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Sinclair Broadcast Group Inc.’s stock recovered more than 12 percent of its value Wednesday after the company announced it would not run a controversial documentary about Sen. John Kerry. That a programming decision could bolster a company’s market capitalization by $85 million and reverse a two-week plunge in its stock price shows just how volatile it is to mix politics and investment. It also has exposed Sinclair to allegations of using its airwaves to benefit President Bush and of engaging in poor corporate governance. The result has been threats of shareholder litigation and calls for advertiser boycotts. “You have someone running the company for his own personal political agenda rather than for the interest of shareholders,” said James Glickenhaus, general partner at Glickenhaus & Co., an investment adviser with clients who hold Sinclair stock. Sinclair general counsel Barry Faber did not return a call for comment. But in a statement issued late Tuesday, Sinclair chairman David D. Smith suggested the public has misunderstood the company’s plans for the documentary, which focuses on allegations from Vietnam prisoners of war that Kerry’s anti-war comments after returning from the conflict led to their abuse in prison. Smith said Sinclair did not intend to run the two-hour documentary during prime time, as has been widely reported. Instead it will air on Friday a one-hour news special focusing on the allegations raised in the movie. The event will be unscripted and has yet to be videotaped, he said. Smith also said his staff has been subject to personal attacks of the “vilest nature,” as well as demands for advertisers to boycott and shareholders to sell their stock. “We cannot in a free America yield to the misguided attempts by a small but vocal minority to influence behavior and trample on the First Amendment rights of those with whom they might not agree,” he said. The statement appeared to temper criticism of the company, which had reached heights usually reserved for corporate wrongdoers such as Enron Corp. or WorldCom Inc. But it is unlikely to appease some investors. William S. Lerach, a partner at Lerach Coughlin Stoia Geller Rudman & Robbins and a noted securities lawyer, set the groundwork for litigation on Tuesday when he sent a so-called demand letter to the company. The document is the first step toward filing a derivative lawsuit, which is an action a shareholder brings against a company’s directors, top executives or other shareholders for a failure by management. In the letter, Lerach said he was writing on behalf of a New York pension fund and other investors complaining about the company’s “dismal” performance and its inability to keep pace with the Nasdaq and broadcasting and cable television indexes. The company’s stock price was down as much as 58 percent this year, before recovering slightly Wednesday. Lerach cites a series of stock sales in December and January by Sinclair insiders, including by vice president Frederick G. Smith, director Robert Smith and vice president J. Duncan Smith. All these sales occurred before the company’s stock plunged. The lawyer demanded that Sinclair sue the three for breach of their fiduciary duties, recover damages and force them to forfeit profits from the transaction. Lerach wrote that the controversy over the Kerry documentary has only made the company’s financial plight even worse. “Our clients are more interested in the success of the company than they are in the political views of Sinclair’s executives or board of directors, and we are extremely concerned at the firestorm Sinclair has ignited,” he wrote. The attorney concludes by describing the devotion of air time for the documentary to be a “reckless use” of company assets, and he questions why Sinclair would expose itself to advertiser boycotts and legal fees. Despite the political combustibility of the case, corporate law experts said Lerach and other plaintiffs’ lawyers could have a tough time prevailing against Sinclair. Charles M. Elson, a law professor at the University of Delaware, said an executive cannot put politics ahead of a company’s financial success. “Your obligation is clearly to maximize shareholder value,” he said. “Your political leanings should have no influence on it.” But turning that generally accepted perspective into a suit against Sinclair may be difficult. Media executives necessarily make decisions about what kind of content to air, which makes second-guessing those decisions in court problematic, Elson said. Under the so-called business judgment rule, decisions by a company’s management and board members are protected from this sort of retrospective scrutiny. The company must show only that it made an informed decision, that it had a legitimate belief that its action would benefit shareholders and that the officials were not acting for their own benefit rather than for the company’s benefit. Experts said Lerach appears to be trying to overcome these business judgment protections by citing the stock sales by Sinclair executives. The implication is that the insiders knew a year ago that the company would be active in the electoral campaign, which could hurt the stock price. Experts said that would be tough to prove because there is such a time lag between the sales and the documentary film controversy. Lawrence Hamermesh, a professor at Widener University School of Law in Delaware, said the chief risk to Sinclair is if an executive were to come out and say that he wanted to use the stations to influence the election regardless of the effect on the stock price. “In the absence of that type of clarity, it is a tough case to win,” he said. Less difficult may be to force changes to how Sinclair is governed. Sinclair is a public company, though it is largely controlled by one family whose members have half of the board seats and the top three management positions. David Smith is chairman, president and chief executive officer. Glickenhaus said one goal of any litigation against Sinclair would be to force the company to add independent directors to its board and to lessen the influence of the Smith family over the company. “The way they are acting is ridiculous,” he said. Copyright �2004 TDD, LLC. All rights reserved.

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