Floored by News Corp.: Who Hacked a Rival’s Computer System?

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Photo: Getty Images

News Corp. was at war with Floorgraphics, a small in-store advertising company, and veteran salesman Gary Henderson was leading the attack. He appeared to have a valuable advantage: access to inside information about future Floorgraphics campaigns — colorful poster-size ads that were displayed on supermarket floors.

“He’d show us an eight-and-a-half-by-eleven color piece of paper of an ad,” a former staffer said. “He would say, ‘They’ — Floorgraphics — ‘are running this and why aren’t we? Let’s go get it.’”

“How the hell did you get that?” the staffer asked at the time.

“Oh, they're easy to get. Don't worry about it,” Henderson responded mysteriously. A second ex-employee also remembered Henderson providing information about upcoming campaigns: “I recall Gary saying, ‘Here’s who Floorgraphics is doing business with.’ It was future stuff.”

News America Marketing, the division of News Corp. that was going head-to-head with Floorgraphics, later admitted that someone in its office had illicitly accessed its competitor’s password-protected website. But an internal investigation, as well as subsequent probes by the FBI and the Secret Service, failed to pinpoint the person responsible.

Years later, after Floorgraphics’ lawsuit against News Corp. was settled and Henderson had received what he called a handsome exit payout, he openly talked about getting a peek at Floorgraphics’ forthcoming ad campaigns. Henderson’s co-workers didn't always know how much faith to put in their boss’s claims, but he certainly wasn’t one to mince words.

“He admitted he had information from inside Floorgraphics’ computer system. He knew how to get into their passwords,” one former News America staffer told New York. "He said he had the blessings of his bosses."

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The Floorgraphics case isn’t as lurid as the British voice mail hacking scandal that forced Rupert Murdoch to shut down his flagship News of the World tabloid this summer. There were no hacked voice mails of murdered schoolgirls; this was about control of the small but growing market for "billboards on the floor." But the News America campaign against Floorgraphics contains many of the same hallmarks: hacking into password-protected systems to gain a competitive advantage, a corporate culture that put extreme pressure on employees for results, a cursory internal investigation, and large financial payouts after the fact.

David Carr of the New York Times, who helped bring the Floorgraphics incident into the spotlight, concluded that it was “a useful window into the broader culture at the News Corporation.”

The FBI and U.S. Attorney’s office are taking a new look at the Floorgraphics case. Investigators have interviewed News America whistle-blower Robert Emmel, and attorneys from the complex fraud and public corruption units of the Manhattan D.A.’s office have spoken with former Floorgraphics lawyer William Isaacson. According to Bloomberg, U.S. investigators have also asked News Corp.'s lawyers for documents related to News America Marketing.

During previous investigations by federal law enforcement agencies and News Corp. itself, no one ever questioned key News America employees — not even the handful specifically hired to take down Floorgraphics. New York's interviews with two dozen ex-employees of News America and Floorgraphics, lawyers, investigators, and congressional staffers involved in the case, as well as examination of court and other documents, suggest they could have found promising leads to pursue.

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News America Marketing isn't a glamorous part of Rupert Murdoch’s empire — his movie studios, television stations, and newspapers claim that distinction — but it dominates the extremely profitable in-store advertising business, delivering a 28 percent profit margin on revenues of as much as $1 billion in some years.

The division’s CEO, Paul Carlucci, who is now also publisher of the New York Post, was determined to expand into selling ads on the floors of large chain stores. That particular business was pioneered by Floorgraphics, a small New Jersey firm run by brothers Richard and George Rebh.

During a now infamous business lunch in July, 1999, Carlucci warned the Rebh brothers about competing against News Corp. “I work for a man who wants everything and doesn't understand anybody telling him he can't have it all,” he said, according to courtroom testimony from the Rebhs.

To Carlucci, Gary Henderson must have seemed the perfect man to get Rupert Murdoch more of what he wanted. Not only had Henderson worked at Floorgraphics — he had in fact set up the fateful lunch meeting — but he had come to loathe the Rebh brothers and their company. "Gary hated Floorgraphics," said one former News America employee. "He wasn’t trying to hide it. He would say it. It was out in the open. He would say, they were looking to destroy them."

Henderson, a hefty six-footer, “never stops selling,” said one former co-worker. It helped make him an effective field general, as did his gift for telling an entertaining story — even if he fudged some of the facts. “Whatever Gary said, I took it with a grain of salt,” said one former colleague. “how wonderful life is for Gary” was one of his favorite themes. Employers tended to overlook Henderson’s more annoying habits, drawn to his reputation as a “make-it-happen guy.”

The Rebhs, who declined to comment for this story, hired him in February 1999 as senior vice-president for advertising sales, according to court transcripts. At first, Henderson and the Rebhs functioned as an effective team; Floorgraphics revenues climbed sharply during his tenure. But on July 3, 2000, following a bitter dispute over compensation, the Rebhs terminated Henderson.

Three months later, in October 2000, he began consulting for News America. In July 2001, he signed on full-time with a clear assignment: supplanting Floorgraphics and achieving market dominance for News America’s competing Floortalk unit. Henderson started by hiring five of his former colleagues at Floorgraphics, offering what he called “unheard-of salaries.”

