A special committee of the board of directors of Hollinger International Inc. filed their 500+ page report on August 31, 2004 with the U.S. District Court in Chicago and the U.S. Securities and Exchange Commission (SEC). The report is the result of an investigation launched in June of 2003 "in response to allegations of fiduciary duty violations and other misconduct at Hollinger".

The members of the special committee are:

The committee was advised by Richard Breeden, former chairman of the SEC.

This is a landmark report which is almost certainly destined to become required reading for current and future practitioners of the field of corporate governance law (it wouldn't do any harm if "corporate governors" read it as well).

Due to the length of the report and the fact that it contains a fair number of diagrams, I've decided to only "node" the first few pages of the report's 48 page Introduction and Executive Summary and the report's 12 page summary of Principal Findings. I believe that this is enough to capture the tone of the report although the reader would be well advised to read the entire report before reaching any "important" or "final" conclusions.

Introduction and Executive Summary

The Hollinger Chronicles

The Special Committee of the Board of Directors of Hollinger International Inc. submits this Report to the U.S. Securities and Exchange Commission and the Honorable Blanche M. Manning of the United States District Court for the Northern District of Illinois pursuant to Section III.4 of the Order of Permanent Injunction dated January 16, 2004 in the matter of United States Securities and Exchange Commission vs. Hollinger International Inc. The Report covers the results of the Special Committee’s investigation since it was formed in June 2003 in response to allegations of fiduciary duty violations and other misconduct at Hollinger.

The Report chronicles events at Hollinger over the decade since it first became a U.S. public company in 1994. Hollinger is a publishing company, but the story of the last decade at Hollinger, which is the subject of this Report, is not about Hollinger’s valuable publishing assets or the quality of the staff at its many publications. Rather, this story is about how Hollinger was systematically manipulated and used by its controlling shareholders for their sole benefit, and in a manner that violated every concept of fiduciary duty. Not once or twice, but on dozens of occasions Hollinger was victimized by its controlling shareholders as they transferred to themselves and their affiliates more than $400 million in the last seven years.1 The aggregate cash taken by Hollinger’s former CEO Conrad M. Black2 and its former COO F. David Radler and their associates represented 95.2% of Hollinger’s entire adjusted net income during 1997-2003.

At the outset, the energies of many people went into building Hollinger into a major publishing enterprise. Over time, however, Hollinger went from being an expanding business to becoming a company whose sole preoccupation was generating current cash for the controlling shareholders, with no concern for building future enterprise value or wealth for all shareholders. Behind a constant stream of bombast regarding their accomplishments as self-described “proprietors,” Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise. The Special Committee knows of few parallels to Black and Radler’s brand of self-righteous, and aggressive looting of Hollinger to the exclusion of all other concerns or interests, and irrespective of whether their actions were remotely fair to shareholders.

The Special Committee believes that the events at Hollinger were driven in large part by insatiable pressure from Black for fee income from Hollinger to prop up the highly levered corporate structure of Ravelston and HLG, and to satisfy the liquidity needs he had arising from the personal lifestyle Black and his wife had chosen to lead. The intensity of the pressure for tens of millions in cash payments to Black, irrespective of corporate performance or the fairness of transactions to shareholders, led to a series of abusive transactions in which Hollinger was a victim of Black and Radler’s ravenous appetite for cash.

The cash that the insiders pursued so ravenously did not come from taking an aggressive share of the growth of an expanding firm, or from gains generated through the value of outsized equity grants. The bulk of what Black and Radler were taking from Hollinger was cash, and that cash did not come from earnings or the creation of value for all shareholders. Rather, one scheme after another was devised to siphon away Hollinger’s opportunities, its cash flow and a share of its balance sheet. For years Black and Radler found excuses for transferring existing cash or assets to themselves, even if it required dismantling Hollinger for their own benefit.

Black and Radler (together with Ravelston and HLG, the corporate vehicles that they controlled and utilized in their improper acts) were the principal actors with the greatest responsibility for conceiving and directing most of the events described in this Report. Others facilitated or assisted efforts to skim cash from Hollinger improperly, or failed to detect and prevent the looting of the Company. The Report describes the actions of those individuals as well.

