness, of Hollinger’s purportedly

independent auditors, KPMG LLP (“KPMG”). KPMG was aware of facts and/or deliberately ignored or

recklessly disregarded facts that showed that Hollinger’s financial statements filed with the SEC and

publicly available to (and read by) investors were materially false and misleading. Nevertheless, KPMG

certified the Company’s financial statements as comporting with applicable accounting rules and SEC

regulations and as accurately presenting the financial condition of the Company when they did not.

KPMG’s reason for participating in and/or aiding and abetting defendants’ fraud was simple – money.

During the Class Period, KPMG billed Hollinger approximately $20 million in audit, tax and other fees

for services rendered to Hollinger. KPMG billed additional sums to Hollinger, Inc., which was controlled

by Black, who also ran and controlled Hollinger. KPMG did not want to jeopardize its long-standing and

lucrative relationship with Hollinger and Hollinger Inc. by questioning or challenging Hollinger’s

improper accounting practices or refusing to certify the Company’s financial statements as “clean.”


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14. Hollinger’s misrepresentations and fraud began at least as early as its 10-Q filed on

August 13, 1999. On August 13, 1999, at the beginning of the Class Period, Hollinger’s stock traded at

$10.08 per share. By March 28, 2002 it traded at $13.11 per share, as a result of the artificial inflation of

Hollinger stock resulting from the fraud of Lord Black and the other Defendants. Beginning in April

2002, isolated information about Lord Blacks’ improper dealings began to dribble into the marketplace.

It was not until December 11, 2002, when Dominion Bond Rating Service Ltd. (“DBRS”) downgraded

Hollinger’s Senior Notes, and the Company’s stock price dropped, that the market assimilated the news of

the fraud that had been slowly disclosed in bits and pieces at the end of the Class Period. This action

therefore is brought on behalf of a class of individuals who purchased Hollinger securities from August

13, 1999 through December 11, 2002 (the “Class Period”). Investors lost millions as a result of

Defendants’ fraud, and seek compensation in this action.

THE PARTIES

15. Lead Plaintiff Teachers, a Louisiana public trust fund, is a public employee pension plan.

Teachers is charged with the investment and reinvestment of the trust fund of the Teachers’ Retirement

System of Louisiana, a public employee welfare and pension benefit plan, and certain other funds.

Teachers maintains its office and principal place of business at 8401 United Plaza Boulevard, Baton

Rouge, Louisiana. During the Class Period, Teachers purchased and held common stock of Hollinger.

16. Plaintiff Washington Carpenters is a Taft Hartley trust fund with over $315 million in

assets and approximately 5,300 participants and retirees. During the Class Period, Washington

Carpenters purchased and held common stock of Hollinger.

17. Plaintiff Cardinal is a Delaware limited partnership with a principal place of business in

Greenwich, Connecticut. Cardinal Capital Management, L.L.C. (“Cardinal Capital”) is a registered

investment advisor and the general partner of Cardinal that invests on behalf of Cardinal funds for

qualified individuals and institutional investors in equity securities of domestic corporations. As set forth


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in the attached Certification of Eugene Fox, Managing Director of Cardinal, during the Class Period

Cardinal purchased and held common stock of Hollinger.

18. Plaintiff Carlson is a citizen of the United States and resident of Topeka, Kansas. During

the Class Period, Carlson purchased and held common stock of Hollinger. Carlson regularly attended

Hollinger’s shareholders meetings during the Class Period.

19. Hollinger is a global newspaper publisher with English-language newspapers in the

United States, Great Britain, and Israel. From approximately 1998 through June 2004, the Company

owned, directly or through its wholly-owned subsidiaries, The Daily Telegraph, the Sunday Telegraph

and The Spectator magazine in Great Britain, the Chicago Sun Times and a large number of community

newspapers in the Chicago area, the Jerusalem Post and the International Jerusalem Post in Israel, a

portfolio of “new media investments,” and a variety of other assets. The Company’s daily newspapers

have a worldwide combined circulation of approximately 2 million readers per day. On July 30, 2004,

Hollinger sold The Daily Telegraph for approximately $1.3 billion to Press Acquisitions Limited, a

company owned by David Barclay and Frederick Barclay, two brothers who own several media and retail

assets in England and Europe. Hollinger is a Delaware Corporation with its primary place of business at

401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611. The Company’s shares are registered

with the SEC and its Class A Common Stock is traded on the New York Stock Exchange (“NYSE”)

under the symbol HLR. As of May 5, 2004, the Company had 90.13 million outstanding shares,

comprised of 75.14 million shares of Class A Common Stock and 14.99 million shares of Class B

Common Stock with an aggregate market capitalization of approximately $1.8 billion (assuming

conversion of the Class B Common Stock). The Class B common shares are owned in their entirety

directly or indirectly by Hollinger Inc.

20. Hollinger is controlled by its parent company, Hollinger Inc., a Canadian corporation

which owns 30.3% of Hollinger’s shares. Because a majority of the Hollinger shares owned by Hollinger

Inc. are Class B common shares that have a 10-to-1 voting preference over the Class A shares held by


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Hollinger’s public shareholders, Hollinger Inc. controls 73% of Hollinger’s overall voting power despite

owning only a minority interest in Hollinger’s equity. Lord Black and Radler created this structure at the

time of Hollinger’s initial public offering to enable them to control Hollinger separate from their

ownership position. As Lord Black admitted in his answer filed in the Delaware Chancery Court action,

he controls Hollinger Inc. through Ravelston, Lord Black’s private holding company, which directly and

indirectly through its subsidiaries and affiliates (RMI, Argus, Moffat and Black-Amiel), controls

approximately 78% of the shares of Hollinger Inc. As explained in the Special Committee Report, “[t]he

multivoting shares gave Black the power to control Hollinger absolutely, even though he owned only a

relatively small and shrinking percentage of its equity, and hence less and less interest in its profitability.

. . . Black had hammerlock control over Hollinger irrespective of a relatively small layer of real equity

interest.”

21. Defendant Hollinger Inc. is an Ontario, Canada corporation with its principal office

located in Toronto, Canada. It is a holding and mutual fund company that trades on the Toronto Stock

Exchange under the symbol HLG. During the Class Period, Hollinger Inc. served as an investment

vehicle enabling Lord Black and Radler to control Hollinger. Hollinger Inc. has since the mid-1990s

solely been a holding company, devoid of any operating activities, having as its principal asset its 30.3%

equity stake in Hollinger. The Special Committee in its Report describes Hollinger Inc. as “a financial

and accounting vehicle without any operating capability.”

22. Defendant Ravelston is an Ontario, Canada corporation with its principal office located in

Toronto, Canada. According to the Illinois and New York actions commenced by the Hollinger Special

Committee, Ravelston and its subsidiaries collectively beneficially own 78% of Hollinger Inc.’s stock,

and therefore, during the Class Period, Ravelston in effect owned 23.6% of Hollinger. As Black admitted

in his answer in the Delaware Chancery Court action, Ravelston controlled Hollinger Inc., and Black

controlled Ravelston. Thus, Black and Ravelston had total control of Hollinger through Hollinger Inc.

Ravelston is a privately-held entity, with 98.5% of its equity owned by officers and directors of Hollinger


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and Hollinger, Inc. and 1.5% of its equity owned by the estate of a former Hollinger, Inc. director. Lord

Black owns 65.19% (through Conrad Black Capital Corporation) and Radler owns 14.29% (through F.D.

Radler, Limited) of Ravelston, providing them with indirect equity stakes of 0.94% and 1.95%

individually and 10.89% collectively. Lord Black controls most of the decisions and actions of

Ravelston, with input from Radler. As stated in the Special Committee Report, “Black and Radler

exercised ultimate control over Hollinger...through their collective 80% control of Ravelston.”

23. Defendant RMI is a Canadian corporation with its principal office located in Toronto,

Canada. According to the actions commenced by the Hollinger Special Committee, RMI is a wholly

owned subsidiary of Ravelston.

24. Defendant Argus is a public Canadian corporation traded on the Toronto Stock Exchange

under the symbol “AR” whose major investment is a 62% interest in the retractable shares of Hollinger

Inc. and whose parent is Ravelston.

25. Defendant Lord Conrad N. Black of Crossharbour (“Lord Black”), was throughout the

Class Period Chairman of the Company’s Board until he was discharged by the Board on

January 17, 2004. Lord Black was the Chief Executive Officer of Hollinger and a member of the Board’s

Executive Committee until November 19, 2003. Black is also a member of the Strategy Advisory Board

of Trireme Partners LP, a venture capital fund. In 2003, Hollinger made a $2.5 million investment in

Trireme Associates LLC, the general partner of Trireme Partners LP. Lord Black remains CEO of

Hollinger Inc. and of Argus. Lord Black has held these positions since 1978. Lord Black owns (through

Conrad Black Capital Corporation) 65.1% of Ravelston and therefore controls Ravelston and Hollinger

Inc. During the Class Period, Lord Black signed many of the Company’s false and misleading SEC

filings. Lord Black owns, directly or indirectly, equity securities of Hollinger Inc. or has the right to

acquire equity securities of Hollinger Inc. through Hollinger Inc.’s Executive Share Option Plan. As

found by the Delaware Chancery Court, Lord Black “was the creator of this group of companies

[Hollinger, Hollinger, Inc., Ravelston and Ravelston’s various subsidiaries and affiliates], has personally


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dominated their affairs, and put in place boards to his liking.” Hollinger International Inc. v. Black, 844

A.2d 1022, 1030 (Del. Ch. 2004). As a result, throughout the Class Period, the boards of these companies

“have comported themselves in a supine manner that confirmed Black’s confidence in his power.” Id.

Black’s control extended even to the Company’s outside directors – as the Delaware Chancery Court

found, Hollinger’s “board was largely filled with outside directors Black had hand-selected and with

whom he had a personal relationship.” Id. at 1029. As stated in the Special Committee Report:

Black had the votes to replace any member of the Board, and they all knew it. Black called the shots, and he wanted a Board filled with prominent people who wouldn’t make waves. Black got what he wanted....

26. The Special Committee further stated that:

Black named every member of the Board, and the Board’s membership was largely composed of individuals with whom Black had longstanding social, business or political ties. The Board Black selected functioned more like a social club or public policy association than as the board of a major corporation, enjoying extremely short meetings followed by a good lunch and discussion of world affairs . ...Actual operating results or corporate performance were rarely discussed.

* * *

Black unquestionably saw Hollinger as “his” company.

* * *

[E]very Board member at least implicitly understood that Black would remove anyone who offered serious resistance to his dictates.

* * *

Unfortunately, most members of the Board also saw Hollinger as Black’s Company. They weren’t selected by institutional shareholders for board seats, they were selected by Black.

* * *

Board members knew that the dual voting system meant in practice that Black named every board member, and was free to replace anyone who disagreed with him.

The Company’s “supine” officers and directors named as defendants herein are identified below.


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27. Defendant Dwayne O. Andreas (“Andreas”) was a member of the Board from February

1996 until his resignation in May 2002. During the Class Period, Andreas signed many of the Company’s

false and misleading SEC filings. Andreas owns, directly or indirectly, equity securities of Hollinger Inc.

or has the right to acquire equity securities of Hollinger Inc. through Hollinger Inc.’s Executive Share

Option Plan.

28. Defendant Peter Y. Atkinson (“Atkinson”) was Executive Vice President of the Company

from 1996 until April 27, 2004 and a member of the Board from early 2002 until his resignation in

November 2003. He served as Vice President of the Company from 1997 to 2002. Atkinson also holds

or has held various positions in entities affiliated with Hollinger or Lord Black. He is an owner of

Ravelston and an officer and director of Argus, Hollinger Inc., and Hollinger Canadian Newspapers G.P.

Inc. and also served as Vice President and General Counsel of Hollinger Inc. During the Class Period,

Atkinson signed many of the Company’s false and misleading SEC filings. Atkinson owns, directly or

indirectly, equity securities of Hollinger Inc. or has the right to acquire equity securities of Hollinger Inc.

through Hollinger Inc.’s Executive Share Option Plan.

29. Defendant Barbara Amiel Black (“Lady Black”) is a citizen of Canada and the United

Kingdom living in London, England, New York, New York, Palm Beach, Florida and Toronto, Canada.

She is the Vice President, Editorial (since September 1995) of Hollinger and a member of the Board

(since February 1996). Lady Black is the wife of Defendant Lord Black. Lady Black is also a director of

Hollinger Inc. and the Jerusalem Post. Lady Black is the direct owner of 391,000 shares and indirect

owner, through her spouse, Lord Black, of an additional 2,105,000 shares of Class A common stock.

During the Class Period, Lady Black signed many of the Company’s false and misleading SEC filings.

Lady Black owns, directly or indirectly, equity securities of Hollinger Inc. or has the right to acquire

equity securities of Hollinger Inc. through Hollinger Inc.’s Executive Share Option Plan, and she is (and

was during the Class Period) a shareholder of Ravelston.


14

30. Defendant Jack A. Boultbee (“Boultbee”) is a Canadian citizen living in Canada. He was

an Executive Vice President of the Company from 1996 until his termination in November 2003. He was

a member of the Board from 1990 to 2001. In addition, he served as Chief Financial Officer from 1995 to

2002. Boultbee is (and was during the Class Period) an owner and director of Ravelston. Boultbee has

also held positions at the following entities affiliated with Lord Black and Hollinger: Hollinger Inc.

(Director, Vice President of Finance and Treasury, Executive Vice President and CFO), Hollinger

Canadian Publishing Holdings Inc. (Executive Vice President, Chief Financial Officer and Director) and

Argus (Director). Boultbee owns at least 603,000 shares of the Company’s Class A common stock.

During the Class Period, Boultbee signed many of the Company’s false and misleading SEC filings.

Boultbee owns, directly or indirectly, equity securities of Hollinger Inc. or has the right to acquire equity

securities of Hollinger Inc. through Hollinger Inc.’s Executive Share Option Plan, and he is (and was

during the Class Period) a shareholder of Ravelston.

31. Defendant Richard R. Burt (“Burt”) has been a member of the Board since September

1994 and was on the Board’s Audit and Compensation Committees during the Class Period. Burt is also

Chairman of IEP Advisors L.L.P., an emerging markets investment banking and advisory services firm.

During the Class Period, Burt signed many of the Company’s false and misleading SEC filings.

32. Defendant Raymond G. Chambers (“Chambers”) was a member of the Board from

February 1996 until his resignation in May 2002. During the Class Period, Chambers signed many of the

Company’s false and misleading SEC filings.

33. Defendant Daniel W. Colson (“Colson”) is a Canadian citizen currently living in London,

England. He was a Vice Chairman and a Director of the Company and a Vice Chairman and Director of

Hollinger Inc. until December 2003. He also served from 1995 and during the Class Period as Deputy

Chairman, Chief Executive Officer and Director of The Telegraph, an affiliated company of which Lord

Black is the Chairman, until Colson resigned in March 2004. Colson also served as Chairman and a

Director of Hollinger Telegraph New Media Ltd., Vice Chairman and a Director of Hollinger Digital Inc.,


15

and a Director of Argus, until he resigned from those positions in March 2004. During the Class Period,

Colson signed many of the Company’s false and misleading SEC filings. Colson owns, directly or

indirectly, equity securities of Hollinger Inc. or has the right to acquire equity securities of Hollinger Inc.

through Hollinger Inc.’s Executive Share Option Plan, and he is (and was during the Class Period) a

shareholder of Ravelston.

34. Defendant Mark S. Kipnis (“Kipnis”) is an attorney who from January 1998 to November

2003 served as Vice President, General Counsel and Secretary of Hollinger. Kipnis also served as

General Counsel for Hollinger’s Chicago owned and operated newspapers. During the Class Period,

Kipnis signed certain of the Company’s false and misleading SEC filings.

35. Defendant Dr. Henry A. Kissinger (“Kissinger”), has been a member of the Board since

February 1996. The Wall Street Journal recently reported that Hollinger has given $200,000 a year to the

National Interest, a conservative publication that includes Kissinger and Lord Black as advisers.

Kissinger, until earlier this year, sat with Lord Black on the strategic advisory board of Trireme Partners

LP (a company in which Hollinger made a $2.5 million investment). During the Class Period, Kissinger

signed many of the Company’s false and misleading SEC filings.

36. Defendant Marie-Josee Kravis, O.C. (“Kravis”) was a member of the Board from

February 1996 until October 2003 and was on the Board’s Audit Committee during the Class Period. In

the past, Kravis sat on the Board of Directors of Canadian Imperial Bank of Commerce with Lord Black.

During the Class Period, Kravis signed many of the Company’s false and misleading SEC filings.

37. Defendant Shmuel Meitar (“Meitar”) has been a member of the Board since February

1996. Meitar was from 1992 to 2002 a Director of Jerusalem Post, a newspaper owned by Hollinger.

During the Class Period, Meitar signed many of the Company’s false and misleading SEC filings.

38. Defendant Richard N. Perle (“Perle”) has been a member of the Board since June 1994

and until March 1, 1998 he sat on the Board’s Compensation Committee. From 1994 until November

2003, Perle served on the Executive Committee of Hollinger, which was comprised of Perle, Black and


16

Radler. Perle is a shareholder and Co-Chairman of Hollinger Digital Inc., a subsidiary of the Company,

and receives a salary from Hollinger Digital Inc. to help find investments. He is also a Director of the

Jerusalem Post. Hollinger made a $2.5 million investment in Trireme Associates LLC, which is the

general partner of Trireme Partners LP, a venture capital fund that is co-managed by Perle. Perle is also a

5% owner of Trireme Associates LLC. Lord Black sits on the strategic advisory board of Trireme

Partners LP. Perle solicited Kissinger to become a member of the Strategic Advisory Board of Trireme

Partners, LP, along with Black. The Wall Street Journal also reported that Hollinger has given $200,000

a year to the National Interest, a conservative publication that includes Perle and Lord Black as advisers.

During the Class Period, Perle signed many of the Company’s false and misleading SEC filings.

39. Defendant F. David Radler (“Radler”) is a Canadian citizen currently living in

Vancouver, Canada and Palm Springs, California. He lived in Chicago, Illinois during the Class Period

and worked out of his offices at the Chicago Sun-Times building in Chicago. He was the Deputy

Chairman, President, Chief Operating Officer and a member of the Board of Hollinger until his

November 2003 resignation. He also served on Hollinger’s Executive Committee. Additionally, Radler

has served as President and Chief Operating Officer since October 25, 1995, as Deputy Chairman since

May 1998, as a Director since 1990, and was Chairman of the Board from 1990 to October 25, 1995. He

was during the Class Period a President and Chief Operating Officer at Hollinger Inc. and also held

numerous other high level positions at that company, and he has been a Director of the following

Hollinger affiliates: Argus, The Telegraph and Jerusalem Post. Radler is (and was during the Class

Period) an owner of Ravelston. Radler, along with Lord Black, is also an owner of Horizon Publications,

Inc., a company that, as described below, acquired newspapers from Hollinger at bargain prices, while

failing to disclose some of the transactions. During the Class Period, Radler signed many of the

Company’s false and misleading SEC filings. Radler owns, directly or indirectly, equity securities of

Hollinger Inc. or has the right to acquire equity securities of Hollinger Inc. through Hollinger Inc.’s

Executive Share Option Plan.


17

40. Defendant Robert S. Strauss (“Strauss”) was a member of the Board from February 1996

until his resignation in May 2002. During the Class Period, Andreas signed many of the Company’s false

and misleading SEC filings.

41. Defendant A. Alfred Taubman (“Taubman”) was a member of the Board from February

1996 until his resignation in May 2002. In December 2001, Taubman, who was then the majority owner

of Sotheby’s Holdings Inc., was convicted of colluding to fix prices with rival auctioneer Christie’s

International Plc. Despite having a high-powered legal team, which included former Whitewater special

prosecutor Robert Fiske Jr., in April 2002 Taubman was sentenced to one year in prison and fined $7.5

million. Incredibly, Taubman remained on the Hollinger Board for six months after his criminal

conviction. During the Class Period, Taubman signed many of the Company’s false and misleading SEC

filings. Taubman owns, directly or indirectly, equity securities of Hollinger Inc. or has the right to

acquire equity securities of Hollinger Inc. through Hollinger Inc.’s Executive Share Option Plan.

42. Defendant James R. Thompson (“Thompson”) has been a member of the Board since

June 1994 and was the chairman of the Board’s Audit Committee and sat on the Compensation

Committee during the Class Period. Thompson is a resident of Illinois. In the past, Thompson received

substantial political contributions from Lord Black. During the Class Period, Thompson signed many of

the Company’s false and misleading SEC filings.

43. Defendant Lord Weidenfeld of Chelsea (“Weidenfeld”) was a member of the Board from

February 1996 until his resignation in May 2002. During the Class Period, Weidenfeld signed many of

the Company’s false and misleading SEC filings.

44. Defendant Leslie H. Wexner (“Wexner”) was a member of the Board from February

1996 until his resignation in May 2002. During the Class Period, Wexner signed many of the Company’s

false and misleading SEC filings.


18

45. Lord Black, Andreas, Atkinson, Lady Black, Boultbee, Burt, Chambers, Colson, Kipnis,

Kissinger, Kravis, Meitar, Perle, Radler, Strauss, Taubman, Thompson, Weidenfeld and Wexner are

referred to collectively herein as the “Individual Defendants.”

46. Defendant KPMG LLP (“KPMG”) is a “Big Four” accounting firm with partners that are

residents of, and offices that are located in, every state, including New York and Illinois, where KPMG’s

office located at 303 East Wacker Drive, Chicago, Illinois handled the outside audits of Hollinger. At all

times relevant to this action, KPMG was Hollinger’s independent auditor. KPMG certified certain of

Hollinger’s false and misleading financial statements that are the subject of this action. During the Class

Period, KPMG also served as the independent auditor of Hollinger Inc., with the outside audits handled

by KPMG’s offices located at Suite 500, 4120 Younge Street, North York, Ontario, Canada M2P 2B8.

NATURE OF ACTION AND JURISDICTION

47. This is a class action brought on behalf of Teachers, Washington Carpenters, Cardinal,

Carlson and similarly situated shareholders of Hollinger, who purchased securities of Hollinger from

August 13, 1999 through December 11, 2002 (the “Class Period”).

48. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§§ 1331, 1337 and 1367, and Section 27 of the Securities Exchange Act of 1934 (the “Exchange Act”), 15

U.S.C. § 78aa.

49. The claims asserted herein arise under and pursuant to Sections 10(b), 18 and 20(a) of

the Exchange Act, 15 U.S.C. §§78j(b), 78r and 78t(a), and Rule 10b-5 promulgated thereunder by the

SEC, 17 C.F.R. §240.10b-5.

50. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C.

§78aa and 28 U.S.C. §1391 (b) and (c), because Hollinger maintains an office in this District and many

of the acts and practices complained of herein occurred in substantial part in this District.


19

51. In connection with the acts alleged in this Complaint, Defendants directly or indirectly

used the means and instrumentalities of interstate commerce, including but not limited to the mails,

interstate telephone communications and the facilities of the national securities markets.

FACTUAL BACKGROUND

A. LORD BLACK THE KING

52. To understand this case, it is necessary to understand Lord Black. For Lord Black,

wealth and extravagance are a birthright to be continued in the fashion of Citizen Kane, that is, before the

mythical figure’s downfall. Not even Dennis Kozlowski, the disgraced former head of Tyco Ltd. who

became famous for spending $6,000 on a shower curtain (on Tyco’s tab), can match Black when it comes

to a taste for the finer things. Lord Black has palatial homes: a 21,000 square foot beachfront mansion in

Palm Beach, Florida; a four-story home in London’s exclusive Kensington enclave bought from

Australian financier Alan Bond; a stunning Toronto mansion complete with a domed roof modeled on St.

Peter’s Basilica in Rome with a chapel consecrated by Toronto’s Roman Catholic archbishop and a 12-

acre estate; and the obligatory multimillion dollar Park Avenue apartment. All these abodes are stuffed

with works of art, historical curios and busts of great military leaders – Caesar and Napoleon being his

favorites. What makes such extravagances relevant (and objectionable) is that, unbeknownst to investors

during the Class Period, the extravagances were funded (in part) by Hollinger – Hollinger pays the cost

of maintaining Lord Black’s Park Avenue apartment (over $100,000 last year), and paid a portion of the

salaries of the staff (Butlers, Senior Butlers, Under Butlers, Houseman, Footman, chef, chauffeurs,

security personnel and maids) at his various residences. Hollinger was charged nearly $9 million for Lord

Black’s acquisition of historic papers of the former President Franklin D. Roosevelt, most of which were

stored in Lord Black’s various residences so that he could write a 900-page biography of FDR while he

was being paid to run the Company, not be an author. Additionally, the Company made charitable

donations not in its own name, but in the name of (and thus on behalf of) Lord and Lady Black (and


20

Radler). The Company also paid Lord Black’s monthly tab at the notoriously expensive Le Cirque 2000

restaurant in New York.

53. During the Class Period, Hollinger also paid for Lord Black’s and Lady Black’s travel to

and from their various residences, whether by air or ground transportation. Lord Black has a vintage

1958 Rolls Royce Silver Wraith to squire him around London, with upkeep and insurance paid by

Hollinger. Though owned and titled in the name of Ravelston, from 2000-2003 Hollinger was billed

approximately $90,000 to refurnish the limousine.

54. Although Hollinger is not a large company, it maintained two corporate jets used

indiscriminately by Lord Black and Lady Black for personal, rather than business, purposes, such as to

transport them to and from their various residences or on vacation to exotic locations such as Bora Bora.

Lord and Lady Black were the primary users of a Gulfstream IV jet — leased by Hollinger and

refurbished (with an exotic wood table, luxury sofa with fold-out bed, and Christofle silverware) at a cost

of $3 million. Lord Black and his wife, as well as the Radlers, also had at their disposal the Company’s

Challenger jet. Running both planes cost Hollinger over $23 million from 2000-2003.

55. For Lord Black, social status is extremely important. Black surrounds himself with

famous people — businessmen, politicians and power brokers — whom he entertains lavishly. His Board

includes a former U.S. Secretary of State (Kissinger), a former Assistant Secretary of Defense (Perle), a

former Governor of Illinois (Thompson), and the wife of corporate raider Henry Kravis (Kravis). His

second wedding to Barbara Amiel was held at the posh Annabel’s nightclub in London, where Black was

seated between Margaret Thatcher and the Duchess of York. Status and title are so important to Black

that he renounced his Canadian citizenship so that he could obtain a seat in England’s House of Lords and

the “Lord Black of Crossharbour” title that went with it.

56. For Lord Black, there is no distinction between what is Hollinger’s (and Hollinger’s

shareholders’) and what is his. Rather, Hollinger and the rest of his media empire are personal piggy-

banks to be raided when necessary to fund his extravagant lifestyle. He considers himself (and his fellow


21

Ravelston shareholders) to be “proprietors” who can without shareholder review or challenge use the

Company’s funds to cover personal expenses. As Lord Black stated in an August 5, 2003 e-mail to

Atkinson (submitted as Joint Trial Exhibit (“JX”) 043 in the Delaware Chancery Court action and quoted

in the Special Committee Report):

There has not been an occasion for many months when I got on our plane without wondering whether it was really affordable. But I’m not prepared to reenact the French Revolutionary renunciation of the rights of nobility. We have to find a balance between an unfair taxation on the company and a reasonable treatment of the founder-builders-managers. We are proprietors, after all, beleaguered though we may be.

57. Viewing himself as “proprietor” or king, Lord Black believed he could pay himself out of

the Company’s coffers without any disclosure to the shareholders or even to the Company’s independent

directors. After giving himself millions of dollars of Company money in the form of purported “non-

compete” payments, Lord Black gloated in a September 4, 2002 memorandum to Ravelston shareholders,

Atkinson, Boultbee, Colson, Radler and White, that he had “pretty well won the great battle over the non-

competition agreements and a decent interval has passed,” and that the actions of “controlling

shareholders [such as himself] . . . to ensure their comfortable enjoyment of the position they (we, in fact),

have created for themselves” should not be hindered by “the agitations of shareholders.”

58. Lord Black’s contempt for the public shareholder majority was apparent in his August 3,

2002 e-mail to Atkinson and Boultbee (quoted in the Special Committee Report), where Black stated:

We have said for some time that [Hollinger] served no purpose as a listed company other than relatively cheap use of other people’s capital, and privatization noises have been audible for a long time. We now have an unsatisfactory situation where a number of the shareholders think we are deliberately suppressing the stock price, some others think we are running a gravy train and a gerrymandered share structure, and we think they are a bunch of self-righteous hypocrites and ingrates, who give us no credit for what has been a skillful job of building and pruning a company in difficult circumstances just ahead of seismic financial events.

59. Lord Black rebuked the Company’s shareholders who he called “corporate governance

zealots” and “terrorists” who in his view had no basis or right to challenge his personal use of the


22

Company’s money and assets. At last year’s annual meeting, Lord Black reportedly responded to

shareholders’ criticisms by saying, “You’re entitled to what you think but you don’t know what you’re

talking about.”

60. Lord Black’s disdain for shareholders has resulted in his outright violation of federal

securities laws designed to require disclosure to shareholders. On July 20, 1982, Lord Black entered into

a settlement with the SEC enjoining further violations of Sections 10(b) and 14(e) of the Exchange Act

for making misrepresentations in SEC filings related to the acquisition by Norcen Energy Resources, Ltd.

(a company that Lord Black chaired) of 8.8% of Hanna Mining Co.’s outstanding stock. The SEC found

that Lord Black and Norcen made false and misleading statements in SEC disclosure documents in failing

to disclose that Norcen’s primary intention was to acquire a controlling interest in Hanna Mining Co. and

the substantial steps Norcen had taken to increase the amount of Hanna common stock which it owned.

The SEC alleged that Black (and Norcen) had “made untrue statements of material facts, omitted to state

material facts necessary to make the statements made not misleading, and engaged in fraudulent,

deceptive and manipulative acts and practices” relating to purchases by Norcen of Hanna stock, and a

subsequent tender offer for Hanna’s shares. See SEC Litigation Release No. 9719, 1982 SEC Lexis 1253,

July 20, 1982.

61. Lord Black has not learned his lesson. Before the Special Committee dethroned the

“king” (just over a week prior to the institution of this action) by removing Lord Black from his

remaining title at the Company (as non-executive Chairman), Lord Black and his accomplices had

concealed their theft of Company money, misrepresented the Board’s review and approval of their

actions, and materially misrepresented the Company’s financial condition and its subscriber figures.

Plaintiffs seek compensation for the damages they have suffered as a result of Lord Black’s and the

defendants’ misrepresentations and fraud.


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B. PAYMENTS RECEIVED FROM NON-COMPETITION AGREEMENTS

62. From 1998 through 2000, Hollinger sold various newspaper assets to third parties, but a

significant portion of the proceeds of these sales secretly went directly into the pockets of Lord Black and

his lieutenants. In these transactions, the third party purchasers bought not only the trade name of

Hollinger’s newspapers, but also the subscriber lists and advertising contracts. In accordance with

standard practice in the industry, the publishers negotiated as part of the transactions an agreement by

Hollinger not to launch any new newspaper in the same market occupied by the newspaper sold by

Hollinger. While Hollinger sold its corporate newspaper assets in these transactions, and Hollinger, and

not any Hollinger executives, was (in many cases) a signatory to the non-compete agreements, Lord

Black and his cohorts received all of the money paid pursuant to the non-compete agreements, while

Hollinger received nothing. In total, Lord Black, Radler, Atkinson and Boultbee have diverted to

themselves approximately $90.25 million paid under the non-compete agreements. However, as the

Special Committee explained in its Report, those non-compete payments were unnecessary and improper:

Since Black, Radler, Boultbee and Atkinson were all Holllinger officers, Hollinger had the ability to require them to honor the terms of any non-compete signed by Hollinger so long as they were officers or employees of Hollinger (or wished to continue receiving management fees through Ravelston in lieu of direct employment). Buyers therefore didn’t need separate non-competes from any of them, and they didn’t need them from [Hollinger Inc.] since it had no employees and no operating capability either in Canada or in the United States.

63. The non-compete payments, in addition to being improper, were not disclosed to the

shareholders. The non-compete payments were (as explained in the Special Committee Report) “straight

carve-outs of the sales price that were paid at closing directly to the individuals.” The non-compete

payments to Hollinger Inc. “reduced the sales proceeds available to Hollinger shareholders, whose assets

had been sold at the direction of Black and Radler” and “all the payments to [Hollinger Inc.] took place

on instructions from Radler to various Hollinger employees.”


24

64. However, Hollinger failed to inform its shareholders at the time of those transactions that

some of the proceeds from its asset sales went to Lord Black and his cronies and not Hollinger. When

Hollinger was finally forced to admit that non-compete payments had been made, it falsely claimed that

the Board had approved those payments, when it had not. While the Company told investors that it was

selling its community newspaper to raise capital, pay down debt and focus on its “core” metropolitan

daily newspapers, Black and Radler engineered these sales as a way to pay themselves (and Boultbee and

Atkinson) millions of dollars in secret and unauthorized non-compete payments. As the SEC stated in its

Enforcement Action, “Hollinger International’s filings with the Commission...contained misstatements

and omissions of material fact regarding the purported non-competition payments.”

1. Sales of U.S. Community Newspapers

65. In 1999, 2000 and 2001, Hollinger sold most of its U.S. community newspaper

properties, and publicly disclosed the proceeds of those transactions. However, the disclosures were all

materially false and misleading, as they failed to identify those portions of the sale proceeds which were

paid directly to Lord Black, his associates, and Hollinger Inc., which Lord Black controls. The disclosures

were materially false and misleading for additional reasons — they failed to disclose that the Company’s

independent directors had never approved, in advance of those transactions, the payments of any non-

compete payments (or other proceeds from the sales) to Lord Black, his associates, or Hollinger Inc.

While the Company told investors that it was selling its community newspapers to raise capital, pay down

debt and focus on its “core” metropolitan daily newspapers, Lord Black and Radler engineered these sales

as a way to pay themselves millions of dollars in secret and unauthorized non-compete payments.

66. On or about August 13, 1999, Hollinger filed its Form 10-Q (“August 1999 10-Q”) where

it described its sales of U.S. community newspapers as follows:

In February 1999, the Company sold approximately 45 community newspapers for gross cash proceeds of approximately $441.0 million. The proceeds were used to pay down outstanding debt on the Bank Credit Facility.


25

The Company described its pending sale of assets to Horizon Publications Inc.:

During the second quarter 1999, the Company entered into an agreement with Horizon Publications Inc. to sell 33 U.S. community newspapers for $43.7 million.

67. On or about March 22, 2000, Hollinger filed its Proxy Statement (the “2000 Proxy

Statement”) which made the following disclosure relating to the sale of community newspapers:

Effective April 1, 1999, the Company sold approximately 18 properties of the Company’s U.S. community newspaper group for an aggregate consideration of approximately $47 million....

68. On or about November 15, 1999, the Company filed is Form 10-Q (“November 1999 10-

Q”) where it again disclosed its February 1999 sale of “approximately 45 community newspapers for

gross cash proceeds of approximately $441.0 million.”

69. The statements in the August and November 1999 10-Qs and the 1999 Proxy Statement

were materially false and misleading because there was no disclosure that any proceeds of the asset sales

discussed in those filings went (or would go) to Lord Black and other Hollinger executives, rather than

Hollinger, under the guise of non-compete payments. Lord Black, Radler, Boultbee and Atkinson kept

concealed from the Company’s shareholders their plans to intercept millions of dollars generated from the

Company’s sales of its U.S. community newspapers, money that would be represented as being paid to

Hollinger, when it was not. Thus, the disclosures of the amounts the Company would receive in pending

asset sales (in the August 1999 10-Q) and the amounts the Company did receive in completed sales (in the

November 1999 10-Q and the 1999 Proxy Statement) were materially false, as the Company received less

money than was disclosed in those filings, due to the non-compete payments.

70. On or about March 30, 2000, Hollinger repeated its misrepresentations when it filed its

Form 10-K for its fiscal year 1999 (the “1999 10-K”). The 1999 10-K stated:

In January 1998, the Company completed the sale of 80 community newspapers for proceeds of $310.0 million. In February 1999, the Company sold 45 community newspapers for approximately $460.0 million, of which $441.0 million was cash. On a pre-tax basis, the sales


26

generated capital gains of approximately $201.2 million in 1998 and approximately $249.2 million in 1999.

* * *

During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43.7 million resulting in a pre-tax gain of approximately $20.7 million.

The 1999 10-K was signed by Lord Black, Radler, Colson, Lady Black, Andreas, Burt, Chambers,

Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Weidenfeld and Wexner.

71. The Company’s Form 10-Q filed on or about May 15, 2000 (the “May 2000 10-Q”)

contained general references to the Company’s asset sales in 1999. However, as with the 1999 10-K,

there was no mention of any non-compete payments being made to any individuals pursuant to those

transactions, and so the 1999 10-K and the May 2000 10-Q were materially false and misleading both in

their failure to disclose the non-compete payments and in their false representation of the amounts the

Company received in its asset sales.

72. On or about August 2, 2000, the Company announced the sale of its remaining U.S.

community newspapers for approximately $215 million to Bradford Publications Company (“Bradford”),

Newspaper Holdings, Inc. of Alabama (“NHIA”), Paxton Media Group, Inc. (“PMG”) and Forum

Communications Company (“Forum”).

73. The Company repeated this disclosure in its Form 10-Q filed on or about August 14,

2000 (the “August 2000 10-Q”). These representations were false and misleading because they failed to

disclose the Company’s plans to have the purchasers of Hollinger’s assets pay Lord Black and others

pursuant to purported non-compete agreements, and because they falsely represented the amount the

Company would receive in the sale transactions. The specific amounts of the non-compete payments

would be disclosed years later by the Special Committee when it filed its complaint against Lord Black.

74. On or about November 14, 2000, the Company disclosed in its Form 10-Q filed that day

(the “November 2000 10-Q”) that the $215 million asset sale to four buyers was completed by October


27

31, 2000. As with prior filings, there was no disclosure in the November 2000 10-Q of any non-compete

payments being made as part of the asset sales, and the representation that the Company would receive

$215 million was false, because non-compete payments to parties other than Hollinger would be made out

of the sale proceeds.

75. In or about January 2001, Lord Black, Radler and Boultbee completed and signed

questionnaires regarding their year-2000 compensation for use in preparing the Company’s disclosures to

be contained in the upcoming proxy statement and annual report (to be provided in a 10-K). In those

questionnaires, these Defendants failed to disclose the millions of dollars of non-compete payments they

took out of the proceeds of the Company’s asset sale transactions.

76. On or about March 27, 2001, the Company filed its Proxy Statement (the “2001 Proxy”)

where the Company stated that “[e]ffective July 20, 2000, the Company sold four properties of the

Company’s U.S. community newspaper group for an aggregate consideration of approximately $38

million to Bradford.” Hollinger also described its transactions with Horizon which the Company stated

were “unanimously approved by the Audit Committee and the independent Directors of the Company as

market value transactions.”

77. Similarly, on or about April 2, 2001, Hollinger filed in its Form 10-K for its 2000 fiscal

year (ending December 31, 2000) (the “2000 10-K”) where it stated that “[d]uring 2000 the Company

sold virtually all of its remaining United States community newspapers for proceeds of approximately

$215.0 million.” The Company also repeated the disclosures made in previous filings regarding its asset

sales in 1998 and 1999:

In February 1999, the Company completed the sale of 45 U.S. community newspapers properties for approximately $460.0 million, of which approximately $441.0 million was cash. . . . During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43.7 million resulting in a pre-tax gain of approximately $20.7 million. . . . In January 1998, the Company completed a sale of approximately 80 community newspapers for aggregate case consideration of approximately $310.0 million.


28

However, as with its previous filings, the Company failed to disclose in its 2000 10-K that proceeds of the

asset sales included payments to Lord Black and others purportedly for their agreement to be bound by

non-compete agreements. Therefore, the disclosures of the amounts the Company received in the sale

transactions were false. Additionally, the Company’s representations (in the 2001 Proxy Statement) that

the transactions with Horizon were approved by the independent investors and Audit Committee were

false, as those transactions never received such approvals. The 2000 10-K was signed by Lord Black,

Boultbee, Radler, Colson, Lady Black, Andreas, Burt, Chambers, Kissinger, Kravis, Meitar, Perle,

Strauss, Taubman, Thompson, Weidenfeld and Wexner.

78. The Company’s Form 10-Qs filed on or about May 15, 2001 (the “May 2001 10-Q”),

August 14, 2001 (the “August 2001 10-Q”), and November 14, 2001 (the “November 2001 10-Q”), while

describing the Company’s sales of its U.S. community newspapers, also fail to disclose that portions of

the price paid in the transactions were allocated to non-compete agreements and paid directly to parties

other than Hollinger.