Henderson’s bosses were delighted by his aggressiveness and referred to his crew as “a specialty Delta Force sales team.” They gave Henderson space in an empty wing at News America’s Wilton, Connecticut, headquarters. Perhaps the isolation helped him nurture a special esprit de corps. “We were kind of like gunslingers,” said one former salesperson.

At first, the Delta Force met considerable resistance. Floorgraphics had sewn up contracts to rent out floor space at giant chains like Safeway, Winn Dixie, and Kmart, and Henderson’s sales force was left with the crumbs. From 2001 to 2002, Floorgraphics revenues grew 37 percent to $70 million.

But News America eventually began to make inroads, including taking the Kmart account from its rival. To celebrate, Henderson had press releases sent directly to the homes of Floorgraphics employees. Henderson’s bosses cheered his progress, but News America is a famously hard-driving company, and they continued to raise the bar: The “executive committee holds tremendous expectations for Gary’s success in driving our [floor] advertising business in fiscal year 2004,” his 2003 performance review stated. “Industry dominance,” was the explicit assignment.

It was in October, 2003 — midway through fiscal 2004 — that someone from News America began breaking into Floorgraphics’ computers. By January 2004, when Floorgraphics discovered the intrusion, its password-protected computer system had been illicitly accessed eleven times.

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Outraged about the intrusion, Floorgraphics reached out through one of its directors to News Corp. CFO Dave Devoe for an explanation in March, 2004. News America launched an internal investigation, including a search of Henderson’s e-mails, but soon dropped the matter.

But the hack was not hard to trace. Luke Cats, then a senior digital forensic examiner and investigator at Stroz Friedberg who was hired by the Rebhs, quickly tracked the intrusion to an IP address used by News America at its offices in Connecticut.
Cats, who formerly worked for the NYPD, concluded in his forensic report that News America “viewed past ad campaigns, as well as campaigns [Floorgraphics] was preparing to install in the coming months.”

As for News Corp.’s internal investigation, he concluded that it “falls far short of any standards in this area." The company made a cursory check of Henderson’s e-mail — “The only search conducted was a limited Outlook 'find' command" — but Cats concluded the company never interviewed Henderson or any other employees. Nor did it preserve a record of the investigation.

Other probes by the FBI and Secret Service followed. In 2004, according to an e-mail, the FBI was narrowing down its list of interviewees, focusing on News America’s Connecticut office. But then it, too, dropped the case.

Secret Service agent Rory Moran launched a subsequent investigation (the Secret Service has jurisdiction over computer fraud). Moran declined to comment, but a person familiar with his thinking recalled his early impression: “The case looked quick and easy, down and dirty. Someone accessed [Floorgraphics'] system using their password. Was it against law? Yeah.”

Moran took the case to the office of Chris Christie, who was then the U.S. Attorney for New Jersey and is now the state's governor. He met with one of Christie’s top deputies, Kevin O'Dowd, who now serves as the governor’s deputy chief counsel. O'Dowd concluded that the case against News America would be challenging to prosecute — someone at News America's Connecticut office had accessed the Floorgraphics system, but it would be difficult to prove which computer had been used and which person had used it. Moran dropped his investigation. The FBI, Secret Service, and U.S. Attorney’s office all failed to interview News America employees.

As the investigations were going nowhere, Floorgraphics’ business was falling apart. A few months after Floorgraphics discovered the computer intrusion, it lost a crucial contract with Safeway to News America. George Rebh claimed in court that information in Floorgraphics’ computer system could have helped a competitor win the Safeway business. Floorgraphics’ revenues steadily and sharply declined from $70 million in 2002 to $31 million in 2005, and a mere $9 million in 2007.

By 2005, it was clear that Henderson's team had won the day, but its members didn't have much time to celebrate — News America promptly disbanded the team. “They threw us to the wolves,” recalled a member of Henderson’s staff.

Henderson was the sole member of the Delta Force sales staff who remained, according to former employees. In 2006, he was reassigned to a new job in business development. He told an ex-employee that the company continued to pay him even though he wasn't doing much revenue-producing work. It did, though, expect him to testify in court. When Floorgraphics sued News America, he was the first witness called in the 2009 trial.

During the trial, News America attorney Lee Abrams admitted that the break-in was carried out by someone using the company’s computers, in what he called an isolated event, but said the internal investigation had failed to find the guilty party. In court, Henderson denied accessing the password-protected Floorgraphics computer system. [Update: News America has since "condemned this conduct," calling it "a violation of the standards of the company." Abrams defended the investigation as thorough, though he acknowledged that it failed to turn up the guilty party.]

Several days into the trial, the Floorgraphics lawsuit was resolved in a series of deals that paid $29.5 million to the Floorgraphics owners and transferred the firm’s few remaining assets to News Corp.

The Floorgraphics suit was the first of three to be filed against News America by various competitors who alleged anti-competitive and unfair business practices. News America paid more than $650 million to settle them.

Gary Henderson didn’t respond to numerous requests for comment on this story. He left News America in 2010. After his departure, a former co-worker asked him why he hadn’t revealed the source of his insights into Floorgraphics campaigns at the time. “I was protecting all of us, keeping the integrity of the sales force intact,” Henderson said.

As usual, he suggested that all was well in Gary’s world. “What a package they gave me to leave,” Henderson said.