Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 1 of 49\0vORTHE - PDF document

Case 3:04-cv-01836 Document 28-1 Filed 0
Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 1 of 49\0vORTHERNIDISTRICT OF TEXASFILEDV^UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF TEXASDeputy^T DISTRICT COURTDALLAS DIVISIONDeputy OPERATING ENGINEERSCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 2 of 49TABLE OF CONTENTSSUMMARY AND OVERVIEWCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 3 of 49SUMMARY AND OVERVIEW1.This is a securities class action on behalf of all purchasers of the common stock ofThe Dallas Morning News newspaper. Beginning as early as

2003, defendants initiated and engagedTh
2003, defendants initiated and engagedThe Dallas Morning News as well as Belo's investors.3.overstated the circulation of The Dallas Morning News in order to fraudulently extract higherThe Dallasto maintain circulation numbers steadily increased. Newspapers throughout theThe Dallas Morning News very hard when the dot-comCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 4 of 495.The Dallas Morning News couldThe Dallas Morning News comprised of over 60% of theThe Dallas Morning News is responsible for more than 30% of theThe Dallas

Morning Newstotaled $100 million. These
Morning Newstotaled $100 million. These declining results put tremendous pressure on defendants because BeloThe Dallas Morning News to the public. The more newspapers these vendors claimed to have tohigher newspaper circulation figures overstated by the company, and thus higher rates overchargedThe Dallas Morning News derived 90% of its revenueThe Dallas Morning News. Instead of encouraging the circulation managersThe Dallas-2-XCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 5 of 49Morning News in order to receive incentive pa

yments, the circulation managers themsel
yments, the circulation managers themselves had an8.The Dallas Morning News became aware that incentives to achievethe decision was made to discontinue paying such bonuses duringInstead of disclosing this to investors or revising circulation data, defendants told WallThe Dallas Morning News circulation figures would decline slightly asresult of defendants' decision to discontinue the circulation sales rewards programs implemented toThe Dallas10.NewsDay and Spanish Language Publication Hoy, had inflatedThe Chicago Sunadmitted that its p

aper's circulation was overstated. These
aper's circulation was overstated. These announcements set off a wave ofCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 6 of 49the Audit Bureau of Circulations ("ABC"), a non-profit, private entity charged with monitoring thethey had already discovered the same problems wereKnowingDefendants' efforts to walk the stock down by removing some of the artificial inflation in Belo'sover $23 share.The Dallas Morning News were overstated by 1.5% for the daily paper and 5% for theThe Dallas Morning News. Defendantsannounced they were co

nducting an internal investigation and t
nducting an internal investigation and that they would refund to advertiserson August 5, 2004 to a low of $18 the next day before finally settling at $21.55, on unprecedentedCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 7 of 49volume of over 4.6 million shares traded. This decline, caused by defendants' false and misleadingJURISDICTION AND VENUE14.rise to the violations of law complained of occurred here.THE PARTIES17..18.20.The Dallas Morning News since June 2001. He served as President of Beloof circulation at The Dallas M

orning News until he resigned on August
orning News until he resigned on August 5, 2004. Peckham is a 21-year veteran of The Dallas Morning News and Belo corporate assignments with a background inPeckham had held senior circulation positions at The Dallas Morningsince September 1988. Previously, he had been the paper's controller and served for one year.22.Defendant John L. (Jack) Sander ("Sander") has been President/Media OperationsBefore that, she was Executive Vice President/Chief Financial Officer from December 2000 to1996 until July 1997, Shive was Vice President/Finan

ce. Shejoined Belo in May 1993. Defendan
ce. Shejoined Belo in May 1993. Defendant Shive may be served at 8258 San Benito Way, Dallas, TXVice President since November 2002. Williamson served as Senior Vice President of the TelevisionCase 3:04-cv-018 36the market. Each defendant was provided with copies of the press releases, alleged herein to beFRAUDULENT SCHEME AND COURSE OF BUSINESS26.Each defendant is liable for: (a) making false statements; or (b) failing to discloseDEFENDANTS' FALSE AND MISLEADING STATEMENTS27.The Dallasfor the sixth month period ended March 31, 2003 wa

s 533,567, with SundayCase 3:04-cv-0183
s 533,567, with SundayCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 11 of 49earnings per share of $0:14. Defendants Decherd and Shive each signed a certification attached tothe statements made, in light of the circumstances under which such statements were(a)(b)(c)Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 12 of 496. The registrant's other certifying officers and I have indicated in thisThe Dallas Morning News. Thecontests for contractors; (2) employee bonuses; (3) low newspaper wholesale rates; and (4) pressureT

he Dallas Morning News. could not beSee
he Dallas Morning News. could not beSee ¶155.revenue and statistical report for April 2003. That report stated that Belo's Newspaper GroupThein the six month period ended March 31, 2003 was 533,567, an increase of.0.7% from the year prior. It reported Sunday circulation for The Dallas Morning News of 786,594,The Dallas Morning News in the six month period ended in March 31, 2003 wasThe DallasNews of 786,594, an increase of 1.3% from the year prior.revenue and statistical report for June 2003. This report stated that Belo's Newspaper G

