David Zalubowski/AP Photo
Employees of The Denver Post rally against the paper’s ownership group, Alden Global Capital, May 8, 2018, outside the paper’s office and printing plant in north Denver.
On May 1, the FBI published a disturbing intelligence bulletin titled “Threat Actors Likely Use Private Investment Funds to Launder Money, Circumventing Regulatory Tripwires.”
The bureau is concerned that criminals and the country’s enemies could use hedge funds and private equity investment firms to hide and launder illicit gains, and there is little in the way of regulation to stop them. In some cases, the report showed, nefarious actors have already done so.
Because I used to work for a hedge fund–owned newspaper and now cover the impact of hedge fund/private equity ownership of news outlets, reports about the FBI bulletin immediately caught my eye. (In the news industry, hedge funds often act like private equity owners to the extent they buy up companies using borrowed money and then pay themselves fees and dividends while stripping the actual newspaper. But they also use their funds to buy debt and actively finance operations. Since these two shadowy financial players increasingly converge, I will refer to all this as hedge fund activity.)
Dramatic changes in news ownership have been recent and swift. Today, hedge funds control one-third of U.S. newspapers, and all four of the largest local newspaper chains are owned or managed by these poorly regulated financial institutions. Three-quarters of the top 200 newspapers by circulation are owned or controlled by hedge funds.
The FBI’s dire assessment spotlights the extreme lack of transparency already demonstrated by these companies, and in the context of local news, it has disastrous implications for democracy.
The FBI’s “law enforcement sensitive” bulletin on private equity was leaked and published online by a transparency group called Distributed Denial of Secrets, after hackers broke into law enforcement records at a Texas web development company. The contents of the leak were verified by intelligence site Krebs on Security, and the story was reported by Reuters.
Noting its assessment was made with “high confidence,” the FBI’s report says that “in the long term, criminally complicit investment fund managers likely will expand their money laundering operations as private placement opportunities increase, resulting in continued infiltration of the licit global financial system.”
The report continues:
Specifically, hedge funds and private equity firms receive funds from entities registered in nations that maintain laws conducive to masking underlying beneficial owners, thereby making it harder for US financial institutions and regulators to determine the source of funding. Additionally, hedge funds and private equity firms have been used to facilitate transactions in support of fraud, transnational organized crime, and sanctions evasion.
The problem is that some of the basic safeguards used to detect money laundering just aren’t applied to private equity and hedge funds. “Of the limited information available about hedge funds, most is general or not publicly reported,” the report says, noting that the required annual Form PF, for example, is not public.
“Furthermore, since many hedge funds and private equity firms are unregistered entities, the SEC has limited oversight ability, making proactive identification of fraudulent hedge funds difficult,” the assessment says. Common anti–money laundering measures that banks and traditional funds operate under—such as “know your customer” due diligence programs or providing detailed trading data and company records to the SEC—do not apply to private equity and hedge funds.
What Do Hedge Funds Have to Do With Your Local News?
Today, the largest U.S. newspaper chains—Tribune, McClatchy, Gannett, and MediaNews Group (MNG)—are owned, controlled by, or indebted to hedge funds.
Taken together, these chains are America’s primary source of local news. Under hedge fund stewardship, local newspapers are bleeding staff and resources, even shutting papers down. Much of this shrinkage has been intentionally accelerated by the hedge fund practice of cutting costs to the bone to maximize short-term returns—democracy be damned.
It’s true that newspapers have struggled for the past two decades to reinvent themselves in the face of readers turning to social media and online aggregators for information, and losing advertising revenue to the likes of Google. But were it not for hedge fund owners bleeding them dry, newspapers could be breaking even or turning modest profits.
The COVID-19 pandemic has accelerated their need to go digital, as print advertising income drops even more. In response to 2020’s urgent demand for reliable, fact-checked information, many newspapers are looking to online subscriptions as a growing source of revenue.
Most local news outlets are aggressively moving onto digital platforms. But hedge funds, with their emphasis on quick profits and extracting rather than investing cash, are now making that shift nearly impossible.
Chains like Alden Global Capital’s MNG simply aren’t investing to expand their online presence, because Alden has made clear it considers it a waste of money. When it unsuccessfully tried to buy Gannett, Alden was highly critical of the chain’s emphasis on digital, arguing the investment cut into shareholders’ returns.
