How to create profits? Hire yourself a soothsaying CPA.
By Andy Van De Voorde
Damages expert Clifford Kupperberg continued his testimony on behalf of the Bay Guardian Wednesday, telling the jury his calculations of how much the Weekly should pay his client are based on a remarkable assumption: that the boom economy of 2000 would have continued forever if not for the Weekly.
Every one of Kupperberg’s “damage models”—the CPA presented six of them, ranging from $4 million to $11.8 million and told the jury to take its pick—begin with the assumption that the Guardian’s financial results from 2000 would have been repeated for the next seven years if not for its competitor.
That means the Guardian wants to calculate its losses from the Weekly’s alleged below-cost pricing based on the best year it ever had—and to ignore the fact that, prior to the glory days of the dot-com boom, it barely managed to keep up with inflation.
During cross-examination, Weekly attorney H. Sinclair Kerr Jr. noted that in one of Kupperberg’s models, the accountant claimed that in 2007 alone the Guardian would have earned an extra $3.5 million in profits if not for the Weekly’s alleged predatory pricing.
Noting that the court has established 2001 to 2007 as the “damages period” for this lawsuit, Kerr had a question.
“Prior to 2001, did the Bay Guardian ever in a single year have a profit of $3.5 million?”
No, said Kupperberg.
“Did they ever in any year have a profit of $3.5 million?”
“In fact, the highest profit they had during the entire 1990s was around $500,000 in 1999, wasn’t it?” continued Kerr.
The smiling CPA nodded his head.
“And that represents one-seventh of the figure you have for lost profits in the year 2007 alone?”
Yes, said Kupperberg.
The Weekly has already noted in pre-trial motions that the Guardian is asking the court to award it damages greater than the sum of all the profits it’s earned in its history.
But Kerr’s questioning showed for the first time how wide the gap really is between the Guardian’s demands and the reality of its past financial performance.
Long before 1995, when the Weekly was purchased by New Times (now Village Voice Media), the Guardian was posting financial results that would have led to a shareholder revolt had it been a publicly held company.
In 1990, for instance, the paper reported a net income of $104,482 on total revenues of $4.6 million.
In 1991, it reported earning $122,030 on total revenues of more than $5 million.
In 1992, it made less: just $105,331 on revenues of $5.9 million.
In 1993, a big year: $471,000 on revenues of $6.4 million, marking the first time it was run efficiently enough to keep up with inflation.
And in 1994, the year before New Times arrived, the Guardian earned a grand total of $547,000 on revenues of $6.9 million.
Those numbers would appear to suggest that the Guardian didn’t need any help from the Weekly to post a lackluster return on investment.
Despite that record of underwhelming fiscal acuity, however, the Guardian seeks a multi-million-dollar payday from the Weekly.
The $500-an-hour Kupperberg, who by his own admission has worked on more than 350 legal cases during his career—at least ten per year on average--was hired to dictate the amount of the check.
The CPA happily acknowledged on the stand that he has no idea whether or not the Weekly actually did anything wrong. He’s simply the man with the calculator.
And he wasted no time in rolling out complex damage estimates for the jury, though the panelists can be forgiven if they found it difficult to keep them all straight.
Under direct examination from Guardian attorney Ralph C. Alldredge, Kupperberg quickly noted that he had selected 2000 as his “baseline” year, in part, he claimed, because the data suggested his client hadn’t really been affected by the Weekly’s skullduggery prior to that time.
That was another way of saying that was the year the Guardian peaked.
For instance, in estimating damages based on display advertising revenues per page, Kupperberg matter-of-factly assumed the Guardian would have been able to charge the same $2,200-per-page rate straight through 2007.
“I saw no need for the Guardian to reduce its pricing,” he observed.
The result of the incredible 7-year make-believe page rate?
Great for the imaginary Guardian, which in Kupperberg’s “but for” world remained blissfully unaffected by the dot-com bust, the events of 9/11, and the general downturn in American print media.
Not so great for the Weekly, which Kupperberg claimed should pay its rival $4.8 million in real-world money to make up the difference.
Kerr seized on the issue during his cross-examination.
“San Francisco suffered considerably during the dot-com bust, didn’t it?” he asked.
“Yes, generally it did,” said Kupperberg.
And there was a drop in the stock market?
More so in the NASDAQ than in the Dow, but, yes, responded the accountant.
And that was because many of the stocks on the NASDAQ were tech stocks, and many of those companies were based in the Bay Area?
Indeed many of them were, said Kupperberg.
“And we had 9/11 that occurred?”
“And an upsurge in Internet advertising?”
“Yes, we did.”
“So when you assumed that $2,200 per page was a rate that could be achieved through this period, that was just an assumption on your part, right?” said Kerr.
Based on the available data, yes, said Kupperberg.
But when it came to assumptions, the accountant was just getting started.
For instance, he assumed the Guardian should have posted the same percentage display advertising revenue gains as those reported by the Palo Alto Weekly and the Pacific Sun, much smaller suburban papers he chose as grist for one of his damage models.
Kupperberg studied those publications in the first place only because Weekly attorneys had exposed one of his earlier damage estimates as being error-ridden.