79. The Company’s disclosures beginning with its August 1999 10-Q through its November

2000 10-Q were false and misleading in their failure to disclose the non-compete payments made in

connection with the Company’s sales of U.S. community newspapers discussed in those SEC filings, and

in their false representation of the amounts the Company received (or stood to receive) in those

transactions. In total, approximately $26 million in non-compete payments were made to parties other

than Hollinger, even though it was Hollinger that was the seller of the assets in those transactions.

80. While the Company in those filings did not disclose the non-compete payments, or break

down each of its asset sales, the New York and Illinois Special Committee Complaints, the SEC

Complaint and Enforcement Action and the Special Committee Report, each describe the following non-

compete payments that were made in connection with the Company’s asset sales:

(a) Hollinger paid Hollinger Inc. $2 million in non-compete payments in connection with the Company’s May 11, 1998 sale of assets, including the American Trucker publication, to


29

Internec Publishing Company (“Internec”) for $75 million, plus the $2 million in non-compete payments. As explained in the Illinois Special Committee Complaint, no such non-compete agreement exists between Internec and Hollinger Inc., but Radler orchestrated this payment on behalf of Hollinger Inc. from his Company office in Chicago. The Special Committee in its Report stated that only Hollinger signed the non-competition agreement in this transaction, and “the May 11, 1998 transaction agreement, which Radler signed, designates Hollinger as the recipient of the non-competition consideration.” Radler told Vogt, then Executive Vice President of Hollinger’s Community Newspaper Division, to “find whatever funds were available” and send the money to Hollinger Inc. “ASAP” because Hollinger Inc. “needed the money.” The $2 million in purported non-competes paid to Hollinger Inc. was not disclosed until the Company’s November 17, 2003 press release.

(b) In connection with Hollinger’s February 1, 1999 asset sale to Community Newspaper Holdings, Inc. (“CNHI”) for $472 million, $50 million of which was allocated to non-compete payments, Hollinger instructed CNHI to wire $12 million of the non-compete allocation to Hollinger Inc. even though Hollinger Inc. was not a party to the asset purchase agreement. The Illinois Special Committee Complaint explains that CNHI did not ask Hollinger Inc. for a non-compete agreement, but Lord Black, Radler and Boultbee requested CNHI’s consent that Hollinger Inc. sign such an agreement. Radler, working out of his Chicago office, instructed that Hollinger Inc. be added to the asset purchase agreement as a non-competition covenantor, and Radler signed on that company’s behalf at closing and ordered that the $12 million be wired to Hollinger Inc. Kipnis, on instructions from Radler, ordered CNHI to pay the $12 million directly to Hollinger Inc. The $12 million in purported non-competes paid to Hollinger Inc. were not disclosed until the Company’s November 17, 2003 press release.

(c) Hollinger paid Hollinger Inc. $1.2 million in non-compete payments in connection with the Company’s asset sales to Horizon which closed on or about June 30, 1999. Once again, Radler, working from his Chicago office, signed the non-compete agreement on behalf of Hollinger Inc., and Kipnis signed on behalf of Hollinger. The $1.2 million in purported non-competes paid to Hollinger Inc. was not disclosed until the Company’s November 17, 2003 press release. The $1.2 million in purported non-competes paid to Hollinger Inc. were not disclosed until the Company’s November 17, 2003 press release.

(d) In connection with the Company’s asset sales to Forum in September 2000 for $14 million, $400,000 of which was


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allocated to a non-compete agreement, Hollinger paid Hollinger Inc. $100,000 in non-compete payments even though Hollinger Inc. was not a party to the asset purchase agreement; it was merely listed (along with Hollinger) as a party to the non-competition agreement. Radler instructed Marc Kipnis, the Company’s Secretary and General Counsel in Chicago, to sign the non-competition agreement on behalf of Hollinger and Hollinger Inc., though he had no authority to bind Hollinger Inc. In fact, as found by the Delaware Chancery Court, Kipnis did not even have an office at Hollinger, Inc. 844 A.2d at 1037.

(e) Hollinger paid Hollinger Inc. $500,000 in non-competes in connection with its October 2, 2000 asset sale to PMG for approximately $59 million. Kipnis again signed the non-compete agreement on behalf of Hollinger and Hollinger Inc. even though he had no authority to bind Hollinger Inc. As the Delaware Chancery Court found, “these non-competition payments were not part of the asset sales agreements” and “Black, Radler, Atkinson and Boultbee never even entered into a non-competition agreement with either Paxton or Forum.” 844 A.2d at 1037. Additionally, as the Special Committee explained in its Report, David Paxton, the CEO of PMG, “only sought a non-competition agreement from the seller, Hollinger. It was Hollinger, through Kipnis, that proposed adding [Hollinger Inc.] and giving [it] 25% [of the total $2 million in non-competes].” As stated in the SEC Enforcement Action, Hollinger Inc. was a party to the non-competition agreement but not the asset purchase agreement.

(f) In connection with Hollinger’s asset sale to CNHI on or about November 1, 2000 for approximately $90 million, CNHI wired $750,000 of the transaction proceeds to Hollinger, Inc. (at Hollinger’s instruction), and Hollinger paid $4.3 million each to Black and Radler, and $450,000 each to Boultbee and Atkinson, for their entry into non-competition agreements, and paid a $100,000 “bonus” to Kipnis for arranging the non-compete payments. As found by the Delaware Chancery Court following its review of the CNHI asset purchase agreement (JX 9) and the closing documents on that transaction (JX 10), “by its own terms the CNHI ... transaction did not call for any non-competition payment to individuals,” but Kipnis signed such non-compete agreements on behalf of Hollinger and Hollinger Inc. The non-compete agreements provided for payments of $2.25 million to Hollinger and $750,000 to Hollinger Inc. The Special Committee stated in its Report that it was informed by CNHI’s counsel “that CNHI never sought non-competition agreements from the individuals” but that “Kipnis typed a new page to the closing statement providing for wire transfers of transaction proceeds to Black, Radler, Boultbee and Atkinson.” The Special


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Committee explains in its Illinois Complaint that Radler instructed Kipnis in November 2000 to alter the non-competition agreement to provide for an additional $9.5 million of purported non-compete payments to be made to Black, Radler, Boultbee and Atkinson in the amounts described above, and Kipnis was paid a bonus for this deception. However, as with the Forum and PMG transactions, Kipnis had no authority to bind Hollinger Inc.

(f) As found by the Delaware Chancery Court and as alleged by the Special Committee in its Illinois federal court action and detailed in the Special Committee Report, in February 2001, Lord Black and Radler caused the Company to pay $5.5 million to Black and Radler ($2,612,500 each) and Boultbee and Atkinson ($137,500 each), and then these individuals caused Hollinger employees to fabricate a documentary record to make the payments appear to be compensation for non-competition agreements. The payments were made in checks issued in February 2001 but back-dated to December 31, 2000, purportedly in connection with a sale of U.S. community newspapers owned by American Publishing Company, a Hollinger subsidiary with (according to the Delaware Chancery Court) “very minor operating assets.” 844 A.2d at 1037. However, as stated in the Illinois Special Committee Complaint, at the time the sham non-compete agreements were signed, American Publishing Company had sold substantially all of its assets and did not employ Black, Radler, Boultbee or Atkinson. Moreover, the sham payments were never reviewed, negotiated or approved by the Company’s independent directors. The Delaware Chancery Court ruled that “for these payments the Special Committee could not even identify a purchaser of assets to whom a non-competition commitment ran.” 844 A.2d at 1037.

81. Additionally, as explained in the Special Committee Complaints, Hollinger made

additional non-compete payments to Hollinger Inc. in connection with the Company’s $310 million asset

sale in January 1998 to Community Newspaper Group (“CNG”), in which CNG agreed to pay

$30,915,000, plus interest, for a non-competition agreement.

82. None of the non-compete payments discussed above were disclosed in the Company’s

public filings from the August 1999 10-Q through the November 2001 10-Q . All of those filings

materially misrepresented the Company’s asset sales and the proceeds that the Company would receive in

those transactions. Thus, beginning with the August 1999 10-Q, Hollinger reported sales of its U.S.

community newspapers, and resulting improvements to the Company’s financial condition, which were


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materially false and misleading. However, the investing community was unaware of the fraud, and so it

reacted favorably, and the Company’s stock climbed in response, going from $10.08 per share on August

13, 1999 to $13.11 per share on Friday, March 28, 2002.

83. It was not until April 1, 2002, when the Company filed its Form 10-K for fiscal year 2001

(“2001 10-K”), that Hollinger disclosed that any payments relating to the sales of community newspapers

were made directly to Lord Black and others, not Hollinger, pursuant to non-competition agreements.

Specifically, the Company stated:

During 2000, the Company sold most of its remaining U.S. community newspaper properties, for total proceeds of approximately $215 million. In connection with the sales of United States newspaper properties in 2000, to satisfy a closing condition, the Company, Lord Black and three senior executives entered into non-competition agreements with the purchasers to which each agreed not to compete directly or indirectly in the United States with the United States businesses sold to purchasers for a fixed period, subject to certain limited exceptions, for aggregate consideration paid in 2001 of $0.6 million. These amounts were in addition to the aggregate consideration paid in respect of these non-competition agreements in 2000 of $15 million. Such amounts were paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

The 2001 10-K was signed by Black, Boultbee, Radler, Colson, Lady Black, Andreas, Burt, Chambers,

Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Lord Weidenfeld and Wexner.

84. This representation, which was subsequently repeated in other Hollinger SEC filings, was

materially false and misleading. The Company’s disclosure that $15.6 million in non-competition

payments were made to four individuals was false because (i) those payments were not made as genuine

consideration for any individual’s agreement, pursuant to a buyer’s request, not to compete with the sold

businesses, and (ii) approximately $26 million in total non-compete payments were made, of which

$16.75 million was paid to Hollinger Inc. Concealed from the shareholders were the Company’s

payments to Hollinger Inc., which is controlled by Lord Black and serves as the corporate parent of

Hollinger. Additionally, only $9.5 million of the payments, not $15 million, were made in 2000.


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85. Hollinger’s 2001 10-K was also materially false because the payments were never

authorized by any independent Hollinger directors and were not made, nor did the Company or Black,

Radler or Boultbee ever sign any non-compete agreement, “to satisfy a closing condition,” as represented

in the 2001 10-K. In fact, Black, Radler, Atkinson and Boultbee did not enter into non-competition

agreements with purchasers in connection with the American Publishing, Forum or PMG transactions.

As revealed almost two years later in the Special Committee Complaints and Report and the Delaware

Chancery Court’s recent decision:

(a) There was no independent director authorization of any non-compete payments made in the January 1998 CNG transaction;

(b) There was no non-competition agreement in the Internec transaction, nor any Hollinger Board resolution authorizing any non-compete payment to Hollinger Inc.;

(c) Neither Lord Black, Radler nor anyone else disclosed to Hollinger’s independent directors or its Board prior to its approval of the February 1999 CNHI transaction that any amount (including the $12 million wired by CNHI to Hollinger Inc.) would be paid to Hollinger Inc., and that payment was made at the request of Black, Radler and Boultbee, as CNHI was prepared to enter the transaction without such non-compete agreement;

(d) Neither Lord Black, nor Radler, nor anyone else informed Hollinger’s Board at the time the Board reviewed the Horizon transaction that $1.2 million of the proceeds would be transferred to Hollinger Inc.;

(e) In the sale to Forum, Hollinger Inc. was added as a party to the non-competition agreement, which was signed by Hollinger’s Secretary and General Counsel, Kipnis, on behalf of both Hollinger and Hollinger Inc.;

(f) In the sale to PMG, Hollinger Inc. was added as a party to the non-competition agreement which, as with the Forum transaction, was signed by Kipnis on behalf of Hollinger and Hollinger Inc.;

(g) In the November 2000 asset sale to CNHI, Kipnis again signed on behalf of Hollinger and Hollinger Inc., and none of the non-compete payments made in that transaction were ever reviewed, negotiated or approved by the Company’s independent directors;


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in fact, the CNHI asset sale agreement did not call for any non-competition payments to any individuals;

(h) Hollinger paid a total of $5.5 million in non-compete payments to Lord Black, Radler, Boultbee and Atkinson so they would not compete with businesses that American Publishing had already sold or transferred, and even though those individuals were not employed by American Publishing; and

(i) Hollinger at the direction of Lord Black and Radler paid a total of $600,000 additional non-compete payments to Lord Black and Radler ($285,000 each) and to Boultbee and Atkinson ($15,000 each) out of the Forum and PMG transactions, even though they did not enter into any such non-compete agreements nor did Forum or PMG request their signatures on such agreements. As the Special Committee stated in its Report, “[t]here was no agreement, phony or otherwise, with any party in connection with these amounts taken from Hollinger. None of the four individuals signed a non-competition agreement with a third party, or with one of their own companies. . . .[N]one of these payments...was...approved by the Audit Committee or Board.” These purported non-competes were paid out of the reserves of the Forum and PMG transactions on or about April 9, 2001, several months after those transactions closed, and the payments were not disclosed until Hollinger filed its 2001 10-K on April 1, 2002, and even then, the disclosure (as described herein) was false and misleading.

86. The Delaware Chancery Court ruled after trial that “the Special Committee was unable to

find any evidence in the corporate minute book, or through other sources, that any of the non-competition

payments had been the subject of specific approval by either [Hollinger] International’s audit committee

or its board of directors.” Hollinger International, Inc. v. Black, 844 A.2d 1022, 1037 (Del. Ch. 2004).

At that trial, Lord Black argued that the Board had later “ratified” the non-compete payments through the

exercise of written consents. However, the Delaware Chancery Court reviewed the written consents

(submitted as JX 616-618) and found that they did not refer to any non-compete agreements or payments

to Hollinger’s executives or Hollinger Inc., nor did the Board minutes “indicate that the [Hollinger]

International board was shown the consents or informed about the non-compete aspects of those

resolutions.” 844 A.2d at 1068. As the court held:


35

I do not discern in these consents evidence of proper approval by independent directors of a conflict transaction.

* * *

There is no indication that there was any discussion of non-competes by the board or that the word even came up at the board . . . [The non-compete agreements] were not actually placed before the board, and were ratified by a board that never saw them and was not informed that they contained within them authorization for officers to negotiate future conflict transactions in favor of other unspecified officers. That is, by their own terms, the consents do not even approve specific non-competition contracts.

844 A.2d at 1068. Likewise, the Special Committee concluded in its Report that the “minutes of the

December 4, 2000 Board meeting do not indicate that any discussion occurred regarding the asset sales to

Forum, Paxton or CNHI.”

87. The Court ruled that, with respect to the November 2000 sale to CNHI, “[b]y its plain

terms, this written consent nowhere refers to any non-compete agreements with individual executives of

[Hollinger] International.” Id. Additionally, “two of the three authorizing signatures were Black and

Radler, the two principal beneficiaries of the non-competes.” Id.

88. The written consent purporting to authorize asset sales and non-compete agreements with

PMG “does not mention non-compete payments to [Hollinger] Inc. or specify the officers. It also does

not set forth the terms of the non-competes or indicate that the action executive officers would receive

money.” Id. With respect to the written consent relating to the Forum transaction, “[n]o mention of a

non-compete with [Hollinger] Inc. is included. Nor is there any specification of the dollar amounts of the

non-compete or that the certain (unspecified) officers would receive payments.” Id. The Company did

not disclose these facts, instead falsely representing that the transactions and the non-compete payments

had been approved by Hollinger’s independent directors, when they had not.

89. Lord Black was ultimately forced to admit that the non-compete payments were made

without proper Board authorization, and the Company has admitted that its SEC filings were materially


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false and misleading. On or about November 15, 2003, Lord Black signed an acknowledgment as part of

a written agreement (the “November Agreement”) with the Company which stated:

... the term “Payments” shall mean the aggregate US $16,550,000 paid to Hollinger Inc. (“HLG”), the aggregate US $7,197,500 paid to each of Messrs. Black and Radler, and the aggregate US $602,500 paid to each of Messrs. Atkinson and Boultbee from 1999 to 2001. The payments were not properly authorized on behalf of the Company.

Thus, the Company’s prior statement (in its 2001 10-K) that the independent directors had approved the

non-compete payments was false, and the independent directors knew, or were reckless in not knowing,

that such statement was false.

90. Also false was Lord Black’s statement, as follows, at the May 2002 Hollinger

shareholder meeting, in response to a shareholder’s question regarding the non-compete payments:

You’re right that there were some non-competes in the American Community sales, but that wasn’t as dissimilar as it seems from the Canadian situation. In those papers, they wanted some assurance that we wouldn’t come back with shoppers, which is always a threat to those small newspapers and indeed, there’s been some incidence in the history of that business of people doing just that . . . .

91. This was false and misleading, and omitted material facts, because, as stated above,

Black, Radler, Atkinson and Boultbee did not enter into non-competition agreements or receive the

purported non-compete payments at the request of any purchasers, and did not execute non-compete

agreements in connection with the Forum or PMG transactions. In addition, there was no sale of

newspapers associated with the purported non-compete agreements and payments in the American

Publishing transaction.

92. As the Company later admitted after the close of the Class Period in its press release on

November 17, 2003, contained in a Form 8-K filed with the SEC on or about that date (the “November

2003 Press Release”), and in a Form 10-Q filed on November 21, 2003 (the “November 2003 10-Q”),

“[p]rior to November 17, 2003, the Company’s public disclosure relating to these [non-competition

payments] had been incomplete or inaccurate.” The Company explained in its November 2003 10-Q that


37

the Special Committee and Audit Committee determined, through their investigation of allegations

regarding related party transactions, that:

a total of $32.15 million in payments styled as “non-competition payments” were made to Lord Black, Messrs. Radler, Boultbee and Atkinson, and [Hollinger Inc.] that were not authorized or approved by either the audit committee or the full board of directors of the Company. Of the total unauthorized payments, $16.55 million was paid to [Hollinger Inc.] in 1999 and 2000, approximately $7.2 million each was paid to Lord Black and Mr. Radler in 2000 and 2001, and $602,500 was paid to each Mr. Boultbee and Mr. Atkinson in 2000 and 2001.

* * * Before November 17, 2003, the $16.55 million in payments to [Hollinger Inc.] had not been publicly disclosed in the notes to the Company’s financial statements or in filings with the U.S. Securities and Exchange Commission (the “SEC”). The $15.6 million in payments to the four individuals were disclosed in the Company’s Form 10-K filed in March 2002. As the Company disclosed on November 17, 2003, however, this disclosure was inaccurate because it stated that the payments in question had been authorized by the independent directors of the board, which did not occur, and that the payments were made “to satisfy a closing condition,” which was not accurate. In addition, as disclosed on November 17, 2003, $5.5 million of such payments had previously been reported to have occurred in 2000 rather than in 2001, when such payments were actually made.

93. Hollinger also admitted that its financial statements in prior SEC filings were materially

false. Specifically, Hollinger admitted that the unauthorized non-compete payments had a material

impact on the Company’s financial condition. The Company stated in its November 2003 Press Release:

In light of the fact that steps to authorize the payments in question were not completed as required, each of Lord Black, Mr. Radler and Mr. Atkinson have agreed to repay Hollinger the full amount of the unauthorized payments received by them, together with interest dating from the date of receipt of these funds, not later than June 1, 2004. In addition, Lord Black has agreed to seek repayment in full by [Hollinger Inc.] of the amounts received by it, with interest, by no later than June 1, 2004. Upon receipt of such restitution, Hollinger’s cash position and net worth will be increased compared with previously reported amounts.

94. The November 2003 Press Release also announced that Lord Black would retire as CEO

effective November 21, 2003, and that effective immediately, Radler had resigned as President and COO,

Messrs. Radler and Atkinson had resigned from the Board, Boultbee’s employment had been terminated,


38

and Mark Kipnis, Vice President, Secretary and Corporate Counsel, had also resigned. Later, on January

17, 2003, after the SEC and the Special Committee filed their complaints against Lord Black and

Hollinger, Lord Black was forced to resign from his position as non-executive chairman. On Tuesday,

November 2, 2004, following the publication of the Special Committee Report, Lord Black resigned from

the Hollinger Board. The circumstances under which these executives resigned and/or were terminated

suggest that these actions were required or precipitated by the executives’ complicity in fraudulently

directing Company money to themselves and fraudulently concealing their theft from the shareholders.

2. Sales to CanWest Global Communications Corp.

95. In the Company’s sales of assets to CanWest Global Communications Corp.

(“CanWest”), Lord Black and his cohorts repeated their pattern of stealing from the Company under the

guise of “non-competition payments” and hiding their theft from the shareholders.

96. On July 31, 2000, the Company announced that it had entered into an agreement to sell

certain assets to CanWest. The Company’s August 2000 10-Q stated that the purchase price would be

$2.35 billion, subject to adjustments, and that the “cash proceeds [would be used] to eliminate bank debt

and possibly to cancel debentures and shares and create a substantial reserve of liquid assets.”

97. In a Form 8-K filed with the SEC on August 16, 2000, Hollinger again stated that it

(along with its affiliates Hollinger Inc., Southam Inc. and Hollinger Canadian Newspapers) had reached

agreement to sell certain assets to CanWest. The press release attached as an exhibit to the 8-K quotes

Lord Black as saying:

Hollinger International expects to emerge from this process with a drastically reduced debt level and smaller number of outstanding shares, a stronger strategic position in relation to other media (and especially new media), appreciably higher earnings per share, and a larger cash reserve with which to take the company forward to the next stage of its development.


39

98. The Company’s November 2000 10-Q filed with the SEC on November 14, 2000 again

discussed the pending sale to CanWest for $2.35 billion, which was expected to be completed the next

day.

99. The Company provided additional details of the CanWest transaction in its press release

attached as an exhibit to its Form 8-K filed with the SEC on December 1, 2000. That press release

announced the completion of the CanWest sale for $2.1 billion, “plus interest and subject to adjustment.”

Hollinger stated that as a result of that transaction and other asset sales, Hollinger was able to “repay all

of its back debt and certain other debt” and “dramatically strengthen its balance sheet.”

100. The disclosures in these press releases and 10-Qs were materially false and misleading

because they did not reveal that part of the proceeds from the sales to CanWest would go directly to Lord

Black and other senior Hollinger executives, rather than Hollinger itself. While the shareholders were

informed that the entire proceeds of the CanWest transaction would be used to pay corporate debt and

strengthen the Company’s balance sheet, a significant portion of the sale proceeds were improperly

diverted to Lord Black and his cronies. The revenues received by Hollinger were substantially less than

what was represented in the Company’s public filings, and the amount of its debt paid off as a result of

the sale to CanWest would have been greater absent the undisclosed misappropriation of corporate money

by Lord Black and his associates.

101. As disclosed in the Illinois Special Committee Complaint, the CanWest transaction

agreement allocated $52.9 million of the purchase price to non-competition agreements. Although

Hollinger was the seller of the assets, the Company paid the entire non-competition agreement plus

interest ($54.12 million in total) to Ravelston ($26.44 million), Black and Radler ($11.9 million each) and

Boultbee and Atkinson ($1.32 million each).

102. The Company repeated its fraud in its 2000 10-K, where the Company stated that its

“Canadian operations were significantly reduced on completion of the sale to CanWest of a significant

number of Canadian newspapers and Internet properties for a total sale proceeds of $1.8 billion including


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both cash and CanWest equity shares.” The Company’s representation that the sale was completed “at

fair value” was false because, unbeknownst to the shareholders, much of that value went to Lord Black

and other executives, and so Hollinger received less than $1.8 billion in the transaction, but could have

received more had the unauthorized, undisclosed non-compete payments not been made. The Company

listed the CanWest transaction as among other “sources of revenue” for the Company which were used

“to pay down the Company’s Back Credit Facility,” without telling shareholders that even more debt

would have been paid off had a portion of the proceeds of the CanWest transaction not been diverted to

Lord Black and other Hollinger executives.

103. The Company likewise failed in its 2001 Proxy Statement to disclose that proceeds from

the CanWest transaction were diverted directly to Lord Black and other Hollinger executives. Thus,

Hollinger’s shareholders did not know when they voted to elect Lord Black and others to the Board that

those same executives had misappropriated Company funds generated from the sales to CanWest.

104. The Company did not disclose that any non-competition payments had been made by

CanWest until the Company filed its May 2001 10-Q with the SEC. And when the non-compete

payments were disclosed, the disclosure was utterly fraudulent.

105. The Company stated in its May 2001 10-Q:

Also, as required by CanWest as a condition to the transaction, Ravelston, Hollinger Inc. and Messrs. Black, Radler, Boultbee and Atkinson, entered into non-competition agreements with CanWest pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to CanWest for a five year period, subject to certain limited exceptions, for aggregate consideration received by Ravelston and the executives of Cdn.$80 million [$51.8 million] paid by CanWest in addition to the purchase price referred to above, consisting of Cdn.$38 million [$24.6 million] paid to Ravelston, Cdn.$19 million paid to Mr. Black, Cdn.$19 million [$12.3 million] paid to Mr. Radler, Cdn.$2 million [$1.3 million] paid to Mr. Boultbee and Cdn.$2 million [$1.3 million] paid to Mr. Atkinson.

106. 105. As the Company admitted in the Special Committee Report, the May 2001 10-Q

was materially false and misleading because:


41

(i) the disclosure inaccurately states the payment amounts; (ii) it fails to disclose that $1.1 million in interest was also paid in addition to the non-compete payments; (iii) it leaves the false impression that the $51.8 million was in addition to the purchase price, when, in fact, it effectively reduced the purchase price; (iv) it leaves the false impression that negotiations with CanWest determined the amounts paid to the individuals and Ravelston, when, in fact, the allocation of the payments was determined solely by Hollinger’s executive officers; and (v) CanWest did not demand non-competition agreements from Boultbee and Atkinson.

107. As explained in the Special Committee Complaint, Lord Black denied in the Company’s

May 23, 2002 annual shareholders meeting in New York, in response to a question from a shareholder

regarding the non-competes, that Lord Black or the other interested directors had any role in allocating

the non-compete payments, stating:

Mr. Asper demanded that there be a non-compete arrangement and effectively the independent directors of this company determined that since he wished – that it was something that he was paying valuable consideration for and some of that should come to us and not to this company. And that was not a matter negotiated directly by us.

[Emphasis supplied.]

[CanWest] attached significant commercial value to a non-compete agreement with us. Not with Hollinger International. . . . And, I accept that there’s a conundrum as to the division between the company’s interest and our thing like that, so we effectively handed it to the independent directors to determine, stayed above the 10 times multiple, shrunk our own incomes, undoubtedly saved all of the shareholders a tremendous inconvenience by doing these deals that have enabled this company to sail relatively painlessly through a difficult time. . . .

And in all the circumstances, the independent directors felt this was the fair thing to do and I must say, I agree. . . .

You’re dealing with a best efforts attempt to accommodate to industry practice and do what’s equitable as determined by independent directors who are a group — quite a distinguished group.

. . . we leave the determination of these matters in the hands of disinterested people, who do, as I said in my remarks, conduct whatever analysis they think is appropriate. It’s not for us to tell them what to do. . . .


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108. Lord Black’s statement that the payments were negotiated by the independent directors

(on the Audit Committee) is false (and the independent directors knew or should have known that the

statement was false), as those payments were set by Lord Black, Radler, Boultbee and Atkinson. The

SEC in its Enforcement Action alleged that “Black personally negotiated the CanWest transaction on

behalf of Hollinger International” and that “Black and Radler determined the amounts that were allocated

to various individuals and entities.” Additionally, Lord Black’s representation that the payments were

made directly by CanWest is false, as Hollinger made the payments out of the transaction proceeds, with

CanWest having no input as to the specific amounts paid to Lord Black and the other Hollinger

executives and Ravelston. As stated in the Special Committee Report: “Atkinson during his interview

acknowledged that this and other Black statements at the meeting were false. (Indeed, Atkinson recalled

that he warned Back before the meeting to speak truthfully, but Black rejected his advice.)”

109. According to the Special Committee, Lord Black also stated at the May 2002

shareholders meeting that the non-competition payments did not reduce Hollinger’s sales proceeds:

The answer is that it was in our opinion not technically speaking a reduction of the compensation paid to the company. The consideration was not reduced there by the acquirer in the principle case that you’re referring to, the CanWest deal.

110. This is false, as Lord Black and Radler caused the $53 million in non-compete payments

to be removed from the agreed-upon transaction proceeds into the non-competition agreement allocation,

and then ultimately into the bank accounts of Ravelston and its shareholders – Lord Black, Radler,

Boultbee and Atkinson. As explained in the Special Committee Report, “[t]hese payments came directly

out of the sales proceeds otherwise payable to Hollinger and its shareholders, while Hollinger itself did

not receive a single dollar of the non-compete proceeds.”

111. Even after the Company disclosed the existence of the non-compete payments, it

continued the fraud by falsely stating that the payments were required as part of the CanWest transaction.

The Company stated in its 2001 10-K that:


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Also, as required by CanWest as a condition to the transaction, the Company, Ravelston, Hollinger Inc., Lord Black and three senior executives entered into non-competition agreements with CanWest pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian business sold to CanWest for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn.$80 million ($53 million) paid by CanWest in addition to the purchase price referred to above of which Cdn.$38 million ($25.2 million) was paid to Ravelston and Cdn.$42 million ($27.8 million) was paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

112. The Company’s disclosures prior to May 2001 were fraudulent because they failed to

disclose the non-compete payments at all. The Company’s disclosures in its May 2001 10-Q and 2001

10-K were fraudulent because, inter alia, they falsely claimed that the non-competition payments were

required by CanWest “as a condition to the transaction.”

113. CanWest has emphatically denied ever allocating any amount of the purchase price to

any non-competition agreement. As the Wall Street Journal reported on November 21, 2003:

CanWest spokesman Geoffrey Elliot said his company agreed only on an overall price to acquire the newspapers and receive the non-competition agreement from Hollinger and didn’t negotiate a separate amount allocated for the non-competition clause. That clause was “a part of the overall transaction,” and the $53 million amount was “established by Hollinger,” Mr. Elliot said. CanWest paid the acquisition price to Hollinger and not to any individuals, he added.

114. Additionally, the Special Committee stated in its complaints that no one from or on

behalf of CanWest ever requested or demanded that any part of the purchase price for Hollinger’s assets

be paid to anyone other than the Company.

115. Finally, the disclosures in the May 2001 10-Q and 2001 10-K were false and misleading

because the payments were not approved by “independent directors”; in fact, after the May 2001 10-Q

and the 2001 10-K were filed, the Audit Committee attempted to “ratify” the payments that had already

been made.

116. As explained by the Special Committee in its Report and its Illinois and New York

Complaints, Hollinger’s Audit Committee originally met on or about September 11, 2000 to review the


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CanWest transaction. However, the committee completely failed to conduct any review of the terms of

that transaction or their fairness to Hollinger. The Audit Committee failed to discuss or conduct any

inquiry into the negotiation and circumstances surrounding the terms of the CanWest sales agreement, or

attempt to determine how the amount and recipients of the non-compete payments were determined. At

that meeting, the Audit Committee purportedly approved $32.4 million in non-compete payments and a

$19.4 million “Management Agreement Break-Up Fee” for Ravelston for its benefiting Hollinger by

“consenting to CanWest having an early termination of its management arrangements.” However, as

stated in the Special Committee Report:

Ravelston had not consented to early termination of its arrangements with Hollinger by even one minute. The Ravelston Management Services Agreement with Hollinger was not canceled, terminated or shortened as a result of the CanWest transaction. Ravelston continued managing the assets Hollinger owned exactly as before, and it continued to receive nearly the same fee income even though the assets under management had shrunk dramatically.

In reality, the $19.4 million “Break-Up Fee” was simply another component of the non-competition fees,

which totaled $51.8 million. The $51.8 million in non-compete payments were allocated to the purchase

price thus reducing the consideration received by Hollinger.

117. On top of the $51.8 million in non-compete fees, an additional $1.1 million was paid to

Ravelston and its shareholders in purported “interest” payments ordered by Radler. As explained in the

Special Committee Report, “Radler decided they should receive interest on the amounts of the non-

competes between the contract and closing” and so he ordered that $1.1 million be taken from Hollinger

and wired to Black, Radler, Atkinson, Boultbee and Ravelston on the closing date, though this additional

payment “was never approved by the Audit Committee or otherwise properly authorized.”

118. Thus, in total, $52.9 million was wired by the Company on November 16, 2000 out of the

CanWest transaction proceeds as follows: Black $11,896,736.17; Radler $11,896,736.17; Ravelston

$26,437,191.50; and Atkinson and Boultbee each $1,321,859.58. As a result of the Audit Committee’s

utter failure to conduct any inquiry into the payments proposed at the September 11, 2000 meeting, the


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committe failed to learn that: (i) CanWest did not require that any non-competition payments be made to

any individual, but Lord Black and Radler inserted only three days before closing a provision allocating

portions of the purchase price to the non-competition agreements; (ii) Ravelston had not consented to any

early termination of any management agreements to justify the $19.4 million “Break-Up Fee,” which was

just another non-compete payment; (iii) Lord Black and Radler actually increased the original non-

compete allocation upward (from $37.7 million to $51.8 million) exclusively for their own benefit; (iv)

Ravelston, Lord Black, Radler, Boultbee and Atkinson would receive an additional $1.1 million as a

percentage of the August 2000-November 2000 interest allocation the CanWest transaction agreement

provided the Company would receive; (v) CanWest originally proposed that the post-closing management

services agreement would be with Hollinger, but Lord Black unilaterally decided that the agreement

would be with Ravelston; (vi) CanWest rejected as unreasonable and excessive the proposed Ravelston

post-closing annual management services fee that Lord Black originally proposed, and only agreed to pay

approximately 32% of that proposal; (vii) the proposed management fee that CanWest rejected as

unreasonable and excessive was approximately the amount that Ravelston had been charging Hollinger to

manage those assets; (viii) Hollinger paid Colson a $1,073,719 “bonus” as part of the CanWest

transaction, though this payment was never approved by the Company’s independent directors; and (ix)

Lord Black and Radler negotiated for themselves an annual management fee and a termination fee paid by

CanWest if it were to terminate the management services agreement ($30.3 million) or even if Ravelston

were to terminate ($15.1 million).

119. As a result of the complete recklessness and lack of inquiry or discussion of even the

basic terms and circumstances surrounding the CanWest transaction, Hollinger’s Audit Committee

completely abdicated its fiduciary duties and failed to make an informed review of the transaction and its

fairness to Hollinger’s shareholders.

120. The full Board met immediately after the Audit Committee on September 11, 2000 and

approved the payments the Audit Committee had approved. In a meeting described in the Special


46

Committee Report as “perfunctory,” the Board gave its approval without receiving any fairness opinion

on the payments or making any inquiry into their amount or propriety.

121. As alleged in the Special Committee Report and Complaints, as a result of the lack of any

inquiry or discussion by the Board or Audit Committee, the Board and committee failed to inquire: (i)

whether Ravelston, Black, Radler, Boultbee and Atkinson would be receiving an interest allocation on top

of the non-compete payments; (ii) whether Hollinger’s subsidiary Hollinger Canadian Newspapers

Limited Partnership (“HCNLP”), which was owned 87% by Hollinger and 13% by public limited

partners, and was selling one-third of the assets in the CanWest transaction, was being charged for any

portion of the non-compete payments; (iii) whether Ravelston had any role in extracting the agreement

from CanWest to pay Ravelston an annual management services fee to manage the assets; and (iv)

whether CanWest would have to pay Ravelston if CanWest or Ravelston were to terminate the services

agreement.

122. The Special Committee Report and Complaints further explain that in or about May

2001, Lord Black and Radler sought to obtain from the Audit Committee and Board an after-the-fact

“ratification” of the November 2000 CanWest non-compete payments. Even with this “second chance” to

conduct an adequate review of the CanWest deal and the non-compete payments, the Audit Committee

and Board still abdicated their duties to review the fairness of that deal and those payments. This is

particularly surprising as Lord Black and Radler told the Audit Committee and Board that CanWest did

not require that any particular amounts of the total non-compete payment allocation be paid to any

individual or entity. Thus, the Board and Audit Committee knew, or were reckless in not knowing, that it

was Lord Black and his associates, rather than CanWest, that decided that the non-compete payments

would be made to these individuals, rather than to Hollinger. Nevertheless, as stated in the Special

Committee Report, the Audit Committee in a twenty minute telephone meeting held on May 14, 2001

unanimously approved the CanWest non-compete payments, and the Board followed suit on May 17 in a

“perfunctory ratification” of those payments. Neither the Audit Committee nor the Board even asked how


47

the amounts of the payments or the recipients were determined. Unbeknownst to investors, neither the

Board nor the Audit Committee nor any of the independent directors fully and fairly reviewed, approved

or “ratified” the non-compete payments and corporate opportunities present in the CanWest transaction.

Nor did they review and approve the over $1 million “bonus” payment to Colson, a payment that Colson

requested and Lord Black ordered.

3. Sales to Osprey Media Group Inc.

123. In July and November 2001, in two separate transactions, Hollinger and Hollinger L.P.

sold Canadian newspapers to Osprey Media Group, Inc. (“Osprey”) for approximately $166 million. As

with the Company’s sales of U.S. community newspapers, a portion of the sale proceeds went directly

into the pockets of Lord Black and his cronies, but that was not disclosed to the shareholders. While

Hollinger apparently agreed not to compete in the markets occupied by the Canadian newspapers it sold,

Lord Black and other Hollinger executives, not Hollinger, received payments pursuant to the non-

competition agreements. As explained in the Special Committee’s Report and its Illinois federal court

action, Atkinson sent an email on June 18, 2001 to Hollinger Inc.’s outside counsel to “add the names of

Conrad [Black], David [Radler], Jack [Boultbee] and me re. the non- competes” and the counsel replied

“[w]ill do.” Accordingly, in connection with the Company’s sale of its Canadian newspapers, Osprey

paid a total of $5,100,000 in non-compete payments, $4,468,000 of which was paid as part of the first

Oprey transaction (on or about July 31, 2001) and allocated as follows: $2,021,000 to Lord Black;

$2,021,000 to Radler; $213,000 to Atkinson, and $213,000 to Boultbee. In the second Osprey deal which

closed on or about November 30, 2001, a total of $700,000 in non-compete payments were paid, with

Black and Radler receiving $317,000 each and Atkinson and Boultbee each receiving $33,000. However,

Hollinger kept these non-competition payments a secret from the Company’s shareholders until well after

those payments had been made.

124. The Company first disclosed the July 2001 sale to Osprey in the Company’s August

2001 10-Q, which was signed by Boultbee. The Company stated:


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On July 31, 2001, the Company announced the sale of most of its remaining Canadian newspapers for approximately Cdn.$220 million, subject to adjustments. Included in this sale were community newspapers in Ontario such as The Kingston Whig- Standard , The Sault Star and the Peterborough Examiner. The consideration for this sale was paid in cash at closing.

There was no mention of any non-competition payments in this filing.

125. Similar disclosures of the sales to Osprey were made in Hollinger’s November 2001 10-

Q, its Registration Statements on Forms S-3 filed with the SEC on December 20, 2001 and March 25,

2002, and its Prospectuses on Forms 424 B3 filed on December 31, 2001 and April 4, 2002. None of

these filings mentioned any non-competition payments as being part of the Osprey transaction.

126. In the Company’s 2001 10-K (filed on or about April 1, 2002 ), the Company again

disclosed the sales to Osprey, stating under the heading “Related Party Transactions,” that:

In two separate transactions in July and November 2001, the Company and Hollinger L.P. completed the sale of most of its remaining Canadian newspapers to Osprey . . . for total sale proceeds of approximately Cdn.$255.0 million ($166.0 million) plus closing adjustments primarily for working capital. . . . Pre-tax gains of approximately $0.8 million were recognized on these sales.

127. The Company also disclosed for the first time that as part of the Osprey transactions non-

competition payments were made to Lord Black and other senior Hollinger executives. The Company

stated in its 2001 10-K:

The Company’s independent directors have approved the terms of these transactions.

In connection with the two above sales of Canadian newspaper properties to Osprey, to satisfy a closing condition, the Company, Hollinger Inc., and Lord Black and three senior executives entered into non-competition agreements with Osprey pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to Osprey for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn. $7.9 million ($5.1 million). Such consideration was paid to Lord Black and the three senior executives and has been approved by the Company’s independent directors.