roupThe Dallas Morning News for the six
roupThe Dallas Morning News for the six month period ended March 31, 2003 was 533,567, an increaseThe Dallas Morning News for theThe Dallas Morning News since 1999. Moreover, the Company furtheradmitted that The Dallas Morning News' daily circulation was inflated by 5.1 % and the SundayThe-11-.Dallas Morning News of 533,567 for the sixth month period ended March 31, 2003, and Sunday(a)designed such disclosure controls and procedures, or causedthe effectiveness of the disclosure controls and procedures, as of the end of(c)on our most r

ecent evaluation of internal control ove
ecent evaluation of internal control over financial reporting, to theCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 15 of 49(a)(b)(a)The Dallasdivision;The Dallas Morning News advertisers;failed to reserve for the estimable administrative, legal and public relationscosts necessary to provide compensation to its advertisers;(d)committed other GAAP violations as specified in ¶T145(a)-(h).Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 16 of 4936.TheDallas Morning News in the six month period ended March 31, 2003 was 533,

567, an increase ofThe Dallas Morning Ne
567, an increase ofThe Dallas Morning News in the sameexpenses are expected to increase less than three percent in the third quarter. Basedon these assumptions, earnings per share are expected to be in the range of $0.25 toThe Dallas Morning News for the six month period endedThe Dallas Morning News for the same time period was 786,594, an increase of 1.3%revenue and statistical data were false and misleading because the Company admitted it had beenThe Dallas Morning News since 1999. The Company further admitted thatThe Dallas Morning

News' daily and Sunday circulations were
News' daily and Sunday circulations were inflated by 5.1% and 11.9%Belo ... reported that its Newspaper Group revenue increased 8.6% in AugCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 17 of 49Aug `02, the adjusted Newspaper Group total revenue would have increased 2% withto be up slightly. The Co. now sees Q3 EPS to be in the range of 25c - 26c (ABOVEThe Dallas Morning News published an article entitled "BeloShares of Belo Corp. rose $2.15, or 9.2 percent, to $25.64 on heavy volumethe consensus estimate from Thomson Financia

l.with providing such credits. Furthermo
l.with providing such credits. Furthermore, defendants' guidance was false because defendants wereThe Dallas Morning News' circulation figures to be overstated — which tendedOn October 22, 2003, defendants issued a press release containing Belo's monthlyhad received revenues of $60,350,000 in September 2003. It also stated that the daily circulation ofThe Dallas Morning News in the six month period ended March 31, 2003 was 533,567, an increaseThe Dallas Morning News forCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 18 of 49qci

rculation since 1999 at The Dallas Morni
rculation since 1999 at The Dallas Morning News. The Company further admitted that The Dallasdaily and Sunday circulations were inflated by 5.1 % and 11.9%, respectively.2003. Both press releases were filed on the same day with the SEC in an 8-K. Defendant DecherdBelo's third quarter results finished a little better than we anticipated when we lastcommented on the third quarter in mid-September. As expected, revenues firmed asBelo's third quarter results finished a little better than we anticipated whenmarket in any event, but certainl

y with that price increase is little mor
y with that price increase is little more difficult.Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 19 of 49On the advertising pricing side, as Jack noted and I think we've said in a.Management's guidance for 4Q reflects improved visibility, but alsoOur FY03 and FY04 EPS estimate are now $1.15 and $1.43. We are rollingOn October 29, 2003 JP Morgan Securities Inc. Equity Research issued an analyst51.On October 29, 2003 The Dallas Morning News published an article entitled "BeloCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005

Page 21 of 4952.The Dallas Morning News
Page 21 of 4952.The Dallas Morning News for the sixof Belo Corp., certify that:"Based on my knowledge, this quarterly report does not contain anythe statements made, in light of the circumstances under which such statements were(a)designed such disclosure controls and procedures, or causedthe effectiveness of the disclosure controls and procedures, as of the end ofCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 22 of 49(c)(a)(b)The Dallasdivision;The Dallas Morning News advertisers;Case 3:04-cv-01836 Document 28-1 Filed 02/07/

2005 Page 23 of 49(c)failed to reserve f
2005 Page 23 of 49(c)failed to reserve for the estimable administrative, legal and public relationscosts necessary to provide compensation to its advertisers;(d)failed to disclose known adverse trends or conditions; and(e)committed other GAAP violations as specified in ¶¶145(a)-(h).revenue and statistical report for October 2003. That report stated that Belo's Newspaper Group hadTheDallas Morning News in the six month period ended September 30, 2003 was 526,088, an increaseThe Dallas Morning News forTheDallas Morning News in the six mo

nth period ended September 30, 2003 was
nth period ended September 30, 2003 was 526,088, an increaseof 0.1 % from the prior year. It stated that Sunday circulation of The Dallas Morning News for theOn February 6, 2004, defendants issued a press release containing Belo's monthlyTheDallas Morning News in the six month period ended September 30, 2003, was 526,191, an increaseThe Dallas Morning News for the.Company admitted that it had been inflating its circulation since 1999. Moreover, the CompanyThe Dallas Morning News' daily and Sunday circulations were inflated by 5.1 % an

dBoth press releases were filed on the s
dBoth press releases were filed on the same day with the SEC in the 8-K.and September 30 reporting periods in 2003."Following an in line fourth quarter, Belo painted an encouraging picture ofNCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 25 of 49Newspaper rev. growth accelerated for the fourth sequential qtr. to 3.4% Y/Y"Belo Corporation (BLC-NYSE-$26.50) Good Momentum into a Big Year." It stated in part:newsprint expense and costs related to the launch of new newspaper products.... WeBelo represents an ideal way to play both

