The man who got smart with Murdoch

The mogul may be more victim than villain in the latest round of tax claims, writes Paul Farrelly
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The Independent Online
These are taxing times for Rupert Murdoch. The Australian media mogul is forging ahead with plans to clone the enormous success of satellite broadcaster BSkyB in a bid for global TV domination.

The investment, in American Sky Broadcasting and Star Asia, will cost billions. But it will secure the Murdoch dynasty as the 65-year-old patriarch passes control to his children.

His ambitions are raising the hackles of regulators and rivals as never before.

With its pounds 35bn merger with British Telecom, his US partner MCI may jettison its stake in News Corporation, Murdoch's Australian master company, to placate politicians.

In midweek, US media giant Time Warner won a New York court order to keep Murdoch off the airwaves. The tit-for-tat battle has already claimed the unlikely scalp of Bugs Bunny over here, as Sky pulled the plug on Warner Brothers' British TV launch.

Meanwhile, Hong Kong is buzzing with rumours that Star Asia is about to quit before the Chinese handover next year, relocating to Bombay, Kuala Lumpur or Singapore.

And then there is the vexed question of tax itself: News Corp has paid very little at all in its global operations. Achieved through a myriad of tax haven subsidiaries, it is as if the public purse is paying for Murdoch's huge legacy.

Politicians in the UK and US may yet stir despite the mogul's media clout. But it is an unlikely outpost that is rattling the empire with tax-evasion claims to the tune of pounds 100m.

Three weeks ago, Israeli tax inspectors raided the offices of a small subsidiary of News International, the UK owner of Murdoch's newspaper stable. The company, News Datacom Research (NDR), sounds un-assuming enough. But it has been key to his recovery from near-bankruptcy in 1990. NDR is the source of BSkyB's crucial "Videocrypt" technology, the satellite codes that allow Sky to restrict its broadcasts to punters who pay.

Last week, the press was chasing stories that the Israelis had issued an arrest warrant for Murdoch. All untrue, as it turned out, and based on a misrepresentation of an order to produce documents.

But enough, none the less, to prompt detailed denials and embarrassment at the highest reaches of the Israeli Inland Revenue and Murdoch group.

The Israeli connection is a murky tale of fraud, bugging claims, a love triangle and alleged thieves falling out.

It is also a story where the much-vilified magnate - documents obtained by the Independent on Sunday suggest- is more victim than villain.

The Murdoch camp alleges that Michael Clinger - a former Murdoch staffer wanted by Interpol - is orchestrating a campaign to force it to drop a pounds 20m lawsuit in London. "He is very busy supplying stories to the Israeli tax authorities. There is no case. They have not filed any charges, nor are there any plans," said one source close to the case.

News International is suing Mr Clinger, a high-rolling 45-year-old, for alleged fraud in the supply of Sky "smartcards" - the credit-card mounted microchip that lets viewers tune in - to its Heathrow- based software firm News Datacom, which owns NDR.

With Indian-born card maker Bharat Marya and a top NDR executive, he conspired to inflate prices paid for smartcards and rake off profits through a web of tax haven firms (see chart above), it alleges.

Through one - International Development Group (IDG) - they claim he also hid ex-News International director Bruce Hundertmark's illicit personal interest in the smartcard venture.

Clinger has a colourful past. Born here in 1951, of Jewish-Hungarian descent, he is now an American citizen, but also travels on British and Israeli passports and uses a variety of aliases: Cornelius Clinger, Michael Klinger, Clinger-Kapeliuk or Kapeliuk, his second wife's maiden name.

Until recently, he lived in the plush Swiss ski resort of St Moritz, before recently seeking refuge in Israel.

He started respectably enough as a banker in the early 1970s before going into medical sales, and in 1982 set up Endo-lase Inc, a supplier of medical lasers.

The venture quickly came unstuck. In 1984, Endo-lase raised $3.5m in a placing of shares, which soared amid aggressive hype. An inquiry by the US Securities and Exchange Commission, started in late 1985, makes disturbing reading.

The SEC pronounced the firm's 1984 and 1985 accounts "materially false and misleading": Clinger and his associates, it found, had recorded fictitious sales and purchases to boost profits.

In 1986, Clinger settled a civil suit from the SEC, handing over $810,000 before emigrating.