49

128. The Company broke down the non-compete payments for the first time in its 2002 Proxy

Statement, filed on April 2, 2002, as follows:

In connection with the two sales of Canadian newspaper properties to Osprey Media Group Inc. (“Osprey”) in 2001, to satisfy a closing condition, Hollinger Inc., the Company, Lord Black and Messrs. Radler, Atkinson and Boultbee entered into non-competition agreements with Osprey pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to Osprey for a five year period, subject to certain limited exceptions, for aggregate consideration of Cdn.$7,940,000, consisting of Cdn.$3,591,995 paid to Lord Black, Cdn.$3,591.905 paid to Mr. Radler, Cdn.$378,095 paid to Mr. Atkinson and Cdn.$378,095 paid to Mr. Boultbee.

129. Hollinger’s shareholders learned from the 2001 10-K and the 2002 Proxy Statement

(filed on consecutive days) that Hollinger did not obtain all of the benefits of its sales to Osprey, as

portions of the sale proceeds were directed to Lord Black and other Hollinger executives.

130. However, Hollinger’s attempts to “come clean” in its 2001 10-K and 2002 Proxy

Statement were unsuccessful, as the Company falsely stated in those filings that the terms of the Osprey

transactions and the non-competition payments were approved by the Company’s “independent

directors,” when that did not occur.

131. As explained in the Special Committee Report and the Illinois and New York Special

Committee Complaints, none of the non-competes paid out of the first Osprey transaction had prior

approval from the Audit Committee or the independent directors. Rather, months later, in or about

September 2001, Lord Black and Radler presented the payments to the Audit Committee for after-the-fact

“ratification.” According to the Special Committee:

The rationale provided to the Audit Committee was that Osprey insisted on the same non-competition agreements that CanWest had obtained and wanted to avoid competition from Defendants Black’s and Radler’s “private interests in other newspaper operations.” The latter was a reference to Horizon, which the Audit Committee had also allowed Defendants Black and Radler to own and run without adequate fairness analysis.


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132. Once again, the Audit Committee and Board failed to conduct any review or inquiry

necessary to approve or “ratify” the payments. The Audit Committee and the Board failed to ask whether

the HCNLP public limited partners were paying (or being asked to pay) any part of the non-competition

allocation, whether Lord Black, Radler, Boultbee and Atkinson had become parties to the non-compete

agreements at their request or on the request of HCNLP, or whether those executives had previously

received non-compete payments in connection with Hollinger’s sales of its U.S. community newspapers.

The Special Committee succinctly stated in its Report that “[t]he Audit Committee did not seek or obtain

any independent legal, financial or accounting advice regarding these payments.” The Audit Committee

simply rubber-stamped the non-compete payments in a twenty minute telephone meeting even though it

knew that it had completely failed to become fully and properly informed as required to analyze the

fairness of the Osprey transaction and the non-compete payments to Hollinger and its shareholders.

133. In the second Osprey transaction (completed on or about November 30, 2001), Lord

Black and Radler each received $317,000, and Boultbee and Atkinson each received $33,000, in non-

compete payments, though once again, without Audit Committee or independent director approval.

Again, these individual defendants presented the non-compete payments to the Audit Committee for

“ratification,” but the Audit Committee and Board failed to conduct any due diligence or other inquiry,

and consequently lacked basic information required to be fully informed and able to analyze the fairness

of the payments to Hollinger and its shareholders. As stated in the Special Committee Report, “the self-

dealing payments and the vacuous Audit Committee ratification became simply rote.” The Company did

not inform the shareholders of the complete lack of care and inquiry by the Audit Committee and Board

in their review, approval or purported ratification of the Osprey transactions.

C. RAVELSTON MANAGEMENT SERVICES AGREEMENTS

134. Since at least 1995, Hollinger and its subsidiaries entered into management service

agreements with Ravelston and its affiliates. Ravelston is and was during the Class Period owned by

Lord Black, Radler, Colson, Boultbee and Atkinson, and non-defendants, Peter White, the Estate of


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Dixon Chant and Charles Cowan (all of whom are current or former officers and/or Directors of Hollinger

Inc. and the Company). According to the Company’s 2001 Proxy Statement, Ravelston is paid by

Hollinger for the following services under the management service agreements:

Pursuant to the Service Agreements, Ravelston provides advisory, consultative, procurement and administrative services to the Company and its respective subsidiaries including, among other things, strategic advice, planning and financial services (including advice and assistance with respect to acquisitions, divestitures or joint venture arrangements); consulting services regarding risk management and insurance coverage; and assistance in operational matters.

135. Since at least March 1999, the Company has fraudulently assured investors that the

management services agreements were properly negotiated by the Company so that the fees paid pursuant

to those agreements were a fair value for the cost to Ravelston of providing the management services.

The Company further assured investors that the Board’s Audit Committee had reviewed and approved the

fees as reasonable. However, these representations were false. The Company admitted in its 2002 10-K

signed by Lord Black, Radler, Colson, Boultbee, Atkinson, Lady Black, Burt, Kissinger, Kravis, Meitar,

Perle, Taubman and Thompson that the payments may not be reasonable, because the Board, and the

Audit Committee in particular, had undisclosed conflicts of interest and lacked independence. But that

was not the full story. In fact, Ravelston was not providing any services pursuant to the management

services agreements, so the payments could not possibly be reasonable or a fair value for the services

provided. In fact, the management services agreements were just another part of defendants’ fraud

orchestrated by Lord Black and Radler to funnel Hollinger’s money into their pockets (and the pockets of

Boultbee and Atkinson). As explained in the Illinois Special Committee Complaint, Boultbee knew that

the Company did not fully deduct the management fee in preparing its tax returns, based on advice from

the Company’s tax advisors that the Company could not defend the reasonableness of the fees in the event

of an audit. However, Hollinger did not disclose this fact in any public filings in the Class Period.

136. Misrepresentations regarding the management services agreements were made in the

1999 Proxy Statement, where the Company stated:


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Pursuant to the Management Agreement, the Company has paid Ravelston (whose affiliates include Messrs. Black, Radler, Colson, Atkinson, Boultbee and Creasey and Mrs. Black, who are officers and/or directors of both Hollinger Inc. and the Company and who, with the exception of Mrs. Black, do not receive compensation directly from the Company in their capacities as executive officers of the Company or Hollinger Inc.) approximately $32 million in 1998 and paid Hollinger Inc. pursuant to the Services Agreement approximately $26 million in 1997. The amount of the management fees was approved by the Audit Committee as reasonable for the services rendered to the Company.

137. The 2000 Proxy Statement described the services provided by Ravelston to Hollinger, the

Company’s Southam Inc. subsidiary and their respective subsidiaries pursuant to the management

services agreements, and also stated:

In 1999 and 1998 in the aggregate approximately $38 million and $32 million, respectively, was paid in fees pursuant to the Services Agreements. The fees paid by the Company were approved by the Audit Committee as reasonable for the services rendered . . . . Additionally, $2.3 million was paid to Ravelston’s affiliate, Moffat Management, for services provided to the Company’s Community Newspaper Group.

138. The 2001 Proxy Statement again described the services provided under the Ravelston

management services agreements, and provided the following information regarding payments to

Ravelston and its affiliates:

In 2000 and 1999 in the aggregate approximately $24 million plus Cdn.$18.5 million and $38 million, respectively, was paid in fees pursuant to the Services Agreements. The fees paid by the Company were approved by the Audit Committee as reasonable for the services rendered. . . . Additionally, $1.56 million was paid to Ravelston’s affiliate, Moffat Management, for services provided to the Company’s Community Newspaper Group.

139. The 2002 Proxy Statement disclosed the following payments pursuant to the Ravelston

management services agreements, stating:

In 2001 approximately $25.8 million plus Cdn.$7.6 million was paid in fees pursuant to the Services Agreements. The fees paid by the Company were approved by the Audit Committee as reasonable for the services rendered. . . . Of the aforementioned Services Agreements fees, approximately $770,000 and $230,000, respectively, were paid to Ravelston’s affiliates, Moffat Management and Black-Amiel Management, for services provided.


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140. At Hollinger’s 2002 annual shareholders meeting, Lord Black characterized the

management fee structure as follows:

We are assured by independent advisors that the [Ravelston management] fee is at the conservative end of the range of practice. ...The normal cost for outsourcing these services . . . is 2 ½ times cost. We are paid much less than that and a substantially smaller percentage of our corporate revenues than most media businesses managed in this way.

141. Hollinger also described in its May 2001 10-Q and in its 2001 10-K the management

services agreement with CanWest and National Post. In those filings, the Company did not identify the

total amount paid to Ravelston from all the service agreements involving Hollinger and its various

newspaper properties and subsidiaries, but did disclose that the agreements with CanWest required

CanWest to make annual payments of $4 million to Ravelston.

142. In all, Hollinger disclosed payments from the Company and its subsidiaries to Ravelston

and its subsidiaries and affiliates that totaled approximately $202 million from 1995 through 2002.

143. Each of the above statements (in the 1999-2002 Proxy Statements) regarding the

Ravelston management services agreements was materially false and misleading when made. Contrary to

the Company’s earlier statements, on March 31, 2003, Hollinger admitted in its 2002 10-K that the terms

of Ravelston services agreements may have been drafted in favor of Ravelston and thus may be unfair to

Hollinger, and that the amounts paid under the agreements may have been unreasonable and therefore

excessive. The Company conceded in its 2002 10-K that:

All of the Service Agreements were negotiated in the context of a parent-subsidiary relationship and, therefore, were not the result of arm’s length negotiations between independent parties. The terms of the Service Agreements may therefore not be as favorable to the Company and its subsidiaries as the terms that might be reached through negotiations with non-affiliated third parties.

144. The disclosure in the 2002 Proxy Statement was false and misleading in its failure to

disclose what compensation was actually received by whom, and it did not account for all of the fees paid

to Ravelston that year, as explained by the Special Committee in its Report.


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145. The Company’s disclosures in its Proxy Statements were also false and misleading

because, as disclosed in the 2002 10-K, certain management services agreements were assigned by

Ravelston to RMI, and RMI as well as Ravelston had been paid by Hollinger for management services

pursuant to these agreements. Additionally, the Company disclosed for the first time that executives at

Ravelston and affiliates of Ravelston and RMI received personal payments pursuant to separate services

agreements with Hollinger’s subsidiaries. The 2002 10-K stated:

The Company and its subsidiaries have entered into a services agreement with The Ravelston Corporation Limited (“Ravelston”), whereby Ravelston acts as manager of the Company and carries out head office and executive responsibilities. This services agreement was assigned on July 5, 2002 to Ravelston Management Inc. (“RMI”), a wholly-owned subsidiary of Ravelston. Ravelston and RMI billed to the Company and its subsidiaries fees totaling $23,731,000, $28,956,000 and $33,618,000for 2002, 2001 and 2000, respectively, pursuant to this agreement. Certain executives of Ravelston and Moffat Management and Black-Amiel Management, affiliates of Ravelston and RMI, have separate services agreements with certain subsidiaries of the Company. Amounts paid directly by subsidiaries of the Company pursuant to such agreements were $1,895,000, $1,697,000 and $3,659,000 for 2002, 2001 and 2000, respectively. The fees under Ravelston’s and RMI’s services agreement and the fees paid directly to executives and affiliates of Ravelston, in aggregate, are negotiated with and approved by the Company’s independent directors.

146. Through the 2002 10-K filing, Hollinger’s disclosed for the first time that not only was

Hollinger paying Black and Radler-controlled entities for management services, the Company and its

subsidiaries were directly paying executives at Black and Radler-controlled entities. While the Company

did not disclose the names of these executives, the controlling owners and/or executives of Ravelston and

RMI include Black and Radler, and additional Ravelston shareholders are Lady Black, Boultbee and

Colson. The “executives” of Black Amiel Management that were paid by Hollinger under the

management services agreements include Lady Black. These directors (Black, Radler, Lady Black,

Boultbee and Colson) were among those deemed by the Company to be “independent” and providing

approval, but the inherent conflict in having them review and approve transactions in which they stood on

both sides and would benefit precluded them from being independent. Thus, the Board, Audit Committee


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and independent director review and approval, which the Company had previously and falsely represented

as occurring and resulting in agreements fair to the Company, instead meant nothing. The Company

stated that it could no longer stand behind the payments that it had previously represented as being

reasonable. Individuals who had invested believing, based upon Company representations, that the

Company was paying a fair and reasonable price for various consulting and management services, were

now warned that the Company may, in fact, be overpaying for those services. Significantly, the recipient

of these apparent overpayments was Ravelston, an entity controlled by Lord Black, who also ran

Hollinger.

147. Even the 2002 10-K filed after the Class Period failed to tell the whole story regarding

the management services agreements. In fact, those agreements were simply a mechanism to funnel

additional Hollinger money to Lord Black and his associates through payments to Ravelston, RMI, Black

Amiel Management and/or “executives” at those entities – such as Lord Black, Radler, Boultbee,

Atkinson, Colson and Lady Black. Also concealed was the fact that Ravelston and its affiliates did not

provide any services whatsoever to earn the fees it received from Hollinger. As explained in the Special

Committee Report:

Ravelston directed Hollinger to pay a portion of the annual management fee to two private companies incorporated in Barbados: Moffat and Black-Amiel. These payments were made pursuant to separate management services agreements between Hollinger and each of Moffat and Black-Amiel, and the Special Committee does not believe that these agreements had any economic substance. Neither company has any employees of which the Special Committee is aware, or provided any services to Hollinger. Black’s services were already compensated ten times over through Ravelston, and Amiel Black already had two paying positions within Hollinger - that of contributing writer and her imaginary service as a full-time corporate officer. Radler, Boultbee and Atkinson were also paid through the Ravelston management fee to serve as Hollinger executives. ...[N]either Black nor Amiel Black was doing anything meaningful through these shell Caribbean corporations. Further, the Special Committee found no evidence to suggest that the entities themselves did anything through anyone. Thus, in the Special Committee’s view, the purported “management fees” were fraudulent in nature. [footnotes omitted].


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148. The Special Committee discerned the reason that fees were paid to Moffat and Black-

Amiel even through they “did nothing to earn fees, and did not have either employees or real operations”

– “paying management fees to them on the pretense that they performed services allowed to recipients the

prospect of transforming a portion of the enormous management fees that could otherwise most likely

have been taxable in Canada or possibly the U.S. . . . into dividends received in Barbados (where nothing

occurred).” [footnote omitted]. Whatever the reason, the payments were never approved: “the Special

Committee has not found any evidence that the payments to those Caribbean shell corporations were ever

presented for approval to either the Audit Committee or the Board.”

149. One component of the management fees was a “broker fee” paid by Hollinger to Moffat

in 1999. Moffat received $900,000 in these purported “broker fees” even though the Special Committee

found no evidence that Moffat performed any such services. As stated in its Report, “[t]he Special

Committee has concluded that Moffat performed no service that would justify the broker fees it received.”

150. In short, Hollinger remained managed by Lord Black, Radler and the other senior

Hollinger executives, but payments were made to Ravelston and its affiliates for purported management

services which were never provided by those entities. As Hollinger remained managed by its Board and

officers and other employees, there were no additional services provided by those who were paid

personally pursuant to the management services agreements – the “executives” receiving such payments

(Black, Radler, Boultbee, Atkinson, Colson and Lady Black) already managed the Company through their

positions at Hollinger.

151. Also not disclosed during the Class Period (or in the 2002 10-K) was the manner in

which the management fees were determined. As explained in the Illinois and New York Special

Committee Complaints, the management services agreements did not establish specific fee amounts to be

paid to Ravelston, as the fee was to be negotiated every year between Ravelston and the independent

members of Hollinger’s Board. While the Company’s Board delegated this responsibility to the Audit


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Committee, the Audit Committee did not discharge this duty, as each year it was Radler, on behalf of

Ravelston, who proposed a management fee to the Audit Committee.

152. The Special Committee provided further details in its Report on the complete lack of any

negotiations surrounding the management services fees, stating that:

there was never any meaningful negotiation between Ravelston and the Audit Committee relating to the annual fee proposal.

* * *

[T]he “negotiations” with the Audit Committee generically consisted of Radler, wearing his Ravelston shareholder hat, submitting an annual fee proposal - in most years, simply the dollar amount that Ravelston wanted to be paid - to Thompson, as Chairman of the Audit Committee. After a cursory discussion, Thompson would agree to the proposal. Thompson did not ask Ravelston to provide any documentary support for the management fee, which enabled Black, Radler and Boultbee to extract increasingly exhorbitant fees for Ravelston.

Radler never provided, and the Audit Committe never requested, any detailed financial analysis that showed the computation of the fee proposal or an itemization of differences between the proposal and the prior year’s fee.

* * *

The Audit Committee never requested or obtained the information and advice necessary to understand what was being paid to Black and Radler, or to develop any business justification for the fees that were paid to them and their associates through Ravelston, notwithstanding a clear and direct conflict between the interests of Ravelston and Hollinger.

153. Radler knew that the fee he proposed had nothing to do with Ravelston’s costs of

providing services to Hollinger, because no such services were provided. The Special Committee stated

in its Report and complaints that Radler consulted with Black and Boultbee in determining a fee to

propose, using as a starting point not the cost of providing such services, but the amounts Ravelston

“needed” to support its activities and service its debt, as well as to satisfy Lord Black’s appetite for

additional compensation.


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154. These “standards” were not disclosed to Hollinger’s shareholders. As Hollinger used its

own senior management team to provide management services to Hollinger, there was no reason to pay

Ravelston for any management services, and indeed, none were provided by Ravelston.

155. Also not disclosed during the Class Period (or in the 2002 10-K) was the fact that the

Audit Committee approval of the management services fees was a sham, because: (i) the Audit

Committee never requested any documentation or support for the proposed annual fees or Ravelston’s

costs of providing management services to Hollinger; and (ii) the Audit Committee never considered any

performance-based criteria (such as percentages of revenues, net income or EBITDA) in evaluating the

fee proposal, basing its approval instead upon reference only to the prior year’s fee and the Company’s

size (in relation to the previous year). Thus, the Audit Committee recklessly failed to conduct any

meaningful review, analysis, or valuation of the proposed fee amounts or the work Ravelston would

purportedly perform under the management services agreements, and so lacked basic information

required to approve those agreements.

156. As the Special Committee stated in its Report:

Each of the Audit Committee members acknowledged that they never questioned the business rationale for, or fairness of, the Ravelston “outsourcing” arrangement. They also acknowledged that they did not develop or apply any comparisons or other metrics against which each year’s proposed fee could intelligently be measured. They never asked for any information about Ravelston: its size, scope of business, revenues/profitability, clientele, employee list, compensation schedules, or anything else. They never asked if the payment of annual management fees to Ravelston was causing Hollinger to incur costs greater than it would incur if the Company simply hired Black, Radler and other needed Ravelston personnel directly. And they never sought to base the annual fee on a performance component, such as a percentage of Hollinger’s EBITDA.

In fact, “the issue of what the fee covered, or why it was so high, never came up in Audit Committee

discussions.” Additionally, after Radler presented the proposed fee to Thompson, who always approved

it without change, Burt and Kravis, the other members of the Audit Committee, “deferred entirely to

Thompson’s annual recommendation to approve management’s fee request.”


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157. The Board’s approval of the management service fees was also a sham. The Special

Committee found no record of any Board discussion of the management service fees prior to February

2000, and scant record of any such discussion even at that Board meeting. As found by the Special

Committee, at the February 2000 Board meeting:

Thompson did not advise the Board members of the specific dollar amount of the fee. The Board was not asked to approve or ratify the Audit Committee’s decision, and the meeting minutes do not reflect any discussion of the management fee by the full Board. ...[T]he Board did not receive any materials in advance in quantifying or justifying the level of the fee. Neither the Board not the Audit Committee had any basis whatsoever to make this “fairness” determination.

Robert Strauss had no recollection at all of Ravelston or its receipt of a management fee from Hollinger . . . . Raymond Chambers stated that . . . he never participated in a discussion relating to management fees and that the issue was never discussed by the Board.

* * *

Lord Weidenfeld . . . recalled no specific Board discussion of Ravelston’s purpose or the management fee.

* * *

Shmuel Meitar stated that . . . there was no discussion at the Board level about the size or reasonableness of the fees.

* * *

Alfred Taubman could not recall any Board discussion of management fees . . . .

* * *

Leslie Wexner could not recall any discussion of Ravelston or the management fee at Board meetings, and did not recall being aware of Ravelston’s function at the time he sat on the Board.

158. Accordingly, Lord Black’s statements to the shareholders at the 2002 annual meeting

about the management fees were false. The Special Committee stated in its Report that it:

found no basis for these statements. First, no Hollinger officer or employee could recall any instance in which an “independent advisor” provided any advice to Hollinger’s management, Audit Committee or


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Board regarding the appropriateness of the management fee. Second, no Hollinger officer or employee interviewed by the Special Committee (other than Radler and Boultbee) could substantiate Black’s claim that the “normal cost” for outsourcing management services is 2.5 times the cost of providing such services, or for that matter, that any other operating companies employed such a practice. Third, although Black suggested that there are many media companies managed by an outsourced management team, the Cook analysis found no other publicly traded newspaper or media companies that are managed through a structure similar to Ravelston/Hollinger. Fourth, Black stated that Ravelston is “paid much less than” 2.5 times cost, but the Special Committee’s analysis suggests that Ravelston was paid approximately 29

times its costs in 2002, and more than 30 times its costs in 2003. Thus, Ravelston’s rate of profitability was more than 10 times greater than Black told shareholders was the case.

These facts were concealed from investors.

159. Also concealed from investors was Hollinger Inc.’s role in helping Ravelston extract the

exorbitant fees from Hollinger. Hollinger Inc. used those fees to pay its own debt obligations to the

Company.

160. Finally, the Company failed to disclose the compensation paid to Lord Black and other

Ravelston executives in the form of the management services fees.

161. Each of Hollinger’s Proxy Statements during the Class Period contained a Summary

Compensation Table setting forth the compensation for the CEO (Lord Black) and the four most highly

compensated executive officers for the previous three fiscal years. These disclosures did not include any

of the management service fees.

162. The Summary Compensation Tables in the 2000-2003 Proxy Statements list annual and

long term compensation for Black, Radler, Atkinson, Boultbee and Colson and the 2000 and 2001 Proxy

Statements contain a footnote stating “[u]nder the Services Agreements with Ravelston, the Company

pays a management fee relating to, among other matters, management and administrative services

provided to the Company by such executives.” The 2002 Proxy Statement contains substantially the

same language.


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163. It was not until the 2003 Proxy Statement that the Company made any disclosure of the

specific amounts paid to Lord Black, Radler, Atkinson, Boultbee and Colson under the management

services agreements, and even then, the disclosure was false. In the 2003 Proxy Statement, the Company

stated as follows:

The Company does not determine the allocation of the management fee paid to Ravelston among its ultimate recipients. That allocation is determined by Ravelston. The Company has requested, and Ravelston provided, an allocation of the economic interest, direct or indirect through compensation arrangements, shareholdings or otherwise, in the management fee paid during the years ended December 31, 2001 and December 31, 2002 which can reasonably be attributed to the Chief Executive Officer of the Company and the other four most senior officers of the Company whose salaries and bonuses for the years ended December 31, 2001 and December 31, 2002 exceeded $100,000. The allocation provided by Ravelston has not been independently verified by the Company.

YEAR ENDED

NAME DECEMBER 31, 2002 DECEMBER 31, 2001

Lord Black $6,485,439 $6,619,256

F. Daniel Radler $3,147,922 $3,102,221

Daniel W. Colson $1,770,770 $1,714,308

Peter Y. Atkinson $ 876,009 $ 846,063

J.A. Boultbee $ 929,395 $ 897,250

164. However, these disclosures were false because they failed to include as compensation

paid to the listed executives any of the management services fees. The Special Committee aptly

summarizes the deficient disclosures as follows:

The record of Hollinger’s disclosures under Black and Radler’s leadership shows repeated instances of incomplete, inaccurate or nonexistent disclosures. . . . For example, until 2003 Hollinger’s proxy statement compensation tables did not include disclosure of even $1 in compensation to Black, Radler and the other Ravelston executives resulting from more than $226 million in management fees Hollinger paid to Ravelston since 1996.

In 2003 there was finally belated footnote disclosure in the proxy statement that, referring to compensation in 2001, listed $13.2 million for


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the five senior officers as “an allocation of the economic interest in the management fee.” However, Ravelston charged Hollinger $30.7 million in management fees in 2001, not $13 million. This curious disclosure doesn’t say what compensation was actually received by whom, and it also only accounts for 43% of the fee actually paid to Ravelston that year, even though the five senior executives hold an 84.2% interest in Ravelston. Approximately $15 million of Hollinger management fees evidently just disappeared. [footnote omitted]

D. ASSET SALES TO AFFILIATED ENTITIES

165. Unbeknownst to Hollinger’s shareholders, the Company engaged in transactions with

entities owned and/or controlled by Lord Black and his cronies. While Hollinger represented that it was

improving its financial condition through sales of its assets to third parties, Hollinger failed to disclose

that Lord Black owned those third parties, that Hollinger’s Board had not given prior approval for the

transactions, that the Board failed to engage in any review or analysis of the value of the properties it was

selling, and that the purchases from Hollinger were financed with Hollinger’s own money.

1. Horizon Publications Inc.

166. In or about 1998, Lord Black and Radler established a new private company, Horizon

Publications Inc. (“Horizon”), which they would use to buy newspaper assets from Hollinger at below-

market rates. Lord Black and Radler were in a good position to turn a quick profit on newspapers

acquired from Hollinger, as they knew the operations and earnings potential of the Company’s

newspapers, as well as the identity of third parties who might be interested in acquiring them. Indeed, as

Lord Black later wrote to a potential investor in Horizon:

We have bought and sold hundreds of these little American newspapers in public companies and have never failed to make handsome profits on them. We sold them a few years ago to clear the debt of our public company and are buying them back now for our own account, knowing their profit potential intimately.

167. Lord Black and Radler kept their controlling ownership interest in Horizon a secret. Lord

Black owned 24.099% of Horizon through his Ontario corporation Conrad Black Capital Corp., and

Radler owned 24.099% of Horizon through his Prince Edward Island Corporation F.D. Radler Ltd. In


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addition, Lord Black and Radler controlled another 24.752% of Horizon through Vee Holdings, Ltd., a

British Columbia company. Radler instructed Todd Vogt – who had been a Hollinger employee in

Chicago until early 1999, when Radler installed him as Horizon’s President and CEO – to act as the

registered holder of the Vee Holdings Ltd.’s Horizon shares, but to secretly hold those shares in trust for

Radler’s F.D. Radler Ltd. In the Declaration of Trust, dated April 30, 1999, Vogt stated that he would

vote the Vee Holdings Ltd.’s Horizon shares “only as directed by” F.D. Radler Ltd. “and in no other

manner,” and that Radler – who had been Vogt’s boss at Hollinger and was his boss and Horizon – would

have “full authority” to give Vogt “instructions and directions” on behalf of F.D. Radler Ltd.

168. Lord Black and Radler did not inform Hollinger’s Board that they owned a controlling

interest in Horizon. To the contrary, on November 30, 1998, when they first discussed Horizon with the

Board, Lord Black and Radler stated only that they would “take equity positions” in Horizon, and they

characterized that company as a venture conceived by Jerry Strader and Vogt, two Hollinger employees.

Lord Black and Radler portrayed themselves as involved in Horizon only as passive investors providing

needed financing and additional equity.

169. Ultimately, Lord Black and Radler used Horizon in at least five separate transactions to

take advantage of Hollinger. First, Horizon acquired U.S. community newspapers from Hollinger at

prices favorable to Horizon and without prior disclosure of the controlling interest Lord Black and Radler

held in Horizon. Second, Horizon engaged in an asset exchange transaction in April 2000 in which it

swapped a group of newspapers that were losing money for a series of profitable Hollinger newspapers.

Third, Hollinger paid Horizon $150,000 to take two newspapers from Hollinger even though a third party

had just offered $750,000 for those assets. Fourth, Hollinger sold additional community newspapers to

Horizon at prices substantially below market price, and without obtaining any independent appraisal of

the value of the transferred properties. Fifth, Hollinger sold a newspaper to Horizon for one dollar, even

though less than two years earlier it had purchased that paper for $1.75 million and had just negotiated to

sell it to a third party for $1.25 million.


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a. Horizon’s Acquisition of Hollinger’s Community Newspapers

170. During 1999, Horizon, owned and controlled by Lord Black and Radler, acquired 33 U.S.

community newspapers from Hollinger for $43.7 million by an asset exchange agreement dated as of

March 31, 1999. The Board resolution approving the sale shows that the Board was not aware of the

controlling interest which Lord Black and Radler had in Horizon. That resolution stated:

WHEREAS, the board of directors has been informed that Messrs. Strader and Vogt, two directors of [Hollinger subsidiary] American Publishing Company (“APC”) . . . are interested in acquiring the Horizon assets for approximately 10x EBITDA, and that Messrs. Black and Radler are interested in assisting Messrs. Strader and Vogt in obtaining financing and by providing equity for such transaction . . . .

In fact, Lord Black and Radler conceived, created and controlled Horizon, and allowed Strader and Vogt

to make small equity investments but were instructed to assist Lord Black and Radler in running that

company.

171. Horizon was able to complete its acquisition of assets from Hollinger because Hollinger

and Hollinger Inc. loaned Horizon the money Horizon needed to finance the purchase. The Special

Committee in its Report lists the financing provided to Horizon which enabled it to pay the $45.5 million

balance required at closing:

i. a $1.2 million demand promissory note to [Hollinger Inc.] - not Hollinger - purportedly in consideration for [Hollinger Inc.’s] non-competition agreement, with interest payable quarterly at 7%;

ii. a $3.8 million demand promissory note to Hollinger, in consideration for Hollinger’s non-competition agreement, with interest payable quarterly at 7%;

iii. a $32,482,752 demand promissory note to Hollinger with interest payable quarterly at 7%; and

iv. an $8 million subordinated promissory note to Hollinger that matures on January 30, 2007, with interest payable quarterly at the lesser of 8% or LIBOR plus 200 basis points.

The terms of the $8 million note favored Horizon — the loan was unsecured and Horizon was given until

2007 to repay Hollinger. The reason the transaction was skewed in favor of Horizon was that Lord Black


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and Radler owned and controlled Horizon and stood to benefit personally in the transaction. A January

30, 2004 article in the Wall Street Journal entitled “Behind Paper Sales, Lord Black Played A Double

Role,” reported that, although Lord Black was “on both sides of the transaction” due to the equity stake he

and Radler had in Horizon, Hollinger loaned Horizon $8 million to help finance the deal, and the loan was

not approved by the Board. Hollinger’s shareholders were not informed of the $8 million loan or the fact

that the Board never approved this sweetheart deal to Horizon until the Special Committee and the SEC

filed their complaints against Lord Black and the Company. In fact, as disclosed in the Special

Committee Report and Illinois Complaint, Horizon has defaulted on its debt obligation to Hollinger and

currently owes the Company $5 million.

172. When the Company first disclosed its sale of assets to Horizon, it did not disclose

Horizon’s affiliations with Black and Radler. In the 1999 10-K the Company stated only that:

During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43.7 million resulting in a pre-tax gain of approximately $20.7 million. Horizon Publications Inc. is managed by former Community Group executives and owned by current and former Hollinger International Inc. executives.

The Company made this identical disclosure in its 2000 10-K.

173. Hollinger’s 2001 10-K contained similar language, adding that Horizon is “controlled by

certain members of the Board of Directors” and that “[t]he terms of these transactions [with Horizon]

were approved by the independent directors of the Company.” None of the Company’s 10-Ks named

Lord Black or Radler as having any ownership stake in Horizon or that they controlled this closely held

company. The Company’s Proxy Statements also stated that the Horizon transactions had been approved

by the Company’s independent directors. In the 2000 Proxy Statement, the Company stated:

Effective April 1, 1999, the Company sold approximately 18 properties of the Company’s U.S. community newspaper group for an aggregate consideration of approximately $47 million to a company formed by a former Vice President of American Publishing. Certain members of the Board of Directors and senior management of the Company are shareholders of such company. The transaction received an independent


66

fairness opinion and was unanimously approved by the independent Directors of the Company as a market value transaction.

The 2000 Proxy contained absolutely no mention of Horizon.

174. The Company’s 2001 and 2002 Proxy Statements both reported that the Company had

consummated transactions with Horizon which were “unanimously approved by the Audit Committee and

the independent Directors of the Company as market value transactions.” Like the Company’s 10-Ks,

these Proxy Statements failed to identify Lord Black’s and Mr. Radler’s ownership stake in and control of

Horizon.

175. The Company’s 2001 Proxy Statement reported additional sales of U.S. properties to

Horizon and misleadingly assured investors that those transactions had been approved by independent

directors, when in fact the members of the Board had undisclosed conflicts of interest that prevented them

from exercising independent business judgment. The 2001 Proxy Statement reported:

The Company consummated three transactions with Horizon Publications Inc., a company formed by a former Vice President of American Publishing and having certain members of the Board of Directors and senior management of the Company as shareholders. Effective April 1, 2000, in two transactions valued at approximately $2.5 million and unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions, American Publishing transferred properties in North Dakota and Washington in exchange for properties in Illinois, and XSTM sold the stock of Westbourne Investments Inc. to Horizon. Effective November 1, 2000, Horizon acquired two properties in California and Idaho in a transaction valued at approximately $4.1 million. The Company had previously contracted to sell such properties to Newspaper Holdings, Inc. as part of a larger transaction, but conveyed title to those two properties directly to Horizon pursuant to an assignment to Horizon from Newspaper Holdings, Inc.

The Board apparently knew, but did not disclose, that Black and Radler owned and controlled Horizon, as

the Company vaguely stated that Horizon had “certain members of the Board of Directors and senior

management of the Company as shareholders.” Additionally, the statement that Horizon was “formed by

a former Vice President of American Publishing” was false and misleading, as Black and Radler formed,

owned and controlled Horizon.


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176. The Company’s 2002 Proxy Statement falsely represented that the sales to Horizon had

been approved by the Audit Committee and independent directors:

The Company consummated two transactions with Horizon Publications, Inc., a company formed by a former Vice President of American Publishing Company and controlled by certain members of the Board of Directors and senior management of the Company as shareholders, which were unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions. American Publishing Company transferred assets in Saagot Valley and San Juan Islands, Washington and Mammoth Lakes, California in exchange for net working capital.

177. The Company’s transactions with Horizon could not have been approved by the

Company’s independent directors, as the directors who “approved” those deals had conflicts which

prevented them from being “independent.” Additionally, the Board never approved the $8 million loan to

Horizon to finance its purchase. Finally, as explained in the Special Committee Report, all of the

disclosures about the Horizon transactions were misleading in their omission of the material fact that “the

$43.7 million sales price was not negotiated but, was determined through unfair and improper

manipulations of data by or under the direction of Radler, an officer, director and major shareholder of

both Hollinger and Horizon.” As explained by the Special Committee, Radler directed the manipulation

of EBITDA figures and valuation multiples for the papers Hollinger was selling to Horizon so that the

resulting figures favored Horizon.

178. According to a November 18, 2003 Wall Street Journal article, Horizon has continued to

quietly buy small newspapers from Hollinger without any disclosure in the Company’s SEC filings. In

fact, the Wall Street Journal reported that Radler assumed the role of the president and chief operating

officer of Horizon about a year ago (though he reportedly stepped down from those positions in late

November 2003) and that he has continued the buying spree. Recent articles report that Hollinger is in

the process of concluding yet another asset sale to Horizon, and that Horizon now owns about 70 papers

across North America. In fact, the majority of Horizon’s newspapers were purchased from Hollinger.

This fact has never been disclosed in any of Hollinger’s public filings.


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b. Horizon’s Asset Exchange With Hollinger

179. In or about March and April 2000, Lord Black and Radler arranged a swap of profitable

Hollinger newspapers for unprofitable newspapers owned by Horizon and its wholly-owned subsidiaries,

Horizon Hawaii and Horizon Illinois. Pursuant to an asset exchange agreement dated April 1, 2000,

Hollinger transferred three newspapers in Colville and Deer Park, Washington, and Valley City, North

Dakota, in exchange for a group of Chicago weekly publications that Horizon had acquired from Lerner

Publications (the “Lerner Newspapers”) and a Hawaiian paper called the Honolulu Pennysaver that

Horizon had acquired from Hollinger in the Company’s 1999 sale of community newspapers to Horizon.

180. The Company reported its asset exchange with Horizon and the Horizon subsidiaries in

the Company’s 2001 Proxy Statement, which stated:

The Company consummated three transactions with Horizon Publications Inc., a company formed by a former Vice President of American Publishing and having certain members of the Board of Directors and senior management of the Company as shareholders. Effective April 1, 2000, in two transactions valued at approximately $2.5 million and unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions, American Publishing transferred properties in North Dakota and Washington in exchange for properties in Illinois, and XSTM sold the stock of Westbourne Investments Inc. to Horizon.

181. Again, while the Company disclosed that its Directors and senior management were

shareholders of Horizon, it omitted the material information that Black and Radler owned and controlled

Horizon. In addition, those two defendants created Horizon, not (as represented) any former Vice

President of American Publishing.

182. In the 2002 Proxy Statement, the Company reported that it had:

consummated two transactions with Horizon Publications, Inc., a company formed by a former Vice President of American Publishing Company and controlled by certain members of the Board of Directors and senior management of the Company as shareholders, which were unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions.


69

The 2002 Proxy Statement contained the first disclosure that any Board members or executives of

Hollinger controlled Horizon.

183. The Company’s Proxy Statements contained patently false and misleading

representations regarding its asset exchange transaction with Horizon, as Lord Black, Radler and the other

Defendants knew, because Horizon obtained Hollinger’s assets in the exchange for substantially less than

those assets’ fair market value, and the transactions were not approved in advance but received only after-

the-fact ratification.

184. As described in the Special Committee Report and Illinois Complaint, the Company

exchanged profitable publications for publications that were worth millions less and had lower cash-flow

margins than any other property the Company owned at the time. In fact, the Lerner Newspapers were

losing money and had realized a positive EBITDA in only one of the previous three years. Not

surprisingly, the Lerner Newspapers lost money for Hollinger in both 2000 and 2001, and their EBITDA

for 2000 was only about $140,720.

185. The Audit Committee and Board failed to conduct any review or inquiry into the value of

the properties Hollinger would receive in the asset exchange, nor did the Audit Committee or Board

obtain a fairness opinion, any independent valuation of the properties being exchanged or retain any

independent financial or legal advisors at all to review the asset exchange transaction, nor did they engage

in any negotiation over the terms of that transaction. In fact, as the Special Committee concluded, the

Board never even “questioned why Hollinger was exchanging profitable publications for less profitable

properties that had lower cash-flow percentages than any other Hollinger-owned properties.”

Additionally, the Proxy Statements were materially false and misleading in their failure to identify Black

and Radler as controlling shareholders of Horizon. As the Board knew of Black and Radler’s controlling

stakes in Horizon, the Board knew that the disclosures in the 2002 Proxy Statement were materially

misleading in their failure to identify Black and Radler as the individuals that controlled Horizon, and


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knew that the disclosures in the 2001 Proxy Statement were completely false in their failure to mention

anyone affiliated with the Company as owning and controlling Horizon.

186. Finally, the Board and Audit Committee did not approve the asset exchange prior to its

consummation; rather the Audit Committee “ratified” the already consummated asset exchange during a

meeting held on or about May 11, 2000, based in part on Radler’s presentation at that meeting. The

representations in the 2001 and 2002 Proxy Statements that the transaction were “unanimously approved

by the Audit Committee and the independent Directors of the Company” were false and misleading, as

was the representation in the 2002 Proxy Statement that the transaction was a “market value” transaction.

187. As the Board was aware that Black and Radler owned and controlled Horizon, they were

on inquiry notice that the transactions with Horizon may not have been fair to the Company, and so the

Board had a duty to at least investigate whether the asset exchange transaction, and all other transactions

with Horizon, were fair to Hollinger. The Board’s failure to conduct such an investigation, obtain a

fairness opinion or make any inquiry into the value of the assets transferred to or received from Horizon

was reckless.

c. Hollinger Pays Horizon To Take Newspaper Assets From Hollinger

188. Pursuant to a stock purchase agreement dated as of May 1, 2000, but effective as of

March 31, 2000, Hollinger paid Horizon and Horizon USA $149,999 to take from Hollinger its Skagit

Valley Argus (“Argus”) and Journal of the San Juan Islands (“Journal”) newspaper properties. The

agreement specified a purchase price of $1 “plus or minus a working capital adjustment (current assets

minus current liabilities),” which was a negative amount (i.e., payable by Hollinger to Horizon) of

approximately $150,000, which (as noted in the Special Committee Report) “turned out to be a negative

amount of approximately $162,100” – an amount that Hollinger paid Horizon to take assets from

Hollinger. Rather than disclose this gift transfer, Hollinger told its shareholders something completely

different.