a recovery in newspaper advertising and
a recovery in newspaper advertising and aThe Dallas Morning News published an article entitled `Belo'sreceived revenues of $57,039,000 in January 2004. It also stated that daily circulation of The Dallasfor the six month period ended September 30, 2003 was 526,191, an increase of 0.1 %Case 3:04-cv-0 1 836 Document 28-1 Filed 02/07/2005 Page 26 of 49from the year prior. It stated that Sunday circulation of The Dallas Morning News for the same timeThe statements contained in ¶64, reporting the January 2004 monthly revenue andThe Dallas

Morningdaily and Sunday circulations we
Morningdaily and Sunday circulations were inflated by 5.1% and 11.9%, respectively.On March 1, 2004, after defendants discontinued the practice of paying managersThe Dallas Morning News toThe Dallas Morning Newsfor the six-month period ended September 30, 2003 was 526,191, with Sunday circulation for thethe statements made, in light of the circumstances under which such statements werefor, the periods presented in this annual report;`(a)designed such disclosure controls and procedures, or causedthe period covered by this report based

on such evaluation; and(c)(a)(b)-25-Ca
on such evaluation; and(c)(a)(b)-25-Case 3:04-cv-018 36that it was impossible to properly calculate circulation. As pleaded in more detail in ¶¶123-46, theThe Dallasdivision;The Dallas Morning News advertisers;failed to reserve for the estimable administrative, legal and public relationscosts necessary to provide compensation to its advertisers;(d)filed to disclose known adverse trends; and(e)President Investor Relations, attended the Bear Stearns 17th Annual Media, Entertainment andDuring that conference, defendant Shive stated:In t

he March 2004 reporting period, while we
he March 2004 reporting period, while we expect circulation in Providence andDefendant Shive's statements that it was expected that The Dallas Morning News'circulation would decline only "slightly" due to a change in calculation methodology were false andCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 29 of 49of circulation, had already decided to terminate the practice of paying managers' bonuses to achieveSee ¶¶118-19, 154, 156.71.23, 2004, defendants issued a press release containing Belo's monthly2004. This report asserted

that Belo's Newspaper Group$62,589,000 i
that Belo's Newspaper Group$62,589,000 in February 2004, and also asserted that the daily circulationThe Dallas Morning News in the sixth month period ended September 30, 2003, was 526,191, anThe Dallas Morning Newsfor the same time period was 785,876, an increase of 0.1% from the year prior.¶71, reporting the February 200 monthly revenue andThe Dallas Morningdaily and Sunday circulations were inflated by 5.1 % and 11.9%, respectively.21, 2004, defendants issued a press release containing Belo's financial2004. These results included EP

S of $0.19, an increase of 36% over2003,
S of $0.19, an increase of 36% over2003, with Newspaper Group revenue up almost 7%. The press release was filed8-K. In that press release, defendant Decherd stated:"As we entered the year, we expected revenue momentum to build through the first$0.16 to $0.17 we provided in early March."2001."The press release also stated:-27-Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 30 of 49At The Dallas Morning News, advertising revenue increased three percent inThe Dallas Morning News in the firstThe Dallas Morning News published an art

icle entitled "BeloOn April 21, 2004 Pru
icle entitled "BeloOn April 21, 2004 Prudential Equity Group, LLC issued an analyst report entitledWe think BLC posted a great quarter, posting 1 Q04 EPS of $0.19, beatingCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 31 of 49expect continued improvement in the company's flagship newspaper, the Dallasrevenues increased 2.2%. Classified employment increased by 2.9% in IQ 2004, theThe Dallas Morning News'circulation was overstated, defendant Decherd sold 40,000 shares of Belo stock for $1,144,024 inOn May 6, 2004, defendants fil

ed Belo's 10-Q with the SEC for the firs
ed Belo's 10-Q with the SEC for the first quarter ofThe Dallas Morning News had a daily circulation of 528,379, andCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 32 of 49quarter. Defendants Decherd and Williamson each signed a certification attached to the 10-Q, whichOfficer of Belo Corp., certify that:"the statements made, in light of the circumstances under which such statements werefor, the periods presented in this quarterly report;(a)designed such disclosure controls and procedures, or causedthe effectiveness of the discl

osure controls and procedures, as of the
osure controls and procedures, as of the end of(c)Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 33 of 49reasonably likely to adversely affect the registrant's ability to record, process,The Dallasdivision;The Dallas Morning News advertisers;failed to reserve for the estimable administrative, legal and public relationscosts necessary to provide compensation to its advertisers;(d)failed to disclose known adverse trends or conditions; and(e)committed other GAAP violations as specified in ¶¶145(a)-(h).The Dallas Morning News publ

ished an article entitled `Belo'sCase 3
ished an article entitled `Belo'sCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 34 of 49Belo Corp. is "in a position of strength" as the economy recovers andThein the six month period ended March 31, 2004 was 528,379. It stated that theThe Dallas Morning News was 755,912 in the same time period.The Dallas Morning News' dailyBLC reported April consolidated revenue growth of 6.7%, driven by a stronghelp wanted was up 17.4% in the period.FCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 35 of 49We are increasing our price

