Rosie's Lawsuit: Publisher 'Cooked' Books

Mike Lavery was a star on Monday.

The mild-mannered Midwestern head of the Audit Bureau of Circulation never knew he could be this popular. But he came in from Chicago and testified in the lawsuit brought by magazine publisher Gruner + Jahr against Rosie O'Donnell. He told me it was the first time he’d ever had to testify in any trial regarding magazine circulation numbers and their possibly being ”cooked.”

Lavery testified that his company, known as ABC, a non-profit organization that has monitored publishers since 1914, did not condone what O’Donnell’s lawyers allege Gruner + Jahr did with her magazine. First reported in this column three weeks ago, it appears that G+J inflated circulation numbers for single copy sales of  Rosie from October 2001 to June 2002 so that O’Donnell would not be able to walk away from the project.

A “milestone” in O’Donnell’s contract stipulated that she or the publisher could quit Rosie on June 30, 2002, if losses exceeded $4.2 million. This “threshold” of sales and revenue has become the main legal point in the contentious case.

It became even more important on Monday when G+J’s chief financial officer, Lawrence Diamond, took the stand. Under direct examination by O’Donnell’s attorney, Diamond — wearing a greenish gray suit and a queasy smile — conceded that on his second day in his current job he’d petitioned the company’s German honcho, Axel Ganz, to “manage the financials” before O’Donnell discovered she could dissolve her partnership.

To make matters worse, Diamond was forced to admit — with the evidence staring at him on a projection screen in court — that he’d e-mailed Ganz, received the go-ahead, then messaged others in the company confirming their plan to pump up circulation numbers.

Earlier in the day, Lavery told the court that this was unacceptable for a publisher and that ABC would be looking into what had happened immediately. After his testimony he told me that inflating numbers was definitely not commonplace among publishers.

ABC audits circulation numbers from magazines and newspapers, comparing them to voluntary reports issued by publishers. The latter reports are called “pink sheets.” For nine months, Gruner + Jahr’s pink sheets for Rosie overestimated the magazine’s numbers by 100,000 or 200,000 copies. Once the “milestone” in O’Donnell’s contract passed — on June 30, 2002 —  G+J’s pink sheets returned to being remarkably on target.

“I noticed that myself,” Lavery told me after he testified. “It’s very unusual. You can make of that what you will.”

The testimony of Diamond and Lavery wasn’t full of fireworks, but it was probably the most crucial part of Rosie O’Donnell’s defense in this $100 million case. A paper trail of memos and e-mails among the G+J hierarchy demonstrates that, concurrent with O’Donnell’s editorial power struggles at the magazine, the publisher was busy plotting its own way around her deal.

O’Donnell, with a $6 million investment, was a 50 percent owner of Rosie.

The paper trail, outlining all kinds of machinations on behalf of the publisher, may ultimately be O’Donnell’s path to success. For example, on May 2, 2002, Diamond wrote to Ganz: “The management team of G+J USA is recommending to you that we manage the financials such that we do not fall below the required threshold point, so that we can continue to publish Rosie. We are asking your approval to this strategy.”

On the stand Monday, Diamond, looking uncomfortable and sheepish, reconfirmed what he’d done. But he did not act alone. “We decided to confirm all the matters with Axel Ganz. We wanted approval for an overall strategy.”

Diamond’s uneasy testimony was followed by a videotaped deposition made with Ganz a few months ago. I reported in this column on June 9 that having heard about Ganz’s performance O’Donnell offered to settle the case. She never heard back from Ganz. But now, seeing his video, one can only wonder why he didn’t take her up on her offer.

“I don’t recall receiving the request,” Ganz says of Diamond’s memo, in heavily accented German. “I’m getting so many e-mails I don’t have time to answer,” the head of international publishing company says in the video about a message from his American chief financial officer.

Later, Ganz, admits with much hesitation and digression, “It’s possible we had a conversation.” In the end though, he says, “I never gave him [Diamond] approval to do anything like that. That’s not in our culture.”

But that wasn’t all. Having inflated the numbers for the first half of the year, the company then planned to do the same again. On July 18, 2002, G+J Senior Vice President Diane Potter wrote to Rosie publisher Joan Sheridan: "We are forced again to inflate … what we report to ABC in the second half in order to hit rate base.” Sheridan headlined this memo with an underlined warning: There could be risk in this.

The risk, of course, is that someone on the outside would find out.

You’d think with all this evidence regarding inflated numbers and conspiracy, Gruner + Jahr would be contrite. But their response has been arrogant and muddled. For example, Dan Rubin, the company’s executive vice president, in his own video deposition shown today in court, tried to spin Diamond’s statements to the point of strained credulity. “Larry is confused here,” he says of the admissions of Diamond, his company’s CFO. “I don’t know what he means. I think he’s talking about financial management,” he observes of the term “managing the financials.”

“I’d be very honored if they said this about me.”