189. The Company reported in its 2001 Proxy Statement that:


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Effective April 1, 2000, in two transactions valued at approximately $2.5 million and unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions, American Publishing transferred properties in North Dakota and Washington in exchange for properties in Illinois, and XSTM sold the stock of Westbourne Investments Inc. [the company that owned the Argus and Journal properties] to Horizon.

This statement was false and misleading, as the transactions were not at “market value” and there was no

disclosure of the $1 “sales price” plus a $150,000 negative working capital adjustment or any disclosure

that Hollinger actually paid Horizon to take the Company’s assets.

190. The 2002 Proxy Statement was equally false and misleading, as it provided:

The Company consummated two transactions with Horizon Publications, Inc., a company formed by a former Vice President of American Publishing Company and controlled by certain members of the Board of Directors and senior management of the Company as shareholders, which were unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions. American Publishing Company transferred assets in Saagot [sic - Skagit] Valley and San Juan Islands, Washington and Mammoth Lakes, California in exchange for net working capital.

As explained above, Horizon was formed and controlled by Lord Black and Radler; it was not “formed by

a former Vice President of American Publishing Company.” Moreover, the characterization of the

transactions as “market value” was false, as the Board and Audit Committee failed to conduct any

investigation or appraisal necessary to make that representation, and the Board and Audit Committee

were precluded from being independent due to conflicts of interest in certain Company directors

(including Black and Radler) having ownership stakes in and control of Horizon.

191. Neither the Board nor the Audit Committee retained any independent legal or financial

advisors or received any valuation of the Hollinger assets being transferred to Horizon, nor did they ever

receive any fairness opinion evaluating of the transaction. In fact, there is no record of the Board ever

approving the Argus and Journal transactions. The Special Committee stated that “[a]t the Board meeting

held later that day [February 22, 2000], Thompson reported that the Audit Committee had approved the

Argus and Journal sale, but the minutes do not reflect any discussion or additional authorization by the


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full Board.” Additionally, the representation that the Audit Committee had approved the transactions was

false. As explained in the Special Committee Report, although the Argus and Journal sales were

presented to the Audit Committee on February 23, 2000, the minutes “did not specifically reference the

$1 price or the exact newspaper names.” Accordingly, a year later, the Audit Committee purportedly

“approved and ratified” the transactions at its February 2001 meeting.

192. The Board and Audit Committee also failed to negotiate the terms of the transaction or

determine whether unrelated parties would be interested in purchasing the properties. Indeed, before that

transaction closed, a third party had offered to buy one of the papers for approximately $750,000, but that,

too, was concealed from investors, and within eighteen months of the closing of the deal with Horizon,

Horizon resold the two properties for almost a $1 million profit.

193. As explained in the Special Committee Report, David Black of Black Press Ltd.

presented in an April 27, 2000 letter, which was faxed to Radler, an offer to buy the Journal for $750,000.

Thus, Radler knew about this offer before Hollinger sold the paper to Horizon for $1.

194. Before the Audit Committee “ratified” the transactions, Horizon sold the Argus (in or

about October 2000) to Skagit Valley Publishing for about $450,000. However, as the Special

Committee reported, “the minutes do not reflect that the Audit Committee was informed that three months

earlier Horizon had sold one of the $1 properties - Argus - for approximately $400,000.” Additionally,

after the Audit Committee’s meeting, in or about September 2001, Horizon sold the Journal to Sound

Publishing Co., a wholly-owned subsidiary of Black Press Ltd., for $280,000. Since the purchaser (David

Black) was forced to pay an additional $213,000 for assets he did not want, he valued the consideration he

paid for the Journal at about $500,000.

195. Hollinger concealed from investors the failures of its Board and Audit Committee to

undertake even the most basic investigation into the value of the properties being “sold” to Horizon or

the fairness of that transaction to Hollinger. Hollinger’s 2001 and 2002 Proxy Statements were materially


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false and misleading in stating that the transactions were at “market value” and in their failure to disclose

that Hollinger was paying Horizon to take Hollinger’s assets.

d. Hollinger’s Sale of Additional Community Newspapers to Horizon

196. Hollinger sold additional community newspapers to Horizon in another transaction to a

related party which was not approved by the Audit Committee. Through an assignment clause in the

September 28, 2000 asset purchase agreement with CNHI, Lord Black and Radler caused Hollinger to sell

its properties in Bishop, California and Blackfoot, Idaho to Horizon for $4.1 million, substantially below

market price. Through this transaction, the Company undermined the value of its newspaper in

Mammouth Lakes, California, which is located only 35 miles from the Bishop area, and which uses the

same printing press as the Bishop paper. Morgan Stanley had recommended to Hollinger’s management

in May 2000 that the Bishop and Mammouth Lake properties “be considered one operating unit for

purposes of [the] sale process” and thus be sold together to maximize their value. However, Black and

Radler caused Hollinger to sell its Mammouth Lakes property separately, and then they convinced the

Audit Committee to sell the Mammouth Lakes property to Horizon for only $1 because it was, according

to them, essentially worthless.

197. Hollinger disclosed its sale of the Bishop and Blackfoot properties in the 2001 Proxy

Statement (incorporated by reference in Hollinger’s 2000 10-K) as follows:

The Company consummated three transactions with Horizon Publications Inc., a company formed by a former Vice President of American Publishing and having certain members of the Board of Directors and senior management of the Company as shareholders. . . . Effective November 1, 2000, Horizon acquired two properties in California and Idaho in a transaction valued at approximately $4.1 million. The Company had previously contracted to sell such properties to Newspaper Holdings, Inc. as part of a larger transaction, but conveyed title to those two properties directly to Horizon pursuant to an assignment to Horizon from Newspaper Holdings, Inc.

As Lord Black and Radler knew, this statement was false and misleading for several reasons.


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198. First, there is no disclosure that the transaction was to a related party – Horizon –

requiring Audit Committee approval. Rather, the disclosure misleadingly characterizes the transaction as

a transfer from a third-party purchaser to Horizon.

199. Second, as explained in the Illinois Special Committee Complaint but not disclosed in the

2001 Proxy Statement, Lord Black and Radler had arranged for CNHI to assign the properties to Horizon

before the Company “contracted to sell such properties to [CNHI] as part of the larger transaction.” In or

about August 2000, Radler asked CNHI to modify the asset purchase agreement to include the Bishop and

Blackfoot properties among those CNHI would purchase, and to insert a provision permitted CNHI to

assign immediately to Horizon “its rights and obligations with respect to the Bishop and Blackfoot

properties,” upon which the purchase price would be reduced from $95.2 million to $90 million. A

corresponding assignment agreement was drafted to allow CNHI to immediately assign away the Bishop

and Blackfoot properties. Thus, the 2001 Proxy Statement was false and misleading in not disclosing that

Radler had pre-arranged the assignment of the properties to Horizon even before the Company had agreed

to sell them to CNHI.

200. Third, the Proxy Statement was misleading in omitting the material fact that the

transactions had not been approved by the Audit Committee or Board. The Proxy Statement also omitted

the material fact that Lord Black and Radler arranged for the “approval” through an “Executive

Committee Unanimous Written Consent,” obtained at a Hollinger executive board committee meeting

held on September 15, 200 and attended by Lord Black, Radler and Perle. None of those directors was

independent, as Lord Black and Radler had controlling stakes in Horizon, and Perle was an employee at

Horizon reporting to Lord Black. While the Board later “ratified” the transaction during a December 4,

2004 Board meeting, the Board was not informed of the controlling stake in Horizon held by Lord Black

and Radler, or that the Bishop and Blackfoot properties had already been sold to Horizon. As stated in

the Special Committee Report, the “resolution provided to the Board . . . did not mention the assignment

of the Bishop and Blackfoot properties to Horizon.”


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201. Finally, the Proxy Statement’s representation that the properties were “valued” at $4.1

million was false and misleading, as neither the Board nor the Audit Committee ever obtained any

independent valuation of the properties or retained any independent financial or legal advisors, nor did

they or any independent Hollinger director or representative negotiate the terms of the transaction. The

Company simply had no basis to represent that the properties had a $4.1 million value, or that the

Company had engaged in any valuation of the properties at all.

e. Horizon’s $1 Acquisition of Hollinger’s Mammouth Times Newspaper

202. As reported in the July 20, 2003 Chicago Tribune, Hollinger “put individual papers up for

sale, rather than selling regional publishing clusters, which would be more attractive to buyers. Such a

tactic would help deter other bidders and ensure that Horizon got the Hollinger papers it sought without a

messy bidding war . . . .” The January 30, 2004 Wall Street Journal article explained that:

Shopping the two papers together would have made them more attractive to potential buyers, since they dominated the local market. Hollinger, however, split them up, making them less attractive to buyers.

However, these facts were not disclosed to the shareholders.

203. In addition to not shopping its assets so as to obtain the highest and best price in any sale,

Hollinger actually rebuffed offers for its newspapers in order to sell them to Lord Black-controlled

Horizon at fire-sale prices. For example, in 1999 Hollinger purchased the Mammoth Times newspaper for

$1.75 million. According to the January 30, 2004 Wall Street Journal article exposing the give-aways to

Horizon, in October 2000, Jack Humphreville of California publisher Target Media signed a letter of

intent with Hollinger to buy the Mammoth Times in Mammoth Lakes, California for $1.25 million. The

Special Committee stated in its Report and Illinois Complaint that Humphreville in a July 27, 2000 letter

to Jerry Strader, a Hollinger manager in charge of various newspapers, offered $3 million plus $1 million

in post-closing consideration (contingent on the publications’ 2001 operating profits) for the Biship and

Mammoth Times papers. Strader rejected that offer. Later, Humphreville sent a letter on November 8,

2000 to Jerry Strader stating that he was interested in buying Hollinger’s Bishop, California paper, but


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Lord Black and Radler wanted Hollinger to sell, and Hollinger later did sell, that paper to Horizon, which

Black and Radler owned. While Hollinger would have obtained more money in a combined sale of the

Mammoth Times and the Bishop, California papers, Black and Radler sold these papers in separate

transactions for their own purposes and to the detriment of the Company and its shareholders

204. In order to accomplish the sale to Horizon, Hollinger first killed the negotiations with

Humphreville. On or about January 30, 2001, Jerry Strader, then president of Hollinger’s community

newspaper division and a Horizon shareholder, sent a memorandum to the Mammoth Times instructing

its onsite executive not to provide all the information that Humphreville was requesting in his due

diligence. Additionally, Target Media sent Hollinger on or about January 24, 2001 a draft purchase

agreement and non-competition agreement which required Hollinger and Horizon to refrain from

competing with the Mammouth Times for five years, though Horizon would be permitted to operate the

nearby Bishop properties it had just acquired from Hollinger. Hollinger (through Linda Loye, a Hollinger

corporate counsel located in Chicago who reported to Radler) refused to sign the non-competition

agreement. As a consequence, Target Media was forced to withdraw its offer, in or around late February

2001. As the Special Committee reported, “Humphreville told the Special Committee that he decided at

that point to walk away from the transaction because he was getting the run-around.” However,

Humphreville told the Special Committee that “he would buy the Mammoth Times for $2.4 million even

today.”

205. For the next five months, nether Lord Black, Radler, nor any other Hollinger employee or

representative undertook any significant efforts to market the Mammouth Times to other prospective

buyers. Instead, Hollinger simply took the Mammoth Times (on or about August 2, 2001) themselves,

“selling” it to Horizon for $1, even though that newspaper was, and remains, a profitable enterprise. As

reported by the Wall Street Journal, Wally Hofmann, the onsite executive for the Mammoth Times, stated

that the paper showed a profit in the seven months before the sale; it earned $119,700 in the month before

the deal closed, and it is still profitable. As stated in the Special Committee Report, the Mammoth Times


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“showed an overall profit in each of 1999, 2000, and 2001” and “earned a profit of $120,000 in August

2001 alone.”

206. However, Hollinger’s shareholders did not know (until the January 30, 2004 Wall Street

Journal article) that Hollinger had rejected a $1.25 million offer in order to sell its profitable newspaper to

a company owned and controlled by Lord Black and Radler for a grand total of one dollar, because

Hollinger never disclosed these facts.

207. The Company tersely reported in its 2001 10-K that “[d]uring 2001, the company sold . .

. its last remaining United States community newspaper.” The Company’s 2002 Proxy Statement

(incorporated by reference in the 2001 10-K) stated that:

The Company consummated two transactions with Horizon Publications, Inc., a company formed by a former Vice President of American Publishing Company and controlled by certain members of the Board of Directors and senior management of the Company as shareholders, which were unanimously approved by the Audit Committee and the independent Directors of the Company as market value transactions. American Publishing Company transferred assets in Saagot Valley and San Juan Islands, Washington and Mammoth Lakes, California in exchange for net working capital.

These statements were false and misleading because they do not disclose that the sale was to a related

party; instead, the Proxy Statement characterizes the transaction as if it were to a third-party in falsely

stating that Horizon was “formed by a former Vice President of American Publishing Company” when in

fact it was formed and controlled by Lord Black and Radler. Additionally, the Mammouth Times was

sold for $1 with “no working capital adjustment,” not for “net working capital” as represented by the

Company.

208. All of the Company’s prior disclosures of its transactions with Horizon were materially

false and misleading in their failure to disclose the Company’s sales of assets to Horizon at below market

rates, such as for one dollar, and their failure to disclose those “sales” to Horizon where Hollinger

actually paid Horizon to take Hollinger’s assets. By completely failing to disclose these gift transfers to

Horizon, or by lumping these transactions with other asset sales to Horizon and disclosing only a total


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sale price for all the transactions together, the Company concealed from investors its outright transfer of

assets to Lord Black and Radler (through their ownership and control of Horizon) for essentially no

consideration.

209. The Company’s disclosures regarding its various transactions with Horizon and Horizon

subsidiaries and affiliates were materially false and misleading also because they failed to disclose that

third parties had offered significant sums for the papers, and the disclosures concealed the complete

failure of the Audit Committee and Board to engage in any review or discussion of the terms of the

Horizon transactions which deterred other bidders and thus precluded the possibility of Hollinger

receiving higher prices for its assets. The Audit Committee and Board failed to engage in the inquiry

required to assess the fairness of the transactions, and were thus in no position to characterize or approve

them as “market value transactions,” as represented in the 2000-2002 Proxy Statements. Rather, the

Audit Committee and Board rubber-stamped these deals which were negotiated and structured by Lord

Black and Radler to benefit themselves and Horizon, which they controlled. In fact, as the Wall Street

Journal reported on January 30, 2004, the Board did not approve the sale of the Mammoth Times for $1;

rather, the directors approved the deal “retroactively” after it was consummated. As stated in the Special

Committee Report:

Thompson reported [at the Board meeting] that the Audit Committee had ratified the Mammoth Times transaction. The full Board then confirmed and approved the Audit Committee’s determination that the Mammoth Times Sale was “fair in the circumstances.” Neither the Audit Committee, nor the Board sought any independent advice or a fairness opinion. . . . [T]he Board...had no business making a “fairness” determination on the record.

210. Shareholders were also not told that Lord Black and Radler owned and controlled

Horizon. These individuals steadfastly refused to define their stakes in Horizon, and Hollinger’s filings

contain only opaque references to “certain current and former Hollinger directors” who have stakes in

Horizon. The Audit Committee failed to engage in any investigation to determine who these unnamed


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Hollinger directors were, or whether their affiliation with Horizon had any effect on the terms of the

transactions.

211. Lord Black was finally forced to define his ownership and control of Horizon in defense

of a lawsuit brought by Paul Winkler, who was wrongly terminated as publisher of a paper owned by

Hollinger Inc. Winkler worked for the Kelowna Capital News, a paper owned by Hollinger Inc. that was

in a fierce fight for subscribers and advertising dollars with archrival Darby Courier, a paper purchased

from Hollinger by Horizon. Winkler alleged in his wrongful termination suit that Radler and other

Hollinger Inc. executives directed business to and supported the Darby Courier to the detriment of the

Capital News, and then fired Winkler.

212. Winkler prevailed and won $160,000. He also was able to get Black to concede that he

and Radler each owned 24% of Horizon with the remainder held by others connected to Hollinger. As

reported in the November 19, 2003 issue of the Globe and Mail and in the Special Committee Report and

Complaints, Black and Radler each own 24% of Horizon plus additional interests through affiliated

companies giving them 50% ownership, 73% voting interest and complete control over Horizon.

However, these facts were not disclosed to the Company’s shareholders in its SEC filings touting the

sales of newspaper assets to Horizon.

2. Bradford Publishing Company

213. Hollinger also sold newspapers to another company – Bradford Publishing Company

(“Bradford”) – which had affiliations with Lord Black which were not disclosed to Hollinger’s

shareholders. In 2000, Hollinger sold four newspapers (the Bradford Era, the Salamanca Press, the

Salamanca Pennysaver, and the Olean Times Herald) to Bradford for $37.559 million. The 2001 Proxy

Statement disclosed only the following with respect to this transaction:

Effective July 20, 2000, the Company sold four properties of the Company’s U.S. community newspaper group for an aggregate consideration of approximately $38 million to Bradford Publishing Company, a company formed by a former Director and Vice President of American Publishing. Certain members of the Board of Directors of the


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Company are shareholders of such company. The transaction was unanimously approved by the Audit Committee and the independent Directors of the Company as a market value transaction.

214. The transaction was not mentioned in the Company’s 2000 10-K, filed a few days later.

The 2001 10-K, filed in March 2002, provided even less information than that disclosed in the 2001

Proxy Statement, stating that:

the Company sold four U.S. Community Newspapers for an aggregate consideration of $38 million to Bradford Publishing Company, a company formed by a former U.S. Community Group executive and in which some of the Company’s directors are shareholders. The terms of this transactions were approved by the independent directors of the Company.

215. Unbeknownst to Hollinger’s shareholders, these representations were false and

incomplete, as they did not disclose that Bradford was able to purchase Hollinger’s newspapers only

because it received financial assistance from Hollinger. The reason Hollinger provided the financing –

Lord Black and Radler owned 50% of Bradford and controlled it – was also concealed.

216. It was not until Hollinger filed its 2003 Proxy Statement on March 31, 2003 that the

Company even suggested that the July 20, 2000 transaction with Bradford was at least partially financed

by Hollinger. In that filing, Hollinger stated that “[a]s reflected in the Company’s financial statements, as

of December 31, 2002, there is due and owing to the Company from Horizon and Bradford, respectively,

$4.9 million plus accrued interest and $5.9 million.” The shareholders were left to guess why Bradford

owed Hollinger anything.

217. The Company’s 2002 10-K (filed on March 31, 2003) made the following belated

disclosure of the financing provided to Bradford:

[W]e sold four U.S. Community Newspapers for an aggregate consideration of $38 million to Bradford Publishing Company, a company formed by a former U.S. Community Group executive and in which some of our officers are shareholders. Our independent directors approved the terms of this transaction.

Bradford Publishing Company, a company in which certain of the Company’s officers are significant shareholders, owes the Company $4.1


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million at December 31, 2002. Such amount represents the present value of the remaining amounts owing under a non-interest bearing note receivable granted to the Company in connection with a non-compete agreement entered into on the sale of certain operations to Bradford Publishing Company during 2000. The note receivable is unsecured and due over the period to 2010, and subordinated to Bradford’s lenders.

This filing did not disclose the material facts that Lord Black and Radler owned and controlled Bradford,

that by that time Bradford was significantly in arrears on its payments on the note, or that Hollinger had

guaranteed Bradford’s debt to a bank.

218. Recent news articles and filings by the Special Committee in the Illinois and New York

federal court actions provided shareholders with additional information about the nature of the financing

provided to Bradford and about Lord Black’s connection to Bradford. The Wall Street Journal reported

on October 3 and November 18, 2003 that Hollinger gave Bradford a sweetheart financing deal in the

form of an unsecured note due in 2010. Additionally, while the 2001 Proxy Statement misleadingly

assured investors that the Bradford transactions had been approved by independent directors, the Special

Committee Complaints and the Cardinal Complaint filed in Delaware Chancery Court disclosed that the

members of the Board had undisclosed conflicts of interest that prevented them from exercising

independent business judgment.

219. According to those complaints, Radler presented this transaction to the Audit Committee

on May 11, 2000. During this meeting, Radler advised the committee of the impending sale of certain

community newspapers to Bradford, a company in which “certain members of the Board of Directors and

senior management of the Company would be stockholders.” Radler revealed that the Company had not

shopped its newspaper properties to any third party and that the price had already been established by

Lord Black.

220. As stated in the Cardinal Complaint, Radler distributed to the members of the Audit

Committee a memorandum drafted by Strader, a Hollinger employee, which stated that Strader

“believe[d] [that Radler] promised John Satterwhite (the son of the person from whom the newspapers


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were purchased) that the properties would never be sold or split,” that “if serious due diligence was

performed by a third party, we would be forced to pay off John in a handsome manner,” and that

attempting to sell “these properties to an ’outsider’ would greatly reduce the value Hollinger would

receive.” Neither Radler nor anyone else provided any support for the claims in Stradler’s memorandum,

nor did the Audit Committee ever ask for such substantiation.

221. The Audit Committee also failed to engage in any inquiry or analysis of the fairness of

the purchase price for the newspaper properties to be sold to Bradford. The purchase price had already

been negotiated by Black with himself (as shareholder of Bradford). The purchase price for Hollinger’s

newspapers included a $6 million non-compete agreement with Hollinger, though the minutes of that

meeting do not reflect any discussion of who would receive the non-compete payments. Unlike other

transactions, where Lord Black and his associates received their non-compete payments up front,

Hollinger instead received a non-interest-bearing ten-year note for the non-compete payments which was

subordinated to Bradford’s lenders. Thus, the vehicle for the interest-free financing was the Company’s

agreement not to compete with the sold properties, to which $6 million of the purchase price was

allocated. Hollinger itself was financing Bradford’s purchase of the Company’s assets, and the non-

compete payment, which represented 16% of the purchase price and would not be fully paid until ten

years later, significantly reduced the effective price paid by Bradford.

222. The Audit Committee also failed to conduct any inquiry into Bradford’s ability to repay

the note. Had the committee investigated Bradford’s creditworthiness, it would have discovered that

Bradford had borrowed $22 million from Bank One to help pay the remainder of the purchase price.

Radler allowed Bradford to consent to certain restrictions in this credit facility that precluded Bradford

from making payments to Hollinger under certain circumstances. An April 2000 memorandum from

Roland McBride, a senior financial officer at Hollinger, to Radler explained that “the non-compete

payments can only be made as long as the Total Leverage Ratio is 4 to 1 or less (year 2003 and beyond)

or the EBITDA is at least the amount listed.” Thus, the Company’s $6 million note was subordinated to


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Bradford’s $22 million credit facility which contained restrictions that could preclude Bradford from

making its annual $600,000 payments to Hollinger.

223. As explained in the Special Committee Report, “Black and Radler ... caused Hollinger’s

seller-financing to be subordinated to Bradford’s bank credit facility.” Black, Radler and Perle signed a

consent as the putative authorization for Hollinger to enter into the subordination agreement with

Bradford and Bank One, restricting Bradford’s ability to make payments to Hollinger, and requiring

Hollinger to guaranty Bradford’s $22 million Bank One loan. There was no business purpose for

Hollinger to expose itself to the risk of not being paid by Bradford on its $6 million note, and of having to

pay Bradford’s $22 million obligation to Bank One. Rather, Lord Black and Radler exercised the consent

to serve their own purposes (and those of Bradford). These facts were not disclosed to investors

224. Notwithstanding the inherent conflicts of interest in the Company selling its assets to an

entity owned and controlled by Lord Black and other Hollinger executives, the Audit Committee

unanimously approved the sale of Hollinger’s assets to Bradford without further inquiry. The Audit

Committee did not attempt to verify the claims made by Strader and Radler, or discuss how the purchase

price was negotiated or whether it was fair. The committee did not even inquire as to who were the

“certain members of management and the Board of Directors” who had ownership stakes in Bradford, or

ask why it was in the Company’s interest to sell its assets, and why they should be sold to Bradford. Nor

did the committee even deign to investigate Bradford’s ability to repay its significant loan from Hollinger.

225. The Company did not inform the shareholders of the complete lack of care and inquiry by

the Audit Committee in its review and approval of the Bradford transaction. The shareholders were not

aware that Lord Black, and not the Audit Committee, had negotiated the transaction, and that the

committee simply rubber-stamped the deal to sell properties to a company in which Lord Black and other

Hollinger officers and directors owned shares. These facts would not be revealed to the shareholders until

the Cardinal Complaint and Special Committee Complaints were filed against Lord Black and others

years later.


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226. In fact, Bradford has not made all of its $600,000 annual payments to Hollinger. As of

May 2004, Bradford should have made at least three $600,000 payments, totaling $1.8 million. However,

Bradford has paid only $700,000, $100,000 of which was paid in December 2002, and $600,000 of which

was paid in October 2003.

E. CANWEST’S MANAGEMENT SERVICES AGREEMENT WITH RAVELSTON

227. In connection with Hollinger’s sale of certain newspapers and related assets to CanWest

for $2.1 billion, Ravelston entered into a management services agreement with CanWest and National

Post pursuant to which it agreed to continue to provide management services to the Canadian businesses

sold to CanWest in consideration for an annual fee of $4 million payable by CanWest. Furthermore,

CanWest agreed to pay Ravelston a termination fee of Cdn. $45 million in the event that CanWest chose

to terminate the management services agreement or Cdn. $22.5 million in the event that Ravelston chose

to terminate the agreement. Incredibly, all of these payments were in addition to the $25,200,000

non-competition fee received by Ravelston in the CanWest transaction (of the total $53,000,000

non-competition fees paid). As explained below, the terms of this agreement were not disclosed by the

Company until April 2002 when Hollinger filed its 2001 10-K. Even then, the disclosure was misleading

and incomplete.

228. In a press release first announcing the CanWest transaction dated July 31, 2000,

Hollinger stated the following:

Through its [Hollinger’s] 15% shareholding in CanWest, its 50% direct interest in the National Post and as continuing manager of these assets, Hollinger will continue to participate in the future growth and exploitation of the franchise value of the assets in conjunction with CanWest’s television, cable channel, radio and other Canadian and international media assets.

This is an absolute falsehood as the management services contract was for the benefit of Ravelston, not

Hollinger, even though Hollinger was the owner of the assets sold to CanWest. Additionally, Ravelston


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would not provide any services to CanWest, but would be paid by CanWest pursuant to the management

services agreement.

229. On August 14, 2000, the Company filed with the SEC a Form 10-Q which described the

CanWest management services agreement as a temporary arrangement to facilitate the change in

ownership and control of the newspapers sold by Hollinger. The August 14, 2000 10-Q stated only the

following with respect to this agreement:

With respect to the other newspaper assets being sold to CanWest, Mr. Black and his associates will enter into a management services agreement for at least 17 months in order to ensure operating continuity and to facilitate a smooth transition to the new arrangements.

This was untrue. Contrary to the Company’s public representations, Lord Black and his cronies intended

to benefit from the CanWest management services payments for the indefinite future. Indeed, as reported

in the December 19, 2003 issue of the Financial Times, CanWest remains obligated under an existing

management services agreement to make payments to Ravelston. Furthermore, the August 14, 10-Q

failed to disclose Ravelston as a principal beneficiary of this agreement.

230. On December 1, 2000, the Company filed with the SEC a Form 8-K which incorporated

as exhibits the asset sales agreements for the CanWest transaction. Although the asset sales agreements

reference the Ravelston management services agreement, the Ravelston agreement itself was not

incorporated in this document and has not been publicly disclosed. The assets sales agreement

reproduced in the December 1, 2000 8-K states the following regarding related-party transactions:

4.36 INTER-AFFILIATE ARRANGEMENTS

Schedule 4.36 sets forth a complete list of all Contracts between and among Ravelston, Hollinger Inc., Hollinger, any Affiliate or subsidiary of Hollinger and the Excluded Businesses relating to the Purchased Businesses and the National Post Business. Except as disclosed on Schedule 4.36, all such Contracts are on reasonable commercial terms that are not less advantageous to any party than if such Contract had been obtained from a Person or company dealing at arm’s length with such party. All such Contracts may be terminated by CanWest upon not more than 30 days prior notice without bonus or penalty.


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The Schedule 4.36 referenced in the asset sales agreement was not attached to the 8-K or to any other

public filings by the Company.

231. The December 1, 2000 8-K, as well as the Company’s prior disclosures regarding the

CanWest transaction (beginning with the July 31, 2000 announcement), are all materially false in their

failure to disclose that Ravelston would not, in fact, provide any services to CanWest pursuant to the

management services agreements but would nevertheless be paid for such services. Additionally, the

following information regarding the management services agreements were not disclosed to the

shareholders: (i) CanWest originally proposed that the post-closing management services agreement

would be with Hollinger, but Lord Black unilaterally decided that the agreement would be with

Ravelston; (ii) CanWest rejected as unreasonable and excessive the proposed Ravelston post-closing

annual management services fee that Lord Black originally proposed, and only agreed to pay

approximately 32% of that proposal; (iii) the proposed management fee that CanWest rejected as

unreasonable and excessive was approximately the amount that Ravelston had been charging Hollinger to

manage those assets; and (vi) Lord Black and Radler negotiated for themselves an annual management

fee and a termination fee paid by CanWest if it were to terminate the management services agreement

($30.3 million) or even if Ravelston were to terminate ($15.1 million). These filings are also misleading

in their failure to disclose that the agreements benefited Lord Black and the other owners of Ravelston.

232. The same material information omitted from the December 1, 2000 8-K was also omitted

from the Company’s 2000 10-K; indeed, the 2000 10-K does not even mention the Ravelston

management services agreement. The 10-K stated only the following with respect to the CanWest deal:

On November 16, 2000, the Company and its affiliates, Southam and Hollinger L.P. (“Hollinger Group”) completed the sale of most of its Canadian newspapers and related assets to CanWest. Included in the sale were the following assets of the Hollinger Group:

a 50% interest in National Post, with the Company continuing as managing partner;


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the metropolitan and a large number of community newspapers in Canada (including the Ottawa Citizen, The Vancouver Sun, The Province (Vancouver), the Calgary Herald, the Edmonton Journal, The Gazette ( Montreal), The Windsor Star, the Regina Leader Post, the Star Phoenix and the Times-Colonist (Victoria); and

the operating Canadian Internet properties, including canada.com.

The sale resulted in the Hollinger Group receiving approximately Cdn. $1.7 billion ($1.1 billion) cash, approximately Cdn. $425 million ($277 million) in voting and non-voting shares of CanWest at fair value (representing an approximate 15.6% equity interest and 5.7% voting interest) and subordinated non-convertible debentures of a holding company in the CanWest group at fair value of approximately Cdn. $697 million ($456 million). The aggregate sale price of these properties at fair value was approximately Cdn. $2.8 billion ($1.8 billion), plus closing adjustments for working capital at August 31, 2000 and cash flow and interest for the period September 1 to November 16, 2000 which in total approximates an additional $40.7 million. $972 million of the cash proceeds from this sale were used to pay down the Company’s Bank Credit Facility.

The 10-K is materially false and misleading in its failure to provide to the shareholders the information

contained in the immediately preceding paragraph regarding the management services agreement with

CanWest.

233. It was not until April 1, 2002, when the Company filed its 2001 10-K, that Hollinger

made any disclosure about the terms of the Ravelston management services agreement. The 2001 10-K

stated:

In connection with the sale to CanWest, Ravelston, a holding company controlled by Lord Black through which most of his interest in the company is ultimately controlled, entered into a management services agreement with CanWest and National Post pursuant to which it agreed to continue to provide management services to the Canadian businesses sold to CanWest in consideration for an annual fee of Cdn. $6 million ($4 million) payable by CanWest. In addition, CanWest will be obligated to pay Ravelston a termination fee of Cdn. $45 million, in the event that CanWest chooses to terminate the management services agreement or Cdn. $22.5 million, in the event that Ravelston chooses to terminate the agreement (which cannot occur before December 31, 2002). . . . The Company’s independent directors have approved the terms of these payments.


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234. The above disclosure is false and misleading because Hollinger failed to disclose that the

management services contract was for the benefit of Ravelston, not Hollinger, even though Hollinger was

the owner of the assets sold to CanWest, and that Ravelston would not even provide any services, but

would be paid under the management services agreement. The 2001 10-K also falsely represents that this

agreement was approved by “independent directors,” when that was not the case, as the directors’

conflicts of interest and divided loyalties precluded them from exercising independent business judgment.

235. Additionally, as explained herein, the Audit Committee and Board completely failed to

conduct any due diligence or inquiry regarding the CanWest management services agreements prior to

reviewing and purportedly approving of these agreements. The Audit Committee and the Board never

asked how the management fees were negotiated or determined, nor did they require or obtain any

opinion on the fairness of these fees. Hollinger’s independent directors did not have the information

necessary for them to make an informed review of the CanWest management services agreement or its

fairness to Hollinger’s shareholders. Accordingly, the “independent directors” were in no position to

“approve” the agreement, as represented in the 2001 10-K.

F. UNDISCLOSED COMPENSATION

236. As explained above, Hollinger’s Proxy Statements did not reflect any of the

compensation paid to Lord Black, Radler and other Ravelston executives from Hollinger as their share of

the million of dollars in management services fees paid throughout the Class Period. The Special

Committee stated in its report that $226 million of such fees were paid from 1996-2003. The Proxy

Statements disclose only that Black and Radler, among others, are affiliates of Ravelton and that

Ravelston (and Moffat Management and Black-Amiel Management) received the management services

fees, although there is no disclosure of how much was compensation; thus, investors had no way of

knowing that the vast bulk of the management services fees represented compensation to Black, Radler

and others at Ravelston.


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237. The Special Committee in its Report summarized the false and misleading compensation

disclosures as follows:

Hollinger’s five most highly compensated officers (all Ravelston shareholders) received $57.2 million, $116.8 million and $60 million, respectively, in compensation in 1999, 2000 and 2001 (including non-competition payments, but excluding stock option grants). However, Hollinger’s proxy compensation table for those same years only disclosed $1.2 million, $5.4 million and $2.8 million (excluding stock option grants, though non-competition agreements were not disclosed). Out of total compensation of $234 million for the five individuals in 1999-2001, only $9.4 million or 4.0% was disclosed in the Hollinger proxy, while approximately 96% went undisclosed, as was generally the case every year.

238. Also not disclosed was the total compensation paid to Black and Perle in incentive

payments from Hollinger Digital LLC, a Hollinger subsidiary engaged in private equity investing,

particularly in Internet and new media ventures.

239. In February 2000, Hollinger’s Audit Committee approved an incentive compensation

plan that awarded Digital executives up to 22% of the profits of the portfolio’s investments that made

money, without netting any losses from unsuccessful investments in the Digital portfolio. Of the 22%

bonus pool, 7% was designated for the Senior Executive Group, composed of Black, Radler and Colson.

240. The 2000 Proxy Statement disclosed that Black collected $2,195,645 in incentive

bonuses in 2000. However, as reported by the Special Committee, that disclosure was false, as Black

actually collected $2,195,645 in Digital incentive payments in 2000, a difference of $335,183. Black’s

January 2001 Proxy Statement questionnaire response did not list any Digital incentive payments.

241. The 2000 and 2001 Proxy Statements are also false and misleading in failing to disclose

any incentive payments to Perle, who served as Digital’s CEO, as well as a Hollinger Director. In those

years, Perle was paid a total of $3,111,863 in incentive payments (with $224,993.57 paid in 2001 and the

balance in 2000). Perle did not disclose all of these payments in his January 2001 Proxy Statement

questionnaire response, stating that he “received $250,000 in salary and $2,000,000 in bonuses as an


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officer and $0 in compensation as a director of the Company’s subsidiary, Hollinger Digital Inc.” This

was false as he received $300,000 in salary and $2.89 million in incentive payments in 2000.

G. UNDISCLOSED PERQUISITES AND OTHER COMPENSATION

242. Hollinger provided a wide range of corporate perquisites to Lord Black, Radler, Colson

and others, including homes, jets, cars, house staff, chauffeurs and club memberships, which constituted

additional compensation to the individuals required by SEC rules to be disclosed. However, the full

extent and costs of these various perks was not disclosed in the Company’s SEC filings.

1. The Improper Swap Of Company And Lord Black Apartments

243. The Company in its 2001 Proxy Statement stated:

In order to facilitate the rendering of management and advisory services by Messrs. Black and Radler, and to enhance the business interests of the Company within the financial community, the newspaper industry and otherwise, a subsidiary of the Company purchased apartments in New York and Chicago in 1994 for the use of Messrs. Black and Radler, respectively, on a rent-free basis while they are in the United States . . . The Company has granted options to Messrs. Black and Radler,

respectively, to acquire at any time the Company’s interest in the New

York and Chicago apartments, respectively at their then fair market

values . . . Effective December 29, 2000, Mr. Black exercised his option

to purchase. [Emphasis added.]

The same language is used in the 2002 Proxy Statement. These disclosures falsely and misleadingly

suggest that Black paid “fair market value” for the Company apartments when, as Black knew, he did not,

as he paid millions below their fair market value.

244. In 1994, Hollinger purchased a second floor apartment on Park Avenue in New York for

$3 million. In January 1998, Lord Black purchased for $499,000 a ground floor apartment in the same

building.

245. In December 2000, Lord Black purchased Hollinger’s second floor apartment for the

same price that Hollinger had paid six years earlier. Lord Black swapped his ground floor apartment

(valued at $850,000, or $350,000 more than he had paid two years earlier) plus $2.15 million in cash for

the second floor apartment, to total $3 million. Thus, Black credited his apartment with significant


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appreciation, but the Company’s apartment was “priced” in the swap without any credit for appreciation,

even though the apartments were in the same building and the Company’s apartment was greatly superior

due to its larger size and better location on a higher floor.

246. As the Special Committee explained in its Report, the amount Black paid for the

Company’s apartment was “wildly below fair market value” because New York City’s Department of

Finance, Repeat Sales Price Index for condominiums on the Upper East Side “suggests that the value of

the Company’s apartment probably appreciated by approximately 80% from 1994 to 2000. An 80%

increase in value would have put the ’fair market value’ at $5.4 million, not the $3 million Black paid.”

Black used his old apartment that the Company acquired in the swap for personal matters – housing his

domestic staff and for personal friends visiting New York.

247. The disclosure of the swap transaction in the 2001 and 2002 Proxy Statements falsely,

characterized the deals as being made, pursuant to an “option to purchase” granted to Black.

Additionally, the disclosures were materially misleading in omitting that the December 2000 Manhattan

apartment swap was never negotiated, discussed or approved by the Audit Committee or Board. Finally,

there was no disclosure of the personal uses to which Lord Black put his old apartment after it was

acquired by the Company in the swap.

2. Staff, Housing And Other Personal Expenses Paid By The Company

248. In addition to allowing Black to purchase the Company’s Park Avenue apartment for

millions of dollars less than its fair market value, Hollinger paid for the maintenance of that apartment

and other properties held by Lord Black, and paid for the housing staff and other personal expenses of

Lord Black. From 1997 to 2003, Hollinger paid $1.8 million for the maintenance, build-out fees and

taxes for Black’s New York apartments and paid $1.4 million in expenses associated with the staffing and

operation of Black’s New York, Florida and London homes, complete with personal staff (including a

chef, senior butler, butler, under butler, maids, housemen, security, chauffeurs, and others) and


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approximately $390,000 in leasing and repair costs for various automobiles used indiscriminately and

primarily by Black for personal matters. As set forth in the Special Committee Report:

From 1997 through mid-June 2003, the Chicago Sun-Times paid a total of $572,757 for the cost of a housekeeper at Black’s New York apartment and for the salary of a chauffeur in New York.

* * *

From 2000 to 2003 Hollinger also paid $9,125 for Black’s dues to the Century Club.

The Telegraph paid approximately $766,525 from 1998 through September 2003 for the “use of Lord Black’s staff.” This included security at Lord Black’s home from 2001-2003. Black charged the Telegraph either 30%, 50% or 75% for each of the London staff’s salary, and 20% of his “cost” of their accommodations. In addition, from 2000-2003, the Telegraph paid close to $90,000 for repairing a Rolls Royce that Ravelston owned and Black used.

From 1998 through 2003, the Telegraph reimbursed Black $390,000 for expenses. The majority of these expenses related to the Black’s entertaining at the Cottesmore Cottage, for which Black generally charged 80% to the Telegraph. These expenses also included (i) a $7,605 flight to New York on the Concord (despite the existence of the G-IV); (ii) flowers, allocated at 80%, for a total cost of $636; (iii) three dinners for Dr. and Mrs. Kissinger, allocated at 80%, totaling $28,480; and (iv) “summer drinks” allocated at 80%, totaling $24,950.