target to $35 from $33 as we move to a 2
target to $35 from $33 as we move to a 2005percent.""Newspaper Group revenue growth in April was enhanced by strong growth.revenue trends on a like days basis; however, the growth in each category is currentlyexpected to be slightly less than April. For the second quarter overall, we continue toThe Dallas Morning News.Thus, defendants' guidance was false because defendants were aware of adverse facts — theOn June 15, 2004, Hollinger International, Inc. admitted that its Audit CommitteeChicago Sun Times. TheTheas simply being caused by

a change in calculation methodology. In
a change in calculation methodology. Instead,Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 37 of 49during the Class Period, Belo shocked analysts with an announcement that the Company wouldThe Dallas Morning News for the six month period ended March 31, 2004 was 528,379. It reportedThe Dallas Morning News for the same time period of 755,912.owns The Dallas Morning News and 19 television stations, said it would earn 37The Dallas Morning News, published an article entitled "Belo toCase 3:04-cv-0 1 836 Document 28-1 Filed 02/0

7/2005 Page 38 of 4993.press hits Wall S
7/2005 Page 38 of 4993.press hits Wall St." It stated in part:Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 39 of 49the Class Period high over $29.00. The truth and extent of the circulation overstatement at Belo'sThe Dallas Morning News, however, remained unknown to the market.The Dallasfor the sixth month period ended March 31, 2004 was 528,379. It reported Sundaycirculation for The Dallas Morning News for the same time period of 755,912.The Dallas Morningdaily and Sunday circulations were inflated by 5.1 % and by 11.9%, re

spectively.99.The Dallas Morning News, 4
spectively.99.The Dallas Morning News, 4.2 percent atCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 40 of 49Advertising revenue for the Newspaper Group increased 4.8 percent compared withthe second quarter of 2003.artificially inflating Belo's results, thereby deceiving investors. As pleaded in more detail in ¶¶123-The Dallasdivision;The Dallas Morning News advertisers;failed to reserve for the estimable administrative, legal and public relationscosts necessary to provide compensation to its advertisers;(d)failed to disclose k

nown adverse trends and conditions; and(
nown adverse trends and conditions; and(e)committed other GAAP violations as specified in ¶¶145(a)-(h).Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 41 of 49THE TRUTH IS REVEALED101.The Dallas Morning News, had been intentionally overstating circulation figures as part of anThe Dallas Morning News for the six month periods ended September 2003 and Marchuncover all of the pertinent facts. The investigation will be supervised by and resultfour to six weeks."The Chicago Sun Times and Tribune's Newsday. In fact, Belo admits in th

e press release that theThe Dallas Morni
e press release that theThe Dallas Morning News began in 1999 with "circulation\tCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 42 of 49circulation that grew over time. Such circulation sales rewards programs were discontinued104.The Dallas Morning News. The circulation sales rewardsThe Dallas Morning News at all. The circulationThe Dallas Morning News.105.TheMorning News' September 2004 circulation figures of approximately 5% daily and 11.5%Sunday, as compared with figures reported for the six months ended September 2003. Be

lo said it1 The Company never actually g
lo said it1 The Company never actually gave these exact figures until August 5, 2004. On March 9,The Dallas Morning News to be "down slightly, withCase 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 43 of 49106.The Dallas Morning News' executive vice president/operations who was107.The Dallas Morning News"is making procedural changes necessary to ensure the collection and reporting of more accurateThe Morning News, and John Walsh, vice president/circulation who wasThe Morning News in August 2003, will implement these changes expedi

tiously andThe Forth Worth Telegram prov
tiously andThe Forth Worth Telegram provided further insight andThe Dallas Morning News in an article titledDelivery contractors failed to count as unsold an average of 39,294 SundayBelo said the questionable practices resulted in Sunday sales being overstatedCombined with other expectedBelo projected the paper's circulation for the six-month period to endSince ad rates are based on paid circulation, local and national businessesof papers charged to contractors. The program was-42-.109.Belo's stock price responded immediately, plummet

ing on August 6, 2004 to a 52-The Dallas
ing on August 6, 2004 to a 52-The Dallas Morning News would be quickly resolved. Innocent investors,DallasIt further stated:misstatements (Tribune and Hollinger as well). Subsequent to Newsday's secondThat we believe serves as a goodand we therefore believe that BLC will take all best efforts to salvage its.We estimate that the Dallas Morning News represents 60 % of BL Cs totalof total company revenue. The%. We assume that BLC willof its inventory.First, we are reducing our H2 04 newspaper estimates.... We are reducing ourGiven the la

rge contribution Dallas has to the BLCpo
rge contribution Dallas has to the BLCportfolio, the impact onof an 8% rate reduction is fairly meaningful. Our base casegrowth and margins of 4.7% and 23.8% for 2005. An 8% rate reduction wouldThe Economist ran a story which stated:Newspapers have found a way to increase circulation: fake itLast week ... Belo Corporation said that The Dallas Morning News hadCase 3:04-cv-0 1 836 Document 28-1 Filed 02/07/2005 Page 46 of 49114. Finally, on August 16, 2004, Belo announced the much-anticipated plan toThe Dallas Morning News. The Company