Today, hedge funds control one-third of U.S. newspapers, and all four of the largest local newspaper chains are owned or managed by these poorly regulated financial institutions.
None of this is to suggest the hedge funds gobbling up troubled newspapers are also laundering cartel money.
But their extreme lack of transparency and disinterest in sustainability should be concerning. And we don’t know who invests in those particular funds registered in foreign tax havens.
“One of the things that private equity firms do … is to try and hoover up as much money from overseas as possible through tax havens, through things like blocker corporations in the Cayman Islands, which are kind of conduits for money coming from other countries,” said Nicholas Shaxson, author of Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.
“What these blocker corporations do is strip out information, so any kind of financial information becomes secret, so you don’t know who the co-investors are, who the people are delivering the other peoples’ money,” Shaxson told me. Among the most secretive firms is the one I report on most, Alden Global Capital.
Besides MNG, Alden owns a third of Tribune Publishing, publisher of the Chicago Tribune, New York Daily News, Hartford Courant, and Orlando Sentinel, among others, and has three seats on its board. MNG publishes hometown papers in San Jose, Denver, Orange County, Boston, St. Paul, Trenton, and scores of smaller communities around the country. Tribune publishes papers in Chicago, Baltimore, Hartford, and Orlando, among other locales. Alden also owns 7 percent of Lee Enterprises—the country’s fifth-largest chain—and 4 percent of Gannett, the largest chain.
In March, Alden reported that nearly two-thirds (64 percent) of its assets under management were beneficially owned by non-U.S. persons.
So why does all this matter when it comes to local news?
Secrecy
We Americans don’t like it when mysterious, unknown entities are in charge of a community’s primary source of information. We’re used to knowing who owns the TV news network or newspaper in our towns—even if only to complain about them. We want to know who they are, so we can judge whether their interests or biases align with our own.
We certainly don’t expect those owners to hide behind shell companies incorporated in tax-secrecy havens like the Cayman Islands. Want to speak your mind to one of the four Cayman Island funds Alden uses to control MNG? Good luck trying to identify their leadership, let alone their investors.
Firms like the privately held Alden have long been highly secretive. As Shaxson told me, Alden “is about the most opaque [firm] I’ve ever seen.”
The New York–based company incorporates its funds in the Caymans and Delaware, locations well known as top corporate-secrecy havens. Alden acknowledges—in its Form ADV, the only publicly released annual report about its activities filed with the Securities and Exchange Commission—that 64 percent of its assets are beneficially owned by “non U.S. persons.”
But what does that mean? In the financial world, “persons” can refer to Alden’s shell companies in the Caymans, as Alden’s president Heath Freeman suggested when asked about it by Sens. Dick Durbin and Tammy Duckworth of Illinois. Or it can mean actual, flesh-and-blood people. We just don’t know, because Freeman is not required to tell us, noting that “Alden has customary contractual confidentiality arrangements with its investors limiting its ability to disclose their identities or background information.”
Chatham Asset Management, the hedge fund that put forth the winning bid to buy the McClatchy newspaper chain in a bankruptcy auction last month, also operates Cayman-based funds. Of the three Chatham funds used to purchase McClatchy out of bankruptcy, one was based in the Cayman Islands. The guarantor of the transaction is based in the Cayman Islands.
Apollo Global Management loaned the Gannett Company $1.8 billion to finance the Gannett-GateHouse merger in November 2019. Yet that debt is held by 34 separate entities, half of which are incorporated outside the United States, and that half is responsible for 55 percent of the debt.
Fortress Investment Group “manages and advises” Gannett, as it did to GateHouse Media, extracting funds from both entities. Fortress is owned by the Tokyo-based Softbank Group.
The FBI bulletin stresses that investigators are concerned about funds “that consist primarily of shell companies registered in high-risk offshore countries maintaining an unverifiable client base.”
That’s a perfect description of the firms now controlling much of our local news.
Coverage suffers
As University of North Carolina researcher Penny Abernathy puts it, “The loss of journalists always results in a loss of journalism, as editors have to make hard decisions about which stories to cover and which to ignore.”