249. Hollinger paid for other living expenses and extravagances of the Blacks. The Company

paid $42,870 for a birthday party in 2000 for Lady Black. As detailed in the Special Committee Report,

food, cell phones, perfume, and even tips by Lady Black while on shopping trips were expensed to

Hollinger. Among other items paid by the Company are Lady Black’s handbags ($2,463) and jogging

attire ($140), exercise equipment ($2,083), a leather briefcase ($2,057), the Blacks’ opera tickets

($2,785), stereo equipment for the New York apartment ($828), and silverware for the Blacks’ corporate

jet ($4,530).

250. The Special Committee Report also details some of the gifts bestowed on Radler using

Company money:


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Hollinger purchased a Chicago apartment for Radler in 1994 for $890,000. The Chicago Sun-Times paid for Radler’s cars: a white Chevy Blazer purchased in 1999 for approximately $24,000 and a blue Chevy Trailblazer purchased in February 2003 for approximately $32,196. The Company also paid at least $42,000 for Radler’s dues to Richmond Country Club, Bighorn, The Springs Clubs, and the Vancouver Club. Radler also had Loye provide him with free legal advice regarding personal matters, including a dispute with an auction house.

From 1996 to 2003 the Telegraph declared a taxable benefit for Black, Radler and Colson for their car benefit, private medial insurance, fuel benefit charge and mobile telephone. Nevertheless, these benefits were not disclosed in Hollinger’s proxy statements.

251. As set forth below, the Company failed to properly disclose these numerous perks given

to the Blacks and Radler.

3. Black’s And Radler’s Personal Use Of Corporate Jets

252. Though Hollinger was a relatively small company, it owned and leased several jets,

including a Gulfstream II, a Gulfstream IV (leased for $3 - $4 million a year) and a Challenger jet

(purchased for $11.6 million), which cost the Company millions of dollars each year to operate and

maintain. Hollinger paid $61.3 million to finance, operate and maintain the jets from 1995 through 2003.

Operating the Challenger and Gulfstream IV jets alone cost the Company over $20 million from 2000-

2002. The costs were divided among Hollinger’s various corporate groups in the U.K., Canada and the

U.S.

253. Lord Black and Radler frequently and indiscriminately used the corporate aircraft for

their own personal benefit, flying to their collection of homes and on vacation, without reimbursing the

Company. The Special Committee examined the airplane logs and other documents and determined that

Lord Black and Radler took numerous flights on corporate aircraft that had no business purpose,

including flights to various vacation locales (such as Palm Springs, Palm Beach, Berlin, Paris and Aspen)

where there were no Company operations or newspapers. The Special Committee found that in 2002

alone, Radler’s flights on the Challenger jet comprised approximately 70.5 hours, more than 20% of the

airplane’s overall usage in 2002, representing an unreimbursed cost to Hollinger of approximately


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$830,000. Likewise, flights by Lord and Lady Black in 2002 on the Gulfstream IV on personal matters

amounted to 57.3 hours, more than 20% of the total 2002 Gulfstream IV usage, costing Hollinger

approximately $1 million. The Special Committee found that “[t]he flight logs from other years evidence

Black’s and Radler’s similar personal use of the Company jets.”

254. Particularly noteworthy is the Black’s 10-day vacation trip to Bora Bora in French

Polynesia. The total flight time racked up by the Blacks on Company aircraft was 33.9 hours costing

$530,000. That cost was charged 50% to Hollinger and 50% to Ravelston, and $365,000 of the costs

were included on Black’s Ravelston tax forms as a benefit. As explained by the Special Committee in its

Report, Black rejected any attempt to impose the costs on him:

In an e-mail to Atkinson dated August 25, 2002, Black stated that Radler had informed him that there was a plan to personally charge him $388,000 for the Bora Bora trip. The controlling shareholder would have none of it: “Needless to say, no such outcome is acceptable.” Black does not appear to have reimbursed the Company for the 50% cost it incurred for this flight, and neither the flight nor the value of the taxable benefit was publicly disclosed.

Neither Black nor Radler ever reimbursed Hollinger for personal flights they took on Company aircraft,

and with the sole exception of the 50% allocation to Ravelston of the Bora Bora Flight costs, Ravelston

reimbursed Hollinger for less than 0.5% of the costs of the aircraft from 2000-2002. As with the other

perks detailed herein, there was little, if any, disclosure to shareholders of the personal uses of corporate

aircraft by the Blacks and Radler.

4. The Company Pays For Lord Black’s Purchases Of FDR Memorabilia

255. From 1996 to 2001, Lord Black acquired presidential papers and other memorabilia of

President Franklin D. Roosevelt for over $9.6 million, of which Hollinger paid at least $8.9 million.

Although the Special Committee did not find any documentary evidence that Lord Black personally paid

for any of these papers, the vast majority of the items were displayed or stored in Black’s various

residences, not in Hollinger’s offices; in fact, in his deposition in the Delaware Chancery Court action,

Black stated that the entire collection was in his New York home.


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256. Lord Black never sought prior Audit Committee or Board approval of these purchases,

and obtained a “ratification” of some of the purchases more than two years after the acquisition occurred.

On October 14, 2002, nearly two years after Black had acquired the Grace Tully Collection of FDR

papers, and seven Board meetings after that acquisition, the Executive Committee (comprised of Black,

Radler and Perle) “ratified” the purchase, which was paid for with $8 million of the Company’s funds.

257. Lord Black had a personal and commercial interest in the FDR papers – he was writing a

biography of FDR. Black’s book was published in November 2003.

258. Despite the millions paid by Hollinger for the FDR papers which Black kept at his

homes, and which he used to write a book, the Company never disclosed the additional monies paid to

Black in these transactions. None of the Company’s disclosures of Black’s compensation included any

amounts paid by the Company for the FDR papers. Accordingly, the disclosures of Black’s compensation

during the Class Period were all false.

5. Charitable Gifts By Hollinger On Behalf of Black And Radler

259. Between 1996 and 2003, Hollinger and its subsidiaries donated over $6.5 million to

hundreds of charities in the United States, Canada, the United Kingdom and Israel, the bulk of these gifts

(as detailed in the Special Committee Report) being made before 2003. Many of these donations were

made to organizations selected by Lord and Lady Black and Radler, and were publicly attributed to them,

not the Company.

260. The Special Committee lists many of these donations in its Report. As a result of the

Company donations which were attributed to Lord and Lady Black and Radler, there is a “Black Family

Foundation Wing” at a major hospital in Toronto, a Bursary Fund established in the name of Lady Black

at the North London Collegiate School, a “Radler Business Wing” at Radler’s alma mater (Queens

University in Ontario), a “Rona and David Radler” trauma recovery unit at a hospital in Jerusalem, the

“Black Commemorative Chair” in the Hyde Park auditorium, a plaque honoring “Lord and Lady Black”


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at the Metropolitan Opera, and other distinctions bestowed on the Blacks and the Radlers for donations

which the charities understood came from those individuals.

261. Despite the notoriety, the directorships and other postions at various charities and

institutions bestowed on the Blacks and the Radlers as a result of these donations, the Company never

disclosed in its filings any benefits accruing to Lord Black, Lady Black or Radler as a result of these

donations.

6. SEC Disclosures Relating To Perquisites And Compensation

262. During the Class Period, Hollinger did not fully disclose the perks and related-party

compensation provided to Lord Black, Lady Black, Radler, Boultbee, Atkinson and Colson. The

Company completely failed to disclose, or did not disclose in their entirety, Company disbursements for

the staffing and operation of Black’s New York and London homes, the fees for drivers, the insurance and

maintenance costs for Black’s Rolls Royce and other automobiles, the millions of dollars paid to operate

and maintain the corporate jets, and the reimbursement of travel and entertainment. For example, other

than a mention in the 2002 10-K (after the end of the Class Period) that Hollinger had purchased the

Challenger, there was no disclosure regarding the corporate jet fleet until the 2003 Proxy Statement which

disclosed that the Company was paying the costs of an airplane and that “other compensation” for Black

and Radler included an “allocation of variable costs covering any occasion when his use of a corporate

airplane is not entirely for corporate purposes.”

263. As stated in the Special Committee Report, “while the Company reported that aircraft

costs are included in other compensation, Hollinger records show that in fact no aircraft costs were

included in the other compensation figures for Black and Radler” in the 2003 Proxy Statement.

264. Item 402 of SEC Regulation S-K requires that proxy statements contain a Summary

Executive Compensation Table setting forth “the compensation on the named executive officers for each

of the registrant’s last three years.” The “named executive officers” include the CEO and the company’s

“four most highly compensated executive officers other than the CEO who were serving as executive


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officers at the end of the last completed fiscal year” along with up to two additional individuals who

served as an executive officer during the last fiscal year but stepped down from such position by the end

of that fiscal year. The Summary Executive Compensation Table must list for each of these individuals

the dollar value of their annual compensation that is not categorized as a salary or bonus. Under the

regulation, “[p]erquisites and other personal benefits, securities or property” must be disclosed “unless the

aggregate amount of such compensation is the lesser of $50,000 or 10% of the total annual salary and

bonus reported for the named executive officers.” The regulation further requires that each perquisite or

other personal benefit exceeding 25% of the total perquisites and other personal benefits reported for the

named executive officers must be identified by type and amount in a footnote or narrative discussion.

The value of the perquisites and other personal benefits must be based on the aggregate incremental cost

to the company and its subsidiaries.

265. Hollinger’s Proxy Statements and other public filings during the Class Period make no

disclosure of any of the compensation paid to Lord Black and Radler in the form of perquisites such as

housing, staff and travel.

266. It was not until after the Class Period, in Hollinger’s 2003 Proxy Statement, where there

is any such disclosure, and that disclosure was contained in a footnote to the Summary Compensation

Table as follows:

With respect to Lord Black, [$248,580 in “Other Compensation”] reflects a portion of the cost of maintaining his New York condominium, an allocation for a portion of the cost of a New York and a London automobile and driver, a portion of the cost of his personal house staffs where offices are maintained and in which meetings are frequently held, and an allocation of variable costs covering any occasion when his use of a corporate airplane is not entirely for corporate purposes.

267. Under the heading Certain Relationships and Related Transactions, the 2003 Proxy

Statement made the following disclosure:

During the period January 1, 2002 to July 1, 2002, one of the corporate airplanes was leased by a subsidiary of Hollinger Inc. The costs associated with the plane, approximately $2.3 million, were charged to


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the Company, as in prior years. Hollinger Inc. and RMI paid an allocation of variable costs covering any occasion of their use. Effective July 1, 2002, such subsidiary was transferred to Publishing for One Dollar ($1.00). The costs were approved by the Audit Committee as reasonable for the services rendered and the transfer to Publishing was approved by the Audit Committee as a market value transaction.

268. As discussed above, the Special Committee found that in 2002 Radler and Black used

corporate jets for personal matters at a cost to Hollinger (and a personal benefit to these executives) of

approximately $830,000 and approximately $1 million respectively, easily surpassing the $50,000

minimum threshold amounts triggering SEC disclosure rules for highly compensated executive officers.

However, as previously noted, the 2003 Proxy Statement valued Black’s “other compensation” for 2002 -

purportedly reflecting the cost of a New York apartment, house staff, car and driver, and airplane use - at

only $248,580, which is $25,000 less than the Special Committee’s conservative estimate of the value of

his personal use of the corporate jet alone. Radler’s “other compensation” reported in the 2003 Proxy

Statement was $127,160, ostensibly for the “costs of maintaining the Chicago condominium and

automobile and an allocation of variable costs covering any occasion when his use of a corporate airplane

is not entirely for corporate purposes.” This disclosed figure amounts to less than half of the value that

the Special Committee conservatively attributed to Radler’s personal use of the Challenger plane in 2002.

269. Further, the proxy disclosure for both Black and Radler is misleading because it states

that the amounts reported as “other compensation” include an “allocation of variable costs covering any

occasion when his use of a corporate airplane is not entirely for corporate purposes.” In fact, according to

Company records reviewed by the Special Committee, the $248,580 and $127,160 reported as other

compensation for Black and Radler, respectively, include no amounts relating to personal use of aircraft.

In any event, the disclosures during the Class Period were completely false in their failure to include as

compensation any of the perquisites given to the Blacks and Radler.


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H. THE TELEGRAPH GROUP AND OTHER SELF-DEALING TRANSACTIONS

270. Hollinger’s shareholders for years were told that the full Board controlled all decisions

regarding the declaration of dividends. The 2001 10-K states that dividends are discretionary, are

declared “by the Board,” and that the ability of Hollinger’s subsidiaries to pay dividends “are subject to

statutory restrictions and restrictions in debt agreements.” However, this statement is false as,

unbeknownst to investors, Lord Black, and not the entire Board, determined when and if dividends were

declared by Hollinger and/or its subsidiaries.

271. Hollinger’s 2002 Proxy Statement contains disclosures about Lord Black’s compensation

but fails to contain any mention of any dividends being paid to Lord Black by Hollinger subsidiaries.

272. Hollinger’s 2002 Proxy Statement reported that Lord Black was paid a salary of

$443,283, a bonus of $250,000, options on 400,000 shares of Hollinger stock and paid $123,302 in “other

compensation” associated with his service on the boards of various Hollinger affiliated companies. There

is no mention whatsoever in the 2002 Proxy Statement of Lord Black being paid any dividends by the

Telegraph Group.

273. The Company’s disclosure of the compensation paid to Lord Black was false in that it

failed to disclose millions of dollars paid to Lord Black in the form of extraordinary dividends by the

Telegraph Group.

274. On November 29, 2003, the Financial Times reported that Lord Black had received more

than £53 million ($93 million) in dividends in 2002 from the Telegraph Group. These dividend payments

stand in stark contrast to the modest £600,000 in dividends paid in the preceding year. Moreover, the

Financial Times reported that this payout exceeded the Telegraph’s pre-tax profits by 37 percent. The

Financial Times reported that, during the past three years, the Telegraph Group has paid more than £4

million in management services fees to entities owned by or affiliated with Lord Black – in other words,

fees that are similar to the Ravelston management services agreement fees paid by Hollinger.


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275. The reason the Telegraph Group suddenly paid such enormous dividends to Lord Black is

now clear – Lord Black needed the cash, and he dictated that a check be made out to him in the form of

dividends.

I. HOLLINGER’S INFLATION OF CIRCULATION FIGURES

276. In public filings, Hollinger disclosed to investors the circulation figures of its newspapers

which, according to the Company, rose (for the most part) during the Class Period. Based upon the large

(and generally growing) number of consumers reading its newspapers, Hollinger was able to charge

higher rates for the placement of advertisements in its papers, and it reported growing revenues based on

its higher circulation figures and advertising revenue. The market price of the Company’s stock, in turn,

increased on this news.

277. However, Hollinger throughout the Class Period artificially inflated its reported

circulation figures by 25% or more in a massive and pervasive scheme to defraud advertisers and

investors alike. This scheme, orchestrated by Radler, was carried out in numerous and diverse

distribution centers for Hollinger’s newspapers, particularly the Sun Times. The Company’s employees,

under the direction of distribution managers (who ultimately reported to Radler) boldly disposed of

newspapers secretly so that the discarded newspapers would not be counted by the Audit Bureau of

Circulation (“ABC”), an organization which monitored circulation figures and to which Hollinger

reported its circulation figures. The Company’s employees under Radler’s direction counted unsold,

returned papers as sold, and even used power failures (on which days circulation figures were not

reported) in an attempt to hide decreasing circulation figures.

278. At the beginning of the Class Period, on November 1, 1999, Radler stated that he “is

particularly pleased by the success of the National Post” and that “circulation has surpassed our wildest

dreams.” Radler did not say that the reported circulation figures were, like dreams, pure fiction.

279. In the Company’s 1999 10-K, the Company stated:

CHICAGO GROUP


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The Company’s Chicago Group consists of three daily and 77 non-daily newspapers including the Chicago Sun-Times, the eighth largest circulation metropolitan daily newspaper in the United States, the Post Tribune in Gary, Indiana and the Daily Southtown. The Chicago Sun-Times is published in a tabloid format and has become Chicago’s best read newspaper, attracting some 1,684,000 readers every day.

* * *

CIRCULATION

Circulation revenues are derived from single copy newspaper sales made through retailers and vending racks and home delivery newspaper sales to subscribers. Approximately 65% of the copies of the Chicago Sun-Times sold in 1999 were single copy sales. Approximately 70% of 1999 circulation revenues of the Chicago area suburban newspapers were derived from subscription sales.

* * *

The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 472,000 and 405,000, respectively, the daily and Sunday paid circulation of the Daily Southtown is approximately 52,000 and 60,000, respectively, the daily and Sunday paid circulation of the Gary Post-Tribune is approximately 63,000 and 68,000, respectively, and the aggregate non-daily paid and free circulation of the Chicago area suburban newspapers is approximately 254,000 and 492,000, respectively.

280. Based on the Company’s purportedly growing circulation figures, Hollinger reported in

its May 2000 10-Q that the operating revenue from circulation in the Chicago Group was $20,070,000 in

2000, up from $19,971,000 in 1999. Those revenue figures, like the circulation figures in the 1999 10-K,

were false, as they resulted from a secret scheme to artificially inflate circulation figures through

improper means, including secretly throwing out newspapers. However, this false reporting fooled

investors as well as purchasers of Hollinger’s assets.

281. On August 1, 2000, the National Post published an article detailing the proposed sale by

Hollinger of a stake in the National Post to CanWest Global. CanWest chairman Izzy Asper trumpeted

the circulation numbers of Hollinger’s National Post, stating:

What CanWest snared is a stake in a newspaper property with an increasing circulation and rising revenues. According to interim


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unaudited figures for the Audit Bureau of Circulation expected to be released in the next few weeks, National Post’s paid circulation has increased 28% to 335,000 for the six-day week and 390,000 for Saturday.

282. Hollinger continued to report false circulation figures. The Company reported in its

August 2000 10-Q the following information pertaining to its Chicago Group:

Circulation revenue in the second quarter 2000 was $19.8 million, down $0.9 million or 4.4% from 1999. In the six months ended June 30, 2000 circulation revenue was $39.9 million, down $0.8 million or 2.0% from 1999. Although circulation revenue declined compared with 1999, average daily ABC circulation was up as of the end of June 2000 compared with June 1999.

283. The Company reported in its November 2000 10-Q that:

The average ABC circulation for the Chicago Sun-Times reflects an increase in circulation of about 1% for the six months ended September 30, 2000 compared with the same period in 1999 as provided by the September Publisher’s Statement.

284. The Company reported in its 2000 10-K the following:

The Chicago Sun-Times is published in a tabloid format and has become Chicago’s best read newspaper, attracting 1.7 million readers every day.

Approximately 65% of the copies of the Chicago Sun-Times sold in 2000 were single copy sales. Approximately 78% of 2000 circulation revenues of the Chicago area suburban newspapers were derived from subscription sales.

* * *

The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 478,000 and 393,000, respectively. The daily and Sunday paid circulation of the Daily Southtown is approximately 51,000 and 60,000, respectively. The daily and Sunday paid circulation of the Post Tribune is approximately 64,000 and 67,000, respectively. The aggregate non-daily paid and free circulation of the Chicago area suburban newspapers is approximately314,000 and 975,000, respectively. The average paid daily and Sunday circulation of the recently acquired Copley Chicago Suburban newspapers is approximately 105,000 and 92,000, respectively.

* * *


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The Chicago Sun-Times is the ninth largest metropolitan daily newspaper in the United States, based on circulation.

However, the circulation and revenue figures in the Company’s 10-K and 10-Q filings for 2000 were

materially false and misleading, as they were propped-up by a widespread and coordinated effort at the

Company to inflate its circulation figures through illicit means. The Company’s subsequent public filings

during the Class Period were also false and misleading in their complete misrepresentation of the

Company’s circulation figures.

285. The November 2001 10-Q reported that “Chicago Group Circulation” for the quarter was

$22,950,000 as compared to the same quarter the prior year and that the average circulation volume at the

Sun Times increased 3.5% compared with the third quarter of 2000.

286. The Company reported in its 2001 10-K:

The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 480,000 and 383,000, respectively. The Chicago Sun-Times has had consecutive increases over the past two years in the paid daily circulation. The daily and Sunday paid circulation of the Daily Southtown is approximately 48,000 and 383,000, respectively. The Chicago Sun-Times has had consecutive increases over the past two years in paid daily circulation. The daily and Sunday paid circulation of the Daily Southtown is approximately 48,000 and 55,000 respectively. The daily and Sunday paid circulation of the Post-Tribune is approximately 64,000 and 69,000, respectively. The aggregate daily and Sunday paid circulation of the Chicago Suburban Newspapers is approximately 98,000 and 111,000, respectively. The aggregate free circulation and bi-weekly paid circulation of the Chicago Suburban Newspapers is approximately 472,000 and 20,000, respectively.

The Audit Bureau of Circulation reported average daily circulation for the Chicago Sun Times for the fourth quarter of 2000 reflected an increase of approximately 6,000 compared with the fourth quarter of 1999. However, circulation revenue was lower resulting from price discounting to building and maintain market share.

287. The Company reported in its Form 10-Q filed on March 31, 2002 (the “March 2002 10-

Q”) that:

Circulation revenue in 2002 was $22.9 million compared with $23.5 million in 2001, a decrease of $0.6 million or 2.6%. The decrease was primarily at Chicago Sun-Times and results almost entirely from the


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price discounting. However, the Chicago Sun-Times average daily circulation in the first quarter 2002 was approximately 1,900 higher than the 480,818 average daily circulation in the first quarter 2001. Printing and other revenue was $2.5 million in 2002 compared with $3.4 million in 2001, a decrease of $0.9 million.

288. All of these disclosures regarding the Company’s circulation were false and misleading.

However, they fooled investors and journalists alike.

289. On November 2, 2002, National Post’s Financial Post & FP Investing (Canada) reported:

Last year, Hollinger sold its biggest Canadian assets, including this paper, to Izzy Asper’s CanWest Global Communications Corp. for $3.2-billion, netting a $920-million gain over their original purchase price years before. Now, Hollinger’s “paltry” assets are still impressive: The flagship The Daily Telegraph in Britain, the Chicago Sun Times and the other Chicago papers with combined circulation of 1.9 million, the prestigious Jerusalem Post and hundreds more small papers south of the border. There are roughly 6,000 employees and Davis is the ands-on publisher of the Jerusalem and Chicago papers. ... Hollinger’s business strategy has been to buy mediocre papers or basket cases, then quickly, some say ruthlessly, turn them around for a profit. Along the way, David earned the nickname “happy hacker.” In Canada, journalists invested a new verb synonymous with being downsized: “Radlerized.”

290. On February 27, 2003, Canada News Wire Ltd. reported:

About Hollinger International Inc. ... The Company’s principal assets are the Chicago Sun-Times, which has the second highest circulation and the highest readership of any newspaper in the Chicago metropolitan area, more than 1000 titles in the greater Chicago metropolitan area, and The Daily Telegraph, the highest circulation broadsheet daily newspaper in the United Kingdom and in Europe, and its related publications in the United Kingdom. The Company also owns The Jerusalem Post in Israel. In addition, Hollinger has a number of minority investments in various Internet and media-related public and private companies.

291. On June 15, 2004, Hollinger announced that its Audit Committee is conducting an

internal review of practices that resulted in an overstatement of circulation figures by the Sun-Times over

the past several years. The Company stated that it does not expect to issue any further announcements

until the Committee concludes its investigation. Also on June 15, Hollinger Inc. issued a statement that it

had no knowledge of unusual circulation practices, that its executives had favored reducing subsidized


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circulation, and that it advised Hollinger International against a recent cover price increase (from $0.35 to

$0.50) for the Sun-Times.

292. The Chicago Tribune published stories in the next few days following Hollinger’s

announcement, reporting that “sources close to the paper said the Sun-Times had overstated its daily

newsstand sales by at least 25% or more than 78,000 copies a day, for at least two years and possibly

longer” which had the effect of “boosting profits while overcharging its customers.” As stated in a June

16, 2004 Tribune article, a Hollinger spokeswoman revealed that “the audit committee had reached a

point in its review they knew the circulation figures were materially overstated back several years,”

industry experts said that the Sun-Times may have to pay refunds to advertisers, and Hollinger

International may have to restate its financial results. The Tribune article described the “circulation

schemes [as] involv[ing] counting as sold papers that never got into readers’ hands.” A former top

executive at the Sun-Times said that “[t]ens of thousands of papers were going out in the morning and

coming back at night.” The article described a widespread scheme at the Sun-Times and noted that “[t]he

Sun-Times circulation scandal fell under the watch of Radler, the former publisher who is accused of

taking millions of dollars in unauthorized payments.” The Audit Bureau of Circulations (“ABC”), to

whom newspapers report their circulation bi-annually, stated that it is launching its own investigation.

293. The Tribune provided further details of the scheme on June 17, 2004. According to

unnamed sources quoted in that article, “[t]here was tremendous pressure to keep numbers high” at

Hollinger International. The sources said that “a number of programs geared to ‘manufacturing the

numbers in the field’ were employed in several occasions,” including instances where “distributors were

compensated to keep returned newspapers or to just ‘get rid of papers.’“ The internal investigation which

revealed the inflation of circulation figures was initiated after the increase in the newsstand price from

$0.35 to $0.50, and the discovery of an apparent discrepancy between circulation numbers and revenue

figures.


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294. A June 21, 2004 article in the Wall Street Journal provided additional details regarding

the scheme at Hollinger. Circulation “officials” at the Sun-Times apparently “set up sham sales accounts

and told distributors to trash newspapers in a complex effort to inflate circulation.” According to the

article, “[o]ne method used was to count unsold papers returned to Sun-Times printing plant as being

received on days when official circulation figures weren’t being compiled, rather than reducing sales

totals for days when figures were reported to circulation authorities.” Other facets of the scheme involved

“taking advantage of so-called throw-out days” which “occur when an event such as a power failure,

storm or printing plant failure impedes distribution, causing that day’s circulation figures not to be

counted in the data compiled for ABC.” Throw-out days were also used in instances where there were no

unusual event (such as a power failure):

For example, if Tuesday was throw-out day, papers returned on Thursday would instead be attributed to Tuesday, since the Tuesday number wasn’t going to be counted in official tallies.

A person within the circulation department at the Sun-Times said that if drivers came back to the office with say, 500 returns, circulation officials often would mark down 400 returns. The disparity would be reconciled on days such as holidays and snow days, when ABC didn’t monitor circulation.

This person said Sun-Times circulation officials set up fake accounts at the Sun-Times-owned agencies that distributed papers to homes, stores and vending machines around Chicago and its suburbs. Drivers took papers to the agencies from the Sun-Times’s printing plant. Circulation officials “told the guys at the agencies to junk the papers. They said, ’We don’t care what you do with them. Don’t send them back here,’“ according to this person.

This person estimates that there may be as many as 100 agencies, and that 200 to 300 papers could have been trashed at each of the agencies, resulting in 20,000 to 30,000 papers being trashed daily. The Sun-Times reported average weekday circulation of 481,798 and average Sunday circulation of 372,527 for the six months ended September 2003.

295. Former Hollinger executives who worked in the circulation and operations departments

of the Sun-Times during the Class Period have provided additional and corroborating information

regarding the circulation fraud at Hollinger. A former Sun-Times national account manager (who worked


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at the Sun-Times from 1995-2000) and an individual who worked in Hollinger’s circulation department

stated that the Company set up fake accounts at distributors, which Hollinger controlled, to inflate

circulation figures at the Sun-Times. According to these two internal sources, Hollinger caused the

drivers to take papers to Hollinger-controlled distributors who would dispose of the papers. The former

Hollinger national account manager knew about the circulation fraud because this source was directly

involved in soliciting advertising business for the Company’s newspapers. These sources estimate that

Hollinger used over 100 of these sham distributors to dispose, rather than sell, Hollinger’s papers. Each

of these sham distributors disposed of approximately 200-300 papers daily, thereby materially overstating

the Sun-Time’s circulation by approximately 20,000-30,000 papers daily.

296. According to a former Hollinger Account Executive, Hollinger also manipulated the

circulation results of other Hollinger-owned papers. This internal source worked for newspapers acquired

by Hollinger and then worked for Hollinger after those acquisitions. She said that after acquiring the

Aurora Beacon, Naperville Sun, Elgin Courier and Waukegan News Sun from Copley in 2002, Hollinger

caused the newspapers to artificially inflate their circulation and readership through a variety of improper

accounting tricks. For example, after Hollinger acquired the Elgin Courier in 2000, it started asking

advertisers to print more inserts for its paper. According to the former Account Executive, after this

increase in printing, “there were so many inserts left over, [the advertisers] were being charged for inserts

for papers that did not exist” or were not sold.

297. Several sources described Radler’s role in the circulation scheme. The former national

account manager said that an editor in the editorial department named Mark Hornung was fired for

plagiarism but was rehired by Radler as the vice president of circulation, though the former national

account manager believed Hornung was “shady.” A former Sun-Times circulations promotions

coordinator at Hollinger from 1992 to 1998 confirmed that Hornung was fired for plagiarism. She also

said that Radler was the individual who re-hired Hornung and placed him in a top position in the

circulation department. Hornung even went to Hollinger’s headquarters, where Radler worked, for a


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“training session” before commencing his duties as vice president of circulation. According to the former

Sun-Times circulation promotion manager, Hornung under direction from Radler set a new tone for the

circulation department – the fraudulent counting and reporting of circulation figures.

298. Radler maintained his tight control of the circulation department, with in-person visits

and through Hornung. As stated by the former Sun-Times circulation promotions coordinator, Radler

attended all the sales meetings and “gave all the big speeches.”

299. The discovery of Hollinger’s inflation of its circulation figures has prompted advertisers

to sue the Company. As reported by United Press International on June 17, 2004, various “businesses

that bought thousands of dollars in advertising in the Sun-Times filed class-action lawsuits charging

fraud, deceptive trade practices and unjust enrichment. Newspaper and magazine advertising rates are

based on circulation, and settlements could cost financially ailing Hollinger International millions in

refunds.”

J. THE TRUTH BEGINS TO EMERGE AND THE SPECIAL

COMMITTEE AND THE SEC COMMENCE THEIR INVESTIGATIONS.

300. The Company’s disclosures regarding self-dealing and misappropriation of Company

money by Lord Black and his accomplices began part-way through the Class Period and, with respect to

the Company’s circulation figures, continued beyond the end of the Class Period. During the Class

Period, the Company began to dribble out some information regarding the secret payments of non-

compete fees and the Company’s deals with entities owned and controlled by Black and Radler. For

instance, the Company disclosed in its 2001 Proxy Statement that Horizon was owned by certain

unnamed Directors and senior management of Hollinger, and a year later in its 2002 Proxy Statement

added the information that those unnamed individuals actually controlled Horizon.

301. Institutional shareholders gradually learned that Lord Black had operated Hollinger as if

it were his own piggy bank, and following the Company’s disclosures that non-competes had been paid

out of the proceeds of the Company’s asset sales, the Company’s debt was downgraded (it bordered on


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being “junk”) as was the debt of Hollinger Inc. DBRS, a credit rating agency, announced on December

11, 2002 that the debt rating on Hollinger’s Senior Unsecured notes would be downgraded to “DB low.”

302. On or about June 17, 2003, the Board established a Special Committee to conduct an

investigation into the allegations of self-dealing. The Company announced that Gordon A. Paris (“Paris”)

was appointed Chairman of the Special Committee and initially as its sole member. Richard Breeden,

former Chairman of the SEC, was retained by the committee to head the investigation.

303. On or about July 24, 2003, the Company announced that Graham W. Savage (“Savage”)

and Raymond G. H. Seitz (“Seitz”) were named to the Board of Directors and both were appointed as

purported independent Directors as members of the Special Committee of the Board. However, Seitz has

been a member of the Telegraph Group’s advisory body, of which Lord Black is the chairman and

defendant Colson is chief executive. Savage sits on the board of Canadian Tire Corp. with defendant

Atkinson. Atkinson is also one of the executives alleged to have received improper payments from

Hollinger.

304. In mid-November 2003, Colson publicly admitted that Hollinger was the subject of an

SEC investigation. As reported in the November 20, 2003 issue of CFO.com, the SEC’s probe includes

“Hollinger’s star-studded board of directors.” The Ontario Securities Commission and the Federal

Bureau of Investigation also at that time began investigating Hollinger.

305. On or about November 19, 2003, the SEC issued subpoenas to Hollinger, Hollinger Inc.

and KPMG for documents.

306. On November 21, 2003, the members of audit committee of Hollinger’s parent company,

Hollinger Inc., Maureen Sabia, Fredrik Eaton, Allan Gotlieb and Douglas Bassett, each recommended that

Black, Radler, Boultbee and Atkinson resign from Hollinger Inc. However, when that proposal was

rejected, all of these independent directors on Hollinger Inc. resigned from the board of that company,

putting Hollinger Inc. in violation of Canadian securities laws requiring Canadian companies to maintain

an audit committee comprised only of independent directors.


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307. As a result of the Company’s concessions that non-compete payments had been secretly

paid to Black and Radler, and the mass exodus of independent directors from Hollinger Inc., and the

enormous pressure put on Black and Radler from institutional investors, Lord Black and Radler abruptly

resigned their executive posts only days before Black would have to certify as CEO the Company’s

quarterly SEC filing; however, Lord Black remained at that time as the Chairman of the Company and its

controlling shareholder. Boultbee was fired. The Company named Paris interim President and CEO.

Although Lord Black and Radler have each agreed to repay Hollinger a portion of the non-competition

payments they received at Hollinger’s expense, the amount of restitution they intend to pay is far less than

the hundreds of millions that Lord Black, Ravelston and Radler siphoned off from the Company.

Additionally, Lord Black has reneged on his original promise and now refuses to repay any of the

amounts he stole from the Company.

K. THE SEC AND SPECIAL COMMITTEE FILE COMPLAINTS

AGAINST THE COMPANY AND LORD BLACK.

308. On December 22, 2003, Lord Black appeared in response to an SEC subpoena for his

testimony. Rather than providing any explanation for his actions, Lord Black refused to testify, invoking

his right not to do so under the Fifth Amendment of the U.S. Constitution.

309. On Friday, January 16, 2004, the SEC filed an action against Hollinger and Lord Black in

the United States District Court for the Northern District of Illinois alleging that the Company issued

filings in 1999 through 2001 that contained “misstatements and omitted to state material facts regarding

transfers of corporate assets to certain of Hollinger International’s insiders and related entities.” In that

complaint, the SEC identified the various asset sale transactions described above and the non-compete

payments that were made out of the proceeds of those transactions but (as alleged by the SEC) not

disclosed by the Company in its public filings. In addition to not disclosing those payments, the SEC

alleged that Hollinger employees “falsified” and improperly altered the Company’s books and records “in

order to mischaracterize certain payments as non-competition payments” and also alleged that the


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Company “failed to have adequate internal controls in order to ensure that payments were properly

approved before they were made and that public filings were accurate.” The SEC also alleged that

corporate insiders had tried “to thwart and obstruct the efforts” of the Board’s Special Committee which

was investigating the conduct of and payments to Lord Black and others.

310. In that action, the SEC obtained an order preserving Hollinger’s assets and barring any

interference with Hollinger’s internal investigation. Hollinger consented to the entry of the order, which

also permanently enjoins the Company from violating the reporting and internal control provisions of the

federal securities laws.

311. Under the order, Hollinger is required to maintain its Special Committee to continue its

investigation of alleged misconduct and to recover and maintain corporate assets. If that committee’s

authority is impaired in any way, including through a change of control in the Company, Richard

Breeden, the current counsel to the Special Committee, would serve as a court-ordered Special Monitor to

protect the interests of Hollinger’s shareholders.

312. Also on January 16, 2004, the Special Committee filed its complaint in the U.S. District

Court for the Southern District of New York to recover damages and disgorgement of over $200 million,

plus prejudgment interest, costs and fees, against Lord Black, Radler, Ravelston and others. The Special

Committee Complaint charges that the defendants (including Lord Black, Radler, Ravelston and

Hollinger Inc.) directed and usurped the Company’s assets and opportunities through systematic breaches

of fiduciary duties owed to the Company. The Special Committee Complaint describes in detail the

payments made to Lord Black and others purportedly pursuant to “non-competition agreements” and the

excessive management fees through which the Company was damaged. The Special Committee filed a

parallel action in the U.S. District Court for the Northern District of Illinois against Lord Black, Radler,

Ravelston, Boultbee and Hollinger Inc. where it also sought over $200 million in damages from the

Company’s payments of unauthorized non-compete payments and excessive management services fees.

The Special Committee amended its Illinois Complaint on May 7, 2004 and now seeks over $380 million


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in damages, together with over $103 million in interest, from various defendants. The Special Committee

added as new defendants various entities owned and controlled by Lord Black and Radler (such as

Horizon and Bradford) and new individual defendants (including Lady Black and Colson).

313. The Federal Bureau of Investigation (“FBI”) has joined regulators at the SEC in

investigating the improprieties at Hollinger. As reported in the March 14, 2004 issue of the Times Online

and in the March 19, 2004 issue of the Chicago Tribune, Federal prosecutors in Chicago, Illinois have

launched their own criminal investigation into whether Black, Radler and others at the Company illegally

took tens of millions of dollars that should have gone to the Company’s shareholders. The FBI, working

with the SEC, as served subpoenas to CNHI, PMG, Forum and other companies that purchased

Hollinger’s assets, in order to determine whether there is any evidence that those companies requested

personal non-compete deals and earmarked funds from the sales to Black and Radler. The FBI and SEC

are also investigating the circumstances surrounding the $6 million loan disguised as a non-compete

payment, made by Hollinger to Black and other executives at Bradford in 2000.

L. LORD BLACK ATTEMPTS TO SELL THE COMPANY IN

AN ATTEMPT TO CONCEAL HIS FRAUD.

314. On January 17, 2004, the day after the Special Committee filed its New York action,

Hollinger announced that Lord Black “has been removed as non-executive chairman of the company,

effective immediately.”

315. As reported in a January 19, 2004 article in the FT Investor, in a letter to Hollinger’s

Board Sunday night, January 18, 2004, Lord Black stated that he did not accept the validity of his

removal. Also on Sunday, Lord Black agreed to sell a controlling interest in Hollinger to a company

owned by David and Frederick Barclay, two British brothers, for about $178 million. As reported in a

January 19, 2004 issue of the New York Times:

The sale amounted to an end run around Hollinger’s board orchestrated by Lord Black. The deal with the Barclays was negotiated in secret from the board, further enraging members of the company’s special committee, which sued Lord Black on Friday, and of the executive


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committee, which removed him as nonexecutive chairman on Saturday, according to executives close to the company. Those same executives said that Hollinger’s lawyers, who had suspected that such a deal might be made, were exploring ways to block it on Sunday evening.

316. On Monday, January 19, 2004, Lord Black issued a preemptive strike against any effort

to stop his attempt to sell the Company. Lord Black filed suit in the Superior Court of Justice in Ontario,

Canada seeking an injunction to prevent the Hollinger Board from blocking his sale of the Company and

seeking a declaration that the deal he reached with the Barclays was “effective, valid and binding.”

Additionally, as reported in the January 27, 2004 issue of the Chicago Tribune, Lord Black had the Board

change its bylaws to reduce the power of the Board’s Special Committee constituted of purportedly

outside directors. The change substantially limits the power of directors lined up against Black by

invoking a rule that all transactions must be approved by the full Board.

317. On January 23, 2004, the New York Post reported that Hollinger and its investment bank

began a formal auction process for the Company’s major properties, a move designed to block Lord Black

from selling his controlling stake in the Company. According to that article, Hollinger’s bankers denied

the Barclay brothers a book detailing Hollinger’s finances.

M. HOLLINGER BRINGS SUIT IN DELAWARE TO

ENJOIN BLACK’S PROPOSED SALE OF THE COMPANY.

318. On January 26, 2004, Hollinger filed suit in Delaware Chancery Court to block Lord

Black’s planned sale of his voting control of the Company. Hollinger contends in that suit that Lord

Black’s sale of the Company to the Barclays impairs the Company’s ability to seek higher bids for some

of its individual newspaper assets. Hollinger is asking the court to undo Black’s changes to the bylaws.

The suit seeks the implementation of a poison pill and the eradication of special voting shares that would

enable the Barclays to control Hollinger (as does Black) while owning only 30% of the Company’s

equity.

319. Following expedited discovery and a three-day trial, the Delaware Chancery Court issued

its decision on February 26, 2004, preliminarily enjoining the proposed sale to the Barclays and declaring


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the bylaw amendments ineffective. Hollinger International, Inc. v. Black, 844 A.2d 1022, 1092 (Del. Ch.

