Whose apartment?

The home reno habits of Lord Black make for good testimony, but what about his home buying deals?

A US$6,000 shower curtain served as a memorable symbol of the perceived excesses of Dennis Kozlowski, the former CEO of Tyco International. Conrad Black apparently got more for his money; he purchased shower doors for the same amount. But that's just a taste of the opulence Black and wife Barbara Amiel enjoyed at a nine-room, 4,500-square-foot apartment Hollinger International purchased for them at 635 Park Ave. in Manhattan. Jurors at the U.S.A. v. Conrad Black et al. trial in Chicago heard plenty about it in connection to one count of fraud levelled by prosecutors against Black and co-defendant John Boultbee, both of whom pleaded not guilty. But the pricey, widely reported accoutrements distract from the central issue: the propriety of the manner in which Black acquired the apartment from the company.

Hollinger International purchased shares in the building's housing co-operative in 1994 for US$3 million “to facilitate the rendering of management and advisory services” by Black during his typically brief visits to the city, where the company had a small office. Under this common New York scheme, residents own shares representing their equity in the co-op's real estate. Because corporations cannot buy into co-ops, the 430 shares were put in Black's name; Hollinger owned a “beneficial interest” in them.

A contract governed their subsequent relations. Among other things, the company agreed to pay maintenance, insurance, property taxes, utilities and other costs. Hollinger would also pay for “all capital improvements, decorating and furnishings needed, as agreed between [Black] and the Company, to put the apartment into appropriate habitable condition.” Most significantly, Black was granted an option to acquire Hollinger's beneficial interest at any time of his choosing, “at its then fair market value.”

Black and his wife embarked on an ambitious renovation. Real estate expert Jonathan Miller, who served as a government witness at the trial, called it “a high-end renovation.” Work eventually concluded in 1997 and cost more than US$2 million.

There was more. Lee Williams, an accountant and tax specialist hired by Black's legal team, testified that Black paid a total of US$4.6 million upgrading the apartment over the years. During cross-examination, prosecutor Eric Sussman gleefully probed the items comprising that total. Stone and marble alone cost US$138,185. A pair of white marble reliefs of elephants cost US$17,710; a pair of Louis XVI painted rectangular stools, US$9,800; the price tag on a diamond vault, also US$9,800. Three towel-warming bars consumed another US$4,399. And who could forget the porcelain bottle and mahogany shaving stand, which belonged to Napoleon Bonaparte? Cost: US$12,500.

This remodelling presented Paul Healy with a problem. As Hollinger International's vice-president of investor relations, he received complaints. “I told him [Black] that certain shareholders had raised concerns about perks, particularly the New York apartment,” Healy testified. “Shareholders felt that a $3-million apartment owned by a company with [limited] cash flows…seemed excessive.” Healy asked Black to pay for the renovations himself. Black agreed. At the time, Healy testified, there was no discussion about how Black might be compensated for granting this concession.

In early 1998, Black bought a smaller apartment in the same building for US$499,000. This, too, was renovated—and Hollinger footed the bill, which the prosecution claims was more than US$1.5 million. Black used the apartment to house his servants; company directors and employees visiting the city stayed there from time to time.

Healy continued pressuring Black to exercise his purchase option on the second-floor apartment. Black demurred. Boultbee, Hollinger International's executive VP, allegedly told Healy in 2000 that Black didn't have enough money. But when Healy learned that Black received a large non-competition payment later that year, he raised the issue once again. This time, Black consented.

There was a catch. According to Healy, Black informed him during a Dec. 4, 2000, conversation that he had the right to acquire the apartment “at cost.” When Healy observed the proxy statement referred to “fair market value,” Black “rather emphatically said, ‘No, it's cost.'” Healy testified that later that day he met Boultbee and relayed Black's position. Boultbee allegedly responded: “Yep, yep, yep. That's right.” Within weeks, Boultbee further instructed Healy that Black would acquire the apartment for US$3 million, US$850,000 of which would be satisfied by transferring ownership of the smaller apartment to Hollinger. “There was no evidence that Boultbee intended to or knew that Black was misrepresenting the terms of the option agreement,” Boultbee's attorneys argued in a recent motion.

According to Healy, Boultbee instructed him to phone real estate experts to “get justification for a fair market value of [US]$3 million” and “write a memo for the file.” Boultbee also told him to make sure those experts knew Black had paid more than US$2 million for renovations. Healy drafted the memo on Dec. 21, 2000. It claimed that “after in-depth discussions with various New York City real estate specialists and meetings with JackBoultbee,” the second-floor apartment's fair market value had been determined to be US$3 million, and the ground floor unit US$850,000. But Healy testified that his actual discussions were anything but in-depth, and that the valuations lacked justification. “This would be an intentional mistake,” Healy offered.

Black and Hollinger International swapped apartments in late December 2000, and Black paid the balance in cash. Hollinger's real estate lawyer, Martin Richman, raised no concerns about the sale price, according to Healy. But had not Manhattan real estate appreciated considerably during the years the company owned the apartment? Was Black receiving credit for the millions he'd spent on renovations? Or didhe and Boultbee use their influence at Hollinger to let Black purchase the apartment at a fraction of its actual value? Such questions are at the heart of the perks-related fraud count. The government alleges that Black's purchase constituted fraud because he didn't obtain approval from Hollinger's independent directors, and because he omitted the purchase price from the company's proxy statements.

Black sold the apartment in October 2005 for more than US$8.9 million. FBI agents swooped in and seized the proceeds moments after the transaction closed. In addition to all the other things they must decide, jurors will determine whether or not he gets that money back.