The Committee has already commenced the Illinois Action against Black, Radler, Amiel Black (Mrs. Black), Colson and Boultbee as individuals, and against Ravelston and HLG as corporate vehicles, seeking $1.25 billion in damages suffered by Hollinger from the individual acts and events described in the Report, and from a long course of fraudulent activities in violation of federal racketeering statutes. As part of the relief sought in the Illinois Action, the Committee’s complaint seeks an order permanently barring Black, Radler, Boultbee, Ravelston and HLG from “conducting or participating in the conduct of the affairs of [Hollinger]” pursuant to 18 U.S.C. §1964 (a) to avoid what would otherwise be a certain resumption of the repeated illegal acts that are chronicled in the Report. Related issues have also been litigated in the Delaware Court of Chancery before Vice Chancellor Leo E. Strine, Jr.3 Earlier this year Vice Chancellor Strine found, among other things, that Black had “persistently and seriously” violated his fiduciary duties to Hollinger, as well as the Restructuring Agreement he entered into with Hollinger in November 2003 as a result of the Special Committee’s work.

The Committee’s investigation has been completely independent, and as thorough as possible. We have sought to evaluate fully and fairly the conduct of numerous people in a large number of transactions and to identify appropriate remedial actions on behalf of the Company and its shareholders. Our Report includes a detailed review of dozens of individual payments and transactions during the period 1997-2003. We interviewed more than 60 witnesses in depth, and reviewed nearly 750,000 pages of documents as background for our analysis. The Committee has met on more than 40 occasions, together with our advisors, and more than half of these meetings have been in person and involved extended discussion of our investigative findings.

1 For ease of reference, this Report presents all monetary amounts in U.S. dollars. To the extent that a conversion from a foreign currency was required and amounts related to a specific transaction, the amounts were converted to U.S. dollars at the closing exchange rate on the date preceding the transaction. For all other conversions, an average annual exchange rate was applied.

2 The Report contains a glossary of the names of individuals and entities that are referred to in the Report, and a brief identification of the major transactions. Individuals, entities or transactions defined in the Glossary will be used in the Report text solely using the defined terms, without repeating definitions.

3 Hollinger Int’l, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004). Hollinger Inc. v. Hollinger Int’l, Inc., 2004 WL 1728003 (Del.Ch. Jul 29,2004)

Principal Findings

The Special Committee’s principal findings are as follows:

1. Management Fees Paid by Hollinger to Ravelston

1.1 Black, Radler and their associates breached their fiduciary duties to Hollinger’s public majority, non-controlling shareholders by causing Hollinger to pay excessive management fees to Ravelston.

1.2 Management fees and other compensation paid to Black and his affiliates and associates were excessive and irrational by any reasonable measure. For example, over the 1997-2003 period, total management fee and other payments made to or for the benefit of Hollinger’s senior executives totaled more than $400 million. This represented more than 95% of Hollinger’s aggregate adjusted net income for the period. The Special Committee found that Hollinger’s relative stock price and operating performance during the years in question were among the worst of its peer group of publicly traded publishing companies.

1.3 The management fees far exceeded Ravelston’s costs of providing services to Hollinger. Ravelston never provided the Hollinger Board or its Audit Committee with any meaningful economic justification for its annual management fee proposal. The Special Committee determined that the principal, if not only, reason for using the Ravelston management fee structure rather than paying direct compensation to Black, Radler and other executives was to mask and conceal the magnitude of funds they were diverting from the Company.

1.4 The Audit Committee never requested or obtained the information and advice necessary to understand what was being paid to Black and Radler, or to develop any business justification for the fees that were paid to them and their associates through Ravelston, notwithstanding a clear and direct conflict between the interests of Ravelston and Hollinger. Knowing that the Audit Committee was not meaningfully reviewing or negotiating their demands, Black and Radler sharply increased their annual fee from $8.5 million in 1996 to more than $40 million in 1999.

1.5 Black caused Hollinger to pay Moffat and Black-Amiel approximately $7 million in management fees between 1998 and 2003. Black caused Hollinger to make these payments even though Moffat and Black-Amiel had no known employees and performed no known services for Hollinger. In addition to these fees, Moffat received a $900,000 payment from Hollinger in August 1999 that was described by a Radler subordinate as “broker fees CNHI.” This payment was unauthorized and had no supportable economic basis.

2. Unauthorized “Non-competition” Styled Payments to Hollinger Officers and HLG in Certain U.S. Community Newspaper Transactions

2.1 Black and Radler caused Hollinger to pay secretly to HLG at least $16.55 million in 1999 and 2000 as purported “non-competition” payments out of the proceeds of the sales of Hollinger newspapers to Intertec, CNHI, Horizon, Forum and Paxton. None of these payments was disclosed to, or reviewed or approved by, the Audit Committee or the full Board.

2.2 Prior to the Special Committee’s work, the unauthorized payments to HLG were not disclosed in Hollinger’s SEC filings.

