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Inside News Corp.'s (Alleged) U.S. Computer-Hacking Scandal

News Corp. (NWS) CFO David DeVoe was informed in 2004 that a supermarket advertising agency named Floorgraphics Inc. believed it had been the victim of repeated computer hacking attacks by News employees, according to a federal court transcript. New York Post publisher Paul Carlucci has been aware of the hacking allegation since that time, court documents show.

The allegation -- which was also investigated by the New Jersey U.S. Attorney's Office and referred to the FBI, according to documents in the case -- was the basis of a bitter lawsuit that was settled mid-trial when News suddenly bought FGI, preventing further damaging testimony about the hacking.

The allegations are -- as yet -- unrelated to the News of the World phone hacking scandal. Nonetheless, they are not helpful to News, as they suggest that hacking by its employees, at least in some form, was not limited to the U.K. CEO Rupert Murdoch's U.S. businesses are much larger than the U.K. operations currently at the center of the scandal. He cannot afford the advertiser boycott that presaged the shuttering of the NOTW to spread to his American newspapers, or to News' obscure but lucrative grocery coupon unit, News America Marketing, which allegedly conducted the U.S. hacking.

News did not immediately return a call for comment. Gary Henderson, a News consultant, denied at the time he was responsible for the hacking.

Smuckers smells a rat
The allegations were first reported by BNET in 2009, and touched upon again by the New York Times today.

In the case, FGI alleged News engaged in a number of anti-competitive practices, including using stolen passwords to illicitly enter its computer system to review or download sales information. George Rebh, the owner of FGI, testified in a New Jersey federal court in 2009 that he had been contacted by Smuckers in January 2004 after the client became curious that News seemed to have confidential information about its business stored on FGI's password-protected website for advertiser clients. Rebh testified:

We -- our IT people looked at our password-protected site to see if there was any access to that site by unauthorized users.
They discovered that beginning in October of 2003 through the time that we discovered this, in January of 2004, in fact, right up to the day before, there had been unauthorized accesses into our system by people utilizing computers registered with an IP address to News America Marketing. IP address is registered to News America Marketing in Connecticut.
... There were 11 separate accesses over that four-month period.
The unauthorized access allowed users to see FGI's clients' advertising plans and sales records -- crucial information that competitors could use to undercut FGI in negotiations with clients. Rebh testified that was exactly what happened: FGI lost its key account with Safeway supermarkets, and the company dwindled to just 25 employees at the time of the case, Rebh said:
In short, the loss of the Safeway contract marked the beginning of the end of our company.
Before FGI agreed to be bought by News for $30 million, Rebh ordered a memo be sent to News CFO DeVoe describing the hacking attempt. The three-page fax, described in court testimony, was sent via FGI board member Bill Berkley on March 3, 2004, shortly after the tampering was discovered. DeVoe did not reply, Rebh testified.

Federal prosecutors alerted
FGI also alerted former U.S. Attorney Chris Christie (now governor of New Jersey) and former U.S. Attorney General Alberto Gonzalez asking for an investigation of the hacking. When the company got no response, it asked former U.S. Sen. Jon Corzine, current U.S. Sen. Frank Lautenberg, and U.S. Rep. Rush Holt to write to Christie and Gonzalez again, asking for an update. (Download the FGI v. News hacking memos here.) Christie's former commercial crimes chief, Deborah Gramiccioni (neé Goldklang, pictured) responded that the case was:

...under review by Assistant U.S. Attorneys in our Commercial Crimes Unit. Because the above-references matter may involve fraud, we are also forwarding copies of your letter and the attached information to the Febreal Bureau of Investigation for review.
Nothing came of the probe. Gramiccioni, now Christie's director of state authorities, did not respond to a request for comment.

The FGI litigation was the first of a trifecta of disastrous cases in which two other ad agencies made claims that used anti-competitive practices to win supermarket advertising business. News settled them for a total of $656 million. Murdoch's top U.S. lawyer, Lawrence "Lon" Jacobs, resigned on the same day that a federal appeals court defeat sealed his zero-wins record in the litigation.

At the time FGI's competitors were allegedly hacked, the CEO of News America Marketing was Paul Carlucci (pictured), who is now also publisher of the New York Post. Carlucci was the focus of a series of contentious depositions prior to the 2009 trial, in which Rebh claimed Carlucci threatened to "destroy" FGI.


Image of DeVoe courtesy of CityFile; hackers courtesy of Flickr user JoseGouloa, CC; Gramiccioni courtesy of the State of New Jersey; Carlucci courtesy of Fordham University.
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