The Hollinger chairman has been stripped of his lavish lifestyle as he awaits the SEC's inquiry, write Ian Griffiths and Paul Murphy.
It is a fair assumption that for Lord Black of Crossharbour - chairman of Hollinger, the newspaper empire stretching from the Chicago Sun-Times to the Jerusalem Post - the penny dropped in June 2002.
The Tory peer's opulence - the houses in London, Miami, New York and Toronto, the casual use of corporate jets, the lavish corporate lifestyle - was under sustained attack.
Dennis Kozlowski, chairman and chief of the sprawling Tyco conglomerate, where Lord Ashcroft, Lord Black's House of Lords colleague, was a director, had just resigned and was being charged with tax evasion.
It was the most telling sign yet that the new fascination with corporate governance sweeping the US was more than a passing fad.
The regulatory clampdown, led by the likes of New York deputy district attorney Eliot Spitzer, was for real. Company shareholders were up in arms, furious at the way corporate executives had milked millions of dollars during the boom years, before the stock market crashed and exposed the crass and often fraudulent way so much of big business had been run.
Lord Black must have realised that, as far as Hollinger and the outside world was concerned, a second front had been established.
An authority on Napoleon, the owner of the Daily Telegraph would have seen that this latest development exposed him to just the strategic weakness that ultimately led to the downfall of his historical hero.
Conrad Black was already fighting a bitter war on a financial front that had subjected his newspaper empire to enormous pressure. Half way through last year, the deepest advertising recession in a generation was taking a severe toll on his finances.
Yet, while the numbers at Hollinger were not pretty, Lord Black knew about balance sheets. He knew how to stretch and bend his firepower and he probably believed that, with a bit of crimping and a fair commercial wind going forward, he would be able to deal with his adversaries.
The emergence of corporate governance as a new potent enemy, however, changed all that.
The newspaper baron's perspective of his longer term prospects would have shifted, fundamentally, because as is now clear, those "corporate finance zealots", as Lord Black was to describe this new threat, were going to ask questions the peer could not answer. He did not want to fight enemies on two fronts.
Mr Kozlowski's arrest at Tyco was preceded by six months of momentum for the governance movement. The Enron collapse had rocked Wall Street and shattered the confidence of ordinary Americans in the ability of US executives to run the businesses they were charged with managing.
On Capitol Hill, politicians were baying for blood. The Sarbanes-Oxley legislation, setting out tougher rules for business conduct, was poised to secure overwhelming cross-party support and, in New York, Mr Spitzer, the district attorney-in-waiting, was securing a high profile with his vigorous assault on Wall Street.
In Mississippi, WorldCom had revealed it had overstated profits by $3.8 billion (€3.2 billion).
Meanwhile, in Delaware, the state where Hollinger is incorporated, investors in Walt Disney Corporation were pursuing a lawsuit against the company, alleging that directors had failed to fulfil their responsibilities to shareholders over a former director's pay-off.
That case would ultimately give investors the right to seek redress through the courts if they felt their interests had not been properly served by the board.
Only days earlier, at the annual meeting of Hollinger International, the US-quoted company that directly owns Lord Black's newspapers, the peer had gained first-hand experience of the new mood among investors.
Tweedy Browne, the US fund manager that was holding a stake of around 18 per cent in Hollinger, had asked a series of awkward questions about the company's business practices.
The New York investor was unhappy with management fees being paid by Hollinger to Ravelston, Lord Black's private company based in Toronto.
In the past seven years, those fees had topped $200 million. The firm had first raised the thorny question of governance in October 2001 but Lord Black, who was poised to be introduced to the Lords later that month, was not going to allow shareholders to sour his transition to the position of a genuine press baron.
By June 2002, however, Mr Browne's overtures were becoming more difficult to resist. There were aspects of Hollinger's arrangements with its senior executives that had not yet captured the public's imagination.
For the previous two years, the company had been selling newspaper titles. As part of those deals new owners had often insisted on non-compete clauses preventing Lord Black, Hollinger and other executives from setting up rival publications.
