The board of directors for News Corporation knew that two of its U.S. subsidiaries were involved in illegal hacking efforts against competitors but did nothing to stop it, according to a lawsuit filed this week by shareholders.
The allegations point to News America Marketing and NDS Group, two News Corp. companies, as carrying out hacking operations against competitors. News Corp. attorneys admitted in court documents from 2009 that computers at News America Marketing were used to hack into the secure website of U.S.-based Floorgraphics, Inc. some 11 times.
Floorgraphics claimed in a lawsuit that News America Marketing stole business from the company by hacking into their website from October 2003 to January 2004. The company agreed to dismiss the case after receiving a $29.5 million payment from News America Marketing.
A lawyer for News America Marketing admitted during the trial that someone hacked into Floorgraphics' website “through a firewall at News America Marketing headquarters,” but that the company did not know who did it.
"For more than a decade, News Corp subsidiaries have engaged in highly improper practices that have subjected News Corp to great financial and reputational damage," the shareholder complaint alleges, adding that the board of directors had "not lifted a finger" to conduct oversight of these activities.
They further suggested that the board's inaction on these matters permitted "a historic pattern of corruption" within the company, calling the behavior "pervasive."
The suit also points to hacking during 2001 by NDS Group, News Corp.'s digital television smart card subsidiary, which was accused by French media giant Vivendi of hacking into subsidiary EchoStar's smart cards and extracting their proprietary software. That software later wound up on the Internet, then on bootlegged smart cards being sold on the streets, giving media pirates free access to pay television channels.
Vivendi claimed NDS's actions had cost them up to $1 billion in damages.
Shareholders said the allegation was settled in 2002, after News Corp. purchased Vivendi's Italian television platform Telepiu for €920 million -- but only after a jury described NDS's actions as "illegal."
The U.S. Department of Justice said it was investigating whether News Corp. employees targeted the families of 9/11 victims in its phone hacking schemes, which have embroiled the company in scandal since July.
So far, 16 employees of News International, the company's British media arm, have been arrested in relation to an investigation by U.K. authorities.
The shareholder lawsuit, filed in a Delaware court, is a revision of a similar suit (PDF) shareholders filed in June. News Corp. officials have not commented on the pending litigation.