In fact, not only were Kupperberg’s pre-trial damage estimates based on unreliable financial data from papers belonging to the Association of Alternative Newsweeklies, but he had forgotten to include color charges as a component of sales revenues.
The latter oversight alone skewed his results by $3 million, Kupperberg admitted on the stand.
And his attempted use of AAN’s proprietary data drew a frosty response from Seija Goldstein, the publishing consultant who compiles the trade group’s annual survey.
“I did not give him permission to use the AAN survey for a damages analysis,” Goldstein wrote in a reply declaration dated January 11, 2008 and filed with the court. “I could not have been more clear about the fact that the Bay Guardian did not have permission to use the survey for any other purpose than internal benchmarking.”
Given the Guardian’s earlier behavior at the trial—for example, its attempt to cast doubt on the reliability of readership numbers provided by Media Audit despite the fact it has used the firm’s numbers in its own media kits—it was not surprising that the newspaper would be willing to alienate business associates in an attempt to win the suit.
But Kupperberg’s attempted use of the AAN data was significant for another reason: The accountant admitted to Kerr that he didn’t even know if the AAN figures had been audited.
The screw-up didn’t seem to faze Kupperberg. He simply threw out the AAN figures, substituted revenue figures from two small Bay Area weeklies, the Pacific Sun and the Palo Alto Weekly, and came up with a damages figure that proved to be the highest of the day.
In fact, he said that, based on comparing percentage gains in display advertising revenue at the smaller papers to the middling performance of the Guardian, he was convinced his client was owed a whopping $10.7 million for profits it didn’t realize between 2001 and 2007.
He told the court he had assumed that every penny of those imaginary gains could be blamed on the Weekly.
In the real world, the Guardian lost $1.2 million during those same six years.
But according to Kupperberg’s math, if it had enjoyed the same percentage gains as the smaller papers, it would have instead been $10.7 million in the black.
As if by magic, a million-dollar market loss was turned into a $10 million courthouse profit.
When Kerr began his cross-examination, he was eager to discuss the suburban weeklies.
Wasn’t it true that the Pacific Sun actually sustained losses for a good part of the time Kupperberg had considered?
Yes, said Kupperberg.
And the paper operates in an affluent suburban area?
And is run by a completely different management team than the Guardian?
As for the Palo Alto Weekly, Kerr noted that the publication is delivered primarily by mail and has an unusually high number of more-lucrative classified ads because of its emphasis on real estate, suggesting it operates on a much different economic model than the Guardian.
The attorney also asked Kupperberg about the glaring lack of any references to specific customers in his damage models.
Was it true he had made “no attempt whatsoever to connect lost profits to specific customers?”
It was true, said the accountant.
“And you made no attempt to look at individual transactions?”
Kupperberg had visited the subject earlier with Alldredge, who asked him about it in an apparent attempt to insulate the Guardian from the fact it has called not a single advertiser to the stand.
It “would be extremely impractical, would be almost impossible,” to gauge damages by looking at real-world transactions, Kupperberg said.
But, Kerr later asked him, wouldn’t examining actual advertising deals be a more accurate method for determining damages than models based on speculation?
It simply couldn’t be done, said Kupperberg.
It was a familiar assertion from the Guardian, which has long argued that the sheer volume of the misconduct by the Weekly makes it impossible to quantify.
The argument is roughly equivalent to a prosecutor telling a jury a criminal defendant has committed so many felonies it’s impossible to sort them all out, but that they should convict him anyway.
But if Kupperberg was too overworked to examine specific transactions, he had no problem being specific about imaginary Guardian losses.
For example, he created a chart calculating the supposed damage to the Guardian from “lost pricing” revenue.
That document indicated that for the nine-month period from October 2001 to June 2002, the Weekly’s lower rates cost the Guardian precisely $192,000.
That amounts to roughly $1,000 every business day for nine months—beginning directly after the terrorist attacks of September 11.
That same depiction of an idyllic world unsullied by the vagaries of human existence appeared in Kupperberg’s next model.
In that calculation—his sixth of the day—Kupperberg envisioned an artificial market in which the Guardian and Weekly compete only against each other and then computed their respective market share.
In 1996, the year after New Times arrived, the Guardian had a whopping 76 percent of the market.
By 2007, it was down to 51 percent, suggesting the Weekly was about to overtake it.
The change occurred despite the fact that the Guardian has always had a higher circulation than the Weekly. In theory, that greater circulation should produce a higher readership, but trial exhibits have shown the Weekly overtaking it on that front as well.
The irritating performance by the Weekly was magically erased by Kupperberg, however.
In his market-share model, he simply assumed the Guardian retained the 63 percent chunk it enjoyed back in 1999.
According to Kupperberg, the Weekly owes the Guardian $5.2 million for taking too big a piece of the pie.
After an entire day of listening to Kupperberg’s conjured calculations (a mostly soporific experience that at one point led the judge to chide a juror for using a handheld electronic device while the CPA was speaking), the $5 million claim barely made a ripple.
After all, as Kupperberg himself had noted earlier in the day, “we’re measuring something that didn’t happen.”
The trial will resume Thursday at 8:30 a.m. at the courthouse on McAllister Street with Kupperberg’s continued cross-examination.