also announced that it wouldhave to reco
also announced that it wouldhave to record a charge of $26 million dollars in 3Q04 as a result of the circulation overstatement.2004 related to this matter, which equates to $16.6 million on an after-tax basis orexpense associated with the advertising credits provided to advertisers, most ofThe Company believes the advertiser compensation plan will have a modest effectRobert W. Decherd, Belo's chairman, president, and chief executive officer,"The trust of our advertisers is a pillar of the economic value Belo has builtThe elements of t

he advertiser compensation plan are as f
he advertiser compensation plan are as follows:Sunday circulation was most affected; therefore, advertisers will receive abank can be used between September 1, 2004 and the end of an advertiser'saddition to the terms of each advertiser's current contract. If an advertiser.Case 3:04-cv-01836 Document 28-1 Filed 02/07/2005 Page 47 of 49does not have a contract, this credit will be matched dollar for dollar withperformance. During that conference call, defendant Decherd stated: "I am focused on three relateddetermining compensation recom

mendations for executive in the chain of
mendations for executive in the chain ofcommand accountable for the circulation overstatement — this includes certain executives of Theof Belo's management committee, including myself. "116.Despite their efforts, defendants were unsuccessful in convincing analysts to trustThe Dallas Morning News would have a greater impact on Belo's financials thanThe Dallas Morning News through the first quarter of 2005.`We are lowering our 2004 and 2005 EPS estimates to reflect a lowerWe Are Less Optimistic Than Management Regarding The Impact To Re

venues At$0.20 to $1.25, implying a 6.3%
venues At$0.20 to $1.25, implying a 6.3% decline in annual EPA growth.n118.The Dallas Morning News would report"While it is difficult to separate the overstatements from normal business trends, most of theBelo further stated in the press release:The Morningresulted from the aggressive pursuit of circulation goals by former seniorDepartment's use of an unrepresentative survey of returns percentages in theThe Morning News' Circulation Department used the following methods toof inaccurate circulation figures.119.The Dallas Morning News o

n January 12, 2005The Dallas Morning-48-
n January 12, 2005The Dallas Morning-48-Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 1 of 33News, defendants admitted for the first time, more than five months after revealing the"There is a direct correlation between the number of preprints distributed2005, preprint revenues at The Dallas Morning News will, therefore, be lower inof 2005 versus the prior year. We currently expect the full year$7 and $9The Company went on to explain that with respect to the advertiser compensation plan:"From September through December 2004, a

dvertisers used approximatelyThe Morning
dvertisers used approximatelyThe Morning News'advertiser compensation plan. We estimate that approximately 80 percent of theseTheMorning News. The advertising credits negatively impacted revenue growthof 2004, so we project that revenue growth in theof 2005 will be favorably impacted by a like amount.""The credit bank expires for most advertisers by the end of the first quarter ofThe Morning News and, similar to the fourthThe Dallas Morning News will affect the P&L in several ways.there will be impact on expense before revenueof $7to $

8 million."120.The Dallas Morning News f
8 million."120.The Dallas Morning News filed itsThe Dallas Morning News' circulation figuresCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 2 of 33for the twelve months ended March 31, 2004 or the six months ended September 30, 2004, as it hadThe Dallasprimarily because the reliable documents and records needed to support revisedThe Dallas Morning News would be restating theirconsistent with the conclusion reached byof Belo's Board of Directors,122.The Dallas Morning News for the six month periods endedand 10-Q for the quarter

ended March 31, 2004, or any other prior
ended March 31, 2004, or any other prior periods or filings.BELO'S FALSE PUBLIC FINANCIAL STATEMENTS123.related to its The Dallas Morning News division; 2) failing to reserve for the clearly foreseeable andThe Dallas Morning News advertisersCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 3 of 33legal and investigative costs necessary to investigate and remediate the damage that would likely beConsolidated Quarterly Revenue and Earnings as Reported:6/03Pretax earningsCorrected Consolidated Quarterly Earnings:6/03Pre-tax Earnings

asoriginally reported.127.statements.
asoriginally reported.127.statements. 17 C.F.R. §210.10-01(a). Specifically, Belo violated at least the following accountingBelo's Fraudulent Revenue Recognition128.for their ads to appear in the Company's newspapers. According to Belo's 2003 10-K, the CompanyThe(and thus recognize as revenue) is based upon the newspaper's circulationSeeFASCON No. 5, ¶83..129.The Dallas Morning News were not reaching the circulation numbersThe Dallas Morning News advertisers.Dallas Morning News advertisers for the past ad overcharges. The charge was

