News Corp. Faces Legal Battles in U.S. Over Phone-Hacking Scandal

Calls are intensifying for a criminal investigation on this side of the Atlantic — and there’s that pesky shareholders’ suit

Last Updated: July 14, 2011 @ 7:46 AM

News Corp. became the rising target of American inquiry on Wednesday, as the U.K.-based phone hacking scandal raised calls for criminal investigation on this side of the Atlantic.

Four Democratic senators including Barbara Boxer (D-Calif.) and Frank Lautenberg (D-N.J.) called on the Department of Justice and Securities and Exchange Commission to investigate whether News Corp. broke the law on either U.S. or U.K. soil by hacking cell phones and allegedly bribing public officials.

And Republican congressman Peter King (R-N.Y.) called on the FBI to investigate the alleged hacking of the phones of 9/11 victims at News of the World, as has been claimed in Great Britain. 

That adds to a shareholder lawsuit that filed a new complaint against News Corp. this week alleging fraud and misconduct at the top of the media giant.

“They are open on lots of fronts to legal action,” Brian Kabateck, an attorney for Kabateck Brown Kellner in Los Angeles, told TheWrap. “You can bet that there are plenty of attorneys that bring plaintiff cases that are busy figuring out the angles. This is not going away soon.”

At minimum, the legal challenges threaten to distract News Corp. leadership for months, if not years. At worst, it could lead to untold millions in legal damages and potential criminal prosecution.

News Corp. stock rose on Wednesday after the company announced it was dropping its bid to assume full ownership of BSkyB, a British satellite company. But the stock has still dropped more than 10 percent since the outbreak of the scandal a week ago.

Among the legal matters that could challenge News Corp. are:

>> An investigation by the Department of Justice into whether News Corp. violated the Foreign Corrupt Practices Act, a rarely used law that prohibits U.S. corporations from bribing foreign officials. A DOJ spokesman said the department was reviewing the senators’ requests.

>> Pressure on the Federal Communications Commission over renewing News Corp.’s lucrative broadcast licenses.

>> An inquiry at the FBI over the alleged hacking of the phones of victims of 9/11.

>> Civil lawsuits by irate shareholders looking to recoup lost share value.

Speculation about Rupert Murdoch's domestic legal headaches intensified when former New York Gov. Eliot Spitzer penned a Slate column suggesting that though the phone breaches of celebrities, terrorist victims and police payoffs occurred in the U.K., News Corp. executives could still be prosecuted under the Foreign Corrupt Practices Act. 

“The rampant violations of British law alleged — payments to cops to influence ongoing investigations and the hacking of phones — are sufficient predicates for the Justice Department to investigate,” Spitzer wrote.

“Indeed, the facts as they are emerging are a case study for why the FCPA was enacted. We do not want companies whose headquarters are here — as News Corp.'s is — or that are listed on our financial exchanges — as News Corp. is — polluting the waters of international commerce with illegal behavior.”

Spitzer’s logic might be too creative to hold up in court. In order to stick, prosecutors would have to prove that executives had participated in bribes, experts said. 

“I would be surprised if you saw any criminal prosecutions in the United States,” Laurie L. Levenson, professor of law at Loyola University, told TheWrap. “I don’t see the natural fit. This certainly hasn’t traditionally been how the foreign corrupt practices act has been used.”

To put Spitzer’s idea into practice will require Attorney General Eric Holder to expend enormous amount of political capital going against an icon of the political right like Rupert Murdoch; a fight he might not want to wage too aggressively with an election year just around the corner.

That could change if any of News Corp.’s publications engaged in illegal newsgathering practices involving officials or executives that are U.S. citizens. The same holds true if a legal body or publication confirms allegations that News of the World reporters hacked the phones of 9/11 victims.

“There’s nothing here that involves U.S. citizens yet, but God help them if it did. We have all kinds of remedies if it touches or involves U.S. citizens, and we’ve had no problem using them,” Kabateck told TheWrap.

Most damaging of all could be a shareholder led suit by Amalgamated Bank and several pension funds that charges that News Corp.’s board of directors failed to exercise proper oversight and take action since news of the hackings first surfaced nearly six years ago.  

“Even before the collapse in 2008 and 2009, shareholder cases were incredibly successful when companies took reckless actions that destroyed a lot of value. I’ve seen cases with far less of a drop in stock be successful,” Kabateck told TheWrap.