Probe of weeklies heats up

Teams of prosecutors are working through the weekend at the federal courthouse downtown, hoping to wrap up their collection of sworn depositions in an investigation into whether the country’s two largest alternative newspaper chains violated antitrust laws when they agreed to close competing weeklies in Los Angeles and Cleveland.

Federal, state and local prosecutors are jointly probing the deal struck in October in which Phoenix-based New Times Media agreed to shut down its 6-year-old Los Angeles newspaper in exchange for more than $8 million, surrendering its Southern California niche to the LA Weekly, which is owned by New York-based Village Voice Media. As part of the arrangement, Village Voice Media closed its Cleveland Free Times in return for a substantially smaller payment from New Times, which continues to publish the Cleveland Scene.

Lawyers from the U.S. Department of Justice, the California and Ohio attorneys general and the Los Angeles County district attorney’s office are examining the deal’s antitrust implications. After taking testimony under oath in Cleveland last month, they began a similar process Monday in Los Angeles, splitting into two teams to question a string of witnesses. Sources say the testimony will extend through Sunday.

If the investigation leads to the filing of an antitrust complaint, the chains might be fined or required to help restore competition to the alternative press in the two cities.

Don T. Hibner Jr., an antitrust specialist in the Los Angeles law firm of Sheppard, Mullin, Richter & Hampton, called the weekend sessions “pretty unusual but consistent with the rapid pace of this investigation, as we have seen it develop. It shows not only a great deal of extra effort on the prosecutors’ part, but also that they think this is a serious matter. It also suggests that they don’t think they can let the body get too cold, if they’re going to fashion a remedy that restores competition to these markets.”

Sources close to the investigation called it “a very busy week” and said the testimony collected so far “has been quite interesting.” Among the onetime LA Weekly employees deposed so far have been former publisher Michael Sigmund, former production manager Paul Davis and former columnist Mark Haefele. Former classified advertising director Jim Kaplan is set to testify today. The prosecutors also have taken an affidavit from another former Weekly publisher, Judy Proffer, and contacted a variety of advertisers affected by the deal, including Terry Heinz & Associates, an advertising agency that places national film and music ads.

According to sources familiar with the testimony given so far, prosecutors were particularly interested to learn that before New Times’ expansion into Los Angeles, the Weekly customarily raised its advertising rates about 6% a year. But during the six years the two chains competed head-to-head in Southern California, the Weekly raised its rates far less frequently and in smaller percentages. Witnesses with firsthand knowledge of the competition testified that the Weekly restrained itself because of New Times’ presence in the Los Angeles market.

Those facts emerged during a Tuesday deposition during which Justice Department lawyers Maurice E. Stucke and Matthew Bester and Deputy Dist. Atty. Kathleen Tuttle were joined by economist Duncan Cameron, managing director of the antitrust division of the Law & Economics Consulting Group. As its name suggests, it is a private firm that provides advice and expert testimony to antitrust litigants. (A third federal prosecutor, Carol Bell, reportedly took the lead role for the second prosecutorial team.)

Hibner, who has retained Cameron as an expert witness in the past, described his presence on the government’s side of the table as “very interesting. Obviously, they want an expert on the ground here. The government only retains private experts occasionally, but Duncan would be on anybody’s list of the top 10 people available on the West Coast. If they got testimony that one paper couldn’t raise prices because of the other’s presence, they would consider that very significant. That would be a good day for them.”

Sources familiar with this week’s depositions said the prosecutors and Cameron repeatedly returned to questions concerning the nature of alternative journalism and the impact of New Times’ closure on local news coverage. Many of the prosecutors’ questions, said one witness who asked not to be identified, “seemed to be driven by their belief that unlike a mainstream daily newspaper, an alternative weekly is suffused throughout with a particular point of view. They seem to believe that losing an alternative paper is a greater hardship to the community in that way than losing a mainstream daily. New Times had what I’d guess you’d call a neo-conservative or populist viewpoint, and that’s just gone from the scene now.”

According to Haefele, who said he testified for four hours on Monday, “I was asked whether I believed this deal and the loss of vigorous competition between the two weeklies had caused a diminution of local news and less news-heavy content for the Weekly. I said that it had. I also testified about stories on which we competed heavily with New Times, including Rampart and the Staples controversy, where they beat us.”

According to Hibner, the prosecutors’ questions about the deal’s financial and journalistic impact represent “a tightening of the noose. They’re eliciting testimony that narrows the confines of the relevant market to that occupied only by alternative weeklies. They’re not going to allow these potential defendants to argue that Los Angeles is a huge market in which, say, The Times and all the TV stations still exist. The government is saying, ‘No, your closest competitor, the one that made you jump and decide things was something called an alternative weekly.’ ”

The government wasn’t the only party to bring its lawyers to town this week. On Monday, Village Voice Media Chief Executive David Schneiderman, accompanied by an attorney from the firm hired to represent the chain, held “confidential” meetings with editors and advertising representatives at the LA Weekly. According to sources familiar with the sessions, Schneiderman and Melanie Sabo, an attorney with the Washington, D.C., office of the Seattle-based firm of Preston, Gates & Ellis, tried to reassure employees that the potential for prosecution or substantial fines was low. Still, Sabo represents a high-powered -- and high-priced -- firm whose clients include the Bill and Melinda Gates Foundation and the Margaret Thatcher Foundation. One of its partners is William H. Neukom, who as general counsel for Microsoft, lead the software giant’s defense against federal and state antitrust charges.

Once the prosecutors complete their work in Los Angeles, Hibner said, “I would expect them to sit down and decide whether anything they’ve learned warrants criminal indictment. At the same time, they’ll draft a civil complaint that could be filed in all three jurisdictions. Then, they’ll go to the potential defendants and say, ‘Take a look. This is what we plan for you. Let’s talk.’ At that point, they’ll propose a consent order that would provide injunctive relief.”

What might that be? The government could force the chains to assist in the start-up of some new alternative news weeklies.

One clue to what may be on the government’s mind can be found in an article titled “Antitrust and the Marketplace of Ideas,” which Stucke and Allen Grunes wrote for the Antitrust Law Journal. In it, they defined a marketplace of ideas as “a sphere in which intangible ideas compete for acceptance ... based on the theory that truth prevails in the widest possible dissemination of information from diverse and antagonistic sources.”