Image: Rupert Murdoch
Carl Court  /  AFP - Getty Images
News Corp. Chief Rupert Murdoch in London on Wednesday.
By Michael Isikoff National investigative correspondent
NBC News
updated 7/21/2011 8:04:08 PM ET 2011-07-22T00:04:08

Justice Department prosecutors are reviewing allegations that News Corp.’s advertising arm repeatedly hacked into the computers of a competitor in the United States as part of an effort to steal the rival firm’s business, according to a lawyer for the company.

Bill Isaacson, the lawyer for Floorgraphics, a New Jersey-based advertising firm, told NBC News he was contacted this week by two federal prosecutors and an FBI agent based in New York seeking information about claims that the firm’s computers were hacked by News America Marketing, the advertising division of Rupert Murdoch’s News Corp., seven years ago.

The allegations were first reported to the FBI in 2004 and prompted investigations at the time by the bureau, the Secret Service and the New Jersey Division of Criminal Justice, according to documents obtained by NBC News and congressional correspondence.

While never prosecuted, the claims became a key part of a civil lawsuit that Floorgraphics filed against News America. The case was resolved six days into a 2009 trial, when News America agreed to buy Floorgraphics' assets for $29.5 million as part of an out-of-court settlement.

The renewed interested in the incident appears to be part of a broader Justice Department probe into News Corp. ordered last week by Attorney General Eric Holder in the wake of disclosures of rampant phone hacking by reporters at the News of the World, the now-shuttered News Corp. newspaper in London. The claim made by Floorgraphics involves alleged computer crimes, not phone hacking, and is the only such allegation that has surfaced against News Corp. in the United States.

Seeking a 'jurisdictional hook'
“They were clearly looking at phone hacking” allegations that have been made against News Corp. in Great Britain and they wanted to see if they could find a “jurisdictional hook” for similar conduct inside the U.S, Isaacson said of his conversation with the federal prosecutor and FBI agent.

Ellen Davis, a spokeswoman for the U.S. Attorney’s Office in New York, declined comment.

Asked about the renewed interest from federal prosecutors and whether the company has been contacted about the matter, Suzanne Halpin, a spokeswoman for News America, declined to comment. She said that the firm “takes violations of our company’s business standards very seriously. News America Marketing and Floorgraphics fully resolved the civil proceeding between the two companies in 2009. The New Jersey Division of Criminal Justice filed no charges in this matter.”

The inquiry into Floorgraphics could pose a problem for another of Murdoch’s top newspaper executives: Paul Carlucci, the publisher of the New York Post. Carlucci also has been the longtime chairman and chief executive of News America and has been accused in three lawsuits of creating a cut-throat competitive culture at the company, including showing his employees a scene from the movie “The Untouchables” in which the mobster Al Capone crushes a rival’s head with a baseball bat.

Carlucci has denied the incident. Asked if Carlucci had any knowledge of the hacking of Floorgraphics’ computers, company spokeswoman Halpin said via email: “Certainly not. No one at News America Marketing had any knowledge of the alleged incident until the claim was made that it had happened.”

Legal experts say it could prove difficult for prosecutors to make a case against News Corp. based on the Floorgraphics allegations alone, since the standard five-year statute of limitations for most federal computer crimes has long since expired.

But legal sources say that the interest in the case appeared to be part of an effort to determine if there is a more extensive pattern of criminal conduct at News Corp. — a line of inquiry that New Jersey’s Democratic Sen. Frank Lautenberg asked be pursued in a letter this week to Holder and FBI Director Robert Mueller.

“As the Department of Justice and FBI examine the recent hacking allegations involving News Corp. and its subsidiaries more closely, I wanted to make sure that you were fully aware of the case of Floorgraphics and News America, as it may be relevant to your current investigation,” Lautenberg wrote.

The start-up and the giant
Floorgraphics was a relatively small start-up firm based in Princeton, N.J., at the time that the computer hacking allegations arose. The firm specialized in creating on-floor advertising displays at grocery store chains such as Safeway — a line of business that put it in direct competition with News America’s own in-store ad business.