Dallas Morning Newsadvertisers, and an a
Dallas Morning Newsadvertisers, and an additional $3 million to cover costs related to its ongoing internal investigationTheDallas Morning News advertisers for the past ad overcharges. As part of Belo's August 16, 2004The Dallas Morning News advertisers during 8/01/03 to 7/31/04. OnCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 6 of 33January 12, 2005 the Company announced that advertisers used about $8 million in credits frombefore it was earned.The Dallas Morning News, defendants improperly recognized at least $38million in

revenues in its financial statements for
revenues in its financial statements for the five consecutive quarters ended 6/30/04. ThisBelo's Failure to Reserve for Costs Stemming from Advertising Customer Overcharges133.During its August 16, 2004 announcement, Belo also represented it would have to`loss contingency by a charge to income, if at the time the financial statements are issued, it isSee FAS No. 5, "Accounting for Contingencies," ¶8.Belo knew or was reckless in not knowing that it was probable that it would incurThe Dallas Morning News advertisers for overcharges when

itsDefendants Failure to Restate Belo's
itsDefendants Failure to Restate Belo's Public Financial Statements137.The Dallas Morning News advertiser customer refunds andCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 8 of 33the error was due to an intentional misuse of facts known at the time the financial statements weremistakes in the application of accounting principles, orIn contrast, a change in accounting estimate results from new informationReporting a Correction of an Error in Previously Issued Financial Statementscorrection of an error in the financial statem

ents ofa prior period discovered subsequ
ents ofa prior period discovered subsequent to their issuance (paragraph 13) should be139. It is clear that the improper revenue and earnings inflation "error" in Belo's ClassCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 9 of 33through its 9/30/04 10-Q and later financial statements in an attempt to minimize the negativeBelo's Failure to Disclose Risks and Uncertainties140. GAAP and American Institute of Certified Public Accountants ("AICPA") Statementprepared in conformity with GAAP must disclose known risks and uncertaintie

s due to the nature ofobligations, and c
s due to the nature ofobligations, and contingent liabilities.The Dallascirculation, and accounting for the inflated revenues and undisclosed contingent costsBelo Ignored Inadequate Internal Controls142. Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reportingSEC v. World-Wide Coin Inv., 567 F. Supp. 724, 746 (N.D. Ga. 1983)The Dallas Morning News-57-Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 10 of 33 F1advertisements. Belo knew its accounting and internal controls for the newspaper circulation

figureswas insufficient to properly docu
figureswas insufficient to properly document, track or verify circulation figures and knew or was reckless innot knowing that its deliberate overstatement of circulation figures would allow it to overstate Dallas144.The Dallas Morning News circulation and revenue, defendants regularlyOther GAAP Violations145.(a)No. 28, ¶10);(c)The principle that financial reporting should provide information about the3Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 11 of 33for the use of enterprise resources entrusted to it, was violated. To th

e extent that management offers(e)(f)The
e extent that management offers(e)(f)The principle that financial reporting should be reliable in that it represents(g)(h)Class Period is the type of information which, because of SEC regulations, regulations of theCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 12 of 33ADDITIONAL SCIENTER ALLEGATIONS147. Defendants knew that the public documents and statements issued or disseminated inThe Dallas Morning News were materially false andThe Dallas MorningNews, all of the Individual Defendants were Executive Officers of Belo or The

Dallas MorningNews, and also members of
Dallas MorningNews, and also members of Belo's seven-person Management Committee, who were responsible formost vital functions and revenue builders, the circulation of the Company's newspaper segment. Infact, newspaper circulation was such an important aspect of the day-to-day operations of Belo, theThe Dallas Morning News, defendantThe Dallas Morning News, their control over, and/or receipt and/or modification ofTheDallas Morning News, which made them privy to confidential proprietary information concerningBelo and The Dallas Morning

News, participated in the fraudulent sc
News, participated in the fraudulent scheme alleged herein.The Dallas Morning News were false and misleading; that the CompanyCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 13 of 33lacked sufficient controls and procedures necessary to accurately calculate, report and recordThe Dallas Morning News; that defendants' scheme to fraudulently overstateThe Dallas Morning News through the use of circulation sales rewardsThe Dallas Morning News because the scheme required defendants'copy distributors to understate the number of unsol

d newspaper returns, or simply to not re
d newspaper returns, or simply to not return theThe Dallas Morning News at all. The circulation sales rewards programs were alsoextended to the circulation managers, who were supposed to verify the accuracy of the distributors'The Dallas Morning News. Even the most rudimentary audit would"Such circulation sales rewards programs were discontinuedof 2004." Thus, defendants' scheme depended on the prevention of even theThe Dallas MorningNews, internal accountants, the Belo Board's Audit Committee, external accountants, as well as theBelo

Management Committee.The DallasNews were
Management Committee.The DallasNews were false and misleading; that the Company lacked sufficient controls andCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 14 of 33procedures necessary to accurately calculate, report and record circulation figures at The DallasNews; that defendants' scheme to fraudulently overstate circulation figures for The DallasNews through the use of circulation sales rewards programs would have a direct impact onThe Dallas MorningNews by virtue of each of these defendants' positions during the Class Per

iod as executive officers ofThe Dallas M
iod as executive officers ofThe Dallas Morning News, and also as members of Belo's seven-member ManagementThe Dallas Morning News, by the "AuditThe Dallas Morning News andThe Dallas Morning News when.As to how the Board will choose to address performance bonuses given theseThen again on August 16, 2004, he said:executives in the chain of command accountable for theof The Dallas Morningof Belo's management committee, including myself.151.The Dallas Morning News were false and misleading; thatThe Dallas Morning News; that defendants' sc

heme to fraudulentlyThe Dallas Morning N
heme to fraudulentlyThe Dallas Morning News through the use of circulation salesThe Dallas Morning News by virtue of his position as the Executivewho was in charge of circulations at The Dallas Morning News.Even more revealing is the stunning admission of defendant Peckham's responsibility andThe Dallas Morning News' executive vicewho was responsible for the circulation department. "152.The Dallas Morning News, John Walsh, almost exactly one yearThe Dallas Morning News, and that defendant Peckham, the executive vice president whoCase

