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“We didn’t have a newspaper circulation overstatement budgeted,” Guy H. Kerr, the senior vice president of law and government and board secretary of Belo Corp. says dryly about his legal department’s expenses this year. Kerr’s sense of humor could prove handy over the next few months, as he steers his company through a legal thicket that has grown up around overstated circulation figures promulgated by The Dallas Morning News, Belo’s subsidiary and flagship daily newspaper. The Securities and Exchange Commission and the Dallas County District Attorney’s Office are reviewing documents related to the News’ overstated circulation numbers. As a result of the circulation overstatement, the company reported a charge of $23.5 million in its 2004 annual report, $19.6 million to compensate advertisers and $3.9 million in related costs. Not awaiting the outcome of the government investigations, shareholders are already crying foul. Partners at Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego represent several Belo shareholders who have filed a class action against the company alleging that it violated securities laws with its circulation overstatements. Todd Fener, et al. v. Belo Corp., et al. was filed in Dallas federal court. Specifically, in that complaint the plaintiffs allege the company fraudulently induced advertisers to pay higher rates, based on overstated circulation figures. Subsequently, the company reported to investors “improper recognition of revenues,” because it had to give advertisers back money, once the overstated circulation figures were disclosed, the plaintiffs allege. Faced with that litigation and the inquiries from the SEC and the Dallas County DA’s office, Belo executives have appeared recently to be attempting to address the circulation overstatement issues directly and publicly. The Belo board of directors’ audit committee hired the Houston office of Seyfarth Shaw, led by partner Camille A. Olson, to conduct an independent investigation of the News’ circulation practices. As a result of Seyfarth Shaw’s review, Belo announced in August 2004 that the Morning News had overstated its circulation figures by as much as 11 percent. On May 18, chairman, CEO and president Robert W. Decherd released a long letter responding to allegations in the shareholders’ complaint, even before the company filed a response in court. Kerr says the company has hired the Dallas office of Gibson Dunn & Crutcher, led by partner Martin McNamara, to represent the company before the SEC and in the shareholder litigation. McNamara, who previously served as an assistant U.S. attorney in the Southern District of New York Criminal Division, says he is also responding for Belo to the Dallas County DA’s inquiries. INK IN HIS BLOOD At this challenging moment in Belo’s more than 120-year history, the significance of Kerr, who has represented the company for 25 years, seems obvious to Decherd. “He is our senior legal officer, and he is coordinating the company’s defense. I have the utmost confidence in him. He is the man in any circumstance to count on and particularly one where there are unfounded assertions. You want a person with character and integrity at your side,” Decherd says of Kerr. At 52, Kerr sits on a seven-member management committee that meets most Tuesdays and “runs Belo,” Decherd says. Kerr also directly oversees 20 employees in the company’s legal, audit and governmental relations departments, including four lawyers. Kerr started his relationship with Dallas-based Belo decades ago as a 1978 Southern Methodist University School of Law graduate and young associate on the corporate side with Locke, Purnell, Boren, Laney & Neely — the predecessor firm to Locke Liddell & Sapp — where he worked on some of his first assignments for Belo. The Dallas Morning News‘ parent company had used the firm since the early 1920s. But Kerr had some newspaper experience, even before he began representing Belo. His grandfather, Kerr says, owned a newspaper in Purcell, Okla. As a youth, Kerr, a Dallas native, was a paperboy who delivered The Dallas Morning News. At the Locke firm, Kerr represented Belo and other clients. In 1984, he became a partner, eventually heading the firm’s corporate and securities practice group and serving on its management committee for six years. When Kerr left the firm in 2000 to become Belo’s general counsel, his departure surprised partners. “We viewed him absolutely as a lifer,” says Don Glendenning, managing partner of Locke Liddell’s Dallas office. Glendenning says in hindsight Kerr’s move to Belo made perfect sense, given how closely he had worked with the company. Decherd says Kerr has worked on every acquisition the company has made since 1983. Decherd hired Kerr as GC when Belo’s former senior vice president for legal and government affairs, Michael J. McCarthy, indicated he wanted to move on. McCarthy had left the Washington, D.C., area some 15 years earlier to join Belo and, Decherd says, McCarthy wanted to return to the East Coast. He’s now a partner in Wiley Rein & Fielding in D.C. To evaluate Kerr’s qualifications, Decherd says, he didn’t need a “sum” or even an interview, because the Locke partner had worked so closely with the company. “This truly was a move across town. He didn’t have to meet anybody,” Decherd recalls. Kerr also possessed the critical understanding, his boss says, that Belo, as a media company, has multiple purposes, as a business and as an institution of journalism. For roughly a year after Kerr joined Belo, McCarthy stayed on to ease the transition. Once McCarthy made the move to Wiley Rein, Kerr started to broaden his