2.3 There was no supportable economic rationale for the secret payments to HLG. In fact, these payments were not made in consideration for HLG non-competition agreements requested by the purchasers, but instead were made either without any HLG non-compete agreement (the Intertec transaction) or in purported consideration for HLG non-competition agreements that were included at the behest of Black and Radler, through the efforts of Kipnis, Hollinger’s corporate counsel, who followed Radler’s instructions.

2.4 Black and Radler caused Hollinger to make $15.6 million in “non-competition” styled payments in 2000 and 2001 to themselves and two associates without any review by or approval from the Audit Committee or the Board. These payments did not have any supportable corporate economic purpose, and like the $16.55 million in “non-competition” payments to HLG, were made as purported consideration for non-competition agreements that were never sought by any of the purchasers.

2.5 These $15.6 million in payments to Hollinger’s officers and directors were made through alterations of Company records, including (i) reducing inapplicable transaction reserves and payables; (ii) reducing gains on sales of U.S. community newspaper properties; (iii) altering closing documents to provide a purported basis for diverting transaction proceeds; (iv) creating and then backdating sham “non-competition” agreements with APC (which never employed the payment recipients and, at the time of the agreements, had disposed of virtually all of its assets); and (v) backdating $5.5 million in checks. The Special Committee has concluded that the use of sham transactions, the deliberate backdating of checks and concealment of the unauthorized payments through alteration of Hollinger’s books, and other conduct, reflects an intent by the recipients to take money they knew was not authorized.

2.6 These $15.6 million in payments to Hollinger’s officers and directors were not fully and accurately disclosed in the Company’s SEC filings. Indeed, no disclosure was made for more than a year after the time it was legally required. The belated disclosure falsely portrayed the payments as consideration for non-compete agreements signed as closing conditions in Hollinger newspaper sale transactions, falsely represented that the payments had been approved by Hollinger’s independent directors, and falsely attributed $5.5 million in payments to calendar year 2000, the year in which the asset dispositions occurred.

3. Non-Competition Payments to the Black Group in the CanWest Transaction

3.1 The Hollinger Audit Committee approved $52 million in non-compete payments to Ravelston, Black, Radler, Boultbee and Atkinson in connection with the CanWest transaction but did so on the basis of false and misleading information knowingly provided to the Audit Committee by Radler, Kipnis and Atkinson. Moreover, three of the four officers who received the payments were present at the Board meeting at which the non-compete payments were approved on the basis of the same false and misleading characterizations, yet none of them corrected the record.

3.2 While CanWest, through its lawyers, requested that Black and Radler personally execute non-competition agreements, the Special Committee has determined that CanWest never requested (nor apparently ever knew) that any specific amount be paid to Black, Radler or any of the other recipients, or that the portion of the purchase price allocated to the non-compete agreements would be paid in its entirety to Black, Radler and their associates.

3.3 None of the payment recipients was entitled to any consideration for signing CanWest non-competition agreements because they remained Hollinger officers who were obtaining already excessive compensation, and Hollinger itself was bound not to compete with CanWest.

3.4 Although the properties sold to CanWest included assets of both Hollinger and HCNLP, Hollinger management directed that the entire non-compete payment attributable to the assets sold to CanWest by HCNLP be made from Hollinger’s share of the HCNLP distribution — in other words, Hollinger’s shareholders bore 100% rather than their pro rata 87% share of this burden. This was done to avoid having to seek the approval of HCNLP’s independent directors for the noncompete payments. This was unfair to Hollinger’s shareholders, and was done at the direction of Black and Atkinson for the apparent reason that review of the payment request by HCNLP’s independent directors might lead to denial or renegotiation of this massive diversion of sales proceeds to the members of the Black Group.

3.5 The non-compete payments made to the Black Group at the November 15, 2000 closing of the CanWest transaction included an unauthorized $1.1 million interest payment, which was a sham because the non-competition agreements were effective only as of the previous day. Radler directed Hollinger employees to make the unwarranted interest payment without disclosure to the Audit Committee or the Board.

3.6 In May 2001, the Audit Committee and Board were advised that they had been “inadvertently” given inaccurate information at the time they approved $52 million in non-compete payments to Black, Radler, Ravelston and others the previous year. However, the memorandum submitted by Kipnis to request Audit Committee and Board ratification of the payments contained further untrue and misleading information and omitted material facts. Despite being advised that it had authorized approximately $52 million in payments to the Black Group based on false information, the Audit Committee did not take any steps to follow up on this new information, or negotiate on the Company’s behalf, and instead ratified their original approval based partly on the further inaccurate information.

3.7 Black made false and misleading statements about the CanWest non-compete payments at Hollinger’s 2002 annual meeting of shareholders. These included, among other things, statements that Hollinger’s independent directors, and not management, negotiated the non-competition arrangements with CanWest, and that the independent directors (again, not management) determined that non-compete payments should be made directly to Black and the other recipients.