When I first worked at the Alden-owned Monterey County Herald, we covered a geographically vast county. The paper has since dropped the word “county” from its masthead, because coverage of Salinas, the county seat, is now nearly nonexistent. So is in-depth coverage of most of the area’s other cities, because the staff of four or five reporters can’t physically be everywhere at once. Journalists also face a 2 p.m. deadline because the paper’s press was sold and the Herald is now printed a five-hour drive away.
Elected officials know they can get away with more when reporters no longer cover their meetings. Research suggests that towns without newspapers pay higher rates for credit and bonds: “Following a newspaper closure, municipal borrowing costs increase by 5 to 11 basis points, costing the municipality an additional $650 thousand per issue,” one report says, while other researchers found lower voter turnout in these communities.
Private equity shows no interest in sustainability
Private equity companies, as the FBI notes, “frequently acquire a controlling interest of a financially distressed business with the prospect of returning it to profitability under new management or profiting from the sale of its underlying assets [emphasis added].”
While Chatham purports to be interested in the first scenario, Alden is a case study in the latter. In its half-hearted bid to buy the McClatchy news chain at a bankruptcy auction last summer, Alden suggested it would lay off 1,000 employees if it took over. (In contrast, the winning bidder, Chatham, has vowed to keep all employees on staff and honor union contracts, although its record with a Canadian news chain tells a different story: Chatham-controlled Postmedia has “cut its work force, shuttered papers across Canada, reduced salaries and benefits, and centralized editorial operations in a way that has made parts of its 106 newspapers into clones of one another,” according to The New York Times.)
Private equity firms and hedge funds like Alden drain news companies of any financial safety nets they once had, leaving them extra-vulnerable to crises like the current recession. These companies have baldly extracted papers’ cash reserves (Alden admitted in court filings that it took hundreds of millions from its papers to invest in unrelated businesses that have since gone bankrupt). They’ve also stripped newspapers of their real estate, the collateral that businesses traditionally tap when they need loans to weather hard times.
Instead of putting extra boots on the ground to cover the current crisis, MNG and Tribune immediately issued nationwide layoffs, furloughs, and buyouts as soon as the pandemic shutdown began—without pausing to first gauge its economic impact.
The irony is that while papers’ print advertising has indeed tanked during the shutdown, their online news subscriptions have soared, thanks to a public desperate for timely, trustworthy information.
In the past, a crisis of any magnitude—much less this life-changing moment in human history—would have meant all hands on deck, even if publishers had to dip into reserves or borrow against the company’s assets. No more sports to cover? Fine, reassign the sports desk to report on the town’s COVID-19 testing capacity or the county’s latest shutdown order.
But that’s not what hedge funds do. Alden, in fact, furloughed many of its papers’ sports and other staff this spring. Hedge funds have shown, over and over, that they are ungrateful corporate citizens that want no investment in the social well-being of the communities these papers serve.
The few reporters who remain in these skeleton news crews have proven that they are indeed essential workers. They bravely risk their lives as they report from hospitals, homeless shelters, and farm labor camps to tell fuller stories of the pandemic’s impact on all sectors of society.
Yet other reporters, laid off or furloughed during this critical time, are posting on social media about their frustration at not being able to do their jobs.
“You might be looking for reports from the Tribune about this very serious flooding but the reporters who would have been working this evening are furloughed,” tweeted Chicago Tribune reporter Madeline Buckley.
Former Baltimore Sun reporter Alec MacGillis posted this:
Furloughed w/o pay this week at the Baltimore Sun:
*health reporter @mercohn, in the midst of a pandemic
*cops reporter @justin_fenton, after a weekend of 8 murders
*ace political feature writer @Tim_Prudente, one week before huge mayoral election.
Am I missing anyone, Tribune??
There have been rumblings in Congress about making hedge funds and private equity more transparent, but to date there’s been little headway. Now, before there’s no one left to report on it, it’s time to ask whether private equity and hedge funds should be allowed in the news business at all.
If hedge funds remain in the news business, they need to be fully transparent. Stakeholders—employees, readers, and the general public—need to know their investors, their managers, and their corporate governance. Likewise, if hedge funds remain in news, they need to be located in the United States. There is a good reason campaign finance laws prohibit donations from foreign nationals. The same should be applied to news.
