Hollinger warns of £5m charge for cost of inquiry

Lord Black of Crossharbour was thrust into the spotlight again yesterday over controversial payments to executives after his publishing empire blamed a profit warning on the cost of a probe into allegations that he and other directors misappropriated millions of dollars of company money.

Hollinger International, owner of the Daily Telegraph, warned that profits would be about 17 per cent lower than expected after it was forced to channel up to $8m (£5m) into a special fund to cover the cost of the investigation.

The company, which is controlled by Lord Black through a complex holding structure, admitted its operational income for the full year would fall to between $54m and $62m, from earlier estimates of as much as $75m.

It blamed the shortfall on legal costs and extra insurance premiums for directors related to the cost of setting up a special committee two months ago to look into accusations from a leading shareholder that $74m had gone to Hollinger executive directors that rightly belonged to the publicly listed company.

The US financial institution Tweedy, Brown, which owns almost one-fifth of Hollinger, sparked the investigation in May after it highlighted the controversial payments, made in the form of non-compete clauses that Hollinger agreed to when it sold its Canadian newspapers. Tweedy, Brown, which has also highlighted concerns over the company's corporate governance record, has hired a New York law firm to pursue the $74m. Although Lord Black owns only 30 per cent of the group's equity, he controls more than 70 per cent of the voting rights.

Hollinger, which also publishes the Chicago Sun-Times in the US and the Jerusalem Post in Israel, said the timing and outcome of the review - conducted by three independent board members - was "uncertain".

Earlier this week Lord Black was critised for using £5m of Hollinger funds to buy papers about the former US president Franklin D Roosevelt, about whom he is writing a 912-page biography.

The Chicago-based newspaper publisher posted the profit warning late on Monday night. It also admitted that profits would suffer because of the extent of the advertising recession. It said weak demand for recruitment advertising had dragged down second-quarter revenues in the UK by 12 per cent. Across the Hollinger group, net earnings for the quarter rose to $23.5m, compared with a net loss of $3m last year.

Hollinger also raised concerns that a restructuring of the company was not proceeding to plan. It admitted that it was impossible to say whether restructuring talks - that could see Lord Black agree to relinquish control of the company over the next five years - would lead to an agreement or what shape that agreement would take.

Hollinger International's shareholders have also criticised lucrative packages for management services paid by the publishing group to Ravelston, Lord Black's private holding company, according to regulatory filings in the US.