2004). The court also found that Black “misrepresented facts” to the Company’s Board and “breached his

fiduciary and contractual duties persistently and seriously” by, inter alia, attempting to sell the Company

without review and approval of that transaction by the Board or audit committee and by paying himself

and others non-compete payments out of the proceeds of the Company’s asset sales, without any review

or approval by the Board or audit committee. Id. at 1030. The court also ruled that Black (and the

Company) made materially false statements in the Company’s public findings by “fail[ing] to identify

millions of dollars in non-compete payments” and by “wrongly describ[ing] when the payments were

made and why they were made.” Id. at 1069. The court’s decision was based on a “very extensive”

record. Id. at 1058, n.76. As noted by the court, “[i]n addition to six trial witnesses, many deposition

excerpts were entered into evidence, as were nearly one thousand exhibits. The parties’ total briefing

alone approached 500 pages in total.” Id.

N. PLAINTIFFS OBTAIN COPIES OF THE TRIAL EXHIBITS AND OTHER

DOCUMENTS PREVIOUSLY UNDER SEAL IN THE DELAWARE ACTION.

320. Following the Delaware Chancery Court’s decision, Plaintiffs’ counsel attempted to

obtain copies of the exhibits and other documents from the parties in that action, but they refused, and the

clerk of court stated that the court’s set of the documents would not be available until the time for any

appeal had run on the court’s February 26, 2004 opinion.

321. Accordingly, on May 21, 2004, Plaintiffs moved to lift the seal on the trial exhibits and

other documents filed under seal. The Delaware Chancery Court granted that motion on June 29, 2004,

and Hollinger’s Delaware counsel provided Plaintiffs with copies of the trial exhibits (about 1,000

separate documents) on July 12, 2004.

O. HOLLINGER DISCLOSES THAT ITS

CIRCULATION FIGURES WERE OVERSTATED.

322. It was not until over three years after the Company filed its May 2001 10-Q containing

disclosures regarding the non-compete payments to Black and others that the Company finally began


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disclosing another facet of its fraudulent scheme – on June 15, 2004, Hollinger announced that it was

investigating internal practices that resulted in an overstatement of its circulation figures. Subsequent

reports revealed that Hollinger had overstated its circulation figures at the Sun-Times and other

newspapers by at least 25% for at least two years and possibly longer. In response, advertisers filed class

action lawsuits against the Company seeking partial refund of advertising payments made to Hollinger.

P. HOLLINGER PLANS TO RESTATE AND

BLACK LEAVES HOLLINGER INC.

323. On August 19, 2004, the Chicago Sun reported that Hollinger said that it may have to

issue a restatement as a result of the improper payments to Black and others.

324. On November 3, 2004, Black left his positions at Hollinger, Inc., stepping down as

director and executive of that company.

Q. THE FALL IN THE COMPANY’S STOCK PRICE

FOLLOWING DISCLOSURE OF THE FRAUD.

325. The defendants’ fraud caused the Company’s stock to trade during the Class Period at

artificially inflated prices.

326. The price of Hollinger’s stock was at $10.08 on the first day of the Class Period (August

13, 1999). As a result of the dissemination of materially false and misleading information and/or

defendant’s failure to disclose material facts, as set forth herein, the price steadily rose and stayed in the

low to mid teens for much of the Class Period – reaching a Class Period high of $17.06 on

August 24, 2000. In May of 2001, there was disclosure (for the first time) of some of the non-compete

payments, and from May 15, 2001 (the filing of the May 2001 10-Q) to August 14, 2001 (the filing of the

August 2001 10-Q) the Company’s stock price fell from $15.66 to $12.86. In late 2001, bolstered by the

Company’s misrepresentations and omissions regarding the non-competes and management services fees,

the false circulation figures, and, in particular, the misleading statements in the November 2001 10-Q

regarding the sale of two Canadian newspapers to Osprey Media Group, the stock climbed again to

$13.75 on April 1, 2002. On April 1, 2002 Hollinger filed its 2001 10-K, and disclosed the existence of


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non-competes relating to the CanWest and Osprey transactions. In response, Hollinger’s stock fell from

$13.40 on April 2, 2002 to $11.77 on May 23, 2002, the date of the Company’s shareholder meeting. The

stock price continued its downward trend as additional negative information regarding the defendants’

self-dealing reached the market. On the last day of the Class Period, December 11, 2002, the stock price

dropped a final 1.1% closing at $9.85 on news that the Company’s Senior Notes were down-graded based

upon its intention to further draw down its secured bank facility. Thus, in reaction to the increasing

negative disclosures regarding the non-competes, failures of the Board to approve related party

transactions, and the negative impact these events had on the Company’s financial outlook, Hollinger’s

stock droped over $7 per share from the Class Period high on August 24, 2000.

327. After the close of the Class Period, information regarding defendants’ self-dealing

continued to flow into the market. After the close of business on April 2, 2003, the Company issued a

press release announcing the filing of its 2002 10-K. The 2002 10-K disclosed that non-competes had

been paid out of the proceeds of Company asset sales to Black and “three senior executives” and admitted

that the Ravelston management services agreements may have been drafted in favor of Ravelston and thus

may be unreasonable and unfair to Hollinger. Based upon this news, the Company’s stock, which had

closed at $8.50 on April 2, 2003, dropped to $8.10 the following day. The continuing post-Class Period

disclosures about the Company show that the price at the end of the Class Period was still inflated.

328. The increase in Hollinger’s stock price beginning in the spring and summer of 2003

several months after the close of the Class Period is attributed in part to the market belief that Black and

Radler would be permanently ousted from the Company which they had used as a personal piggy bank.

This upward movement in the stock price resulted in part from a correction of what the Special

Committee Report referred to as a “Conrad Black Discount” (Special Committee Report at 11, n. 6 and

93) which no longer applied as Black would no longer be running the Company. Moreover, by this time,

well beyond the PSLRA statutory look-back period, the Company’s stock price was influenced by other

unrelated market forces.


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329. During the summer of 2004, following disclosure of the Company’s artificial inflation of

the Company’s circulation figures, the stock price again dropped, going from $17.82 on June 15, 2004 to

$16.10 on June 16, 2004, and further dropped to $15.71 on July 26, 2004, following additional news

articles about the circulation figure scheme.

HOLLINGER’S FRAUDULENT ACCOUNTING PRACTICES

330. GAAP consists of those principles recognized by the accounting profession as the

conventions, rules, and procedures necessary to define accepted accounting practice. Those principles are

the official standards adopted by the American Institute of Certified Public Accountants (the “AICPA”), a

private professional association, through three successor groups it established: the Committee on

Accounting Procedure, the Accounting Principles Board (the “APB”), and the Financial Accounting

Standards Board (the “FASB”). GAAP includes the following authoritative literature and

pronouncements: Statements of Financial Accounting Standards (“FAS”), APB Opinions, FASB

Interpretations (“FIN”), AICPA Accounting Research Bulletins (“ARB”), AICPA Statements of Position

(“SOP”), FASB Technical Bulletins (“FTB”), Consensus Positions of the FASB Emerging Issues Task

Force (“EITF”), Statements of Financial Accounting Concepts (“CON”) and Staff Accounting Bulletins

(“SAB”).

331. SEC Regulation S-X, to which the Company is subject as a registrant under the Exchange

Act, requires that financial statements filed with the SEC conform with GAAP. As set forth in SEC Rule

4-01 (a) of SEC Regulation S-X, “financial statements filed with the [SEC] which are not prepared in

accordance with [GAAP] will be presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-01(a) (1).

332. Management is responsible for preparing financial statements that conform to GAAP. As

noted by the AICPA Auditing Standards (“AU”), Section 110.03:

Management is responsible for adopting sound accounting policies and for establishing and maintaining internal controls that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the


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related assets, liabilities and equity are within the direct knowledge and control of management . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management’s responsibility.

333. The SEC regulates statements by companies “that can reasonably be expected to reach

investors and the trading markets, whoever the intended primary audience.” SEC Release No. 33-6504, 3

Fed. Sec. L. Rep. (CCH) ¶ 23,120, at 17,095-3, 17 C.F.R. § 241.20560 (Jan. 13, 1984). In addition to the

periodic reports required under the Exchange Act, management of a public company has a duty promptly

“to make full and prompt announcements of material facts regarding the company’s financial condition.”

SEC Release No. 34-8995, 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at 17,095, 17 C.F.R. § 241.8995

(October. 15, 1970). The SEC has emphasized that “[i]nvestors have legitimate expectations that public

companies are making, and will continue to make, prompt disclosure of significant corporate

developments.” SEC Release No. 18271, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,049,

at 84,618 (November. 19, 1981).

334. Defendants caused Hollinger’s financial statement disclosures to be materially false and

misleading during the Class Period because they failed to disclose Hollinger’s related-party transactions

as required by GAAP. Defendants knew that if they properly disclosed Hollinger’s related-party

transactions as alleged herein, it would uncover the massive scheme by Lord Black and others to

misappropriate millions of dollars of Hollinger’s income and assets for their own personal benefit.

335. Pursuant to GAAP, as set forth in FAS No. 57, “Related Party Disclosures,” financial

statements are required to include disclosures of material related-party transactions. FAS No. 57 defines

related parties to include the principal owner of an enterprise and its management, as well as their

affiliates. FAS No. 57 requires that companies disclose the following about material related party

transactions:

(a) the nature of the relationship(s) involved; (b) a description of the transactions ... for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial


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statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

336. Related-party transactions are not and cannot be presumed to be carried out on an arm’s-

length basis. Representations that a related-party transaction was carried out on an arm’s-length basis

should only be made if such representations can be verified. FAS No. 57, ¶3.

337. SEC regulation S-X, rules 4-08(k)(1) sets forth the following additional requirement

concerning related party transactions:

Related party transactions, which affect the financial statements. (1) Related party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or statement of cash flows.

338. Item 404 of SEC Regulation S-K also sets out the requirements for disclosing related-

party transactions in the non-financial statement portions of SEC filings, including proxy statements and

the annual reports on Form 10-K. Item 404(a) requires disclosure of, among other things, transactions

exceeding $60,000 in which an executive officer of the company has a material interest,

naming such person and indicating the person’s relationship to the registrant, the nature of such person’s interest in the transaction(s), the amount of such transaction(s) and, where practicable, the amount of such person’s interest in the transaction(s).

The instructions to this section provide:

The materiality of any interest is to be determined on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other and the amount involved in the transactions are among the factors to be considered in determining the significance of the information to investors.

339. According to GAAP, financial statements are complete only when they contain all

material information necessary to represent validly the underlying events and conditions. See Statement

of Financial Accounting Concepts 2, ¶79. Financial statements must disclose the financial effects of


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transactions and events that already have happened. See Statement of Financial Accounting Concepts 1,

¶21.

340. During the Class Period, defendants caused Hollinger to engage in various related-party

transactions which were used by Lord Black and others to improperly misappropriate millions of dollars

of income and assets from Hollinger for their own benefit. In order to continue their misappropriation

scheme, defendants failed to disclose the true nature and effect of certain non-competition payments,

service agreements and other related-party transactions in violation of GAAP.

341. One type of related-party transaction in which Hollinger engaged but which was

improperly accounted for involved non-competition payments. During the Class Period, portions of the

proceeds generated in Hollinger’s sales of certain of its newspaper assets were secretly diverted to Lord

Black, Radler, Boultbee and Atkinson pursuant to purported “non-compete” agreements with the

companies purchasing Hollinger’s assets. At least $88 million was diverted from Hollinger and paid

directly to Lord Black and his associates.

342. During the Class Period, Hollinger’s disclosures of these non-compete payments were

incomplete and inadequate. Originally, Hollinger failed to even mention many of these non-compete

payments in Hollinger’s financial statements, in violation of GAAP. When Hollinger finally did

eventually disclose some of these non-complete payments, Hollinger falsely claimed that the payments

had been approved by the Company’s independent directors and were required by the purchasers as a

condition of the transaction (when they were not), and the disclosures were intentionally misleading in

their failure to disclose that the size of the non-compete payments and their distribution were decided

entirely by Lord Black and his associates. (See trial exhibits submitted in the Delaware Chancery Court

action – JX 634, 667-668.)

343. Among other related party transactions involving secret diversions of purported non-

compete payments, Hollinger sold its U.S. community newspapers to various third parties, and some of its

newspaper assets in separate transactions to CanWest and Osprey. In connection with the CanWest


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transaction alone, over $52 million of the sale proceeds was secretly diverted to Lord Black and his

cronies, and not received by Hollinger, the seller of the assets. The $52 million was paid in the form of

purported non-compete payments as follows: Defendant Black - $11,896,736, Defendant Radler -

$11,896,736, Defendant Boultbee - $1,321,859 and Defendant Ravelston - $26,437,193. (JX 615.)

344. While the Company in its 2000 10-K and other SEC filings discussed the CanWest

transaction at length, there is no mention of the non-compete payments. The Company then belatedly

disclosed in its May 2001 10-Q that the non-compete payments had been paid, but falsely stated that the

fees were in addition to the purchase price paid by CanWest (when they were not), that CanWest required

the non-compete agreements as part of the transaction (when it did not), and that CanWest determined the

amount of those payments (when in fact the fees were dictated by Lord Black and his associates).

345. The Company’s disclosures regarding its sales to its American Publishing Company

subsidiary are equally false and misleading. According to the Company’s own documents, in connection

with a sale to American Publishing Company in February of 2001, a total of $5.5 million was diverted to

four individuals for non-compete payments, rather than being paid to Hollinger in connection with this

sale. The $5.5 million was distributed as follows: Defendant Black - $2,612,500, Defendant Radler -

$2,612,500, Defendant Boultbee - $137,500 and Defendant Atkinson - $137,500. (See Delaware

Chancery Court trial exhibits – JX 004 and JX 016.) However, in the Company’s 2002 10-K filing, there

is no mention of this sale or the non-compete payments to the defendants. In fact, in that filing, Hollinger

mentions only those non-compete payments paid in connection with two sales in 2001 – both to Osprey –

when in fact there were four sales in 2001 that involved non-compete payments being paid to individuals

rather than to Hollinger (the other one not mentioned involved $600,000 being paid to Black, Radler,

Atkinson and Boultbee purportedly in connection with a sale to PMG and Forum).

346. Additionally, according to Company documents, $2 million was paid to Hollinger Inc. as

a non-compete payment in connection with a transaction between Hollinger and Internec in or about


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1998. (See Delaware Chancery Court trial exhibits – JX 002, 615.) Again there is no mention of this

payment to Hollinger Inc. in Hollinger’s 1999 10-K filed in March of 2000.

347. Another type of related-party transaction engaged in and improperly accounted for by

Hollinger involved management services agreements between the Company and Defendant Ravelston and

its affiliates. Pursuant to these agreements, Ravelston charged Hollinger millions of dollars a year in

“management fees” for management advisory and similarly vaguely defined services. Hollinger disclosed

that the fees paid were a fair value for the cost to Ravelston of providing services, but no such

management or advisory services were ever provided by Ravelston in exchange for these fees, so the

payments could not be fair value for any services. In fact, the Audit Committee never conducted any

meaningful review, analysis or valuation of the proposed fee amounts under the management services

agreements, and the Company did not fully deduct the management fees on its tax returns, as it knew it

could not defend the reasonableness of those fees.

348. A third type of related-party transaction which was not properly disclosed or accounted

for by Hollinger involved the transferring of Hollinger’s assets to companies owned or controlled by

Black and his associates – Horizon and its various subsidiaries and affiliates, and Bradford. In these

transactions, Hollinger sold its assets at below market prices; in some cases, Hollinger even paid Black-

affiliated and controlled companies to take assets from Hollinger. During the Class Period, Hollinger

engaged in at least six newspaper asset sales to companies owned or controlled by Black and his

associates. These included the following sales: (i) 16 properties throughout the U.S. comprising 33

publications in March of 1999 to Horizon; (ii) three properties in Colvill and Deer Park, Washington and

in Valley City, North Dakota in April 2000 to Horizon; (iii) the Skagit Valley Argus in Washington and

the Journal of San Juan Islands in May 2000 to Horizon; (iv) the sale of four publications – the Bradford

Era in Pennsylvania, the Salamanca Press, the Salamanca Pennysaver and the Olean Times Herald in New

York – in July 2000 to Bradford; (v) Bishop, CA, Blackfoot ID in September 2000 to Horizon; and (vi)

the Mammoth Times in August 2001 to Horizon. (See Delaware Chancery Court trial exhibit – JX 634.)


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349. Lord Black and his associates unilaterally determined the assets Hollinger would transfer

to the Horizon and Bradford and the unfair terms of those transfers. The Company’s Board and Audit

Committee failed to conduct any review or analysis of the value of the assets being sold and also failed to

give prior approval of these transactions. In a few instances, defendants even rejected better offers

received from independent third-parties for the assets.

350. In the Company’s SEC filings during the Class Period, Hollinger failed to disclose the

true nature and amount of these purported asset sales in violation of GAAP. For example, with respect to

the Mammoth Times sale in 2001, the 2001 10-K filed in April of 2002 contains only the brief statement

that “[d]uring 2001, the Company sold its last remaining United States community newspaper.” There is

no mention that the Mammoth Times was sold to a related party. In the Company’s 2002 Proxy

Statement, Hollinger provided a little more detail, but more falsehoods. Even after the Class Period, the

Company did not disclose the full truth. For example, the 2002 10-K stated in pertinent part:

During 2001, we transferred two publications to Horizon Publications Inc. in exchange for net working capital. Horizon Publications Inc. is managed by former Community Group executives and controlled by certain officers of the Company. The terms of this transaction were approved by our independent directors.

This disclosure is incomplete and inaccurate, because according to the Asset Purchase Agreement, the

Mammoth Times was not sold for “net working capital” but rather it was sold for $1 with “no working

capital adjustment.” Furthermore, the Audit Committee’s purported approval of this transaction was an

after-the-fact ratification based upon false and misleading information.

351. Hollinger’s disclosures involving the sales of its other assets to related parties were

similarly incomplete and inaccurate and thus were false and misleading. Contrary to the defendants’

representations, Hollinger’s transactions with its related parties were not fair to Hollinger or on terms

representative of those that could be obtained in arm’s-length transactions with third parties.

352. Hollinger’s financial statements for the fiscal years 2000 through 2002 (including the

related quarterly periods) violated SEC Regulations and GAAP, in that they failed to (i) disclose facts


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necessary to present a fair and truthful representation of the Company’s asset sales, management services

agreements, financial position and operations, (ii) provide those disclosures which were required by

GAAP, and (iii) identify and address those key variables and other qualitative and quantitative factors

which were peculiar to and necessary for an understanding and evaluation of the Company.

Consequently, the overall impression created by the financial statements was not consistent with the

business realities of the Company’s reported financial position and operations.

353. The financial statements that were issued by Hollinger during the Class Period did not

fairly and accurately represent the Company’s financial position and operations. Among other reasons,

they violated the following principles of GAAP:

a) that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change resources and claims to those resources (CON No. 1, Objectives of Financial Reporting by Business Enterprises, ¶ 40);

b) that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶ 10);

c) that financial reporting should provide information that is useful to present and potential investors and creditors in making rational investment, credit and similar decisions (CON No. 1, Objectives of Financial Reporting by Business Enterprises, ¶ 34);

d) that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to stockholders for the use of enterprise resources entrusted to it (CON No. 1, ¶50);

e) that financial reporting should disclose material related party transactions, such as transactions between a company “and its principal owners, management, or members of their immediate families,” and including guarantees (FAS No. 57, “Related Party Disclosures”);

f) that the costs of services be matched with, i.e., recognized contemporaneously with, the recognition of revenues that resulted from the same transactions (CON No. 6, Elements of Financial Statements, ¶ 145);

g) that financial reporting should provide accurate information about an enterprise’s financial performance during a certain time period (CON No. 1, Objectives of Financial Reporting by Business Enterprises, ¶ 42);


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h) that financial reporting should be reliable in that it represents what it purports to represent — that information should be reliable as well as relevant is a central principle of accounting (CON No. 2, Qualitative Characteristics of Accounting Information, ¶¶ 58-59);

i) that financial information be presented in a conservative fashion to try to ensure that uncertainties and risks inherent in business situations are adequately considered (CON No. 2, ¶¶95, 97);

j) that information is complete and nothing is left out that may be necessary to insure that it validly represents underlying events and conditions (CON No. 2, Qualitative Characteristics of Accounting Information, ¶¶ 79, 80);

k) that Management’s Discussion and Analysis (MD&A) requires a discussion of liquidity, capital resources, results of operations and other information necessary to gain an understanding of a registrant’s financial condition, changes in financial condition and results of operations. This includes unusual or infrequent transactions, known trends or uncertainties that have had, or might reasonably be expected to have, a favorable or unfavorable material effect on revenue, operating income or net income and the relationship between revenue and the costs of the revenue. . . . The Commission stated in Financial Reporting Release (FRR) 36 that MD&A should “give investors an opportunity to look at the registrant through the eyes of management by providing a historical and prospective analysis of the registrant’s financial condition and results of operations, with a particular emphasis on the registrant’s prospects for the future” (SAB No. 101, Revenue Recognition in Financial Statements, Section B(1)); and

l) that the meaning of Present Fairly in Conformity with GAAP recognizes the importance of reporting transactions in accordance with their substance and the substance of a reported transaction should not differ materially from its form (AU Section 411.06).

354. Hollinger violated the foregoing GAAP pronouncements by failing to disclose the

existence of the non-compete payments at the time it announced pending sales of its assets or the

consummation of such sales, by misrepresenting the amount of such payments when they were ultimately

disclosed, by failing to disclose that Ravelston was not providing any services to Hollinger pursuant to the

managements services agreements, and by falsely stating that the Board and Audit Committee had

approved the terms of the asset sale transactions, the non-compete payments and the management services

agreements.


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355. Hollinger also violated Accounting Principles Board Statements (“APS”) No. 4, Basic

Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, paragraph

106, which states:

Financial information that meets the qualitative objectives of financial accounting also meets the reporting standard of adequate disclosure. Adequate disclosure relates particularly to objectives of relevance, neutrality, completeness, and understandability. Information should be presented in a way that facilitates understanding and avoids erroneous implications. The headings, captions, and amounts must be supplemented by enough additional data so that their meaning is clear but no by so much information that important matters are buried in a mass of trivia.

Additionally paragraph 199 of APS No. 4 states:

In addition to informative classifications and segregation of data, financial statements should disclose all additional information that is necessary for fair presentation in conformity with generally accepted accounting principles. Notes that are necessary for adequate disclosure are an integral part of the financial statements.

356. Hollinger violated SEC Staff Accounting Bulletin (“SAB”) 4E, which requires disclosure

and recording of deferred compensation, and provides that “all amounts receivable from officers and

directors resulting from other transactions [e.g., not involving compensation arising from the issuance of

capital stock at below market prices] . . . should be separately stated in the balance sheet irrespective of

whether such amounts may be shown as assets or are required to be reported as deductions from

stockholders’ equity.”

357. By failing to disclose the non-compete payments, by later misrepresenting the amounts of

those payments, by failing to disclose that the management services fees were paid for services which

were never provided, and by falsely stating that the non-compete payments and management services

agreements were approved by the Board and Audit Committee, Hollinger violated paragraphs 106 and

199 of APS No. 4. By failing to disclose the dividends paid to Black by the Telegraph Group, Hollinger

violated SAB 4E.


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358. Hollinger also violated these provisions by failing to disclose the compensation paid to

Lord Black, Lady Black, Radler, Atkinson, Boultbee and Colson in the form of the management services

fees, or in the form of corporate reimbursements for living and travel expenses and other perquisites. As

stated herein, Item 402 of SEC Regulation S-X requires disclosure for the CEO and the four most highly

compensated executive officers of any annual compensation not categorized as salary or bonus, unless the

aggregate amount of such compensation is less that $50,000 or 10% of the total annual salary and bonus

for such executives.

359. As detailed herein, the Company paid millions of dollars to Lord Black, Lady Black and

Radler in the form of corporate perquisites which were not disclosed, in violation of Regulation S-X.

360. The fact that Hollinger admitted in its November 2003 10-Q that it will be required to

restate its previously issued financial statements due to inaccuracies the Special Committee discovered

involving the amount, authorization and purpose of payments characterized as non-compete payments

made by the Company to related parties is an admission that the financial statements originally issued

were false. Pursuant to GAAP, as set forth in Accounting Principles Board (“APB”) Opinion No. 20, the

type of restatement announced by Hollinger was to correct for material errors in its previously issued

financial statements. See APB Opinion No. 20, ¶¶7-13. The restatement of past financial statements is a

disfavored method of recognizing an accounting change as it dilutes confidence by investors in the

financial statements, makes it difficult to compare financial statements, and it is often difficult, if not

impossible, to generate the numbers when restatement occurs. See APB Opinion No. 20, ¶14. Thus,

GAAP provides that financial statements should only be restated in limited circumstances, such as when

there is a change in the reporting entity, when there is a change in accounting principles used, or to

correct an error in previously issued financial statements. Hollinger’s restatement was not due to a

change in the reporting entity or a change in any accounting principle but was required due to errors in

previously issued financial statements. Thus, the restatement is an admission by Hollinger that the

previously issued financial results were false and misleading.


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361. Additionally, the undisclosed adverse information concealed by defendants during the

Class Period is the type of information which, because of SEC regulations, regulations of the national

stock exchanges and customary business practices, is expected by investors and securities analysts to be

disclosed and is known by corporate officials and their legal and financial advisors to be the type of

information which is expected to be and must be disclosed.

362. Hollinger’s financial statements were also in violation of the requirement to keep

accurate books and records. Section 13(b)(2) of the Exchange Act states, in pertinent part, that every

reporting company must: “(A) make and keep books, records, and accounts which, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [and] (B) devise

and maintain a system of internal controls sufficient to provide reasonable assurances that ... transactions

are recorded as necessary ... to permit preparation of financial statements in conformity with [GAAP].”

These provisions require an issuer to employ and supervise reliable personnel, to maintain reasonable

assurances that transactions are executed as authorized, to properly record transactions on an issuer’s

books and, at reasonable intervals, to compare accounting records with physical assets.

363. During the Class Period, Hollinger violated §13(b)(2)(A) of the Exchange Act by failing

to maintain adequate internal controls designed to insure that payments were properly approved before

they were made and that public filings were accurate. In the SEC’s action against Hollinger, the SEC

alleged that “[f]rom at least 1999 through at least 2001, Hollinger failed to devise and maintain a system

of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded

as necessary to permit preparation of financial statements in conformity with GAAP...” The SEC

obtained an order in that action permanently enjoining the Company from violating the reporting and

internal control provisions of the federal securities laws.

364. Hollinger’s lack of adequate internal controls rendered the Company’s financial reporting

during the Class Period inherently unreliable and precluded the Company from preparing financial

statements that complied with GAAP. Nonetheless, throughout the Class Period, the Company regularly


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issued quarterly and annual financial statements without ever disclosing the existence of the significant

and material deficiencies in its internal accounting controls and falsely asserted that its financial

statements complied with GAAP.

365. Hollinger’s financial statements were also in violation of the requirement to disclose

trends and uncertainties that would affect its revenues. Item 7 of Form 10-K and Item 2 of Form 10-Q,

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”),

require the issuer to furnish information required by Item 303 of Regulation S-K, 17 C.F.R. §229.303.

Item 303 of Regulation S-K requires the registrant, in discussing results of operations, to:

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

The instructions to paragraph 303(a) further state:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results . . . .

366. In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-26831, has

indicated that registrants should employ the following two-step analysis in determining when a known

trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item 303 of

Regulation S-K:

A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have a material effect on the registrant’s financial condition or results of operation.

367. The MD&A requirements are intended to provide, in one section of a filing, material

historical and prospective textual disclosure enabling investors and other users to assess the financial

condition and results of operations of the registrant, with particular emphasis on the registrant’s prospects

for the future. As Securities Act Release No. 33-6711 states:


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The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company.

368. Thus, there is a duty to disclose in periodic reports filed with the SEC “known trends or

any known demands, commitments, events or uncertainties” that are reasonably likely to have a material

impact on a company’s sales revenues, income or liquidity, or cause previously reported financial

information not to be indicative of future operating results. 17 C.F.R. § 229.303(a)(l)-(3) and Instruction

3.

369. Section 229.303 (Item 303) Management’s discussion and analysis of financial condition

and results of operations states:

To the extent that the financial statements disclose material increases in net sales or revenues, provide a narrative discussion of the extent to which such increases are attributable to increases in prices or to increases in the volume or amount of goods or services being sold or to the introduction of new products or services.

Additionally, in Securities Act Release No. 33-6349 (September 8, 1981), the SEC stated:

[I]t is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.

370. In Accounting Series Release 173, the SEC reiterated the duty of management to present

a true representation of a company’s operations:

[I]t is important that the overall impression created by the financial statements be consistent with the business realities of the company’s financial position and operations.

371. Hollinger’s financial statements during the Class Period were in violation of these SEC

regulations because the Company failed to properly record (or disclose) the true nature and effect of non-

competition payments, management services agreements and other related-party transactions and further


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failed to maintain adequate internal controls in order to insure that payments were properly approved

before they were made and that public filings were accurate. The payments of the non-competition

payments and management service fees were reasonably likely to have, and did have, a material adverse

effect on Hollinger’s operating results, and thus disclosure of these payments was necessary for a proper

understanding and evaluation of the Company’s operating performance and an informed investment

decision.

372. Hollinger also violated GAAP and SEC regulations by reporting artificially inflated

circulation figures. As explained above, Hollinger and Radler and other defendants employed a massive

and widespread scheme at Hollinger to engage in a variety of illicit practices designed to artificially pump

up the Company’s circulation figures, in order to obtain higher rates for advertisements placed in

Hollinger’s Company’s report revenue and the market price of the Company’s stock.

373. A principal source of Hollinger’s revenue is based upon its advertising revenue – the

amount it charges its advertisers for space purchased in the Company’s newspapers. According to

Hollinger’s 2002 10-K, the Company recognizes advertising revenue “upon publication of the

advertisements.” The rate Hollinger is able to charge to advertisers is based upon its circulation.

Advertisers pay higher rates as the circulation figures increase, as the advertisers reach more consumers.

However, the rates Hollinger charged to its advertisers were based upon intentionally over-inflated

circulation numbers and thus, Hollinger was not entitled to the full amount of the fees it charged to its

advertisers. Hollinger’s recognition of advertising revenue was improper and in violation of the basic

GAAP concept that revenue must be earned and realizable in order for it to be recognized. See FASB

Statement of Concepts (“FASCON”) No. 5, ¶¶83-84.

374. Advertisers have recently brought suit against Hollinger to obtain refunds based upon the

difference between the amount Hollinger charged advertisers based upon the false circulation numbers

and the amount it should have charged advertisers based upon the Company’s actual circulation numbers.


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375. Hollinger’s recognition of revenue based upon the false circulation numbers was

improper as the revenue was not earned or realizable and accordingly, violated GAAP.

KPMG’S PARTICIPATION IN THE FRAUD

376. KPMG is one of the largest international firms of certified public accountants and a

member of the AICPA. The Company engaged KPMG to provide auditing and accounting services as

well as tax and consulting services throughout the Class Period. To ensure KPMG’s steadfast loyalty,

defendants repeatedly agreed that KPMG would be paid millions of dollars to provide accounting,

auditing and/or consulting services to the Company.

377. As stated in the Company’s 2001 Proxy Statement, during fiscal 2000, KPMG billed

Hollinger $1,274,316 “for professional services rendered for the audit of the Company’s annual financial

statements and the reviews of financial statements included in the Company’s forms 10-Q” along with

$5,517,206 “for all other non-audit professional services,” or a total of $6,791,522.

378. KPMG was paid similarly exorbitant amounts for audit and non-audit services in fiscal

2001 and 2002. The Company reported in its 2002 Proxy Statement that KPMG billed Hollinger in fiscal

2001 $672,301 for audit services and $6,680,148 for all other non-audit professional services, or a total of

$7,352,449.

379. The Company reported in its 2003 Proxy Statement that KPMG billed Hollinger the

following in fiscal 2002: $1,528,036 in audit fees, $133,004 in “audit related” fees, $3,832,018 in tax

fees, and $463,282 in “all other fees”, for a total of $5,956,340.

380. KPMG also served during the Class Period as auditors for Hollinger, Inc., through the

amount of fees KMPG earned for services rendered to Hollinger Inc. has not been publicly disclosed.

However, what is known is that Hollinger Inc. has no real assets other than its Hollinger stockholdings

and that Lord Black controlled (and still controls) Hollinger Inc. Thus, when KPMG was retained by

Hollinger Inc., it was essentially hired by Black. At the time KPMG was serving as auditors for

Hollinger, it was also beholden to and serving Black through its work for Hollinger Inc. There was a very


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apparent and real conflict in having KPMG serve as auditor of Hollinger Inc., hired and paid by Black,

while also serving as the auditor and “public watchdog” for Hollinger, where it would be charged with,

among other things, ensuring the integrity and accuracy of the Company’s financials and internal controls.

As investors later discovered, this inherent conflict resulted in KPMG’s utter failure to discharge its duties

as the Company’s independent auditors.

381. In return for the millions of fees paid by Hollinger and Hollinger Inc. to KPMG each year

during the Class Period, KPMG participated in the fraud perpetrated by Lord Black, Radler and the other

defendants. In fact, KPMG had a significant role in defendants’ fraud and the maintenance of Hollinger

stock at artificially inflated prices.

382. During the Class Period in which Lord Black, Ravelston and other Hollinger insiders

helped themselves to hundreds of millions of dollars in improper payments at the Company’s expense,

KPMG purportedly audited Hollinger’s books and records (as well as the books and records of Hollinger

Inc.). Rather than doing so, KPMG helped Lord Black and his associates raid the Company’s coffers and

then conceal this theft from the shareholders.

383. From at least August 13, 1999, KPMG has served as purportedly independent auditors for

Hollinger and had, since that time, certified the Company’s financial statements as fairly and accurately

reflecting the financial condition of the Company.

384. KPMG assisted in the preparation of Hollinger’s annual and quarterly statements,

reviewed the quarterly financial statements and the text that accompanied them in the Company’s Form

10-Qs, and audited the Company’s annual financial statements and the text that accompanied them in the

Company’s Form 10-Ks.

385. KPMG was required to perform its audit services according to generally accepted

auditing standards (“GAAS”), and to issue an unqualified opinion only if the Company’s annual financial

statements were fairly presented in accordance with generally accepted accounting principles (“GAAP”).


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386. Additionally, KPMG was required to review the information in Hollinger’s public filings

that was outside the financial statements. AU § 550, “Other Information in Documents Containing

Audited Financial Information,” states that the auditor “should read the other [non-financial] information

and consider whether such information, or the manner of its presentation, is materially inconsistent with

information, or the manner of its presentation, in the financial statements.” If the auditor determines that

such other information is either inconsistent with the information contained in the financial statements or

is aware of a material misstatement of fact contained in the other information, then the auditor should

withhold the use of the audit report from the document containing the inconsistency or misstatement. AU

§ 550 at ¶¶.04-06. Thus, KPMG was required to review the non-financial disclosures in Hollinger’s

public filings to determine whether there was any inconsistency with the financial information presented

in those filings and, if so, KPMG was required to withhold its certification of the financials.

387. KPMG issued unqualified audit opinions on Hollinger’s annual financial statements from

at least 1999 through 2003, stating that it had “conducted [its] audits with generally accepted auditing

standards,” and that Hollinger’s “consolidated financial statements . . . present fairly, in all material

respects, the financial position of Hollinger International Inc. and its subsidiaries . . . in conformity with

generally accepted accounting principles.”

388. However, KPMG’s audit opinions were materially false and misleading, and KPMG’s

audits represent an extreme departure from GAAS. In addition, the manner in which the Company’s

financial results were reported in Hollinger’s financial statements represents an extreme departure from

GAAS and applicable SEC regulations.

389. KPMG purportedly conducted audit examinations and participated in investigations of

the business, operations, financial, accounting and management control systems of Hollinger. But

because KPMG did not conduct its audits in accordance with GAAS, and because it acted with extreme

recklessness and consciously disregarded and ignored numerous warning signs that the Company’s

financial statements and other public statements were materially false and misleading, KPMG did not


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discover, or actually ignored and disregarded, the massive fraud being perpetrated by Lord Black, Radler

and the other defendants and the fact that the Company’s financial statements were not prepared in

accordance with GAAP.

390. KPMG performed timely reviews of the quarterly financial statements of the Company

throughout this period. KPMG was aware of facts and/or recklessly disregarded facts that precluded

KPMG from stating that Hollinger’s financials were prepared in accordance with GAAP or that KPMG

had audited those financials in accordance with GAAS. However, the Company’s financial statements

and KPMG’s opinion on them were used by the Company with KPMG’s knowledge and consent to

publicly disseminate its financial results in its annual Forms 10-K filed with the SEC during the Class

Period.

391. KPMG’s certification of Hollinger financial statements which KPMG knew, or was

reckless in not knowing, were materially false and misleading, assisted or allowed the Individual

Defendants to succeed in their fraudulent scheme, and the price of Hollinger stock continued to trade at

artificially inflated prices. As the long-time auditor of Hollinger and Hollinger Inc., KPMG was aware

not only of the Company’s financial condition, but also of the byzantine corporate network through which

money flowed to Lord Black and/or Black-owned and controlled entities. Thus, KPMG was aware, or

was reckless in not knowing, of each instance in which Hollinger engaged in business, or transferred

money or assets, to Black-owned entities. As KPMG assisted in the preparation of Hollinger’s annual

and quarterly financial statements and public filings, KPMG knew, or was reckless in not knowing, that

those documents did not disclose Black’s involvement, either personally or through entities he owned and

controlled, in the related party transactions.

392. KPMG knew, or was reckless in not knowing, that the Company’s financial statements

and public filings contained material misrepresentations and omissions regarding the Company’s related

party transactions and Black’s outright misappropriation of Company monies. However, KPMG


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knowingly (or recklessly) participated, and aided and abetted in, the Individual Defendants’ failure to

completely and accurately disclose these facts.

393. KPMG knew, or was reckless in not knowing, that non-compete fees were being paid to

others (such as Hollinger, Inc., for whom KPMG served as auditors), but knew that those fees were not

disclosed in Hollinger’s financial statements. KPMG knew about the fraudulent nature of the

management services fees as: (i) it advised the Company and Boultbee that Hollinger could not fully

deduct those fees because they were not reasonable, and (ii) Hollinger Inc., a KPMG audit client, was also

paid the management services fees purportedly for services rendered to the Company.

394. KPMG also knew, at least by March 27, 2001 (the date the 2001 Proxy Statement was

filed with the SEC), that the disclosures regarding the Company’s transactions with Horizon were false

and misleading, as the Company disclosed in the 2001 Proxy Statement that Horizon was owned by

certain unnamed Hollinger Directors and executives, when in fact Black and Radler owned and

controlled Horizon and were using that company to take advantage of Hollinger. KPMG was on notice

by at least that filing that the terms of the Company’s transactions with Horizon may not be fair to the

Company, and that certain Hollinger Directors could not exercise independent business judgment in

renewing and approving the transactions with Horizon because those directors also owned Horizon.

KPMG had the duty to determine if the Company’s prior disclosures regarding its transactions with

Horizon were false and misleading or accurate and complete, and also was obliged to investigate the

Company’s other transactions to determine if they, too, were with entities (such as Bradford) owned and

controlled or otherwise affiliated with Black and other Hollinger Directors and executives.

395. By the 2002 Proxy Statement, where the Company disclosed that certain unnamed

Hollinger Directors and Management controlled Horizon, KPMG knew that the Company’s prior

disclosures were false. KPMG knew that the Company’s representations about various transactions (such

as those with Horizon and Bradford) being approved by independent directors were all false, as KPMG

knew that the directors purportedly providing approval stood on both sides of those transactions and so


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were not independent. KPMG also knew, or was reckless in not knowing, that Black and Radler owned

and controlled Horizon and Bradford.

396. As a result of KPMG’s knowing participation in the fraud, or its reckless ignorance or

disregard of fraudulent acts or “red flags” that put KPMG and any reasonable person on notice of the

fraud, Plaintiffs and other Class Members were deliberately misled and misinformed regarding the nature

and scope of Black’s theft of Company money and the Company’s related party transactions, and Class

members made investment decisions and cast votes on the election of directors, including Lord Black,

Radler and other Individual Defendants, based on the Company’s false and misleading public filings.

397. At no time during the Class Period, however, did KPMG ever reveal that the related-party

transactions engaged in by Hollinger were merely a scheme to allow the defendants to raid the

Company’s coffers at the expense of public shareholders or that there were material deficiencies in the

Company’s internal controls. Hollinger recently disclosed that it will be required to restate previously

issued financial statements due to inaccuracies discovered involving the amount, authorization and

purpose of payments characterized as non-compete payments made by the Company to related parties.

