News Corp phone hacking: So how high will US courts look in the chain of command?

In April 2008, the month that James Murdoch agreed secretly to pay Gordon Taylor £700,000 to settle a UK phone hacking claim, Judge David Carter in the District Court of California was asking questions about corporate responsibility—when a subsidiary of Rupert Murdoch’s News Corporation was accused of corrupt behaviour, how high in the chain of command should executives be called to account?

Why is it important? It’s significant for the US actions to be filed over telephone hacking. How high is the chain of responsibility in such cases likely to go? It’s a taste of what may come on this issue.

To date, more than 70 people have been arrested in the UK in connection with the various hacking investigations, and close to 20 people are facing criminal charges. No senior executives have lost their jobs as a consequence, other than Rebekah Brooks, former head of News International, who is herself facing criminal charges over over phone hacking and perverting the course of justice. James Murdoch, to whom she reported, has moved to an executive position in the US. But as the EchoStar case shows, the ground rules are different in the US courts. This is not to prejudge any finding. It is merely mapping the terrain for the conflict.

The context here: US satellite broadcaster EchoStar and its conditional access arm NagraStar had accused News Corp’s NDS arm of pirating its product. NDS in turn claimed that EchoStar had improperly obtained stolen emails from the hard drive of its former UK security chief Ray Adams.

In the course of the 2008 trial Judge Carter repeatedly warned counsel that senior executives on both sides had better show up to testify. Echostar chief Charlie Ergen had been the first witness. Now Carter wanted the other three leading players on the stand: “There are four individuals behind all these corporations — Peled, Murdoch, Ergen, and Kudelski.” (NDS chief exec Abe Peled, Rupert Murdoch, Ergen and Andre Kudelski of Kudelski Corporation, which owned NagraStar together with EchoStar). ‘. . . Those are horrendous allegations on both sides.’

It’s a theme he returned to, again and again. You can see the idea evolving for him. In the end he would be assuming that at least Abe Peled would be testifying, if not Rupert Murdoch. But he would be disappointed…

No. SACV 03-950 DOC  US District Court, Central District of California, Judge David O Carter presiding. (All text below comes from the transcript)

Judge Carter: You may tactically end up placing yourself in a position where there’s a certain assumption amongst jurors — and you can’t read their mind — that leadership starts at the top, and it’s hard to believe with billions and billions of dollars and this industry in flux that the top of the ladder didn’t know that.

Just as Mr. Ergen, you would argue, should have known as a leader — and his conniving that you’ve alleged in terms of revenge motive — all starts with Mr. Ergen.  And now he’s been presented, and the jury can judge that  credibility.  That side thinks it’s good; your side thinks  it’s not so good.

Without Mr. Murdoch here or Mr. Peled here, you leave yourself in the position of an argument that Rupert Murdoch on behalf of DirecTV or Mr. Peled on behalf of NDS not only knew about the thefts that took place, these 26,000 pages of documents, but the unsaid supposition is that leadership starts at the top.  And this isn’t a couple hundred there that got stolen.  This is a whole industry with two primary competitors.  And some jurors may find it  hard to believe that minimally, if it doesn’t come from  Mr. Ergen or Mr. Murdoch, it certainly comes from the  highest levels of management.

 —————

Now, I understand that we’re using these  engineers, et cetera, to speculate about where the  management decisions came.  Why didn’t you call Thomson  chip?  We can go right up the ladder to Shmoe or whatever  his name is, but we’ll never find as a practical matter if  that order was given.  You’ll never find it in a major  corporation with thousands of employees.  So it’s fair warning, because if, in fact, the  argument ensues, I don’t know that I’m going to limit that  argument.

So do you have to produce Rupert Murdoch?  Absolutely not.  Mr. Peled?  Absolutely not.  Do they ever  have to produce Mr. Kudelski?  Absolutely not.  But if they don’t, the adverse inference is so strong that your case would be over.  So Mr. Kudelski is going to be here.

————-

THE COURT:  Counsel, however you designate it, for either EchoStar or NDS, I think it’s literally tragic that you’re placing on both parties’ parts low-level engineers on the witness stand from Haifa, Israel, who don’t quite know where they got directions from in Jerusalem.

I think it’s tragic that we have this whole milieu of NDS, NagraStar — so I am fair to both sides — NagraStar, NDS, and DirecTV, and you have what you may designate a corporate representative for 30(b) and yet the gentleman doesn’t quite understand the structure.