Testifying in another civil case two years ago, George Rebh, one of the two brothers who owned Floorgraphics, described a 1999 lunch with Carlucci in which the News America executive allegedly threatened to “destroy” his company.

According to the company’s lawsuit, News America that year launched a “deliberate and malicious” campaign to do that by, among other actions, threatening retailers who did business with Floorgraphics, creating “confusion” in the marketplace by “spreading rumors” that it was about to go out of business and “breaking into” the firm’s password- protected computer system to acquire information about its past and future business contracts.

Read more reporting by Michael Isikoff in 'The Isikoff Files'

According to a forensic report that a computer security firm prepared for Floorgraphics as part of its civil case against News America, the security breach was traced to the IP address of a News America computer.

The hacker gained unauthorized access on 13 different occasions between Oct. 6, 2003 and Jan. 13, 2004, viewing floor ads that Floorgraphics had installed in retail customers’ stores as well as “images, instructions and schedules for ads it was preparing to install in the coming months,” according to the report.

FBI agents originally visited Floorgraphics’ offices to examine its computers in early 2004 — and the case was initially assigned to a prosecutor working for Chris Christie, then the U.S. attorney in New Jersey and now the state’s governor. But it’s unclear how far it was pursued; a company source told NBC that the FBI agent assigned to the matter later told the firm that agents were too busy at the time working on security for the 2004 Republican convention in New Jersey.

But the matter generated interest from members of Congress: Both New Jersey senators at the time, Lautenberg and then-Sen. Jon Corzine, wrote letters to the Justice Department asking that an investigation be pursued, as did Democratic Rep. Rush Holt, who represented Floorgraphics.

When the case went to trial, News America’s lawyer, Lee Abrams, did not dispute the hacking allegation. Instead, he told the jurors in his opening statement that “some person” gained entry to the website of Floorgraphics “through a firewall at News America Marketing headquarters,” adding “we don’t know who did the access.”

While confirming that “someone using a News America Marketing computer address” accessed Floorgraphics’ password protected computers, News America spokeswoman Halpin told NBC that “this site was available to hundreds, if not thousands, of Floorgraphics retailers, representatives of consumer packaged goods companies and Floorgraphics employees. There is considerable employee movement within this industry, and we believe it was someone with an authorized password. News America Marketing condemned this conduct, which is in violation of the standard of our company.”

Whistleblower testifies
The trial also featured testimony by Robert Emmel, a former News America employee turned whistleblower who has turned over voluminous material about alleged anti-competitive behavior by the firm to U.S. Senate and federal investigators. Shortly after the trial began, News America and Floorgraphics entered into a settlement agreement that included a $29.5 million payment to the New Jersey firm’s owners as well as the purchase of Floorgraphics’ assets. The settlement also included a “non-disparagement” clause that prevents Floorgraphics’ principals from saying anything that could be perceived as critical of News America.

In her statement to NBC, Halpin said of the settlement: “Over the years, Floorgraphics approached News America Marketing about buying the company, including prior to the lawsuit. In fact, News America Marketing paid no money in any settlement. Rather, News America Marketing bought Floorgraphics’ assets and Floorgraphics dismissed its case.”

The lawsuit wasn’t the only one that News America has settled. On the eve of trial last year, News America agreed to pay $500 million to Valassis Communications, another advertising company that accused it of anti-competitive behavior. In a statement at the time, Chase Carey, News Corp.’s deputy chairman, said: “It has become evident to our legal advisers from pre-trial proceedings over the past couple of weeks that significant risks were developing in presenting this case to a jury.”

This year, one day into a civil trial, News America agreed to pay $125 million to Insignia Systems, another rival firm that accused it of violating anti-trust laws and engaging in anti-competitive behavior.

Although the Valassis and Insignia cases involved similar claims of anti-competitive behavior, they did not involve allegations of computer hacking.