responsibilities at Belo. “He quickly stepped into the role that Mike had evolved over a longer period of time,” Decherd says. In 2003, the company tapped Russ Coleman, Kerr’s former partner at Locke Liddell, to assume the general counsel post left open as Kerr became senior vice president of law and government and board secretary of Belo. Kerr moved up to oversee the audit and lobbying departments, in addition to his responsibilities over the legal department. Coleman, a vice president, says he “had a comfort level with Guy,” and that factored into his decision to accept the Belo in-house position. Kerr’s compensation has expanded with his responsibilities. According to the 2004 proxy statement, the last one listing Kerr’s compensation, he earned roughly $505,000 in salary, other compensation and bonuses that year. Kerr confirms that his pay did not decline this year, but, because of a one-time bonus for another executive, he was not ranked among the five highest-paid executives at Belo and therefore did not have his compensation appear in the 2005 proxy. At Belo, Coleman says, Kerr effectively delegates. “I don’t think he could succeed in his current position if he [didn't],” Coleman says. For instance, David Starr, the deputy general counsel, reports to Coleman and then Coleman reports to Kerr. MEDIA MAN With 26 media companies, television stations, cable stations, newspapers and Web sites across the country, serving some 30 million consumers, according to the company’s Web site, Belo has no shortage of work for lawyers. With the standard media company need for pre-publication and pre-broadcast reviews on certain stories, as well as the garden variety libel cases, the company hires law firms all over the country to represent its various entities. As a Fortune 1,000 company — with a reported $1.5 billion in annual revenues and 7,600 employees — Belo has corporate matters to match that size. The company spent a good part of its legal expenses last year — Kerr won’t specify exactly how much — on compliance costs related to the Sarbanes-Oxley Corporate Fraud and Accountability Act of 2002. Starr, who as deputy general counsel manages the company’s litigation, says he has access to Kerr, who always makes himself available. Starr also sees Kerr at regular weekly staff meetings. Starr notes that Kerr and Coleman give him breathing room to get the job done on his own. Starr, who previously worked for American Airlines’ parent company, Fort Worth-based AMR Corp., and its subsidiaries, says Kerr has noticeable leadership traits. “Every time I’ve seen him interact with anyone, he takes the time to listen,” Starr says. Outside the legal department, Kerr also gets favorable reviews from Belo executives. Bob Mong, the editor of the News, says Kerr’s legal department is “very responsive.” But Mong, as with the editors and broadcasters at other Belo entities, often works directly with outside lawyers whom Kerr has hired. Since Belo has only five in-house lawyers, the company relies heavily on outside counsel, Starr and Coleman confirm, a necessity borne out of the geographically diverse markets Belo serves. Often Coleman says, newspapers and television stations have a relationship with outside counsel that’s independent of the mother corporation for long periods. Starr, for instance, will receive weekly reports from outside counsel, but editors feel free to call those outside lawyers directly, without Starr’s intervention. The circulation overstatement matters have consumed a large chunk of in-house and outside legal resources, Kerr says, but he declines to provide dollar amounts. He also stresses that the circulation issues — while generating plenty of controversial press for the media company — are not as all-consuming as they might seem from the outside. “While this is a significant matter, our company is a whole lot more than this matter,” Kerr says about the circulation woes. Kerr adamantly rejects allegations in the Fener complaint that Belo executives misled investors, although he and the four other company executives interviewed for this article decline to discuss litigation and its subject matter in detail. BELO FIGHTS BACK For Kerr, however, the Fener shareholder suit cannot help but seem personal since the plaintiffs have attacked his boss and his subordinate. Specifically, the Fener complaint names CEO Decherd as a defendant and alleges he personally misled investors. It also asserts allegations regarding deputy GC Starr. The Fener plaintiffs allege in their complaint that Decherd personally received a letter and one audiotape in January 2003 from a News distributor, who was contracted to deliver the newspaper. The plaintiffs allege that, in the letter, the unnamed distributor told Decherd that the audiotape the distributor had sent was one of several he had recorded of News circulation managers instructing him to lie about the number of papers he had sold. The distributor stated that he had refused to lie and therefore was worried about his contract with Belo. The Fener plaintiffs also allege in their complaint that Decherd sold some $3.3 million in Belo stock, knowing of the purported plan to overstate the newspaper’s circulation and prior to disclosing the circulation woes publicly. “We believe the lawsuit is without merit and we intend to defend vigorously against the claims asserted,” Decherd wrote in a written statement to employees, which was also released over the PR Newswire on May 18. Henry Rosen, a partner in Lerach Coughlin in San Diego who filed Fener, says “it is highly unusual” for a company executive to respond in the press with such a lengthy letter before the company files a response to the complaint in