4. The Ravelston-CanWest Management Services Agreement

4.1 In November 2000, Ravelston entered into a management services agreement with CanWest pursuant to which CanWest agreed to pay Ravelston $3.9 million per year in perpetuity in consideration for Ravelston assisting CanWest in managing the assets purchased from Hollinger. This management fee agreement reduced by $39 million (ten times the $3.9 million annual fee) the purchase price paid to Hollinger for the sale of its assets, yet Ravelston has kept the annual fee for itself (notwithstanding that Ravelston has provided minimal services to CanWest and Hollinger already pays all of Ravelston’s costs in providing such services as part of the Hollinger management fee).

4.2 CanWest initially proposed that Hollinger provide the post-closing management services and receive the annual management fee; at Black’s behest, however, Ravelston was substituted as the services provider and fee recipient.

4.3 Black further enriched himself and Radler, through Ravelston, by negotiating an unusual termination provision in the services agreement. Under this provision, in the event that CanWest terminates the agreement, CanWest would be obligated to pay $29.1 million to Ravelston, and in the event that Ravelston terminates the agreement, CanWest would still be obligated to make a payment to Ravelston, in the amount of $14.6 million.

5. The Osprey Non-Compete Payments

5.1 As was the case in the CanWest transaction, members of the Black Group put their own interests ahead of Hollinger’s in connection with the Osprey transactions. The Osprey transactions, which closed in July and November 2001, involved the sale of Canadian newspapers to a company headed by a former Hollinger executive for a total price of $144 million. As part of these transactions, Black and Radler arranged for total payments of $4.5 million to be skimmed from the sale and paid to themselves (and Boultbee and Atkinson) as compensation for purported “non-compete” agreements. These individuals took all of the transactions’ non-compete allocations for themselves, and Hollinger received nothing.

5.2 Black and Radler failed to seek prior approval of the Osprey non-compete payments from the Audit Committee or the Board. After taking the money, they provided incomplete and untrue information to the Audit Committee when seeking ratification of the payments. Black and Radler failed to negotiate the non-compete arrangements in the best interests of Hollinger’s public shareholders.

5.3 None of the payment recipients was entitled to any consideration for signing Osprey non-competition agreements because they remained Hollinger officers who were obtaining already excessive compensation and Hollinger itself was bound not to compete with Osprey.

5.4 As in the CanWest transaction, Black and his associates avoided having to seek the HCNLP independent directors approval of the non-compete payments by directing that the entire non-compete payment attributable to the HCNLP assets sold to Osprey be made from Hollinger’s share of the HCNLP distribution, thereby unfairly reducing the net proceeds to Hollinger.

5.5 A fallout of the CanWest and Osprey non-compete payments was another improper seven-figure payment to one of Black’s associates. In 2001, Colson expressed his dissatisfaction to Black that he did not receive any non-compete payments out of Hollinger’s CanWest or Osprey transaction proceeds. To appease Colson, Black had Hollinger pay him $1,073,319 on September 5, 2001, without obtaining Audit Committee or Compensation Committee approval.

6. Related-Party Asset Sales to Horizon and Bradford

6.1 The Special Committee has determined that from 1998 through 2001, Black and Radler caused Hollinger to sell cash-generating U.S. community newspaper properties to Horizon and Bradford, entities Black and Radler controlled, for tens of millions of dollars less than the properties’ fair market value.

6.2 Although Horizon I was approved by the Board, Radler misled the Board, and the terms of the sale differed from those that the Board had approved. Radler falsely told the Board, among other things, that Horizon I would “mirror” the CNHI I transaction in both form and price. This statement was untrue for several reasons, all of which Radler knew. Among other things, Horizon paid almost $18 million less than it should have paid had the Horizon I pricing truly “mirrored” the CNHI I transaction pricing. Moreover, Radler through a subordinate manipulated the EBITDA figures and valuation multiples to make the proposed Horizon I consideration (which he then unilaterally “discounted” further) appear more favorable to Hollinger than it was.

6.3 In the Lerner Exchange, Radler caused Hollinger to swap with Horizon, a company in which he and Black held almost a 75% ownership interest, Hollinger properties worth $6.6 million, in exchange for Horizon properties worth less than $4 million.

6.4 Black and Radler caused Hollinger to sell the Argus & Journal properties to Horizon for $1 (plus a working capital adjustment that effectively required a Hollinger payment of approximately $162,000 to Horizon), based on misrepresentations to the Audit Committee by Radler and his subordinates that the papers were losing money and could not be run profitably. Before the sale to Horizon, a third party had offered to purchase the Journal alone for 1x revenue, or $750,000. The Audit Committee was not told about this superior offer. Horizon later sold the two publications for a total price of approximately $730,000.