398. In connection with Hollinger’s operations, KPMG had virtually limitless access to

information concerning the Company’s true operations as:

KPMG had been Hollinger’s auditor since at least 1996.

KPMG was present at Hollinger’s headquarters and divisions frequently during the Class Period.

KPMG regularly communicated with the Individual Defendants, including the members of the Company’s Audit Committee, in face-to-face meetings and telephone calls.

KPMG provided auditing, review and other services to the Individual Defendants.

KPMG had frequent conversations with Hollinger management and employees about the Company’s operations and financial statements.

KPMG had access to Ravelston’s offices in Toronto.


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KPMG reviewed Hollinger’s financial statements during the Class Period and knew or was reckless in not knowing that Hollinger’s financial statements were not accurate or prepared in compliance with GAAP or GAAS.

Drafting of disclosures concerning related-party transactions was a collaborative effort between KPMG officials and senior management of Hollinger. (See Delaware Chancery Court trial exhibits – JX 667-668.)

399. KPMG also served as Hollinger Inc.’s auditor during the Class Period. In describing the

role of Hollinger Inc.’s Audit Committee in its Form 20F filing with the SEC on June 27, 2003, Hollinger

Inc. stated:

The majority of the Company’s revenue in the last financial year represents dividends from International. The outside auditor of

International is KPMG who is also the outside auditor of the Company.

In addition, management services are provided to International by RMI and RMI’s parent, Ravelston, which also provides management services to the Company. The Audit Committee of the Company relies in good

faith on the financial statements of International in considering and

reviewing the financial statements of the Company. In doing so, the

Audit Committee takes steps in order to be satisfied that such reliance

is reasonable and appropriate. Such steps include meeting with the

representatives of KPMG who have carried out the audit of

International in order to satisfy the Audit Committee of the Company

that International’s financial statements have been prepared in

accordance with generally accepted accounting principles in the U.S.,

that an appropriate system of internal controls and procedures is in

place at International, that the Audit Committee understands the key

accounting principles applied in preparing the financial statements of

International and the effect of alternative presentations, and that

KPMG is independent and objective for purposes of that audit. The Audit Committee of the Company meets with the members of management of Ravelston responsible for providing through RMI financial and accounting services to International. The Audit Committee of the Company also reviews the management letter prepared by KPMG and sent to management of International in connection with the audit of the financial statements of International as well as other material written communications from KPMG to management of International or its audit committee in connection with financial or internal control matters.

With respect to the financial results of the Company’s operations unrelated to International, the Audit Committee is responsible for monitoring and reviewing the matters referred to above in accordance with its Audit Committee charter. In that connection, the Audit Committee has direct communication channels with the external auditors of the Company and has oversight responsibility for management reporting on internal control. In carrying out these responsibilities, the


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Audit Committee meets regularly with KPMG and the individuals at

Ravelston responsible for providing through RMI financial and

accounting services to the Company.

400. KPMG resigned as Hollinger Inc.’s auditor on December 23, 2003.

401. KPMG recklessly failed to provide proper and adequate professional accounting and

auditing services for Hollinger. KPMG reviewed Hollinger’s quarterly and year-end results, advised

and/or opined upon the veracity of Hollinger’s SEC filings and had intimate knowledge of the nature of

Hollinger’s business and the intricacies of the myriad of related-party transactions that occurred during

this time. KPMG also attended the meetings and advised the members of the Audit Committee of

Hollinger’s Board of Directors.

402. As a result of its intimate knowledge of Hollinger and its executives, KPMG knew, or

was reckless in not knowing, about the accounting irregularities and improprieties at Hollinger as alleged

herein. KPMG consented to the inclusion of its unqualified report on Hollinger’s year-end financial

statements throughout the Class Period, which reports it knew, or was reckless in not knowing, were

materially false at the time they were issued. Despite KPMG’s extreme recklessness and failure to

exercise reasonable care and competence in performing its services to Hollinger by allowing the

Company to misreport many related-party transactions, Hollinger’s Board, including the members of the

Audit Committee, refused to terminate KPMG as the Company’s “independent” auditors.

403. Nevertheless, throughout the Class Period, KPMG provided an unequivocal opinion that

Hollinger’s year-end financial statements were valid and accurate and thereby violated federal securities

laws by falsely reporting the Company’s financial results and financial statements.

404. KPMG enjoyed a lucrative, long-standing business relationship with Hollinger’s senior

management, particularly Lord Black, for which it has received tens of millions of dollars. KPMG

partners responsible for the Hollinger engagement were particularly motivated to appease defendant

Black and the other Individual Defendants because their remuneration was closely tied to the fees

generated from Hollinger. Maintaining the client relationship was highly dependent on the Individual


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Defendants, particularly Hollinger’s CEO Black, and KPMG compromised itself to do so. By engaging

in the unlawful conduct alleged herein, KPMG injured Hollinger’s shareholders.

405. KPMG was required to perform its audits in accordance with GAAS. GAAS provides

that an audit is to be adequately planned. Audit planning involves developing an overall strategy for the

expected conduct and the scope of the audit. In planning an audit, the auditor must obtain knowledge of

the matters which relate to the nature of the entity’s business, its organization, and operating

characteristics (AU 311). The auditor is required to design the audit with professional skepticism in order

to provide reasonable assurance of detecting errors and irregularities (AU 316), material misstatements

(AU 312) or fraud (AU 316).

406. KPMG failed to comply with GAAS because it failed to design its audit plan to provide

reasonable assurance of detecting material error as required by Statement of Auditing Standards No. 82,

The Auditor’s Responsibility to Detect and Report Errors and Irregularities (AU 316).

407. In particular, KPMG also failed to observe the following provisions of GAAS:

(a) AICPA Audit Risk Alert - 1998/99, which provides that auditors should be alert for significant unusual or complex transactions;

(b) AU 316, Consideration of Fraud in a Financial Statement Audit, which requires an auditor to specifically assess the risk of material misstatement of the financial statements due to fraud and consider that assessment in designing the audit procedures to be performed;

(c) AU 326, Evidential Matter, which requires an auditor to obtain sufficient evidence to provide reasonable assurances that the financial statements are free from material misstatements;

(d) AU 220.01, which provides that in all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors; and

(e) AU 220.03, which requires that auditors maintain the utmost professionalism, and remain independent, intellectually honest, and free from any obligation or interest in the client, its management or its owners.

408. There was a substantial risk of material misstatement and fraud due to the complete lack

of financial or accounting expertise on Hollinger’s Audit Committee. At all relevant times during the


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Class Period, the Audit Committee was composed of Defendant Thompson, Chairman, Defendant Burt

and Defendant Kravis. In the 2001 Proxy Statement filed on March 27, 2001, the following was

disclosed about obligations and responsibilities of the Audit Committee and its findings with regard to the

fiscal year 2000 financial statements:

The Audit Committee’s duties include reviewing internal financial information, monitoring cash flow, budget variances and credit arrangements, reviewing the audit program, reviewing with the Company’s accountants the results of all audits upon their completion, annually selecting and recommending independent public accountants, overseeing the quarterly unaudited reporting process and taking such other action as may be necessary to assure the adequacy and integrity of all financial information distributed by the Company. Each member of the Audit Committee is independent in the judgment of the Company’s Board of Directors and as required by the listing standards of the New York Stock Exchange.

In addition, pursuant to the Services Agreements, the Audit Committee is responsible for reviewing the cost of services charged by Ravelston, and monitoring the Company’s decisions with respect to related party acquisition opportunities and the exercise of the Company’s rights under its Business Opportunities Agreement with Hollinger Inc. See “Certain Relationships and Related Transactions.” The Audit Committee also has authority to recommend to the Board policies and procedures for dealing with conflicts of interest and to review the application of such policies and procedures.

The Audit Committee reports that it has: (i) reviewed and discussed the audited financial statements with management; (ii) discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61; and (iii) received certain disclosures from the auditors regarding the auditors’ independence as required by the Independence Standards Board Standard No. 1, and discussed with the auditors the auditors’ independence. Based on such review and discussions, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for 2000 for filing with the Commission. On May 5, 1999, the Audit Committee adopted, and the Board of Directors ratified, the Hollinger International Inc. Audit Committee Charter (a copy of which was attached to the Company’s Proxy Statement filed in March of 2000).

Similar disclosures were made in the Company’s earlier Proxy Statements.


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409. The Company’s later Proxy Statements contained similar disclosures, along with a

startling new fact. In the 2002 Proxy Statement filed on April 2, 2002, the Company included the

following admission regarding the qualifications (actually, the lack of qualifications) of the Audit

Committee:

Management is responsible for the financial reporting process, the preparation of consolidated financial statements in accordance with generally accepted accounting principles, the system of internal controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. KPMG LLP is responsible for auditing the financial statements. The Audit Committee’s responsibility is to monitor and review these processes and procedure. The members

of the Audit Committee are not professionally engaged in the practice

of accounting or auditing and are not experts in the fields of

accounting or auditing, including evaluating auditor independence.

The Audit Committee relies, without independent verification, on the

information provided to it and on the representations made by

management and the independent auditors that the financial

statements have been prepared with integrity and objectivity and in

conformity with generally accepted accounting principles.

Accordingly, the Audit Committee’s oversight does not provide an

independent basis to determine that management has maintained

appropriate accounting and financial reporting principles or

appropriate internal controls and procedures designed to assure

compliance with accounting standards and applicable law and

regulations.

410. Thus, KPMG was on notice by at least April 2, 2002 that the Audit Committee lacked

any capacity to structure or implement internal controls or verify the propriety or accuracy of the

Company’s accounting and financial reporting. KPMG was obligated upon its receipt of this information

to scrutinize the terms, accounting and reporting of the Company’s significant transactions, most of which

involved asset transfers to related parties, and all of which involved secret payments of non-compete

payments to Black, Radler and others. The Audit Committee’s complete lack of accounting or financial

reporting expertise required KPMG to review the Company’s management services agreements as well,

and the Company’s prior disclosures regarding those agreements and asset sales.

411. KPMG failed to perform its audit in conformity with the Statement of Accounting

Standard (“SAS”) No. 82, “Consideration of Fraud in a Financial Statement Audit,” which includes


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auditing for misstatements arising from the misappropriation of assets. During the course of its audit of

Hollinger’s financial statements during the Class Period, KPMG knew, deliberately ignored or was

reckless in not knowing, of the irregularities which caused Hollinger’s earnings to be misstated over a

minimum of four fiscal years. The substantial risk of fraud was a potential reportable condition which

should have been reported to the Audit Committee and senior management. KPMG not only failed to

report a substantial risk of fraud – as stated herein, KPMG knew that fraud had occurred.

412. KPMG also knew that the Company’s internal controls were seriously deficient, if they

existed at all. KPMG knew that Lord Black dominated and controlled the Board and the Company,

through his hand-picked directors and through his ownership and control of Hollinger Inc. and Ravelston.

KPMG knew that the Company was paying exorbitant personal expenses of Lord Black and his wife,

though their expenses did not relate to the business of Hollinger.

413. KMPG knew that non-competes were being paid and not reported, that management fees

were being paid but were not properly earned, and that transactions were being consummated and

payments being made without proper disclosure or any Board oversight, review or approval. Based upon

all these facts, KPMG knew that Lord Black dominated and controlled all of Hollinger’s operations, and

that all decisions were made because Lord Black decided that they should be made, and that the

Company’s public filings were materially false and misleading.

414. KPMG either deliberately ignored the facts showing that the Company had made

materially false and misleading public statements, including those in its SEC filings, or KPMG recklessly

disregarded such facts, and failed to exercise due professional care in the performance of its audits of

Hollinger’s financial statements. KPMG either did the math and calculated the amount Hollinger

received in selling various assets, and learned that Lord Black and others were taking part of the sale

proceeds themselves, and that the Company was being shorted by tens of millions of dollars in its sales of

its newspaper assets, or KPMG deliberately and recklessly failed to do the math thus shirking a basic and

important obligation and duty of an outside auditor. KPMG either deliberately ignored or recklessly


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failed to investigate the transactions in which Hollinger was selling its assets to Black and Radler-

controlled entities at fire sale prices in transactions designed to thwart any competing bids from being

made for Hollinger’s assets, and transactions in which Hollinger actually paid the Black and Radler-

controlled entities to take Hollinger’s assets.

415. KPMG also violated GAAS by failing to recognize or investigate “red flags” or warnings

or other possibilities that Hollinger’s financial statements were materially false and misleading. GAAS

sets out a list of such red flags that auditors should look out for in determining audit risk relating to

misstatements arising from fraudulent financial reporting. (AU Section 316.16-17). One such “red flag”

involves related party transactions.

416. AU §316, Fraud in a Financial Statement Audit, lists various red flags that an auditor

such as KPMG must consider, including:

Specific indicators as to include a motivation for management to engage in fraudulent financial reporting.

Domination of management by a single person or small group without compensating controls such as effective oversight by the board of directors or audit committee.

Management displaying a significant disregard for regulatory authorities.

Management failing to display an appropriate attitude towards internal controls and the financial reporting process.

Claims against the entity or its senior management alleging fraud or violations of securities laws.

Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm.

417. However, KPMG ignored or recklessly disregarded numerous red flags that mirrored

those listed in AU §316 and that should have alerted KPMG to the possibility that Hollinger’s financial

statements were materially false and misleading, including the following:

Due to the unique structure of the company, Hollinger was controlled by a small group of people led by defendant Black.


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There was not effective oversight by the board of directors or the Audit Committee.

Defendant Black and his associates frequently overrode Hollinger’s internal controls.

Defendant Black and his associates maintained an opulent personal lifestyle financed in large part by the Company. Hollinger paid for personal expenses for many of the defendants, including paying for apartments, automobiles, aircrafts and personal staff for Defendant Black and his associates.

Defendant Black had an open disdain for corporate governance and an open disregard for the sanctity of corporate assets.

There was an inordinate amount of related-party transactions with an unusual structure and unusual terms, including terms actually requiring Hollinger to pay related parties to take the Company’s assets.

There were numerous misrepresentations in the Company’s financial statements some of which the Company attempted to correct in subsequent filings which were themselves false and misleading; thus, KPMG knew that the Company’s prior disclosures were false, and it was on notice that other disclosures could also be false.

418. The sheer number of the Company’s related-party transactions also required KPMG to

carefully evaluate each of these transactions. Pursuant to AU §334.09:

After identifying related party transactions, the auditor should apply the procedures he considers necessary to obtain satisfaction concerning the purpose, nature, and extent of these transactions and their effect on the financial statements. The procedures should be directed toward obtaining and evaluating sufficient competent evidential matter and should extend beyond inquiry of management. Procedures that should be considered include the following:

a. Obtain an understanding of the business purpose of the transaction.

b. Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents.

c. Determine whether the transaction has been approved by the board of directors or other appropriate officials.

d. Test for reasonableness the compilation of amounts to be disclosed, or considered for disclosure, in the financial statements.


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e. Arrange for the audits of intercompany account balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative related party transactions by the auditors for each of the parties, with appropriate exchange of relevant information.

f. Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral.

419. The SEC has emphasized the requirement that auditors carefully review related-party

transactions in an audit. In a recent SEC action, styled as In re Grant Thornton LLP, SEC, Admin. Proc.

File No. 3-11377, 1/20/04), the SEC filed administrative charges against auditors Grant Thornton LLP

and Doeren Mayhew & Co. P.C. over allegations of misconduct stemming from their inadequate audit

concerning disclosure of related party transactions. The SEC contends that the auditors ignored the use of

related-party transactions by MCA Financial Corp. to inflate and mischaracterize income, assets and

equity. Timothy L. Warren, Associate Regional Director of the Commission’s Midwest Regional Office,

stated in the SEC’s press release:

The abysmal failure by the Grant Thornton and Doeren Mayhew auditors in this matter contributed to the loss of millions of dollars by public investors. The auditors were staring at related party transactions that were not disclosed by MCA and failed to take appropriate actions. This proceeding demonstrates that the Division of Enforcement will act vigorously to seek sanctions for such conduct.

420. KPMG ignored the professional literature, which required that KPMG understand the

transactions and the business purpose for the transactions, and failed to insist that Hollinger make

adequate disclosure and proper accounting for its related party transactions. Here, the sheer volume of the

related party transactions at the Company was a red flag that each of these transactions should be

carefully examined. For years, Hollinger had been engaging in numerous related party transactions,

including (i) payments of millions of dollars of the proceeds from sales of Hollinger’s assets in the form

of non-compete payments to Black and his associates, (ii) payments of millions of dollars in management

service fees by Hollinger to Ravelston for advisory and other services, (iii) sales of Hollinger’s assets to

entities owned and companies controlled by Black to Ravelston, a company owned and controlled by


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Black and Radler, at below-market prices, and (iv) the Company’s payments of millions of dollars of

personal expenses of Lord Black and his associates. Additionally, the failure of the Board and the Audit

Committee to properly examine and approve these related party transactions put KPMG on notice that

these transactions needed to be more closely examined by the outside auditors.

421. The nature of the Company’s disclosures (such as disclosures that the Company was

dealing with entities in which Company Directors and executives were shareholders) also served as a

warning to KPMG that the underlying transactions required greater scrutiny. KPMG knew that these

disclosures were false and misleading, since they gave the impression that executives other than Black

and Radler were the owners. Moreover KPMG knew that Black and Radler were far more than

shareholders in these companies with which Hollinger was dealing – they owned them.

422. In fact, Hollinger’s Joint Audit Committee and Compensation Committee noted at a

February 25, 2002 meeting that of the “key areas of audit focus” of KPMG’s audit of the 2001 financial

statements one was “related party transactions, including management fees and noncompete payments.”

(See Delaware Chancery Court trial exhibit – JX 615.) However, KPMG issued unqualified opinions

year after year even though Hollinger did not accurately disclose the related party transactions.

423. Additionally, as an auditor, KPMG was obligated to assess the Hollinger’s internal

disclosure, financial and accounting controls and whether such controls had been placed in operation,

were effective and complied with Sarbanes-Oxley, including controls to provide assurance about the

safeguarding of assets, financial reporting, operations and compliance with regulations. KPMG was

required to evaluate whether poor controls might lead to or contribute to the risk that fraud might not be

detected.

424. Internal controls are essential to a company’s financial reporting as adequately designed

internal controls provide a company with reasonable assurance of the reliability of financial reporting, the

effectiveness and efficiency of operations, and compliance with applicable laws and regulations.


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Auditing Standard (“AU”) §319.06. Section 319.02 provides as follows with respect to auditing

standards:

In all audits, the auditor should obtain an understanding of internal control sufficient to plan the audit by performing procedures to understand the design of controls relevant to an audit of financial statements, and whether they have been in operation.

425. The original SAS which formed the basis for AU §319 was SAS No. 55, “Consideration

of Internal Control in a Financial Statement Audit,” issued in 1988. AU §319 was amended in 1995 by

SAS No. 78 which applies to audits of financial statements of periods beginning after 1/1/97. This

standard applies to KPMG’s audits conducted prior to June 30, 2001. AU §319 was further amended by

SAS No.94 issued in May 2001 for audits of financial statements for periods beginning after June 30,

2001. This standard applies to KPMG’s audits conducted in 2002 and thereafter. A key requirement

under both standards is that an auditor is obligated to assess the company’s internal controls.

426. If the auditor identifies any material weaknesses in the company’s internal controls

during the audit, the auditor must communicate these weaknesses to the company’s audit committee. AU

§325. Further, the auditor should identify any limitations related to the internal control weaknesses in his

or her audit opinion in accordance with the procedures proscribed by the professional standards.

427. Here, Hollinger’s internal controls were completely deficient. In the SEC’s action

against Hollinger, the SEC alleged that “[f]rom at least 1999 through at least 2001, Hollinger failed to

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances

that transactions were recorded as necessary to permit preparation of financial statements in conformity

with GAAP...” The SEC obtained an order in this action permanently enjoining the Company from

violating the reporting and internal control provisions of the federal securities laws.

428. In failing to adequately plan and perform its audit, and in deliberately or recklessly

ignoring the numerous red flags identified above, KPMG violated the following provisions of GAAS:


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(a) KPMG violated the first general standard, which provides that the audit is to be

performed by a person or persons having adequate technical training and proficiency as an auditor. Given

the pervasiveness and complexity of Hollinger’s related-party transactions and risk of self-dealing, it was

incumbent upon KPMG to ensure that the individuals who performed the audit had the requisite technical

proficiency in those areas and had familiarity with the those transactions so that any improper self-dealing

by Lord Black and other senior executives would be detected. KPMG failed to do so.

(b) KPMG violated the second general standard, which provides the auditors should

maintain an independence in mental attitude in all matters relating to the engagement.

(c) KPMG violated the third general standard, which provides that due professional

care is to be exercised in the planning and performance of the audit and the preparation of the report. Due

professional care concerns what the independent auditor does and how well he or she does it. KPMG

violated this standard by not recognizing the questionable nature of the sales of Hollinger assets to entities

owned and/or controlled by Lord Black and Radler (and the non-compete payments), and the

management services agreements with Ravelston, all of which required audit procedures sufficient to

confirm the full nature and intent of the transactions.

(d) KPMG violated the first standard of reporting which, requires the report to state

whether the financial statements are presented in accordance with GAAP.

(e) KPMG violated the second standard of reporting, which requires the report to

identify circumstances in which GAAP has not been consistently observed.

(f) KPMG violated the third standard of reporting, which states that informative

disclosures are regarded as reasonably adequate unless otherwise stated in the report.

(g) KPMG violated the fourth standard of reporting, which states the report to

contain an expression of opinion or the reasons why an opinion cannot be expressed.

(h) KPMG violated the first standard of field work, which provides that the work is

to be adequately planned and assistants, if any, are to be properly supervised. This standard requires the


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nature, timing and extent of planning to be based in part on the auditor’s experience with the entity and

his or her knowledge of the entity’s business. KPMG violated this standard, because had KPMG

adequately planned and supervised its audit efforts, it would have investigated the related party

transactions and discovered that the Company’s disclosures regarding the non-compete payments, the

sales of its assets, and the management services agreements were all false and misleading.

(i) KPMG violated the second standard of field work, which provides that a

sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature,

timing, and extent of tests to be performed. This standard requires the auditor to make a proper study of

existing internal controls, including accounting, financial and managerial controls, to determine whether

reliance thereon was justified, and if such controls are not reliable, to expand the nature and scope of the

auditing procedures to be applied. In the course of auditing Hollinger’s financial statements, KPMG

either knew or recklessly disregarded facts that evidenced that KPMG failed to sufficiently understand

Hollinger’s internal control structure and/or it disregarded weaknesses and deficiencies in Hollinger’s

internal control structure, and failed to adequately plan its audit or expand its auditing procedures.

(j) KPMG violated the third standard of field work, which provides that sufficient

competent evidential matter is to be obtained through inspection, observation, inquiries, and

confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

Given the widespread use of inappropriate non-compete payments and transactions with related parties, it

is apparent that KPMG failed to require proper evidentiary support for Hollinger’s financial statements.

(k) KPMG violated SAS No. 82, which provides that an auditor must have

considered the following factors in assessing audit risk: (a) whether management compensation creates a

motivation to engage in fraudulent financial reporting; (b) domination of management by a small group;

(c) actions which are not supported by proper documentation or are not appropriately authorized; (d)

reporting records or files that should be, but are not, readily available and are not promptly produced

when requested; and (e) lack of timely inappropriate documentation for transactions.


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(l) KPMG violated SAS No. 55 , which provides that the auditor’s understanding of

internal controls may sometimes raise doubts about the auditability of an entity’s financial statements,

either by failing to adequately understand Hollinger’s internal controls (and lack thereof) and/or by failing

to acknowledge and report to the audit committee that Hollinger’s lack of internal controls made an

appropriate and thorough audit impossible.

429. Throughout the Class Period, KPMG knew or was reckless in not knowing of the

possibility of fraud due to Hollinger’s dealings with related entities, and/or entities owned, controlled by

or affiliated with Lord Black, but KPMG failed to investigate Hollinger’s related party transactions to

determine whether they were accurately represented by the Company.

430. Defendant KPMG owed Hollinger’s shareholders the obligation to act with reasonable

care and competence in the performance of its accounting and auditing services for Hollinger and not to

allow the Company’s officers or directors to accept any improper monetary benefit in his or her capacity

as an officer and/or director or to engage in any active or deliberate dishonesty. KPMG was required to

exercise professional skepticism, an attitude that includes a questioning mind, including an increased

recognition of the need to corroborate management representations and explanations concerning mutual

matters. Here, KPMG completely failed in its duties by issuing “clean” or unqualified opinions in

connection with its deficient audits and reviews of Hollinger’s financial statements.

INDIVIDUAL DEFENDANTS’ SCIENTER

431. The Individual Defendants personally and directly or indirectly (through their ownership

of Ravelston and other companies affiliated with or doing business with Hollinger) profited from the

fraud alleged herein, or are liable as a result of their complicity and/or reckless disregard of numerous

instances of improper conduct which were rubber-stamped by the Board and Audit Committee without

inquiry or evaluation.

432. Lord Black, Radler, Boultbee and Atkinson were motivated to misrepresent and conceal

material facts from the shareholders so that these defendants could successfully pay themselves millions


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of dollars in purported non-compete payments as part of the Company’s sales of its newspaper assets, and

pay themselves additional millions of dollars through the Company’s payments to Ravelston (which they

owned) for purported management services which Ravelston never provided.

433. By virtue of these defendants’ positions within the Hollinger, they not only had access to

undisclosed information about the terms of the Company’s asset sale transactions and the management

services agreements, and the circumstances surrounding those agreements, these defendants actually

orchestrated the asset sales, structured the management service agreements, and knew that those

transactions and agreements were misrepresented in the Company’s public filings. Lord Black, Radler,

Boultbee and Atkinson knew that they were (a) diverting significant portions of the proceeds from the

sales of certain Hollinger assets by causing the payment of purported non-compete payments to

themselves and/or entities with which they were affiliated, owned and/or controlled; (b) causing Hollinger

to sell certain of its assets to entities, including Bradford and Horizon, that they owned and/or controlled

at below market prices (or Hollinger actually paid those entities to take Hollinger’s assets) for purposes of

unjustly enriching themselves; and (c) causing Hollinger to enter into certain management services

agreements that required Hollinger to pay purported management services fees to themselves and/or

entities they owned or with which they were affiliated, owned and/or controlled without having those

entities provide any services to Hollinger. In addition, Radler knew that the Company was artificially

inflating its circulation figures. These defendants knew and had access to information concerning these

self-dealing and related-party transactions (and Radler had access to information concerning the

Company’s true circulation figures) through Hollinger’s internal corporate documents, conversations with

other corporate officers and directors, and affiliated companies, attendance at management and Board

meetings and committees thereof, and through reports and other information provided to them in

connection with their roles and duties as Hollinger executives and/or directors.


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434. Because of their knowledge of such information, Lord Black, Radler, Boultbee and

Atkinson knew or recklessly disregarded the fact that adverse facts specified herein had not been

disclosed to, and were being concealed from, the investing public.

435. The other individual defendants (Andreas, Lady Black, Burt, Chambers, Colson, Kipnis,

Kissinger, Kravis, Meitar, Perle, Strauss, Taubman, Thompson, Weidenfeld and Wexner) likewise knew

or recklessly disregarded the facts regarding the self-dealing and related party transactions described

herein. Through Hollinger’s internal corporate documents, conversations with other Hollinger officers

and directors, attendance at management, Board and committee meetings, and through reports and other

information provided to them in connection with their roles and duties as Hollinger executives and/or

directors, these defendants had access to undisclosed information about the terms of the Company’s asset

sales (including the non-compete payments), the management services agreements described herein, and

the circumstances surrounding those agreements. However, rather than conducting any review of the

terms of the asset sales and management service agreements, or the fairness of those deals and agreements

to Hollinger, these defendants simply rubber-stamped, often after-the-fact, these deals and agreements in

a complete failure to exercise any independent review or oversight of the actions of Lord Black, Radler,

Boultbee or Atkinson. As the Delaware Chancery Court concluded after trial, these directors conducted

themselves in a “supine manner.” Hollinger International, Inc., 844 A.2d at 1033.

436. Additionally, to the extent any of these individual defendants considered or deemed

themselves to be “independent directors,” they knew, or were reckless in not knowing, that the

Company’s representations (described herein) that certain transactions had been approved by the

independent directors were false. These purportedly independent directors knew, or were reckless in not

knowing, that no such approvals had been given, or that the independent directors’ complete failure to

conduct any inquiry or investigation into the facts of the transactions or their fairness to Hollinger

prevented those directors from being sufficiently informed to “approve” the transactions.


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437. In particular, Thompson, Burt and Kravis, as members of the Audit Committee, had a

duty to review the Company’s financial information, oversee the audit process and take steps necessary to

assure the adequacy, integrity and accuracy of the financial statements issued by Hollinger and the

propriety of the Company’s accounting practices and financial reporting. The Audit Committee was also

responsible for reviewing the management services agreements and the amounts paid by Hollinger

pursuant to those agreements, monitoring and reviewing the Company’s related party transactions, and

reviewing and recommending, where necessary, policies and procedures to address conflicts of interest.

The Audit Committee completely failed to discharge these duties and responsibilities and therefore acted

with extreme recklessness. As described above, these Directors signed the Company’s public filings

which represented that certain transactions and non-compete payments had been approved by the Audit

Committee when they had not, and therefore, these Directors acted fraudulently, or at least with extreme

recklessness.

438. In fact, the Company and its Board have admitted the falsity of Hollinger’s prior

disclosures, including representations that transactions and non-compete payments described herein were

approved by the Board, Audit Committee and independent directors. The Company, through its Special

Committee, has in its New York and Illinois federal actions against Lord Black, Radler, Boultbee,

Colson, Lady Black, Hollinger Inc., Ravelston, Horizon and Bradford, admitted that transactions with

Horizon, Bradford and others and certain non-compete payments did not receive prior approval by the

Board, Audit Committee or independent directors. The Special Committee is seeking to recover over

$484 million in damages resulting from unauthorized transactions and unauthorized transfers of money to

Lord Black and his cronies and affiliated companies (such as Hollinger Inc., Ravelston, Horizon and

Bradford).

439. Defendant Perle was motivated to assist in the defendants’ fraud because he served as

head of a Hollinger subsidiary, Hollinger Digital, for which he was paid approximately $300,000 per

year, along with over $3 million in incentive bonus compensation paid from 2000 to 2001. Additionally,


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Perle is a close friend of Lord Black, as demonstrated by Perle’s service as a Board member of Trireme

Partners LP and as managing partner of an investment company known as Trireme Associates LLC

(“Trireme”) in which Hollinger on or about March 28, 2003 invested $2.5 million. When Hollinger

invested in Trireme, Perle was a Hollinger Director and member of the Board’s Executive Committee, a

Co-Chairman of Hollinger Digital, and an equity holder in Trireme, and Black and Kissinger were

members of the Trireme Partners LP Strategic Advisory Board. Hollinger has invested over $14 million

with other venture capital companies operated by other partners of Trireme. Hollinger has a 25%

ownership stake in Trireme and is entitled to 20% of the Trireme Partner LP’s profits.

440. Kissinger was motivated to assist in defendants’ fraud because he serves on the Trireme

Strategic Advisory Board.

441. Thompson was motivated to assist in the fraud because he received substantial political

contributions from Lord Black.

442. It is appropriate to treat all the Individual Defendants as a group for pleading purposes

and to presume that the materially false, misleading and incomplete information conveyed in the

Company’s public filings, press releases and other publications as alleged herein are the collective actions

of all of the Individual Defendants in this action. The Individual Defendants, by virtue of their high-level

positions within Hollinger, directly participated in the management of the Company, were directly

involved in the day-to-day operations of the Company at the highest levels and were privy to confidential

information concerning the Company and its business, operations, finances, asset sales (including the

sales of Hollinger assets to related-parties), significant contracts (including the management services

agreements),and self-deal transactions (including the illicit non-compete payments), as alleged herein.

443. The Individual Defendants were involved in drafting, producing, reviewing, approving

and/or disseminating the materially false and misleading statements and information alleged herein,

including SEC filings, press releases, and other public documents, were aware of or recklessly


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disregarded the fact that materially false and misleading statements were being issued regarding the

Company, and approved or ratified these statements, in violation of the federal securities laws.

444. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the and was traded

on the NYSE, and governed by the provisions of the federal securities laws, the Individual Defendants

each had a duty to disseminate prompt, accurate and truthful information with respect to the Company’s

financial condition, operations, financial statements, business, management, proceeds from asset sales,

significant contracts, related-party transactions and to correct any previously-issued statements that had

become materially misleading or untrue, so that the market price of the Company’s publicly traded

common stock would be based upon truthful and accurate information. The Individual Defendants’

material misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

445. The Individual Defendants, by virtue of their positions of control and authority as officers

and/or directors of the Company, were able to and did control the content of the various SEC filings, press

releases and other public statements pertaining to the Company during the Class Period. The Individual

Defendants were provided with copies of the documents alleged herein to be misleading prior to or

shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause

them to be corrected. Accordingly, the Individual Defendants are responsible for the accuracy of the

public reports and releases detailed herein.

446. Hollinger and the Individual Defendants had the responsibility to maintain sufficient

controls to accurately report the Company’s results. The representations made by a company in its

financial statements and in other financial disclosures to the public are the representations of that

company’s management.


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447. According to SEC rules, to accomplish the objectives of accurately recording, processing,

summarizing and reporting financial data, a company must establish an internal control structure.

Pursuant to Section 13 (b)(2) of the Exchange Act, Hollinger was required to:

[M]ake and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(A) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that

(1) - transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary

(I) to permit preparation of financial statements in conformity with generally accepted accounting principles....

448. To accomplish the objectives of accurately recording, processing, summarizing and

reporting data, a company must establish an internal control structure. In the structure, according to

Appendix D to Statement on Auditing Standards No. 55, Consideration of the Internal Control Structure

in a Financial Statement Audit (“SAS 55”), management should consider, among other things, such

objectives as (i) making certain that “[transactions are recorded as necessary ... to permit presentation of

financial statements in conformity with generally accepted accounting principles. . . and to maintain

accountability for assets,” and (ii) making certain that “[t]he recorded accountability for assets is

compared with the existing assets at reasonable intervals and appropriate action is taken with respect to

any differences.”

449. According to SAS 55 (AU § 319 A.37 & 38):

Establishing and maintaining an internal control structure is an important management responsibility. To provide reasonable assurance that an entity’s objectives will be achieved, the internal control structure should be under ongoing supervision by management to determine that it is


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operating as intended and that it is modified as appropriate for changes in conditions.

450. Hollinger and the Individual Defendants had repeatedly represented to investors the

adequacy and strength of its internal control systems. In each of the Company’s 10-Ks during the Class

Period, the Company represented that Lord Black and the Company’s CFO had “reviewed [Hollinger’s]

disclosure controls and procedures” and therefore “believe that [Hollinger’s] disclosure controls and

procedures are effective in ensuring that material information related to the Company is made known to

[Lord Black and the CFO] by others within the Company.”

451. Contrary to the requirements of GAAP and SEC rules, Hollinger and the Individual

Defendants failed to implement and maintain an adequate internal accounting control system. Hollinger

management knowingly tolerated the existence of inadequate internal controls and/or recklessly

disregarded its obligation to implement adequate controls to ensure that proceeds from its asset sales were

properly represented and disclosed, to ensure that Hollinger received the management services for which

it was paying, and to ensure that the asset sales and management services agreements were properly

presented to the Board and Audit Committee; and reviewed and approved by the Board and Audit

Committee.

452. The Individual Defendants are liable as participants in a scheme to defraud or deceive

purchasers of Hollinger common stock by disseminating materially false and misleading statements

and/or concealing material adverse facts regarding Hollinger’s asset sales and the management services

agreements, and the Company’s financial condition, operations, financial statements, business, earnings,

proceeds from asset sales, significant contracts, related-party transactions and the intrinsic value of

Hollinger common stock.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

453. As alleged herein, the Individual Defendants acted with scienter in that the Individual

Defendants knew at the time they issued them that the public documents and statements issued or


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disseminated in the name of the Company were materially false and misleading or omitted material facts;

knew that such statements or documents would be issued or disseminated to the investing public; knew

that persons were likely to reasonably rely on those misrepresentations and omissions; and knowingly and

substantially participated or were involved in the issuance or dissemination of such statements or

documents as primary violations of the federal securities law. As set forth elsewhere herein in detail, the

Individual Defendants, by virtue of their receipt of information reflecting the true facts regarding

Hollinger, their control over, and/or receipt of Hollinger’s allegedly materially misleading misstatements

and/or their association with the Company which made them privy to confidential proprietary information

concerning Hollinger which were used to inflate financial results and which defendants caused or were

informed of, participated in and knew of the fraudulent scheme alleged herein. With respect to non-

forward-looking statements and/or omissions, defendants knew and/or recklessly disregarded the falsity

and misleading nature of the information which they caused to be disseminated to the investing public.

454. Defendants’ false and misleading statements and omissions do not constitute forward-

looking statements protected by any statutory safe harbor. The statements alleged to be false and

misleading herein all relate to facts and conditions existing at the time the statements were made. No

statutory safe harbor applies to any of Hollinger’s material false or misleading statements.

455. Alternatively, to the extent that any statutory safe harbor is intended to apply to any

forward-looking statement pled herein, the Individual Defendants are liable for the false forward-looking

statement pled because, at the time each forward-looking statement was made, the speaker knew or had

actual knowledge that the forward-looking statement was materially false or misleading, and the forward-

looking statement was authorized and/or approved by a director and/or executive officer of Hollinger who

knew that the forward-looking statement was false or misleading. None of the historic or present tense

statements made by defendants was an assumption underlying or relating to any plan, projection or

statement of future economic performance, as they were not stated to be such an assumption underlying

or relating to any projection or statement of future economic performance when made nor were any of the


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projections or forecasts made by the Individual Defendants expressly related to or stated to be dependent

on those historic or present tense statements when made.

APPLICABILITY OF PRESUMPTION OF RELIANCE:

FRAUD ON THE MARKET DOCTRINE

456. At all relevant times, the market for Hollinger’s stock was an open, well-developed and

efficient market at all relevant times for the following reasons, among others:

(a) Hollinger common stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, Hollinger was required to file and did file periodic reports with the SEC;

(c) Hollinger regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national and international circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services;

(d) Hollinger was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms, which reports were each publicly available and entered the public marketplace; and

(e) the trading volume of Hollinger stock was substantial during the Class Period.

457. As a result, the market for Hollinger stock promptly digested current information

regarding Hollinger from all publicly available sources and reflected such information in Hollinger’s

stock price. Under these circumstances, all persons in the Class who purchased Hollinger common stock

during the Class Period based on defendants’ false and misleading statements suffered similar injury

through their purchase of shares of such stock at artificially inflated prices and a presumption of reliance

applies.

CLASS ACTION ALLEGATIONS

458. Plaintiffs bring Counts I-VIII of this action as a class action pursuant to Rule 23 of the

Federal Rule of Civil Procedure on behalf of themselves and all persons who purchased, acquired or

owned common stock in Hollinger (the “Class”) between August 13, 1999, when Hollinger filed its


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August 10-Q containing various false and misleading statements described herein, and December 11,

2002, and who were damaged thereby. Plaintiffs bring Count VI on behalf of themselves and members of

a class comprised solely of other States, political subdivisions or State pension plans, as defined in 15

U.S.C. § 77p, that have authorized participation in this action.

459. Excluded from the Class are defendants, their subsidiaries and affiliates, and the officers

and directors of Hollinger, members of their immediate families and their legal representations, heirs,

successors or assigns or any entity in which any of the foregoing has a controlling interest.

460. All Counts are properly maintainable as a class action counts.

461. The Class is so numerous that joinder of all members is impractical. Throughout the

Class Period, Hollinger common shares were actively traded on the NYSE. As of May 5, 2004, Hollinger

had outstanding approximately 90.13 million shares of its common stock. While the exact number of

Class members is unknown to Plaintiffs at this time and can only be ascertained through discovery,

Plaintiffs believe that there are thousands of members of the proposed class, including individuals and

entities too numerous to bring separate actions. It is reasonable to assume that holders of Hollinger

common stock are geographically dispersed throughout the United States of America.

462. Record owners and other members of the Class may be identified from records

maintained by Hollinger or its transfer agent and may be notified of the pendency of this action by mail,

using the form of notice similar to that customarily used in securities class actions.

