Rosie's Publisher May Have Fudged

An executive from the former publisher of Rosie O'Donnell's magazine said he recommended manipulating circulation figures to hide losses so it could keep publishing.

"We did not want to shut down," Lawrence Diamond of Gruner + Jahr USA testified Monday in Manhattan's state Supreme Court. O'Donnell and G+J are suing each other for breach of contract.

Diamond said the decision to recommend tweaking circulation numbers came after an e-mail memo on April 26, 2002, from magazine executive Glenn Spotto. "Bad news coming on the newsstand, it appears that we are inching closer to that trigger point," Spotto wrote.

O'Donnell quit the magazine in mid-September 2002, and it folded with the December 2002 issue.

The publishers sued her for $100 million, alleging breach of contract for walking out. O'Donnell countersued for $125 million, declaring that by cutting her out of key editorial decisions, G+J had violated its contract with her.

Her lawyers on Monday said G+J executives were falsifying circulation numbers during the height of the fight for magazine control.

But Diamond said G+J executives decided to "manage the financials" of the magazine, so they could keep publishing. If the magazine lost more than $4.2 million in a fiscal year, O'Donnell would have been permitted to end her arrangement with G+J.

"We thought it was in both parties' interests to continue publishing the magazine," Diamond said. "We thought it had great potential and great future value."

Matthew Fishbein, an O'Donnell lawyer, said the bogus numbers were reported to the Audit Bureau of Circulation, a nonprofit association of publishers, and advertising buyers and sellers, whose information is used to helped determine ad rates.

Fishbein elicited testimony from an official with the audit association that while "Rosie" charged advertisers on the basis of a circulation of 3.5 million per month, its actual subscription and newsstand sales usually fell short of that number.

David Williams, an accountant for Deloitte Touche LLP, also testified that after examining the magazine's financial records, he found unreported liabilities and expenses improperly excluded.

"He didn't match Rosie in terms of firepower, but he did a good job," David Carr of The New York Times told CBS News.

G+J lawyers say O'Donnell killed the magazine because of a fight over the cover of the September 2002 issue which featured actresses from the TV show "The Sopranos." The cover, showing O'Donnell between Lorraine Bracco and Edie Falco, was never used.

The trial is expected to conclude Wednesday, and attorneys for the magazine tell CBS News Early Show Correspondent Jon Frankel to "buckle up and get ready for some fireworks" then.

A judge is hearing the trial without a jury, and will decide the case.