The US authorities did not stop there. Angry investors brought a class action and in 1990 a federal grand jury indicted him on charges of conspiracy, fraud and insider dealing.

Two associates were convicted, and an arrest warrant for Clinger issued by a New York court is still in force.

"He remains a fugitive from justice. The last attempt at extradition, through Interpol in February this year, remains unanswered by Israel," one US source says.

Meanwhile, in mid-1987, as News International's statement of claim shows, Clinger was introduced by an Israeli scientist to Hundertmark, then a consultant looking for high-tech investments for the group.

One appealed in particular: codes invented by top Israeli cryptologist Professor Adi Shamir that would safeguard Sky's smartcards from widespread piracy.

In 1988, what was to become News Datacom was formed as a joint venture with Prof Shamir's Weizmann Institute and IDG, which brought Clinger's "marketing skills".

The Murdoch camp alleges it did not know IDG was also a front for a personal rake-off by Hundertmark.

Those claims were strengthened last year when Hundertmark sued Clinger in Israel, claiming he had been ripped off after the $5m sale of IDG's stake to News Datacom in 1991.

By then, Hundertmark had been pushed out, but not before he had signed five secret deals to market cards overseas, News International claims. One, Catalyst Systems - renamed Phoenix Micro Inc (PMI) - was to play a key future role.

Clinger, too, it decided, had to go after rising tensions between the UK and Israeli operations.

But far from making a clean break, under the terms of the buyout, Clinger had already conspired to inflate prices and split profits with Mr Marya, it alleges.

To ward off News International's attempts to secure alternative suppliers, the group also claims Clinger co-opted News Datacom's operations manager, Meir Matatyahu.

The net effect, it alleges, was that until late 1995 it depended for smartcard supplies on four Clinger/Marya controlled firms - PMI, US3, Catalyst Satellite Systems and Phoenix Datacrypt - which extracted increasingly tougher terms.

From 1991 to January this year, News Datacom bought 19 million cards, mainly for Sky, at an average pounds 3 a time. Based on a price of pounds 1 less quoted by Germany's Siemens, News Corp's legal director Arthur Siskind claims the group has lost pounds 19m.

Clinger, it claims, received the bulk of the profits via a 60 per cent holding in PMI, and Marya much of the rest through his alleged 40 per cent stake. Matatyahu, it alleges, was paid at least $200,000, via another offshore firm, Linden Finance.

This weekend, speaking from Israel, Clinger denied the allegations: "Their whole claim is based on lack of disclosure and I believe both I and Mr Marya disclosed everything to them a long time ago."

Marya's City lawyer, Ian Rosenblatt, said his client will fight the charges: "We are defending it vigorously."

Clinger, represented by City lawyers Clifford Chance, has filed a counter- suit for unpaid royalties after the IDG sale, which News International stopped last year. Its suit, he says, was prompted by that claim.

He also denies making false allegations to the Israeli tax authorities.

The Murdoch camp's howls of "extortion" stem from a New York meeting with Clinger's Tel Aviv lawyer, David Martin, at which it claims it was threatened with tax problems in Israel if its case went ahead.

A "smoking memo", from Israeli tax expert Avi Alter, was also brandished by Mr Martin. That opinion, however, suspiciously left off the name of the client and was based on false information about News Datacom's Israeli operations, according to News Corp's own lawyers Herzog, Fox & Neeman.

This weekend, Clinger denied he was the mystery client: "It was commissioned by a lawyer concerned about his previous involvement with News Datacom," he said.

However, he declined to comment on whether it was Martin who originally helped structure the venture.

Clinger none the less has good contacts with the tax inspectors after helping in the prosecution of News Datacom's former finance director Leo Krieger, who was arrested in 1995 and faces charges of pounds 650,000 of unpaid tax on share options.

Krieger is the boyfriend of Clinger's ex-wife and has been helping News International with its inquiries.

Twelve tape recordings supplied by Krieger form part of its case against Clinger, which has led to bitter allegations of illegal bugging, which News International refutes.

Meanwhile, the group feels Clinger has been less than frank in revealing his assets and, next week, Murdoch's City lawyers Allen & Overy will continue court action to force further disclosure.

This weekend, Clinger said he was worth a little less than $4m. Investigators claim, however, to have identified an art collection in two offshore companies - Bukan and Eden Glen - which is worth that amount alone.