6.5 In July 2000, Radler arranged for Hollinger to sell four community newspapers located in northwestern Pennsylvania and southwestern New York to Black and himself, using Bradford, of which they owned 50%. The Special Committee has determined that at least one independent purchaser (and likely others) was prepared and able to purchase these properties at a substantially higher price than the price Bradford agreed to pay. Radler misled the Audit Committee by failing to tell them that CNHI wanted to buy these properties at a higher price, and by manipulating EBITDA figures to overstate the value of the price Bradford had agreed to pay Hollinger.

6.6 Black and Radler arranged for Bradford to defer payment of $6 million of the purchase price, without interest, for a 10-year period, an arrangement that was directly contrary to the interests of Hollinger’s shareholders. The Board was not told that this debt would be subordinated to Bradford’s own bank debt, that Hollinger was guaranteeing Bradford’s bank debt, and that there was a material risk that Bradford would not be able to honor its payment obligations to Hollinger due to restrictive covenants in Bradford’s credit facility, which in fact occurred.

6.7 Neither the Audit Committee nor the Board approved the Bishop and Blackfoot sale. In fact, Radler structured the transaction in a manner designed to conceal various material facts and circumvent the Audit Committee at the very same time that Black and Radler were seeking Audit Committee approval for the CanWest “non-competition” payments. Although Black and Radler knew that sales to Horizon required Audit Committee approval, they structured the Bishop and Blackfoot transaction as a sale to CNHI in the CNHI II transaction, with CNHI agreeing to immediately assign these properties to Horizon. This enabled Black and Radler to conceal the transfer from the Board and acquire the properties at a valuation sharply lower than valuations that Hollinger was obtaining at that time from third-party buyers. Moreover, by separating Bishop’s ownership from the nearby Mammoth Times, Radler and Black diluted the value of both Bishop and the Mammoth Times.

6.8 Hollinger’s sale of the Mammoth Times to Horizon for $1 was ratified by the Audit Committee in August 2001 based on Radler’s false and misleading information. He told the Audit Committee, for example, that there were no other buyers for the property, when approximately six months earlier an unrelated party had committed to pay $1.25 million for it. Radler also told the Audit Committee that the Mammoth Times had been unprofitable in July 2001, without disclosing that the paper was profitable on an annual basis and that its August 2001 profits more than made up for its July 2001 losses.

6.9 Black and Radler used Horizon for their own benefit and to Hollinger’s detriment even when they weren’t selling Hollinger’s assets to themselves on unfair terms. In the spring of 1999, Radler arranged for Horizon to purchase the Kelowna Daily, the main rival of Hollinger’s Kelowna Capital, without obtaining Audit Committee or Board approval. The Canadian Competition Bureau concluded the following year that since senior Hollinger executives controlled Horizon, either Hollinger or Horizon would have to sell its Kelowna paper. Rather than presenting that choice to Hollinger’s Board, Radler unilaterally arranged for Hollinger to divest the Kelowna Capital, so that Horizon could retain the Kelowna Daily. Throughout 2000, Radler failed to inform the Board of offers from an unaffiliated purchaser to buy Hollinger’s Kelowna Capital for between $7.4 million and $8.1 million, and chose instead to sell the newspaper for $5 million to West Partners, a company that Radler knew had been hand-picked by Horizon President (and Radler subordinate) Vogt and had received Vogt’s help in obtaining bank financing for the acquisition. While West Partners paid Hollinger $3.1 million less than unaffiliated party’s $7.4 — $8.1 million offer, the transaction was structured so that West Partners’ price appeared nearly comparable, with Hollinger simultaneously (i) selling the Kelowna Capital to West Partners for $7.3 million in one agreement, and (ii) paying West Partners $2.3 million for taking another newspaper, the Vernon Sun, in a separate agreement. Approximately five months after being given $2.3 million to take Hollinger’s Vernon Sun, West Partners sold it for $213,000. Approximately two years after acquiring Hollinger’s Kelowna Capital for approximately $5 million, West Partners sold it for $13.7 million.

7. Investment Activities: Digital, Trireme and the FDR Papers

7.1 Black, Radler, Colson, Perle and other Hollinger executives crafted an incentive compensation plan for Digital, Hollinger’s new media/internet investment subsidiary, through which they were paid 22% of profits on successful investments, without any offset for investments on which Digital lost money. In other words, the incentive plan participants would share excessively in investment gains, and Hollinger’s shareholders would bear all losses.