Both of you in my humble opinion with international companies crossing international borders should have had Ergen here.  You should have had Andre Kudelski here.  You should have the gentleman from England — help me.

MR. SNYDER:  Dr. Peled.

THE COURT:  Dr. Peled, and you should have Rupert  Murdoch.  When you have alleged piracy of this type and you  have the trading and stealing of documents of this type in  those allegations, the jury has the right to hear it from the very top of these organizations that they didn’t know  about this theft or they had no knowledge of it, and they  have the right to see the person and judge their demeanor  and their credibility.  I don’t think I could have been any clearer about that by giving a warm invitation to all to testify, nor do I think I could have any more clear about the fact that sometimes jurors may assume that leadership starts at the top.

———————

THE COURT:  Can you get Dr. Peled here?  Can you get Mr. Murdoch here?  How about Andre Kudelski?  Is he going to come in here and say he never had knowledge about stealing NDS documents?  Can you get Mr. Murdoch and Mr.  Peled to say, you know, at the top of this pyramid, at the top of this structure, they had no idea about the alleged satellite piracy if it occurred? If you can’t produce somebody in court, why is this jury listening?  I don’t mean to denigrate either of you gentlemen.  You are not middle management.  You are the top of the structure, but you are the top of a limited structure.  I am getting tired of hearing about different corporations who are supposedly separate entities, and, quite frankly, there are four individuals behind all these corporations — Peled, Murdoch, Ergen, and Kudelski.

So you can divide that up, slice that with the jury  and pretend that all these are separate entitles, but the  shares flow, and the ownership flows, and finally they are  publicly held companies.  That’s another reason why the  consumer has the right to know it’s a publicly-held company.

————————————

– In our society, and generally speaking, this  concept of plausibility/deniability has grown up, where the  top of these various institutions are somewhat insulated by those who work in different capacities, who, in a sense make the everyday decisions and oftentimes end up or sometimes end up in court.

It’s a difficult position to foresee, but with the allegations involved in this rather small competitive market, that I may be approached four weeks from now by EchoStar, wishing to argue that not only is this a satellite piracy, but this has to have occurred at the highest levels  of NDS’s management structure.  And since the Court is not  bifurcating liability and punitives and is going to the jury  at one time, there is only one opportunity during your cases  in chief, on behalf of EchoStar and NDS, to put your best  foot forward in front of this jury.

If liability was found, in that same argument,  you’ll probably seek to argue that not only is this  egregious, but it could only be conducted over this period  of time — with these stakes — not by middle management,  but by the very top of the NDS power structure.  And perhaps  you’ll pick names, and I don’t know that that’s fair.  I  haven’t heard the evidence yet.  I don’t know how far I’ll  let those arguments go.  But there’s every possibility.

And the same thing on NDS’s behalf.  It’s been  represented to me that they’re going to be able to show that  26,000 pages of NDS documents were literally stolen, that  has great weight to NDS; and that that’s transferred in some airport near the North Pole or someplace in Canada in the middle of the night to one Mr. Ereiser, who then gets that back to EchoStar.

Now, those are horrendous allegations on both sides.  And I assume you’re going to be arguing, if not Mr. Ergen, somebody else had to know at the very top of this power structure of EchoStar that that kind of activity and those kinds of documents that you rely upon carry great  weight.  And this couldn’t be carried out, quite frankly,  without somebody if not condoning it or ordering it,  certainly becoming aware of it, even at the topmost part of  the structure, and doing something about it.

————————

I well understand that DirecTV, for a significant period of time, was concerned about NDS’s activities.  And Mr. Murdoch, for instance, may not be as relevant as  Mr. Peled.  The difficulty, though, that may need to be  sorted out is that, at some point, News Corp., through  Mr. Murdoch, purchased NDS.  And when that occurred, of  course, it killed the lawsuit that was taking place between  DirecTV and NDS.  There’s no reason to continue it.

—————–

They’re going to be accusing you of revenge, the  $600 million paid, you know, Ergen striking back, the swap  was vindictive, it was an outmoded system, it should have  been paid for anyway by EchoStar, and you sloughed it off on  NDS.  But NDS is going to be arguing just as strongly that,  if this isn’t the top of the pyramid, how couldn’t it be,  with this period of hacking and the people involved; and  that, when you start hiring these kinds of people,  et cetera, that this has to reach all the way to the top,  and it doesn’t just stop with some security adviser, you  know, in Haifa; that this is serious stuff when the industry  is that small and there’s billions on the line in  competitive advantage.

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