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.
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.”
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.