7.2 Black, Radler, Colson, Atkinson and Boultbee knew, and were advised by outside counsel, that this “upside-only” compensation structure was virtually unheard of in the venture capital/private equity business. They not only withheld this information from the Audit Committee, but they also affirmatively misrepresented to the Committee that the incentive plan was “consistent with the marketplace.” The Audit Committee did not take any steps to inform themselves of market practices or to negotiate modifications to this highly unusual compensation structure.

7.3 The Digital Incentive Plan was also unfair to Hollinger’s shareholders because it awarded bonuses based on a definition of “realized gain” on an investment that was divorced from the amount Hollinger actually realized. The definition locked in profits for the Digital Incentive Plan participants, allowing them to speculate at Hollinger’s expense before they liquidated Hollinger’s investments.

7.4 Black, Radler, Colson, Atkinson, Boultbee and Perle received a total of $8.3 million in Digital Incentive Plan payments, even though Digital’s investments, in aggregate, have generated $68 million in losses as of December 31, 2003, for a total negative return of 33% to Hollinger.

7.5 Radler breached his duty of loyalty by causing Hollinger to make investments from which Salman Partners, an investment bank in which Radler had an undisclosed equity interest, derived a financial benefit. Hollinger ultimately suffered losses of $3.5 million from these failed investments.

7.6 Black and Perle caused Hollinger to make a $2.5 million investment in Trireme, an investment fund in which each of them held a financial interest. They did not seek Audit Committee approval of this self-interested transaction, even though Atkinson expressly reminded Black that he had an obligation to do so. The Trireme investment is now worth approximately $1.5 million, representing an unrealized loss to Hollinger shareholders of $1.0 million.

7.7 Between 1996 and 2001, Black caused Hollinger to pay $8.9 million to acquire FDR papers and memorabilia without seeking prior Audit Committee or Board approval. Most of these papers were displayed or stored in Black’s private residences. When, in October 2002, Black finally sought Executive Committee ratification of the largest of these purchases, the January 2001 $8 million acquisition of the Grace Tully Collection, the Committee was falsely informed that the purchase had been negotiated by Boultbee, when in fact Black had negotiated it. During the period of these purchases, Black was writing a biography of President Roosevelt, which was published in November 2003. Hollinger has accepted an offer of $2.4 million for the Grace Tully Collection, and believes it to represent fair market value, representing a 70% loss to Hollinger from the $8 million price that Black caused Hollinger to pay.

8. Sale of NP Holdings Tax Loss Carryforwards to Ravelston

8.1 In 2002, Black, Radler, Boultbee and Atkinson arranged for Ravelston (through a subsidiary) to acquire the tax losses held by Hollinger subsidiary NP Holdings, by having Hollinger sell NP Holdings to Ravelston for $3.6 million. They obtained Audit Committee approval for this transaction by misrepresenting that CanWest, the only other eligible purchaser of the losses, had offered $2.8 million to purchase NP Holdings. In fact, CanWest had offered $4.1 million, or $500,000 more than the price Ravelston paid.

8.2 Following the CanWest transaction, Hollinger retained a contingent liability to CanWest, in the amount of $14.6 million, relating to Hollinger’s sale to CanWest in 2001 of its remaining interest in the National Post. Black and Boultbee caused NP Holdings to assume Hollinger’s liability to CanWest without CanWest’s consent, while causing Hollinger to remain the primary obligor. Black and Boultbee “funded” NP Holdings’ potential liability by making a demand loan from Hollinger to NP Holdings. They structured the transaction in a self-serving manner that exposed Hollinger to possible double liability, to both CanWest and Ravelston, for the $14.6 million obligation.

9. Financing Transactions for HLG’s Benefit to Hollinger’s Detriment

9.1 In September 1997, Black and Boultbee caused Hollinger to lend $42.5 million to HLG on unfair terms, and without Audit Committee review or approval. HLG’s effective annual interest rate on that loan was only 1.25%. At the time, Hollinger was paying 9.25% on its own debt. That interest differential alone damaged Hollinger by at least $5.3 million, plus interest from the time period in which the higher interest should have been paid. HLG finally “repaid” the overdue loan in February 1999 using, among other sources, the $14 million in round-tripped non-compete payments that HLG improperly took out of Hollinger’s American Trucker and CNHI I transaction proceeds.

9.2 Also in September 1997, and again without Audit Committee consent, the Black Group used Hollinger’s credit for HLG’s own purposes and without compensating Hollinger. The Black Group did so by causing Hollinger subsidiary HCPH to issue 4.1 million “Special Shares” for HLG’s use in extending debenture debt that HLG would otherwise have had to repay. In effect, the Black Group caused Hollinger to provide HLG a three-year $36.8 million letter of credit, free of charge.

