An ongoing newspaper industry scandal in which some well-known dailies falsified circulation figures broadened on Wednesday with the unveiling of criminal charges against three former employees of the Tribune Company.
The federal government arrested three former mid-level circulation executives for Newsday, a daily newspaper based in Long Island, N.Y., and the Spanish-language daily Hoy for conspiring to commit fraud, and other crimes.
Newsday is a Pulitzer-winning tabloid that, before the circulation scandal, had been among the nation's 10 largest newspapers. It has long staked a claim as a quality daily in the shadow of the New York Times. Hoy, Tribune's foray into the Latino market, is based in Queens, N.Y., and published daily editions in New York, Los Angeles and Chicago.
Last year, the Chicago-based Tribune Co. acknowledged that circulation levels had been inflated by as much as 20 percent at Newsday, and as much as 50 percent for daily sales of Hoy. Circulation for the two papers relied on many of the same people -- including two of the defendants.
Now, for the first time, the federal government says the business models for Newsday and Hoy were based on criminal fraud from 2002 through 2004.
Similar circulation scandals recently enveloped the Dallas Morning News, the flagship of Belo Co., and the Chicago Sun-Times. Those papers were not involved in the arrests made Wednesday.
The charges announced against the former Tribune employees -- Ed Smith, Richard Czark and Robert Garcia -- stemmed from their alleged involvement in inflating circulation numbers for the New York newspapers. Smith and Garcia were arrested in New York on Wednesday. Czark was arrested in South Carolina.
An affidavit unsealed in federal court sketched out an elaborate scheme involving phony accounting, kickbacks and the creation of sham corporations.
According to the affidavit -- filed by the U.S. Postal Inspection Service in federal court in New York City -- confidential informants told agents that Newsday distributors and delivery agents were also convinced to take part in a sophisticated deception of the Audit Bureau of Circulation, or ABC, an independent group that verifies newspaper figures by spot-checking sales. Distributors were coached by two of the defendants -- both circulation managers -- on how to lie to Tribune auditors about Hoy's circulations.
There were three deceived parties -- the Tribune Co., its advertisers and the ABC. Tribune set aside $90 million last year to compensate advertisers, whose rates are based on circulation levels. Advertisers pay significantly more to reach people who pay to receive a newspaper than those who get it for free, based on the belief the former are more likely to read the paper.
In one instance contained in the federal filing, a pair of brothers, Richard and John Faiella, started a home-delivery service in 2000 to deliver Newsday, as well as hawk it on street corners and at train stations. Richard Faiella participated in a scheme hatched by Newsday staffers to make sham purchases of newspaper copies to inflate sales.
The affidavit says Newsday reported to the Audit Bureau of Circulation that the Faiellas sold 30,000 papers daily. Newsday's internal invoices show he claimed to deliver up to 65,000 copies a day. In fact, the government says, the Faiella company never sold more than 7,000.
Richard Faiella died in 2003 and his brother John ran the company afterward. John Faiella was not named as a defendant in the charges released on Wednesday.
The affidavit cites at least six confidential sources -- several of whom are expected to plead guilty to criminal charges stemming from their participation in the circulation scams.
The federal affidavit says a confidential informant reported that defendant Ed Smith, a 30-year Newsday veteran who remained a circulation consultant after his retirement in 2002, also staged a complicated deception for visiting ABC auditors.
An ABC employee saw what was a staged version of Faiella's purported hawking program. Newsday employees recruited bogus customers to buy multiple copies of Newsday for the benefit of the observing auditor, the affidavit charges. Many of the fake customers were themselves employees of the newspapers, according to the government. And Smith repeatedly coached employees to lie to the ABC auditor, the affidavit charges.
Richard Czark, the second defendant, is a former Newsday employee who became Hoy's national circulation manager. He allegedly joined Smith in faking sales of Hoy in New Jersey, Chicago and Los Angeles, the government charges. For example, when Hoy expanded to Los Angeles in 2003, a distributor who claimed to sell 15,000 copies daily actually sold only 5,000 copies, the affidavit says.
Robert Garcia, the third defendant, was Hoy's sales manager. The federal affidavit says he participated in fraudulent schemes, including arranging for the creation of false invoices to hide kickbacks to distributors for newspapers that were reported delivered -- but never were.
The Tribune Co. and Newsday did not immediately respond to calls seeking comment.