3:04-cv-01836 Document 28-2 Filed 02/07/
3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 16 of 33was in charge of circulation had resigned, effective immediately. For one year, Walsh reportedskills will be a great asset to our circulation operation and to The Dallas MorningNews."The timing of Walsh's recruitment, coupled with the timing of the termination of circulation salesrewards programs at The Dallas Morning News in the first quarter of 2004, along with the tellingThe Dallas Morning News were false and misleading; that the CompanyThe Dallas Morning News; that defendant

s' scheme to fraudulently overstateThe D
s' scheme to fraudulently overstateThe Dallas Morning News through the use of circulation sales rewardscirculation figures for The Dallas Morning News because defendants knew that the truth wouldThe Dallas Morning News, especially in light of the fact that beginning in June 2004 theThe Dallas Morning News as"Such circulation-64-.Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 17 of 33sales rewards programs were discontinued during the first quarter of 2004." In June 2004,The Chicago Sun Times and Newsday, for years using simila

r circulation sales rewards programs.Com
r circulation sales rewards programs.Company's senior management to review the circulation practicesJune 2004. Then on August 5, 2004, he said that: "When certainquestionable circulation practices at The Dallas Morning News were reported to me last week, IThe Chicago Sun Times andNewsday, both of which just so happened to announce in June 2004 they had beenoverstating circulation figures. In fact, Belo admitted in the August 2004 press release that thescheme to overstate circulation figures at The Dallas Morning News began back in 1999

with154. Further evidence that defendan
with154. Further evidence that defendants acted with scienter is the way defendants attemptedafter they discontinued other practices which admittedly led to fraudulentlyThe Dallas Morning News, and the announcement came out aboutcirculation at The Dallas Morning Newsattributing the decreaseCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 18 of 33to a "change in ... methodology."The Dallas Morning News, BeloThe Dallas Morning News' September 2004 circulationit estimated theof circulation decline directly related to the circulati

on overstatement scandal would%, which t
on overstatement scandal would%, which they combined with the numbers they supposedlyThe Dallas Morning News. Of course, on September 29, 2004,The Dallas Morning News, in a press release and conference call, defendants admitted that of theexpected decline in circulation results for the six-month period ended September 30, 2004, which it"most of the declines are believed to beThe timing of defendants announcements, revisions and apparent cover-The Dallas Morning News. For this reason, of course, "Suchof 2004."3 Case 3:04-cv-01836 Docum

ent 28-2 Filed 02/07/2005 Page 19 of 33T
ent 28-2 Filed 02/07/2005 Page 19 of 33The Dallas Morning News because on August 5, 2004, defendant Decherd stated that The DallasNews:is making procedural changes necessary to ensure the collection and reporting ofmore accurate circulation data. I have every confidence that Jim Moroney, in hisThe Morning News, and John Walsh,The Morning News in August 2003,not be issuing an audit report of The Dallas Morning News' circulation figures for the twelve monthsThe Dallas Morning Newsprimarily because the reliable documents and records neede

d to support revised circulation figures
d to support revised circulation figuresWhile the Company made ongoing statements since AugustThe Dallas Morning News would be restating their circulation figures with theis consistent with theandcompleted in September 2004.The Dallas Morning News for the six month periods endedand 10-Q for the quarter ended March 31, 2004, or any other prior periods or filings.The Dallas Morning News, as well as to disseminatenspace in the newspaper, because there is a direct correlation between the circulation figures at TheDallas Morning News and t

he amount of revenue generated by the Co
he amount of revenue generated by the Company. Analysts estimate thatThe Dallas Morning News represents 60% of BLC's total publishing revenue and over 30% of totalThe Dallas Morning News isapproximately 90%/10%. Evidence of this motivation and that defendants knew or recklesslyThe Dallas MorningNews through the use of circulation sales rewards programs would have a direct impact on Belo'sThe Dallas Morning News, is the"There is a direct correlation between the number of preprints distributed2005, preprint revenues at The Dallas Morning

News will, therefore, be lower in$7 and
News will, therefore, be lower in$7 and $9Defendants further admitted that with respect to the advertiser compensation plan:"From September through December 2004, advertisers used approximatelyThe Morning News'advertiser compensation plan. We estimate that approximately 80 percent of theseTheMorning News. The advertising credits negatively impacted revenue growth"The credit bank expires for most advertisers by the end of the first quarter ofThe Morning News and, similar to the fourthThe Dallas Morning News will affect the P&L in sever

al ways.Case 3:04-cv-01836 Document 28-
al ways.Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 21 of 33we expect an annual increase in EBITDA of about $5 million. But as we transitionthere will be impact on expense before revenueof $7to $8 million."INSIDER SELLING157.The Dallas Morning News had been fraudulently reporting inflated circulation figures, theCase 3:04-cv-018 36159.The Dallas Morning News.Analysts and investors welcomed the good news, and believed defendants' statements that Belo andThe Dallas Morning News would be the success story to emerge out of the

entire publishingThe Dallas Morning New
entire publishingThe Dallas Morning News, it was manipulative andAfter several months of making positive statements about Belo, and especially thelong-awaited turnaround of advertising revenue growth at The Dallas Morning News, Belo stockThe Dallas Morning News would be "down slightly, with Sunday circulation down a bit more thanThe Dallas Morning News that were put in place in 1999 in order toa share on March 16, 2004. It was manipulative and deceptive for defendant Decherd to sell 40,000Case 3:04-cv-01836 Document 28-2 Filed 02/07/