463. There are questions of law and fact that are common to the Class which predominate over

any questions affecting only individual Class members. The common questions include:

(a) Whether the defendants publicly disseminated or caused the Company to publicly disseminate press releases, earnings pronouncements, regulatory filings and other public statements during the Class Period which contained material misrepresentations or omitted to state material facts necessary to make such statements not misleading in violation of the federal securities laws as alleged herein;


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(b) Whether defendants participated in a fraudulent scheme to artificially inflate and misrepresent the proceeds from Hollinger’s asset sales and thereby artificially inflate Hollinger’s stock price;

(c) Whether the defendants acted intentionally with direct knowledge of the falsity of such statements, or at least recklessly, in making such statements;

(d) Whether the Individual Defendants, Hollinger Inc. and Ravelston are “controlling persons” as that term is defined in Section 20(a) of the Exchange Act;

(e) Whether the market prices of Hollinger’s common stock during the Class Period were artificially inflated due to material misstatements and omissions complained of herein;

(f) Whether the Individual Defendants concealed their breaches of fiduciary duties in causing, directing and/or approving, or allowing or permitting, material misrepresentations and omissions in the Company’s public statements and filings relating to certain related party transactions and the Company’s financial condition;

(g) Whether the individual Class members were improperly induced to hold their Hollinger shares;

(h) Whether the individual Class members were improperly induced to purchase their Hollinger shares; and

(i) Whether the members of the Class have sustained damages and, if so, what the appropriate measure of damages should be.

464. Plaintiffs are committed to prosecuting the Class claims and have retained competent

counsel experienced in litigating claims of this nature. Plaintiffs’ claims are typical of the claims of other

members of the Class. Accordingly, Plaintiffs are adequate representatives of the Class and will fairly

and adequately protect the interests of the Class.

465. Plaintiffs anticipate that there will be no difficulty in maintaining each and every Count

as a class action Count.

466. The class action is an appropriate method for the fair and efficient adjudication of those

Counts.


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467. Defendants have acted on grounds generally applicable to the Class with respect to the

matters complained of herein, thereby making appropriate the relief sought herein with respect to the

Class as a whole.

468. The prosecution of separate actions would create the risk of:

a. Inconsistent or varying adjudications which would establish incompatible standards for conduct for the defendants; and/or

b. Adjudications which would as a practical matter be dispositive of the interests of other members of the Class.

Accordingly, a class action is superior to other available methods for the fair and efficient adjudication of

this controversy. Additionally, because the damages suffered by individual members of the Class may in

some circumstances be relatively small, the expense and burden of individual litigation make it

impossible for such class members individually redress the wrongs done to them.

COUNT I

VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT

AND RULE 10b-5 PROMULGATED THEREUNDER

(Individual And Class Claim Against All Individual Defendants, Hollinger and KPMG)

469. Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth

herein.

470. This Count is asserted by Plaintiffs on behalf of themselves and the Class against all

Individual Defendants, Hollinger and KPMG and is based upon Section 10(b) of the Exchange Act, 15

U.S.C. §78j(b), and Rule 10b-5, §240.10b-5, promulgated thereunder.

471. During the Class Period, these defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing public,

including Plaintiffs and other Class members, as alleged herein; (b) artificially inflate and maintain the

market price of Hollinger’s stock; and (c) caused Plaintiffs and other members of the Class to purchase or


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otherwise acquire Hollinger’s stock at artificially inflated prices. In furtherance of this unlawful scheme,

plan and course of conduct, the defendants took the actions set forth herein.

472. In addition to the duties of full disclosure imposed on these defendants as a result of their

making affirmative statements and reports, or participation in the making of affirmative statements and

reports to the investing public, they had a duty to promptly disseminate truthful information that would be

material to investors, in compliance with GAAP and the integrated disclosure provisions of the SEC as

embodied in SEC Regulations S-X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R. § 229.01 et seq.) and

other SEC regulations, including truthful, complete and accurate information with respect to the

Company’s operations and performance so that the market prices of the Company’s publicly traded

securities would be based on truthful, complete and accurate information.

473. The defendants named in this Count, individually and in concert, directly and indirectly,

by the use of means and instrumentalities of interstate commerce and/or the mails, engaged and

participated in a continuous course of conduct to conceal adverse material information about the

Company’s financial results, businesses, operations, asset sales, material contracts and business prospects

as specified herein. These defendants employed devices, schemes, and artifices to defraud, while in

possession of material, adverse, non-public information, and engaged in acts, practices, and a course of

conduct as alleged herein, in an effort to assure investors of Hollinger’s earnings, assets, revenues,

expenses, proceeds from asset sales and the accuracy of the Company’s financial reporting of

performance, which included the making of, or the participation in the making of, untrue statements of

material facts and omissions, or to state the material facts necessary in order to make the statements made

about the Company’s financial and business operations in light of the circumstances under which they

were made, not misleading, as set forth particularly herein.

474. Specifically, as part of their scheme, the Individual Defendants, Hollinger and KPMG

failed to disclose or disclosed in a manner that was knowingly false and misleading, information

regarding certain self-dealing and related party transactions including: (a) the diversion of significant


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portions of the proceeds from the sales of Hollinger’s assets to Hollinger, Lord Black, Radler, Boultbee

and Atkinson under the guise of non-compete payments; (b) Hollinger’s asset sales to entities, including

Bradford and Horizon, that were owned and/or controlled by certain of the defendants (including Lord

Black and Radler) on terms unfavorable to Hollinger and at below market prices for purposes of unjustly

enriching themselves; and (c) Hollinger’s entry into certain management services agreements that

required Hollinger to pay purported management services fees to defendants and/or entities they owned or

controlled or with which they were affiliated, when no such management services were provided. As a

result of this unlawful scheme, plan and course of conduct, Plaintiffs and other members of the Class

were caused to purchase or otherwise acquire Hollinger securities at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, these defendants, and each of them,

engaged in the actions set forth herein.

475. The Individual Defendants’ primary liability arises from the following facts: (i) they

were high-level executives and directors of the Company during the Class Period and were members of

the Company’s management team; (ii) by virtue of their responsibilities and activities as senior officers of

the Company, they were privy to and participated in the drafting, reviewing, and/or approving the

misleading statements, omissions, releases, reports, and other public representations of and about

Hollinger and/or signed the Company’s public SEC filings, which public filings contained the allegedly

material misleading statements and omissions; (iii) they knew or had access to the material adverse non-

public information about the financial results of Hollinger which were not disclosed; and (iv) they were

aware of the Company’s dissemination of information to the investing public which they knew or

recklessly disregarded was materially false and misleading.

476. Each of the defendants named in this Court I had actual knowledge of the

misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the

truth in that they failed to ascertain and to disclose such facts, even though such facts were available to

them. These defendants’ material misrepresentations and/or omissions were done knowingly or


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recklessly and for the purpose and effect of concealing the following from the investing public and

supporting the artificially inflated price of its securities: (i) payments of non-compete payments and

management service fees (where no management services were provided); (ii) the failure of the Board and

Audit Committee to properly review and approve these agreements and the Company’s related party

transactions; and (iii) the Company’s accounting irregularities and the fraudulent use of other companies

as participants in Hollinger’s fraudulent schemes. As demonstrated by these defendants’ statements

throughout the Class Period, if they did not have actual knowledge of the misrepresentations and

omissions alleged, they were reckless in failing to obtain such knowledge by deliberately refraining from

taking those steps necessary to discover whether those statements were false or misleading.

477. As a result of the dissemination of the materially false and misleading information and/or

defendants’ failure to disclose material facts, as set forth herein, the market price of Hollinger’s securities

was at all times during the Class Period artificially inflated. In ignorance of the fact that the market price

of Hollinger’s publicly-traded securities was artificially inflated, and relying directly or indirectly on the

materially false and misleading statements made by defendants, or upon the integrity of the market in

which the securities trade, and the truth of any representations made to appropriate agencies as to the

investing public, at the times at which any statements were made, and/or on the absence of material

adverse information that was known to or recklessly disregarded by these defendants but not disclosed in

public statements by such defendants during the Class Period, Plaintiffs and the Class purchased or

otherwise acquired for value Hollinger stock during the Class Period at artificially high prices and were

damaged thereby. But for these defendants’ materially false and misleading statements and omissions

alleged herein, Plaintiffs and the Class would not have purchased or otherwise acquired for value

Hollinger stock during the Class Period at artificially high prices.

478. At the time of such misstatements and omissions, Plaintiffs and the Class were ignorant

of their falsity, and believed them to be true. Had Plaintiffs, the Class and the marketplace known of the

non-compete payments, the payments for management services which were not provided, the failure of


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the Board and Audit Committee to properly review and approve these payments, the true financial

condition of the Company, the true circulation figures for the Company’s newspapers, and the other facts

described herein which were not disclosed by defendants, Plaintiff and the Class would not have

purchased or otherwise acquired Hollinger stock during the Class Period, or, if they had purchased or

otherwise acquired such securities during the Class Period, they would not have done so at artificially

inflated prices.

479. The market price of Hollinger securities declined materially upon the public disclosure of

the true facts which had been misrepresented or concealed as alleged herein.

480. As a direct and proximate cause of the wrongful conduct of the Individual Defendants,

Hollinger and KPMG, Plaintiffs and other members of the Class suffered damages in connection with

their respective purchases and sales of Hollinger securities during the Class Period.

481. Therefore, by virtue of the foregoing, these defendants have violated Section 10(b) of the

1934 Act, and Rule 10b-5 promulgated thereunder.

482. As a result of the defendants’ conduct, Plaintiffs were damaged in an amount to be

proved at trial.

COUNT II

VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT

AND RULE 10b-5 PROMULGATED THEREUNDER

(Individual And Class Claim Against Hollinger and Radler)


herein.

484. This Count is asserted by Plaintiffs on behalf of themselves and the Class against

Hollinger and Radler and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule

10b-5, §240.10b-5, promulgated thereunder.


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485. During the Class Period, these defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing public,

including Plaintiffs and other Class members, as alleged herein; (b) artificially inflate and maintain the

market price of Hollinger’s stock; and (c) caused Plaintiffs and other members of the Class to purchase or

otherwise acquire Hollinger’s stock at artificially inflated prices. In furtherance of this unlawful scheme,

plan and course of conduct, the defendants took the actions set forth herein.

486. In addition to the duties of full disclosure imposed on these defendants as a result of their

making affirmative statements and reports, or participation in the making of affirmative statements and

reports to the investing public, they had a duty to promptly disseminate truthful information that would be

material to investors, in compliance with GAAP and the integrated disclosure provisions of the SEC as

embodied in SEC Regulations S-X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R. § 229.01 et seq.) and

other SEC regulations, including truthful, complete and accurate information with respect to the

Company’s operations and performance so that the market prices of the Company’s publicly traded

securities would be based on truthful, complete and accurate information.

487. The defendants named in this Count, individually and in concert, directly and indirectly,

by the use of means and instrumentalities of interstate commerce and/or the mails, engaged and

participated in a continuous course of conduct to artificially inflate through improper means the

Company’s circulation figures. Hollinger and Radler reported false circulation figures in a scheme to

obtain higher payments from advertisers and to drive up the market price of the Company’s stock.

Hollinger and Radler employed this fraudulent scheme while in possession of material, adverse, non-

public information about the Company’s true circulation figures, and engaged in acts, practices, and a

course of conduct as alleged herein, in an effort to present to Hollinger’s investors a false presentation of

the Company’s circulation figures and financial and business operations. As a result of this unlawful

scheme, plan and course of conduct, Plaintiffs and other members of the Class were caused to purchase or

otherwise acquire Hollinger securities at artificially inflated prices. In furtherance of this unlawful


169

scheme, plan and course of conduct, these defendants, and each of them, engaged in the actions set forth

herein.

488. Radler’s primary liability arises from the following facts: (i) he was a high-level

executive and director of the Company during the Class Period and was a member of the Company’s

management team; (ii) by virtue of his responsibilities and activities as a senior officer of the Company,

he was privy to and participated in the drafting, reviewing, and/or approving the misleading statements,

omissions, releases, reports, and other public representations of and about Hollinger and/or signed the

Company’s public SEC filings, which public filings contained the allegedly material misleading

statements and omissions; (iii) he knew or had access to the true circulation figures of Hollinger which

were not disclosed; and (iv) he was aware of the Company’s dissemination of information to the investing

public which he knew or recklessly disregarded was materially false and misleading.

489. Each of the defendants named in this Court II had actual knowledge of the

misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the

truth in that they failed to ascertain and to disclose such facts, even though such facts were available to

them. These defendants’ material misrepresentations and/or omissions were done knowingly or

recklessly and for the purpose and effect of concealing the Company’s true circulation figures from the

investing public and supporting the artificially inflated price of Hollinger’s securities. As demonstrated

by these defendants’ statements throughout the Class Period, if they did not have actual knowledge of the

misrepresentations and omissions alleged, they were reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to discover whether those statements were false

or misleading.

490. As a result of the dissemination of the materially false and misleading information and/or

defendants’ failure to disclose material facts, as set forth herein, the market price of Hollinger’s securities

was at all times during the Class Period (and beyond the Class Period) artificially inflated. In ignorance

of the fact that the market price of Hollinger’s publicly-traded securities was artificially inflated, and


170

relying directly or indirectly on the materially false and misleading statements made by defendants, or

upon the integrity of the market in which the securities trade, and the truth of any representations made to

appropriate agencies as to the investing public, at the times at which any statements were made, and/or on

the absence of material adverse information that was known to or recklessly disregarded by these

defendants but not disclosed in public statements by such defendants during the Class Period, Plaintiffs

and the Class purchased or otherwise acquired for value Hollinger stock during the Class Period at

artificially high prices and were damaged thereby. But for these defendants’ materially false and

misleading statements and omissions alleged herein, Plaintiffs and the Class would not have purchased or

otherwise acquired for value Hollinger stock during the Class Period at artificially high prices.

491. At the time of such misstatements and omissions, Plaintiffs and the Class were ignorant

of their falsity, and believed them to be true. Had Plaintiffs, the Class and the marketplace known of the

artificial inflation of the Company’s circulation figures, and known of the true circulation figures for the

Company’s newspapers, Plaintiff and the Class would not have purchased or otherwise acquired

Hollinger stock during the Class Period, or, if they had purchased or otherwise acquired such securities

during the Class Period, they would not have done so at artificially inflated prices.

492. The market price of Hollinger securities declined materially upon the public disclosure of

the true circulation figures and related facts which had been misrepresented or concealed as alleged

herein.

493. As a direct and proximate cause of the wrongful conduct of Hollinger and Radler,

Plaintiffs and other members of the Class suffered damages in connection with their respective purchases

and sales of Hollinger securities during the Class Period.

494. Therefore, by virtue of the foregoing, these defendants have violated Section 10(b) of the

1934 Act, and Rule 10b-5 promulgated thereunder.

495. As a result of the defendants’ conduct, Plaintiffs were damaged in an amount to be

proved at trial.


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COUNT III

VIOLATION OF SECTION 18 OF THE EXCHANGE ACT

(Individual And Class Claim Against Hollinger, KPMG And The Individual Defendants)


herein.

497. This Count is asserted by Plaintiffs on behalf of themselves and the Class pursuant to

Section 18 of the Exchange Act against Hollinger, KPMG and each of the Individual Defendants.

498. As set forth above, Hollinger, KPMG and the Individual Defendants made or caused to

be made statements which were, at the time and in light of the circumstances under which they were

made, false or misleading with respect to material facts, in documents filed with the SEC. Specifically,

the Company’s audited financial statements for the fiscal years 2000, 2001 and 2002 were included in the

Company’s Forms 10-K that were filed with the SEC. The Company has already admitted that those

financial statements are materially false and misleading and so they must be withdrawn and restated

which, by way of definition makes them false and misleading. Additionally, the financial statements (and

Hollinger’s 2000-2003 10-Ks) were false and misleading because, as stated in SEC Rule 4-01(a) of

Regulation S-X, “financial statements filed with the [SEC] which are not prepared in accordance with

[GAAP] will be presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1).

499. KPMG falsely certified in Hollinger’s 2000-2002 10-Ks that Hollinger’s financial

statements complied with GAAP and that KPMG had performed its audits in accordance with GAAS.

500. Plaintiffs and other members of the Class read and relied upon each of the Forms 10-K,

and the financial statements contained therein, not knowing that they were false and misleading.

501. The Individual Defendants each signed the Company’s 2000 and 2001 Forms 10-K and

KPMG signed its certifications in those filings.

502. In connection with their purchases of Hollinger stock, Plaintiffs and other Class members

specifically read and relied on the false and misleading statements regarding the sales of Hollinger assets


172

to related parties, including Bradford and Horizon, the reported proceeds of those asset sales (which

improperly included non-compete payments made to Lord Black, Radler, Atkinson, Boultbee, Ravelston

and Hollinger Inc.), the Ravelston management services agreements in the Company’s Forms 10-K, filed

with the SEC, and the Company’s reported circulation figures. Plaintiffs’ reliance was reasonable,

particularly given the clean opinions from the Company’s auditor, KPMG.

503. When the market had assimilated the truth about defendants’ fraud (that was dribbled out

to the market beginning in May 2002), and the effect of those disclosures was reflected in the stock price

(by December 11, 2002), Plaintiffs and other Class members were significantly damaged by the resulting

drop in the value of the Company’s stock.

504. As a direct and proximate result of defendants’ wrongful conduct, Plaintiffs and other

Class members suffered damage in connection with their purchases of Hollinger stock.

505. By virtue of the foregoing, Hollinger, KPMG and the Individual Defendants have

violated Section 18 of the Exchange Act.

506. As a result of the Individual Defendants’ conduct described herein, Plaintiffs and other

Class members were damaged in amounts to be proved at trial.

COUNT IV

VIOLATION OF SECTION 18 OF THE EXCHANGE ACT

(Individual And Class Claim Against Hollinger and Radler)


herein.

508. This Count is asserted by Plaintiffs on behalf of themselves and the Class pursuant to

Section 18 of the Exchange Act against Hollinger and Radler.

509. As set forth above, Hollinger, and Radler made or caused to be made public statements

regarding the Company’ s circulation figures which were, at the time and in light of the circumstances

under which they were made, false or misleading with respect to material facts, in documents filed with


173

the SEC. These false and misleading statements were included in the Company’s Forms 10-K that were

filed with the SEC during the Class Period. The Company has already admitted that its public statements

in its Forms 10-K regarding its circulation figures are materially false and misleading.

510. Plaintiffs and other members of the Class read and relied upon each of the Forms 10-K,

not knowing that they were false and misleading.

511. Radler signed the Company’s 2000 and 2001 Forms 10-K.

512. In connection with their purchases of Hollinger stock, Plaintiffs and other Class members

specifically read and relied on the false and misleading statements regarding the Company’s reported

circulation figures, and Plaintiffs’ reliance was reasonable.

513. When the truth began to emerge on or after June 15, 2004 about the false and misleading

statements in the Company’s documents and reports filed with the SEC, Plaintiffs and other Class

members were significantly damaged by the resulting drop in the value of the Company’s stock.

514. As a direct and proximate result of defendants’ wrongful conduct, Plaintiffs and other

Class members suffered damage in connection with their purchases of Hollinger stock.

515. By virtue of the foregoing, Hollinger and Radler have violated Section 18 of the

Exchange Act.

516. As a result of the conduct of Hollinger and Radler described herein, Plaintiffs and other

Class members were damaged in amounts to be proved at trial.

COUNT V

VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT

(Individual And Class Claim Against The Individual Defendants,

Hollinger Inc., Ravelston And Argus)


herein.

518. This Count is asserted by Plaintiffs on behalf of themselves and the Class against all the

Individual Defendants, Hollinger Inc., Ravelston and Argus under Section 20(a) of the Exchange Act.


174

519. Each of these defendants acted as controlling persons of Hollinger within the meaning of

Section 20(a) of the Exchange Act as alleged herein. By virtue of the Individual Defendants’ executive

positions, Board membership and/or stock ownership, as alleged above, these defendants had the power to

influence and control and did influence and control, directly or indirectly, the decision-making of the

Company, including the content and dissemination of the various statements which Plaintiffs and other

Class members contend are false and misleading. The Individual Defendants were provided with or had

unlimited access to copies of the Company’s internal reports, press releases, public filings and other

statements alleged by Plaintiffs and other Class members to be misleading prior to and/or shortly after

these statements were issued and had the ability and power to direct or prevent the issuance of the

statements or cause the statements to be corrected.

520. In particular, Lord Black, Radler, Atkinson and Boultbee had direct involvement in and

control over the day-to-day operations of the Company and also had the power to control or influence the

particular transactions (and statements and activities) giving rise to the securities violations as alleged

herein, and exercised the same.

521. As set forth above, the Individual Defendants committed primary violations of Section

10(b) and Rule 10b-5 and Section 18 of the Exchange Act by the acts and omissions alleged in this

Complaint. By virtue of their positions as controlling persons of Hollinger, the Individual Defendants are

liable pursuant to Section 20(a) of the Exchange Act.

522. Hollinger Inc., Ravelston and Argus also controlled Hollinger within the meaning of

Section 20(a) of the Exchange Act. Hollinger Inc. controlled Hollinger through its ownership of 30.3% of

Hollinger’s shares and control of 73% of Hollinger’s overall voting power. Ravelston and Argus

controlled Hollinger because they controlled 78% of the shares of Hollinger Inc. which, in turn, controls

Hollinger.


175

523. As a direct and proximate result of the wrongful conduct of the Individual Defendants,

Hollinger Inc., Ravelston and Argus, Plaintiffs and the other members of the Class suffered damages in

connection with their purchase or acquisition of Hollinger securities.

524. As a result of the conduct of the Individual Defendants, Hollinger Inc., Ravelston and

Argus, Plaintiffs and other Class members were damaged in amounts to be proved at trial.

COUNT VI

BREACH OF FIDUCIARY DUTY FOR

INDUCING RETENTION OF HOLLINGER STOCK

(Individual And Class Claim Against Hollinger And All Individual Defendants)


herein.

526. This claim is brought against Hollinger and all Individual Defendants for breach of

fiduciary duty.

527. As alleged herein, Hollinger and the Individual Defendants employed a fraudulent

scheme, and made material misrepresentations or omitted to disclose material facts to Plaintiffs and the

investing public regarding Hollinger’s asset sales, management services agreements and the Company’s

financial condition.

528. Hollinger and the Individual Defendants were required to present Hollinger’s business

and financial condition in a fair and accurate manner in, among other documents, reports that it was

required to file with the SEC and in press releases.

529. As described in greater detail above, the Individual Defendants, by virtue of their

positions at the Company, knew or were reckless in not knowing that the Company’s public filings and

statements materially misrepresented the Company’s asset sales (and the proceeds received from such

sales), the management services agreements, and the Board’s and Audit Committee’s review and approval

of the asset sales and management services agreements. Each of the Individual Defendants knew or had

access to material, adverse non-public information about Hollinger’s financial results and then- existing


176

business condition which was not disclosed. Each of the Individual Defendants participated in drafting,

renewing and/or approving the misleading statements, releases, reports and other public representations

about Hollinger, and was responsible for Hollinger’s financial accounting system, internal controls, and

the preparation and review of the audited and unaudited financial statements prepared and published in

the name of the Company and contained in reports and other documents, including those filed with the

SEC.

530. As alleged herein, the Company’s documents contained untrue statements of material

facts and/or omitted material facts required to be stated therein to make the statements therein not

misleading. The Company has admitted that its financial statements for the fiscal years 1999-2002 were

all materially false when issued.

531. The Individual Defendants, as present or former directors and/or officers of Hollinger, at

all times relevant to this Count, were fiduciaries of the Company’s public shareholders. As such, they

owed Hollinger’s shareholders the highest duties of good faith, due care, fair dealing and loyalty.

532. The Individual Defendants breached their fiduciary duties of care and loyalty by causing,

directing and/or approving, or allowing or permitting, and/or failing to properly and fully review,

investigate and evaluate the terms and fairness to Hollinger of the self-dealing transactions described

herein, and by causing, directing or approving, or allowing or permitting the materially misleading

statements and omissions in the Company’s public statements and SEC filings described herein.

533. The Individual Defendants’ breaches of fiduciary duty and their materially false and

misleading statements were made in connection with the financial statements and public filings upon

which Plaintiff relied in retaining its holdings of Hollinger stock.

534. The materially false and misleading statements by the defendants named in this Count

were made in connection with the public filings and financial statements upon which Plaintiffs relied in

retaining its holdings of Hollinger stock.


177

535. At the time Plaintiffs and other members of the Class held Hollinger stock, they did not

know of any of the false and/or misleading statements and omissions and breaches of fiduciary duty, and

relied upon the representations made by defendants in retaining such stock.

536. The aforesaid misrepresentations and omissions by these defendants induced Plaintiffs

and other members of the Class to retain their holdings of Hollinger stock.

537. As a direct and proximate result of the breaches of fiduciary duty, Plaintiffs in reliance

on these defendants’ misrepresentations and in ignorance of the material omitted facts, suffered damages

in connection with retaining their holdings of Hollinger stock.

COUNT VII

§ 12(F), (G) & (I) OF THE ILLINOIS SECURITIES LAW OF 1953, 815 ILCS § 5/12

(On Behalf Of Plaintiffs And Members Of A Class Comprised Solely Of States,

Political Subdivisions Or State Pension Plans Against All Defendants)


herein, except to the extent such allegations charge the defendants with intentional misconduct as it

relates to this claim.

539. This Count is asserted by Plaintiffs on behalf of themselves and members of a class

comprised solely of other States, political subdivisions or State pension plans, as defined in 15 U.S.C.

§ 77p, that have authorized participation in this action (the “§ 12 Plaintiffs”).

540. By filing this action, the § 12 Plaintiffs hereby elect to avoid sales of Hollinger securities

and avail themselves of the remedy of recision, as provided in 815 ILCS § 5/13. The § 12 Plaintiffs aver

that less than six months have elapsed between time they obtained knowledge that sales were voidable

and filing of this action.

541. During the Class Period, defendants engaged in the transactions, practices and/or a course

of business in connection with the sale of Hollinger securities which worked or tended to work a fraud or

deceit upon the purchasers of Hollinger securities.


178

542. The defendants made or caused to be made statements which were false and/or

misleading with respect to material facts concerning Hollinger’s business (including its asset sales, the

management services agreements, and the Board’s and Audit Committee’s review and approval of the

asset sales and management services agreements), financial condition and related party transactions.

543. The defendants employed devices, schemes and/or artifices to defraud directly and

indirectly in connection with the sale of Hollinger securities.

544. The defendants signed and circulated statements pertaining to Hollinger securities

knowing or having reasonable grounds to know that such statements contained material

misrepresentations and omissions, including but not limited to statements regarding related party

transactions, compensation and other payments received by Hollinger officers and directors and other

false or misleading statements and omissions concerning the transactions described above.

545. As result of the defendants’ fraudulent activity, the § 12 Plaintiffs purchased Hollinger

securities that the § 12 Plaintiffs would not have purchased but for defendants’ fraud.

546. As a direct and proximate cause of defendants’ wrongful conduct, the § 12 Plaintiffs

suffered damages in connection with their respective purchases of Hollinger securities during the Class

Period.

COUNT VIII

AIDING AND ABETTING BREACH OF FIDUCIARY

DUTY WHICH INDUCED RETENTION OF HOLLINGER STOCK

(Individual And Class Claim For Aiding And Abetting

Against KPMG, Hollinger Inc., Ravelston, RMI And Argus)


herein.

548. Plaintiffs bring this Count against KPMG, Hollinger Inc., Ravelston, RMI and Argus for

aiding and abetting the breaches of fiduciary duty by the Individual Defendants.


179

549. As alleged herein, KPMG knew of the self-dealing transactions perpetrated at Hollinger

by Lord Black and the Individual Defendants, and knew, or was reckless in not knowing, that Lord Black

and other Individual Defendants were diverting part of the proceeds of the Company’s asset sales to

themselves, that the Company was paying for management services which were never provided, and that

the Company was materially misrepresenting the proceeds it received from its asset sales, and other facts,

in the Company’s public filings and public statements. Hollinger Inc. and Ravelston also knew these

facts due to their control over Hollinger, and because Lord Black owned and controlled Hollinger Inc. and

Ravelston as well as Hollinger.

550. KPMG, Hollinger Inc., Ravelston, RMI and Argus knew of the Company’s material

misrepresentations and omissions of material facts in its public filings.

551. KPMG failed to properly alert the investing public that Hollinger and the Individual

Defendants were making material misrepresentations and/or omissions when KPMG issued clean audits

of Hollinger.

552. KPMG, Hollinger Inc., Ravelston, RMI and Argus were aware of their role as part of

Hollinger’s and the Individual Defendants’ fraudulent scheme to conceal from the investing public these

improper self-dealing transactions at the time when KPMG was assisting Hollinger and the Individual

Defendants’ in perpetrating this scheme.

553. As a result of KPMG’s professional negligence, and its certification of Hollinger’s

financial statements which KPMG knew were materially false and misleading, and as a result of the

participation of Hollinger Inc. and Ravelston in the fraudulent scheme described herein, the Individual

Defendants succeeded in their fraudulent scheme, to the detriment of Hollinger shareholders.

Accordingly, Lord Black and the Individual Defendants were able to enter into the transactions in which

Hollinger sold assets to third parties, as described above, and divested millions of dollars of the proceeds

from such asset sales to themselves when these payments should have gone to Hollinger. The Individual


180

Defendants were also able to cause the Company to pay to entities affiliated with the Individual

Defendants for management services which were never provided to Hollinger.

554. Additionally, as a result of KPMG’s knowing and substantial assistance in preparing

Hollinger’s public filings which KPMG knew were materially false, misleading and incomplete in their

descriptions of the asset sales, management services agreements and related party transactions, and as a

result of Hollinger Inc.’s and Ravelston’s knowing and substantial assistance in preparing the

management services agreements, Plaintiff and other members of the Class were improperly induced to

retain their Hollinger shares based upon materially false and misleading statements and omissions.

555. By their actions, KPMG, Hollinger Inc., Ravelston, RMI and Argus knowingly

participated in, and aided and abetted, the Individual Defendants’ breaches of fiduciary duty and their

divestiture of hundreds of millions of dollars of the purchase prices from the sales of Hollinger assets.

556. As a result of these defendants’ aiding and abetting the improper actions of the Individual

Defendants, Hollinger and its shareholders have been and continue to be irreparably damaged.

557. At the time Plaintiff and other members of the Class held Hollinger stock, they did not

know of any of the false and/or misleading statements and omissions and breaches of fiduciary duty, and

relied upon the representations made by defendants in retaining such stock.

558. As a result of these defendants’ knowing participation and substantial assistance in

aiding and abetting the Individual Defendants’ breaches of fiduciary duty, Plaintiff and the Class have

suffered damages.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action, and certifying Plaintiffs as

class representatives under Rule 23 of the Federal Rules of Civil Procedure;


181

(b) Awarding compensatory damages in favor of Plaintiffs and all other Class

members against all defendants, jointly and severally, for all damages sustained as a result of defendants’

wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding extraordinary, equitable and/or injunctive relief as permitted by law

including but not limited to an order permanently enjoining the defendants from future violations of the

federal securities laws;

(d) Awarding Plaintiffs and all Class members their costs and disbursements of this

suit, including reasonable attorneys’ fees, accountants’ fees and experts’ fees; and

(e) Awarding recision and such other and further relief as may be just and proper.


JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury on all claims so triable .

Dated: September 13, 2006Respectfully submitted ,

\s\ Carol V . GildenMUCH SHELIST FREED DENENBERG

AMENT & RUBENSTEIN, P .C .Carol V. GildenKatrina Blumenkrant s191 North Wacker Drive - Suite 1800Chicago, Illinois 60606-1615Telephone: (312) 521-2000Facsimile: (312) 521-2100

Liaison Counsel for the Plaintiff Class

Jay W . EisenhoferJohn C . KairisGRANT & EISENHOFER P .A .Chase Manhattan Centre1201 No rth Market StreetWilmington , DE 19801Telephone : (302) 622-7000Facsimile: (302) 622-7100

Attorneys for Lead Plaintiff Teachers'Retirement System of Louisiana, ClassRepresentative Cardinal Mid-Cap Value Equit yPartners, L.P. and Co-Lead Counsel for thePlaintiff Class

182

Darren J . RobbinsTravis E . Downs, HIScott H . SahamLERACH COUGHLTN STOIA & ROBBINS LLP401 B, Street, Suite 1700San Diego, CA 92101Telephoner (619) 231-1058Facsimile : (619) 231-742 3

Attorneys for Plaintiff Washington Area CarpentersPension and Retirement Fund, Class RepresentativeCardinal Mid-Cap Value Equity Partners, L.P, and Co-Lead Counsel for the Plaintiff Clas s

Of Counsel :

Richard S . SchiffrinRichard A, ManiskasSCHIFFRTN & BARROWAY LLPThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004Telephone : (610) 667-7706Facsimile : (610) 667-7056

John T. DeCarloDeCARLO, CONNOR & SI~LVO533 South Fremont Avenue, 9th FloorLos Angeles, CA 90071-1706Telephone: (213) 488-4100Facsimile: (213) 488-4180

44844_4

183

CERTIFICATION OF REPRESENTATIVE PLAINTIFFPURSUANT TO FEDERAL SECURITIES LAW S

1, Eugene Fox , duly swear and say, as to the claims asserted under the federal securitieslaws, that :

R1 . I anal Managing Director of Cardinal Capital Management, L .L,C. ("Cardina l

Capital"), a registered investment advisor and the general partner of Cardinal Mid-CapValue Equity Partners, L.P. ("Cardinal"), a Delaware limited partnership with a principalplace of business in Grccnwich, Connecticut . On behalf of Cardinal, Cardinal Capitalinvests funds for qualified individuals and institutional investors in equity securities ofdomestic companies . I am authorized to make this Certification on behalf of Cardinal .

2. 1 have reviewed and authorized the filing of the Third Consolidated Amended ClassAction Complaint styled In re Hollinger International, Inc, Securities Litigation, Cons .C,A, No. 04-C-0834 (N .D . fit .) .

3 . Cardinal did not purchase the securities, exercise options or enter into any agreement thatis the subject of this action at the, direction of Cardinal's counsel (or counsel for anyplaintiff in the above .captioned Hollinger litigation) or in order to participate in anyprivate action arising under the federal securities laws.

4. Cardinal invested in Hollinger International, Inc . ("Hollinger") solely for its ownbusiness purposes .

5 . Cardinal is willing to serve as a representative party on behalf of the plaintiff class in theHollinger litigation, including providing testimony at depositions and trial, if necessary.Cardinal Intends to pursue this litigation for the best interests of all class members ,

6 . I have reviewed the records of the Cardinal transactions in the stock of Hollinger for thetime period August 13, 1999 through December 11, 2002 (the "Class Period") . Thosetransactions are as follows ,

Date of Purchase Number of Shares Price per Share

12/10/20013/27/2002

11/21/2002

810400600

$11 .10$13 .32$9.55

7. During the three-year period. preceding the date of this Certification, Cardinal has notserved as lend plai ntiff in any securities fraud class actions .

8 . Cardinal has not sought to serve as a representative party on behalf of a class in anyaction filed during the three years preceding the date of this Certification .

9. Cardinal Will not accept any payment for serving as representative party on beMif of theplaintiff class beyond the its pro rata share of any recovery, except as ordered andapproved by the Court .

I declare under penalty of perjury under the laws of the United States that the foregoing istrue and correct.

Dated ; September 12, 2006teens Fox

Managing DirectorCardinal Capital Management, L.L.C.

CERTIFICATE OF SERVICE

I, Carol V. Gilden, hereby certify that on September 13, 2006, I electronically filed

Plaintiffs Third Consolidated Amended Class Action Complaint with the Clerk of the Court

using the CMIECF system which will send notification of such filing to registered parties . I also

certify that on September 13, 2006, I served via First Class Mail the parties named below .

Isl Carol V . GildenCarol V . Gilden

The following are those who are currently on the list to receive e-mail notices for this case viathe CMIECF system :

Douglas Alan Albrittondalbritton @ freebornpeters .com

Robert M. Andalmanrandalman@sonnenschein .com [email protected]

Karl Richard Barnickolkarl .barnickol @kattenlaw .com marisa.morado @kattenlaw .com,[email protected]

William Butler Bernd tberndt@sw .com [email protected];[email protected]

Sharon M. Blaskeysblaskey@willkie .com

Lisa Maria CiprianoIcipriano@eimerstahl .com

Donald A [email protected]

Brian L. [email protected] [email protected]

Jonathan M. Cyrlukcyrluk@stetlerandduffy .com edocket@stetlerandduffy .com

Adam B. Deutschadeutsch@eimerstahl .comtlarson @eimerstahl .com;fharvey @ eimerstahl .com ;adreyer @ eimerstahl .com

Jay Stephen Dobrutsk yjdobrutsky@burkelaw .com jpowell @burkelaw .com;bmears@burkelaw .com

Cary E. Donhamcdonham@shefskylaw .com [email protected]

Travis E Downs, [email protected]

Joseph J. Duffyjduffy@stetlerandduffy .com edocket@stetlerandduffy .com;[email protected] .com

Michael Anthony [email protected] [email protected]

Nathan P. Eimerneimer@eimerstahl .com

Timothy D . [email protected]

James R. Figliulojfigliulo@fslegal .com

Michael D . Freebornmfreebom@freeboi-npeters .com

Alan Scott Gilbertagilbert@sonnenschein .com NDIL_ECF@sonnenschein .com

Veronica [email protected] ddjones@sw .com;[email protected]

Robert S. Grabemanngrabemann@mbslaw .com [email protected]

Michael Thomas Grahammgraham@fslegal .com

John F. [email protected]

Daniel T. [email protected] [email protected]

Valarie Haysvalarie.hays @usdoj .gov

Ted S . [email protected] patricia.cappuzzo@kattenlaw .com,ecfdocket@kattenlaw .com

Ian K . Hochmani h ochman @ wi ll kie . c om

Ferris J Husseinferris .hussein@kattenlaw .com

Vanessa G. Jacobsenvjacobsen@eimerstahl .com erogers@eimerstahl .com

David C . Jacobsondjacobson@sonnenschein .com cborkowski@sonnenschein .com ;[email protected]

Christine M. Johnsoncjohnson@eimerstahl .com

Stephanie D. Jonessjones @fslegal .com

Andrew George Klevornaklevorn @ eimerstahl . com

Leigh R. Laskylasky@lasky,rifkind.com

Paula Enid [email protected] central @sw .com,[email protected]

Royal B. Martinmartin@mbslaw .com of-mbs@mbslaw .com

Lisa S. MeyerImeyer@cimerstahl .com

Marvin Alan [email protected]

Gordon B . Nash, Jrgnash@gcd .com DOCKETMAIL@GCD .COM

Douglas J. [email protected]

Douglas Michael Ramseydramsey@shefskylaw .com sfdocket@shefskylaw .com

Sara Kristine Ranki [email protected]

Ronald S . Saferrsafer@schiffhardin .com edocket@schiffhardin .com

Peter A. Silvermanpsilverman@fslegal .com

David B Singerdsinger@fhslc .com

Allan T. [email protected] [email protected]

Gregory L. Stelzergstelzer@fslcgal .com

William Gibbs Sullivansullivan@mbslaw .com ef-mbs@mbslaw .com

Miki Vucic Tesij amtesija@foley .com

Stephen C. Vorissvoris@burkelaw .com

John Friedrich Zabriskiejzabr-iskie@foley .com

4

Manual Notice List

The following is the list of attorneys who will be receiving a copy of the attached filing via FirstClass Mail :

Alex J BourellyBaker Botts LLPThe Warner1299 Pennsylvannia Avenue, N .W.Washington, DC 20004-2400

John C Kairi sJay W. EisenhoferGrant & Eisenhofer1201 N. Market StreetSuite 2100Wilmington, DE 1980 1

Martin FlumenbaumPaul, Weiss, Rifkind, Wharton & Garrison LLP1285 Avenue of the AmericasNew York, NY 10019-6064

Gregory P JosephGregory P. Joseph Law Offices LLC805 Third Avenue31st FloorNew York, NY 10022

Sandra M Lipsma nGregory P Joseph Law Offices LLC805 Third AvenueNew York, NY 10022

Richard A. RothmanWeil, Gotshal & Manges767 Fifth AvenueNew York, NY 10153

Martin L Seide lCadwalader, Wickersham and TaftOne World Financial CenterNew York, NY 10281

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Ira Lee SorkinDonald A. CorbettDickstein Shapiro Morin & Oshinsky LLP1177 Avenue of the AmericasNew York, NY 10036

Marc A Topa zSchiffrin & Barroway, LLP280 King of Prussia RoadRadnor, PA 19087