court. The letter, which Decherd says he conferred about with Kerr before dispatching, states that Belo will seek a dismissal of the Fener claims. In the same letter, Decherd also addressed directly the allegation “that I knew that The Morning News had been overstating circulation figures for more than a year before the public announcement of the circulation overstatement.” “Here’s what actually happened,” Decherd wrote. In January 2003, I received a letter and a tape from an independent contractor for The Morning News working in an area outside the Dallas metropolitan market. The letter said that the contractor’s supervisor had told the contractor to lie about the number of papers the contractor had sold. I immediately referred these materials to Belo’s Legal Department, which coordinated a thorough investigation by Belo’s corporate Human Resources Department and Morning News executives, including interviews of dozens of Morning News employees and contractors. This investigation was intended to determine what had happened with the one contractor and whether there were similar situations with other contractors. Based on the results of this inquiry, several circulation managers were terminated. The information in the contractor letter dealt only with the one contractor, and the resultant investigation from January 2003 to February 2003 made us certain at that time that the issues raised had been comprehensively addressed and there wasn’t a larger problem with respect to circulation at The Morning News. The allegations raised by this independent contractor and our responses were reviewed again and fully considered last August and September as part of the independent investigation of the circulation overstatement performed by a national law firm [Seyfarth Shaw] under the direction of the Audit Committee of Belo’s Board of Directors. The 2004 independent investigation did not dispute or contradict the 2003 internal report on this matter. Decherd also wrote that his stock sales in 2003 and 2004 “were part of a formal trading plan” that was “pre-scheduled” and “administered by a third-party financial institution.” About Belo’s deputy general counsel, the Fener plaintiffs allege in their complaint that on Jan. 16, 2003, Starr wrote back on Decherd’s behalf to the contracted distributor who had complained about circulation managers allegedly insisting that he lie about his sales. In Starr’s letter, as alleged in the complaint, the Belo deputy general counsel told the distributor that the News was investigating the matter but also asked that the distributor to send him copies of all the other audiotapes he had recorded of the circulation manager. As alleged in the complaint, Starr followed up that letter to the distributor with repeated phone calls. The complaint alleges that the phone calls by Starr and others — the complaint is not clear about who exactly made which calls — were intended to persuade the distributor to give all the audiotapes to the company. Starr and other Belo executives, as alleged in the complaint, “were in a frenzy to get a hold of and destroy permanently this damning evidence that threatened to expose their whole scheme… .” The complaint quotes the distributor as recalling the Belo executives saying things such as: “Do you know what this will do to The Morning News?” and “ We can’t let those tapes out.” Not surprisingly, Starr strongly objects to the allegations in the complaint, particularly as they relate to him. He confirms that he did send a letter, which “basically asked for [the distributor's] cooperation in our investigation of his allegation.” But Starr says, “I deny that I said any of the other things that were alleged to be said to the distributor by me and others. That’s just nonsense.” Asked if in hindsight and given the allegations now asserted in Fener, he would have instructed his legal department to respond any differently when the unnamed distributor sent Decherd those tapes, Kerr expresses unflagging confidence. “Knowing what we did at the time, we took the right actions,” Kerr says in an e-mail. Kerr does not believe that the Dallas district attorney is gearing up to prosecute his company or its executives. “They will ask themselves whether there is any criminal violation, and our expectation is the answer will be no,” Kerr says. Rachel Horton, a spokeswoman for the Dallas County DA’s office, declines to comment on the Belo investigation. “We don’t comment about any matter pending before the grand jury,” Horton says. The SEC’s interest, which is part of a broader review the federal agency is conducting of the overstated circulation numbers of several daily newspapers nationwide, has so far just been a request for documents, Kerr says. John Heine, a spokesman for the SEC, declines comment. Overall, Kerr doesn’t project the image of a man worried about his company’s ethics. “I call it the sleep-at-night factor,” says Kerr, whose own ethics recently garnered praise. His alma mater and the Texas General Counsel Forum jointly honored Kerr last October by presenting him with the Robert H. Dedman Award for Ethics and Law. “Can I sleep at night? I can, because I am surrounded by people with high integrity. Doing the right thing is expected here. It’s not a choice. That’s a very important element for me,” the Belo senior vice president says. For Decherd, Kerr’s length of service with the company makes the CEO rest easier about his conducting Belo’s defense against the circulation-related allegations. Notes Decherd, “To have had so many experiences in the past 25 years with this man, that gives me confidence that our responses will true up.”

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