2005 Page 23 of 33information that just
2005 Page 23 of 33information that just one week later the stock price would begin to drop with defendants' March 9,2004 announcement.The Dallas Morning Newsin the first quarter of 2004, and in the exact same month as Hollinger and Tribune shocked theChicago Sun Times and Newsday, had beenThe Dallas Morning News, andThe Dallas Morning News, it was manipulative and deceptive for defendant Decherd to sellAPPLICABILITY OF PRESUMPTION OF RELIANCE:162.in that, among other things:the omissions and misrepresentations were material;(c)Case 3:

04-cv-01836 Document 28-2 Filed 02/07/20
04-cv-01836 Document 28-2 Filed 02/07/2005 Page 24 of 33(e) plaintiff and other members of the class purchased Belo common stocks(b)news wire services and through other wide-ranging public disclosures, such as communications with(c)NO SAFE HARBOR164. The statutory safe harbor provided for forward-looking statements under certainthe Company who knew that those statements were false when made.Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 25 of 33165. Any purported warnings contained in the press releases and statements quoted h

ereinwere generic and unparticularized b
ereinwere generic and unparticularized boilerplate statements of risks, and thus, lacked the meaningfulcautionary language necessary to insulate any purportedly forward-looking statements.FIRST CLAIM FOR RELIEFFor Violation of §10(b) of the 1934 Act andRule 10b-5 Against All Defendants166. Plaintiff incorporates ¶¶1-52 by reference.employed devices, schemes and artifices to defraud;(b)(c)170. Plaintiff and the class have suffered damages in that, in reliance on the integrity of theCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page

26 of 33not have purchased Belo common
26 of 33not have purchased Belo common stock at the prices they paid, or at all, if they had been aware thatAs a direct and proximate result of defendants' wrongful conduct, plaintiff and theSECOND CLAIM FOR RELIEFFor Violation of §20(a) of the 1934Act Against All Defendants172.CLASS ACTION ALLEGATIONS174.of Civil Procedure on behalf of all persons who purchased Belo common stock on the open marketCase 3:04-cv-0 1836 Document 28-2 Filed 02/07/2005 Page 27 of 33176. There is a well-defined community of interest in the questions of law

and fact(a)whether the 1934 Act was vio
and fact(a)whether the 1934 Act was violated by defendants;(b)whether defendants omitted and/or misrepresented material facts;(c)(d)PRAYER FOR RELIEFWHEREFORE, plaintiff prays for judgment as follows:A.Declaring this action to be a proper class action pursuant to Rule 23 of the FederalAwarding plaintiff and the members of the class damages, interest and costs; andCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 28 of 33C.JURY DEMANDPlaintiff demands a trial by jury.Robert E. JenkinsState Bar No. 24036842WILLIAM S. LERACHHENRY R

OSENERIN P. MCDANIEL401 B Street, Suite
OSENERIN P. MCDANIEL401 B Street, Suite 1600S \CasesSD\Be10\CPT000I8041_Amended doc-76-Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 29 of 33CERTIFICATION OF NAMED PLAINTIFFSee attached Schedule A.5.In re NeoPharm, Inc. Sec. Litig., No. 02-C-2976 (N.D. Ill.)Thomas v. HealthTronics Surgical Services, Inc., et al., No. 03-CV-2800(CC) (N.D. Ga.)Operating Engineers Const. Ind. v. IMPAC Medical Systems, Inc., et al., No. C-04-3773-VRWCal.)6.The Plaintiff will not accept any payment for serving as a representativeSACase Startup\Bel

o\Certs\0E Local 66.docCase 3:04-cv-018
o\Certs\0E Local 66.docCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 30 of 33zexcept 1 such reasonable costs and expenses (including lost wages) directly relating toExeoutf d this 30th day of August OPERATING ENGINEERSCONSTRUCTION INDUSTRY ANDPENSION FUNDIts: Chairman -2-3: au StaruCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 31 of 33SCHEDULE ASECURITIES TRANSACTIONSDateAcquiredSecurities Acq02/11/2004Case 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 32 of 33DECLARATION OF SERVICE BY MAIL92101.2.VIOLATION OF

THE FEDERAL SECURITIES LAWS by depositi
THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in aUnited States mailbox at San Diego, California in a sealed envelope with postage thereon fullyplaces so addressed.6vm^' X #Re6le DIANA L. HOUCKCase 3:04-cv-01836 Document 28-2 Filed 02/07/2005 Page 33 of 33EBELO (LEAD)(04-0281)Page 1 of 1Counsel For Defendant(s)Martin B. McNamara **Roger Evans **M. Sean RoyallGibson Dunn & Crutcher LLP214/698-3100214/698-3400 (Fax)Counsel For Plaintiff(s)William S. LerachErin P. McDanielLerach Coughlin Stoia Geller Rudman &619/231-1058