Bloomberg News

News Corp. Response to Hacking Was ‘Deficient,’ Expert Said

July 21, 2011

(Adds details of News America probe in 23rd paragraph.)

July 21 (Bloomberg) -- News Corp.’s response to allegations of hacking from its U.S. marketing arm was “rudimentary and deficient,” according to an expert hired by a New Jersey company that said its password-protected website was accessed illegally.

The expert was retained by lawyers for Floorgraphics Inc., which sold floor advertising in grocery stores, to investigate how its website was hacked by someone at News America Marketing In-Store Services. Luke Cats, then a forensic examiner at the firm Stroz Friedberg LLC, wrote in a 2007 report that News America Marketing “gained unauthorized access” to Floorgraphics’ secure site 11 times from October 2003 to January 2004.

Alerted to the hacking by Floorgraphics, News America Marketing started a “rudimentary and deficient” probe and failed to pursue obvious leads, Cats wrote. In reviewing the investigation, he said he was relying on the deposition of David Benson, News America Marketing’s chief information officer. News America Marketing’s “investigation falls far short of any standards in this area,” Cats said.

The report was included in records of a U.S. court fight between Floorgraphics and Wilton, Connecticut-based News America Marketing. At a 2009 civil trial over hacking allegations, Lee Abrams, a lawyer for News America Marketing, acknowledged to jurors in Trenton, New Jersey, that his client’s computers were used to access Floorgraphics’ secure website.

“We don’t know who did the access,” he said.

FBI Probe

The Federal Bureau of Investigation is probing whether employees of New York-based News Corp., mired in a voice-mail hacking scandal in the U.K., sought unauthorized access to voice-mail accounts of victims of the Sept. 11, 2001, terrorist attack on the World Trade Center.

New Jersey Senator Frank Lautenberg yesterday wrote to the U.S. Justice Department to ensure that it was “fully aware of the case of Floorgraphics and News America, as it may be relevant to your current investigation” into alleged hacking of Sept. 11 victims, according to a copy of the letter.

News Corp. Chairman Rupert Murdoch told U.K. lawmakers on July 19 that he has “seen no evidence” of hacking of Sept. 11 victims. Jim Margolin, a spokesman for the FBI in New York, said yesterday that the agency will “look at all facts relevant to our investigation.”

News Corp., owner of the Fox TV networks and the Wall Street Journal, has fallen 11 percent since allegations surfaced July 4 that one of Murdoch’s U.K. tabloid newspapers hacked into the voice mail of a murdered schoolgirl. The shares rose 14 cents to $15.93 yesterday on the Nasdaq Stock Market.

Condemn Conduct

Suzanne Halpin, a spokeswoman for News America Marketing, said in a statement that the accessed website “was available to hundreds, if not thousands, of Floorgraphics retailers, representatives of consumer packaged goods companies and Floorgraphics employees.”

“There is considerable employee movement within this industry, and we believe it was someone with an authorized password” who was using a News America Marketing computer, she said. “News America Marketing condemns such conduct, which is in violation of the standards of our company.”

The Floorgraphics case grew out of the refusal of the company, now based in Hamilton, New Jersey, to sell itself in 1999 to News America Marketing, co-founder George Rebh testified at the 2009 trial.

After the offer by News America Marketing Chief Executive Officer Paul Carlucci was rebuffed, the News Corp. unit began spreading lies and otherwise attacking Floorgraphics’ business of selling supermarket floor advertising for companies such as Nestle SA, Rebh said.

Safeway Contract

Floorgraphics discovered that its site was hacked in January 2004 as it and News America Marketing vied for a “critically important” contract with grocer Safeway Inc., Rebh testified. Floorgraphics lost the contract to News America Marketing, which was able to use “comprehensive” financial data stored on Floorgraphics’ site for its bid, Rebh said.

“We investigated as to how information had fallen into our competitor’s hands,” Rebh testified.

“Right up to the day before” the breach was discovered, “there had been unauthorized accesses into our system by people utilizing computers registered with an IP address to News America Marketing,” he said, using the initials for Internet protocol.

The discovery of the computer breach spurred Rebh in early 2004 to have a board member, William Berkley, alert David Devoe, then and now News Corp.’s chief financial officer, Rebh testified. Berkley forwarded a memo written by Rebh’s brother to Devoe, Rebh said.

Company Response

“Did Mr. Berkley or did you get a response from News America after this was sent?” Rebh was asked at the trial.

“No,” Rebh testified.

Berkley confirmed Rebh’s account in an interview. Rebh wouldn’t comment. Halpin, News America Marketing’s spokeswoman, didn’t have an immediate comment on the company’s response.

In his report, Cats said that investigators for News America Marketing “appear to have lacked the basic skills one would expect of IT personnel charged with securing the integrity of corporate networks.”

Investigators interviewed only one company employee, searched a single computer for clues of hacking, didn’t ask important questions, and failed to save documents and notes, Cats said.

‘Failed to Perform’

They didn’t question an employee who had once worked for Floorgraphics, didn’t scan a company computer registry that kept track of usernames and passwords that are entered, and didn’t check whether Floorgraphics’ site was password-protected, said Cats, who had previously worked as a forensic expert for the New York Police Department.

Investigators “failed to perform any of these basic steps,” Cats wrote, calling their probe “deficient.”

At the 2009 trial, Abrams, the lawyer for News America Marketing, argued that Floorgraphics’ website wasn’t secure and held only pictures of its advertising, not confidential data. He said News America Marketing didn’t steal business.

“News America Marketing has succeeded in this business the old-fashioned way, by working hard to introduce new products,” he told jurors. Of the alleged hacking, he said there was no proof that the accessing of Floorgraphics’ site “had any impact on the success of News America Marketing.”

‘Beginning of the End’

Six days into the trial, News America Marketing entered into what its lawyer called a “series of business arrangements” with Floorgraphics, part of which involved a $29.5 million payment and an agreement to buy Floorgraphics’ assets, according to court records. Floorgraphics, which hadn’t yet presented Cats’s report, dismissed the case.

The loss of the Safeway contract “marked the beginning of the end” for Floorgraphics, which had 85 employees at its peak and fewer than 25 in 2009, Rebh testified.

“They were outraged,” Berkley said of Rebh and his brother. “They had given their life to the thing.”

Allegations of News Corp. hacking and other misdeeds spurred other suits and a state probe. Alerted by Floorgraphics executives, the New Jersey Division of Criminal Justice’s computer unit opened an investigation into News America Marketing in 2006, according to court papers filed in a lawsuit against Floorgraphics by an ex-officer and director, Fred Potok.

‘Surprised’

The investigation ended without charges being filed, said Rachel Goemat, a spokeswoman for the Division of Criminal Justice, declining to comment further. Abrams, the lawyer for News America Marketing, said in an interview that the company was never contacted by New Jersey investigators.

As part of the New Jersey probe, Potok cooperated with investigators and initially agreed to wear a wire to record a conversation with Abrams, according to Abrams. Abrams said he recently read an account given by Potok in a deposition in which he said he ultimately chose not to wear a body wire.

“He said he was going to do it at the request of the State Police,” Abrams said. “I was surprised.”

“He fully cooperated with the state investigation,” said Potok’s lawyer, Thomas McNamara. Potok isn’t accused of wrongdoing.

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

The case is Floorgraphics v. News America Marketing In- Store Services Inc, 04-cv-3500, U.S. District Court, District of New Jersey (Trenton).

--With assistance from Sophia Pearson in Philadelphia. Editors: Patrick Oster, John Pickering

To contact the reporter on this story: David Glovin in U.S. District Court in New York at dglovin@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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