The clauses were accepted in return for generous fees, which found their way to individual directors and their private holding company, Ravelston, rather than into the coffers of Hollinger.
Over the next 16 months, Lord Black appears to have pursued a strategy of trying to justify the existence of what looked like indefensible management fees by linking them directly to the financial health of the whole group.
The management fees were needed, it would be claimed, to keep Hollinger solvent.
In June 2002, however, Lord Black knew he needed to reinforce his empire's other front, namely its finances.
The global economy, which had been weak before terrorists struck in the US, was deteriorating. After three years of good profitability, Hollinger Inc, Lord Black's quoted Toronto holding company that gave him control of Hollinger International, had recorded a $102 million loss in 2001. Further losses were anticipated in 2002.
At the time, Lord Black's internal estimates for New York-based Hollinger International pointed to a cash-flow deficit of $80 million in the current year and then a deficit of $22 million for 2003.
To make matters worse, Black knew that when these forecasts became actual figures and were consolidated into his Canadian Hollinger Inc holding company, the financial pressures would increase. The complex structure of Hollinger Inc, set up as a tax-efficient investment trust, meant the company could be forced to buy back shares from its ordinary investors. In April 2004, Hollinger Inc would also be forced to repurchase $72 million worth of preference shares.
What Lord Black required was a mechanism that could close down one or both of the fronts on which he was fighting. He needed something that could somehow put the financial difficulties on hold and simultaneously remove the issue of management fees from the corporate governance arena.
It was time for a meeting of the inner circle. Lord Black was not a believer in exorbitant fees for investment bankers and corporate lawyers. He preferred loyal friends to hired hands. Not only did Lord Black's circle provide some sharp business minds, they also understood Hollinger's complex dynamic. In David Radler and Peter White, his closest confidants, Lord Black knew he had brilliant advisers.
But he will have missed the counsel of Montegu, his elder brother, who had died of cancer in January. Years earlier, the two had taken the Canadian business scene by storm, with Conrad's deep knowledge of so many military campaigns providing the vision, while Montegu brought business acumen to the partnership.
In 1999, Hollinger International sold 33 US titles to Horizon. The transactions gave rise to a string of governance questions, such as whether it could ever have been appropriate for Hollinger to sell an asset to a company that at the time was controlled by officers and members of the Hollinger board and then have Hollinger finance at least a portion of the purchase price.
The company had given no information on which individuals negotiated the purchase price on behalf of Horizon and Hollinger, nor was there detail on how the Hollinger audit committee had ensured that the purchase price was fair for the shareholders.
The deal was typical of so many Hollinger transactions - opaque, overly complex and riddled with potential conflicts of interest between a publicly listed company and a private counterpart. Between the management fees, the non-compete fees and the so-called related party transactions, there was a danger that the corporate governance brigade would find something that would stick.
Hollinger appears to have devised a plan that lent much to Napoleon's philosophy to use an "indirect approach and outflank the enemy". If the management fees were to be the focus of any corporate governance backlash, Hollinger's case could be assisted by establishing an economic link between Hollinger International, which paid the fees, and Ravelston which received them.
Until late 2002, Ravelston was an understated and private vehicle for Lord Black and his Hollinger colleagues. Now was the time to demonstrate its essential involvement in the corporate circle that represented Lord Black's empire. Last autumn, the publishing group began a series of financial manoeuvres that would change the way the management fees were perceived and simultaneously create the impression that Hollinger Inc, the Canadian holding company, had been placed in an economic straitjacket.
Crucial to this was the appearance of a $120 million debt issue on the Hollinger Inc balance sheet in March this year. It is a loan costing more than double the rate of interest on the debt it replaced and one that carries extraordinarily onerous banking covenants, limiting the way Black can run his business. It is also secured with almost all the holding company's shares in Hollinger International, the company owning the newspapers.