9.3 In July 2000, Hollinger lent HLG $36.8 million to repurchase the HCPH Special Shares that HLG had given to its debenture holders in September 1997. Although this loan was approved by the Audit Committee with investment banker advice at a more reasonable interest rate of 13%, the Black Group did not disclose the full circumstances of the transaction and misrepresented to the Audit Committee HLG’s need for the money. Since the loan was made under false pretenses, Hollinger is entitled to rescind it and be paid the full outstanding balance today, which is approximately $32.2 million (taking into account a large principal payment by HLG in March 2003, and without regard to an improper, unilateral interest rate reduction by Black and Radler).

9.4 If Hollinger were to exercise its discretion not to rescind the July 2000 loan, Hollinger would still be entitled to damages of $4.7 million, plus interest from March 2003, because of Black’s and Radler’s improper reduction of the interest rate on that loan. On January 1, 2002, Black, Radler, and interested director Richard Perle, acting as the Executive Committee, purported to authorize reducing the interest rate on the loan from 13% to 90-day LIBOR plus 3% (at that time equivalent to approximately 4.9%), without Hollinger receiving any consideration in return. The interest rate remained at around 5% or less at all times until March 2003, by which time the debt had grown to $47.2 million because HLG had made none of the required interest payments. In March 2003, when Black, Boultbee and HLG asked the Audit Committee to subordinate that debt to new notes HLG was issuing, the interest rate was increased to 14.25% if timely paid in cash or 16.5% if not paid and added to the principal balance (the latter of which has been the case) as a result of negotiations by the outside advisors to the Audit Committee.

10. Use of Corporate Aircraft; Other Excessive Perquisites

10.1 At the same time they were collecting exorbitant management and other fees from Hollinger, Black, Amiel Black, Radler and other Hollinger executives caused Hollinger to further subsidize their lifestyles by providing a wide range of perquisites. Hollinger’s non-controlling shareholders were forced to pay for homes, private jets, cars, house staff and chauffeurs, private club memberships, and even contributions to Black’s and Radler’s pet charities in their names. For example, from 1997 to 2003, Hollinger paid $1.8 million to improve, maintain and pay taxes on apartments for Black and Radler that Hollinger purchased for their use, and another $1.4 million for private staff in Black’s residences.

10.2 In December 2000, Black caused Hollinger to swap with him a Manhattan apartment that Hollinger had purchased in 1994 for $3 million, for cash and another apartment in the same building that Black had purchased in 1998 for $499,000. The value attributed to Hollinger’s apartment was its six-year-old $3 million cost, while the value attributed to Black’s apartment was $850,000, a two-year appreciation of 70%. This transaction diverted at least $2.5 million in value from Hollinger to Black.

10.3 Hollinger leased a Gulfstream IV jet for Black’s use, and purchased a Challenger jet for Radler’s use, and incurred financing, operating and maintenance costs of approximately $23.7 million from 2000 through 2003. Black and Radler used the jets extensively for personal purposes (including commuting to and from vacation homes and, in one instance, a round-trip vacation to Bora Bora for the Blacks), and with the minor exception of Ravelston’s partial reimbursement for Black’s Bora Bora trip, never reimbursed Hollinger for any of these expenses.

11. Abuse by Black and Radler of Hollinger’s Charitable Giving

11.1 Between 1996 and 2003, Hollinger and its subsidiaries donated at least $6.5 million to charities in the United States, Canada, the U.K. and Israel. While the Special Committee recognizes the value and importance of charitable giving by public companies, many of Hollinger’s donations were made to organizations selected by Black, Amiel Black and Radler, and often were publicly attributed to them, not to Hollinger.

11.2 The Blacks and Radlers directed thousands of Hollinger’s dollars in contributions to pet charities of their friends and other Hollinger directors, even in years when Hollinger reported a net loss. In return, they often served on charity boards or attended lavish events, particularly in New York. Hollinger never publicly disclosed its charitable donations, and Black and Radler did not present donation requests for Hollinger Audit Committee or Board consideration.

11.3 Black directed Hollinger and its subsidiaries to donate at least $445,000 to Toronto’s Hospital for Sick Children, to partly fund a pledge made by Black on behalf of his private foundation and the National Post. In return for the donation, the hospital named a major wing of its building the “Black Family Foundation Wing.

11.4 At Radler’s direction, Hollinger donated $168,000 to his alma mater, Queen’s University in Toronto, which named the “Radler Business Wing” in appreciation of “his” contribution. The Jerusalem Post Charitable Fund funded donations for the purchase of medical equipment at Herzog Hospital in Jerusalem, which resulted in the dedication of a “Rona and David Radler” trauma recovery unit.