© 2013  Reprints

Video: Questions over James Murdoch’s testimony

  1. Closed captioning of: Questions over James Murdoch’s testimony

    >>> rupert murdoch 's son james is now being accused of not telling the truth during a key part of his testimony to parliament tuesday. during tuesday's testimony, james murdoch said he was never told about a vital email suggesting reporter neville thur elback was involved in phone hacking. but today, collin miler, editor of "news of the world" just before it shut down and tom crone, the paper's former head of legal affairs , said they had told murdoch of the email which included transcripts of hacked voicemails. in a joint statement, they said --

    >>> news corp . then issued this statement. james murdoch stands by his testimony to the select committee . the committee chairman may ask james murdoch to appear again before parliament to clear up that matter. this cartoon appeared in today's edition of murdoch 's british newspaper "the times," under the word "priorities." the cartoon shows a group of starving so mallian children with one of them saying, i've had a bellyful of phone hacking. the cartoon provoked a storm of criticism on twitter. the bbc's robert rea tweeted, disgraceful. implies focusing on corruption allows famine to go unchecked. npr's louisa lim said it's crude, tasteless, and comes off as pro murdoch propaganda. and on this side of the ocean, it seems like the united states is indeed investigating claims of news corp . repeatedly hacking one of its rivals.

    >>> joining me now, michael isikoff . michael, what is the latest in terms of the investigation that's going on here in the states?

    >> well, the new development is this company in new jersey, floor graphics, which is an advertising firm that does floor graphics for safeway and stores like that, had been a rival of news america , which was the advertising division of news corp . and back in 2003 and 2004 , it discovered that its password protected computer system had been hacked and traced it to an ip address at news america , its competitor. they reported this to the fbi at the time, to the u.s. attorney 's office, then headed by chris christie in new jersey, and the new jersey state police . nothing came of those. but these allegations were a central part of a lawsuit that floor graphics filed against news america , and that was settled with a $29 million payment by news america to the owners of floor graphics in 2009 . what happened this week is the lawyer for floor graphics gets contacted by two prosecutors at the u.s. attorney 's office out of the southern district of new york , and an fbi agent, asking about the details of that computer hacking incident. it was clearly related to this broader inquiry of news corp . that was ordered last week by attorney general holder, and it's the first sign of a tangible, specific allegation of hacking in the united states that's being investigated by the justice department .

    >> and so where -- news of america , who is in that entity? who would be exposed in this?

    >> the chairman and ceo is a man by the name of paul carlucci, who is the publisher of "the new york post." he was at news of america , and he was promoted to the job of "new york post" editor in 2005 . after this incident had taken place.

    >> so here is an operation that may have engaged in this kind of activity just in its operation of an advertising business. when you move over into the operations of "the new york post," there could be even more interesting ways as they have discovered in london in the newspapers to exploit that kind of thing.

    >> well, could be. but let's be clear. we don't have any evidence of that. and i should also point out that it would be very hard to see how the feds could make a case about this particular allegation alone at this time, because the statute of limitations has expired. there's a five-year statute of limitations on computer crime . but if it's part of a broader pattern of conduct, which is what lawyers suspect, the fbi and the prosecutors are trying to look at here, is there this broader pattern, if so, then this could become part of that.

    >> and big surprise, a very, very sharp contradiction in james murdoch 's testimony plays out today. and the murdoch response was basically no response at all.

    >> right. you know, the interesting character to watch there is tom crone, the lawyer. he's made clear that he's not going to be the fall guy here. and if they -- if the murdochs and news corp . try to lay everything on him, because he was the chief lawyer for "news of the world," he's not going to sit idly by. so if the brits are looking for a john dean character in all this, i would think that tom crone is the guy to watch, and the statement today contradicting james murdoch 's testimony about that email is the first sign that he may in fact be willing to go there.

    >> nbc news national investigative correspondent michael isikoff . thank you for joining me tonight, michael.

    >> thank you, lawrence.


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