Regulatory filings by Hollinger do not adequately explain why this loan was taken out. For a start, Hollinger had already made great strides in reducing its long-term debt, which had fallen from $1.4 billion at the end of 2002 to $770 million at the end of June this year. The most recent half- yearly accounts reveal an increase in cash and a fall in short-term bank debt. Yet the same interim report reveals that Hollinger Inc is dependent upon the continuing financial support of Ravelston, the private holding company, in order for Hollinger to "pay its liabilities as they fall due". Conventional wisdom would dictate that Black was forced to accept such harsh terms (an interest rate of nearly 12 per cent) because he was a distressed borrower desperate for the cash to keep his empire afloat.
The $120 million loan replaced a revolving bank credit facility - effectively an overdraft, which stood at $70 million. This "revolver", as such banking facilities are known, was in default, but Hollinger's bankers waived the breach of terms and only wanted $34 million repaid.
Black could have eased this pressure by selling down a little of Hollinger Inc's stake in the Hollinger International division, which at the time was worth around $215 million. Instead Hollinger Inc chose to raise $120 million through the new loan, expose itself to severe restrictions and put virtually its entire investment in Hollinger International up as collateral for the debt.
The money raised was used to make not just the mandatory $34 million payment but to pay off the entire overdraft. A further $38 million was repaid to Ravelston and, bizarrely, another $12 million was handed to Ravelston to cover the interest due on the Hollinger loan for the first year.
In essence, Hollinger Inc had swapped a $70 million loan with an interest rate of 5.5 per cent and flexible covenants and collateral for a $120 million loan paying interest at nearly 12 per cent and bearing extremely harsh covenants and generous collateral.
Importantly, from a corporate governance perspective, a committee of independent directors was formed to scrutinise and approve all aspects of the $120 million debt issue. At a stroke the debt issue created a clear economic relationship between Hollinger Inc, Hollinger International and Ravelston. The guarantees Ravelston gave to support Hollinger Inc and help fund the interest payments on the bond remain dependent on it receiving sufficient management fees from Hollinger International.
Any examination of the management fees enjoyed by Ravelston would be made against a backdrop that makes it clear that Hollinger Inc will face severe financial difficulties if the fees are cut. Importantly, the debt issue also restricted Hollinger Inc's ability to repay money falling due to shareholders.
In particular, Black faced a $20 million repayment of one set of preference shares in August this year and then the looming liability of $72 million on a series of preferences shares due to be redeemed on April 30th next year. Also, $92 million was due to ordinary shareholders who had exercised their right to have their stock repurchased by the company. The ugly $120 million bond issue allowed Black to tell all these creditors that they would just have to wait for their money, since by paying them now would impair Hollinger's liquidity.
Finally, the debt issue locked up almost all Lord Black's investment in Hollinger International because it was pledged as collateral for the debt. Any prospect of those shares being sold to refinance Hollinger Inc had been removed, as those shares are now held in trust on behalf of the bondholders in the event of a default.
Although Hollinger Inc has said in earlier regulatory filings it could sell shares in Hollinger International to pay down debt, that option is no longer available.
If investors were to demand that Black scale back his investment in Hollinger Inc to resolve outstanding financial problems, he can legitimately argue that the shares are no longer his to sell.
Black and his lieutenants seem to have been gambling that so long as the situation looked dense enough, the issues over corporate governance and the need for a stream of management fees to Ravelston from Hollinger International would remain out of focus. If so, the strategy has now backfired, in spectacular fashion.
This summer, under yet more pressure from Tweedy Browne, Black set up a committee of independent directors to investigate the allegations of corporate governance shortcomings.
Chaired by Richard Breeden, a former head of the SEC and the man chosen to investigate WorldCom's collapse, the independent committee was seen as a robust proxy for a more formal inquiry that could have been launched at any time by the US authorities.
Radler has gone and Black has been stripped of his executive duties. As he faces the inevitable formal SEC inquiry, the peer's shareholding has been frozen while the new board decides on how it might fix Hollinger's ghastly finances.
In 1812 Napoleon won the Battle of Borodino, but at such mortal cost that he was eventually forced to retreat from Russia. Black also fought on two fronts. But he seems to have lost on both.