11.5 Radler caused Hollinger and its subsidiaries to donate $110,000 to Haifa University, a university in Israel that bestowed an honorary degree on Radler in May 2002.

12. Richard Perle

12.1 Perle repeatedly breached his fiduciary duties as a member of the Executive Committee of the Board. Perle repeatedly signed Unanimous Written Consents without evaluating (or even reading) them, including several that “authorized” many of the unfair related-party transactions discussed in this Report in a manner that enabled Black and Radler to evade full (or any) disclosure to the Audit Committee or the Board. These include: (i) Hollinger’s September 1997 loan of $42.5 million to HLG on unfair terms; (ii) the subordination of Hollinger’s seller-financing of the July 2000 Bradford transaction, and Hollinger’s guarantee of Bradford’s bank loan for that transaction; (ii) the September 2000 transfer to Horizon of Hollinger’s valuable Bishop and Blackfoot properties; and (iv) the January 2002 improper interest rate reduction from 13% to 90-day LIBOR + 3% (i.e., approximately 5%) on Hollinger’s $36.8 million loan to HLG. Those transactions alone have to date resulted in well over $10 million in losses to Hollinger. Perle’s abject failure to fulfill his fiduciary duties as an Executive Committee member subjects him to personal liability for breaching his duty of good faith.

12.2 As Perle knew, he was not an independent Board member, but instead was beholden to Black and other insiders for his compensation. During his tenure as an Executive Committee member, Perle received more than $3 million in bonuses under the Digital Incentive Plan, as well as hundreds of thousands more in Digital and Hollinger compensation. Perle therefore had a motive to abdicate his fiduciary duties as an Executive Committee member so as to accommodate Black and Radler, two of the three members of the Digital compensation committee, which administered the Digital Incentive Plan.

12.3 By putting his own interests above those of Hollinger’s shareholders, Perle has violated his duties of good faith and loyalty. As a faithless fiduciary, Perle should be required to disgorge all compensation he received from the Company.

13. Independent Directors

13.1 The Special Committee has determined that the Audit Committee was deliberately misled by Black Radler, Kipnis, and other Hollinger officers. Material facts were repeatedly misrepresented to, and withheld from, the Audit Committee.

13.2 Although the Audit Committee was generally entitled to rely reasonably on the Hollinger management’s presentations, the Audit Committee was also inert and ineffective. The Audit Committee repeatedly failed to negotiate or meaningfully review Hollinger’s related-party transactions with the Black Group, and failed to hire legal or financial experts, advisors or consultants to inform its decisionmaking.

13.3 The Audit Committee approved Ravelston’s excessive and disproportionate management fees in a routine, unquestioning manner. The Audit Committee did not inquire into the nature, purposes, or allocation of the management fees, or why Hollinger management was outsourced at all.

13.4 The Audit Committee did not make appropriate inquiries or obtain adequate advice in approving or ratifying the unfair CanWest and Osprey non-compete payments to Ravelston, Black, Radler, Boultbee and Atkinson. More egregious was the Audit Committee’s May 2001 cursory ratification of its September 2001 approval of the CanWest non-competes after being told that the primary justifications for the original approval was “inadvertently” misrepresented. The Audit Committee did not question the reasons behind the misinformation, the late correction, or why it would be reasonable for the Committee to continue to rely on Hollinger officers’ presentations. This ratification took place during a 20 minute phone call.

13.5 The Audit Committee was similarly passive when approving the Horizon, Bradford, and NP Holdings transactions. Although the Committee was lied to by Radler and others, it failed to make any meaningful inquiry or to obtain independent advice regarding, or to meaningfully and independently negotiate, these related-party transactions.

13.6 The Audit Committee failed to take appropriate steps to insure that Hollinger’s proxy statements and other SEC filings were in compliance with the disclosure requirements of the federal securities laws.

13.7 As for those independent directors who were not also on the Audit Committee (apart from Perle, who was not independent and is considered separately), the Special Committee has determined that while those directors could have done more, they had a good faith basis to rely on the presentations of the Audit Committee, and to believe that the Audit Committee was performing its role.

13.8 All independent directors have performed ably and in the interests of Hollinger’s shareholders since June 2003. Those directors have greatly assisted the Special Committee and the Company in instituting new and effective management, drastically reducing the drain of cash to the Black Group, obtaining approximately $42 million in recoveries from the Black Group, pursuing a $1.25 billion lawsuit against the Black Group and others, and seeking at long last to maximize shareholder value.

The complete report is (currently) available for download at <http://sec.gov/Archives/edgar/data/868512/000095012304010413/y01437exv99w2.htm>

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