Citizen Bunky: A Hearst family scandal
When the marriage of William Randolph Hearst's grandson hit the skids, it dragged his family's multibillion-dollar media empire into a legal battle that threatened to expose the company's secrets.
(Fortune magazine) -- In September 2004, John Randolph "Bunky" Hearst Jr. and his wife, Barbara, hosted what would be their last dinner party at the couple's estate in the Hamptons.
In the middle of the festivities, Bunky, who had suffered a debilitating stroke in 1989, escaped to his usual hiding place. According to court papers, whenever the 70-year-old needed a break from arguing over money with his third wife, he would either walk or roll his wheelchair into his bedroom, where he would wait quietly until his nurses let him know the coast was clear.
On this night, however, Barbara followed him into his bedroom. She was joined there by two process servers.
"We can do it ugly, or we can do it nice," Barbara warned Bunky as the servers handed him the divorce papers. "Remember one thing: I am much smarter than you are." With this threat, Barbara fired the first shot in a legal battle that would eventually threaten to reveal Hearst Corp.'s most tightly held secrets.
This lateral attack came at a time when the company was quietly grappling with seismic upheavals in the media business. Today Hearst Corp. is a multibillion-dollar media empire consisting of 200 magazines worldwide (including Cosmopolitan and O, the Oprah Magazine), 16 newspapers (including the San Francisco Chronicle), 29 television stations, the Arts & Entertainment channel, 20% of ESPN, and its $500 million Manhattan headquarters, for which the company paid all cash.
As the divorce played out, the company would pare down its newspaper holdings, invest tens of millions in broadcast television, and force out its longtime CEO, Victor F. Ganzi, a move widely attributed to his digital strategy, or lack thereof.
How the corporation got dragged into the last throes of Bunky's marriage is now a cautionary tale in corporate governance. Thanks to William Randolph Hearst's will, Hearst Corp. is privately held and owned by the Hearst Family Trust.
The way the trust works is pretty straightforward: Five of the 13 spots on the board of trustees are reserved for descendants of William Randolph Hearst -- now Bunky and four of his cousins -- and the other eight spots go to current or former senior executives. There are no real outsiders.
The 13 trustees also sit on the corporation's 20-member board of directors. The remaining seven seats on the board are filled by a combination of Hearst family members, Hearst Corp. executives, or those who are both, like Stephen T. Hearst, head of the corporation's ranching and timber operations.
Although the Hearst trust is not the only one to wholly control a sizable private company -- the du Pont trust, for example, owns a hospital -- Hearst Corp. is almost certainly the largest company managed by trustees.
When Bunky's cousin Patty Hearst was kidnapped in 1974, the Hearst trustees successfully petitioned the California probate court to seal Hearst's will and trust on the basis that they could serve as road maps to future kidnappings. Since then the trustees have gone to extraordinary lengths to keep the family business private.
Skeptics -- among them some renegade Hearst family members -- have suggested that the trustees' fondness for secrecy has more to do with their fear of being sued and preservation of their own sinecures than with protection of the family.
So when Bunky's divorce proceedings stalled and he accused his wife of taking advantage of his post-stroke "vulnerability" to loot his estate, Barbara's legal team cleverly turned Bunky's claim against him and Hearst Corp.
If Bunky's competence was in question, Barbara's attorneys contended, then the decisions he made over the past 15 years as a Hearst trustee and director should be admissible at trial -- every letter he signed and the minutes of every meeting he attended since his stroke.
For executives at rival media companies, business partners of the Hearst Corp. such as ABC (which owns the 80% of ESPN that Hearst does not), and investors in the company's then publicly traded subsidiary, Hearst-Argyle Television, the release of such documents would be a window into the inner workings of the corporation.
At first glance Bunky's divorce was simply tabloid fodder -- he claimed that one of Barbara's alleged lovers was found dead from a bad reaction to black-market Viagra. But on a deeper level, the case provided a test of how ironclad the Hearst trust is when compared with, say, the dual-class stock system that the Graham family of the Washington Post (WPO) or the Sulzbergers of the New York Times (NYT) use to control their dynasties. In those cases, the company's stock is publicly traded, but the family rules through a special class of stock with controlling voting rights.
The saga of this attack on the Hearst trust began in 1987 when Bunky started dating Barbara. Back then they were both regulars at Bobby Van's, a local Hamptons watering hole. Though Bunky, who was in his fifties, dressed like a deck hand on a fishing boat, he reminded Barbara of her father -- physically imposing but gentle.
Barbara was a military kid who spent her childhood bouncing from city to city until her parents settled in Charlotte. By the time she took up with Bunky, Barbara had been married and divorced. She was in her forties, working as a photo stylist in Manhattan and spending weekends in Wainscott on Long Island, about three miles from Bunky's modest three-bedroom cottage in Bridgehampton. She owed the IRS more than $50,000.
"I had known Bunky for at least 10 years before we ever dated," she says. "We were in a community of writers, and Bunky was faster with the turn of a phrase than anybody. He was just such a nice person." He was also, she notes, "70 pounds thinner."
Up to that point, Bunky's life had been both charmed and a little sad. In 1945, when he was 12, his father, John Randolph Hearst, and his mother, Gretchen Wilson, agreed to ship him off to his grandpa's estate. His parents -- his father was a heavy drinker, his mother attracted to heavy drinkers -- were divorced and in the process of starting new families with new spouses. Neither was particularly interested in raising Bunky.
Athletic, gregarious, and rebellious, Bunky soon became William Randolph Hearst's favorite grandchild, the only one of Hearst's 15 grandchildren ever to live with him at what outsiders call the Hearst Castle in San Simeon, Calif. (Family members call it "the ranch.")
Bunky was not lonely rattling around the 56-bedroom, 61,000-square-foot mountaintop castle overlooking the Pacific Ocean. He spent time with his grandfather's celebrity houseguests. He watched movies next to Charlie Chaplin. He played football with gridiron legend Jim Thorpe. And early one morning he learned that breasts float when he came upon Rita Hayworth skinny-dipping in his grandpa's famous marble-lined pool.
Even his nickname had a glamorous tinge -- Washington Redskins owner George Marshall gave it to him as a toddler because of his resemblance to the baby of the same name in the 1920s comic strip.
When William Randolph Hearst died in 1951, months before Bunky turned 18, Bunky was the only grandchild mentioned by name in the will. The estate -- about $400 million in today's dollars -- was divided among three trusts, one for his family and two for charities.
When Bunky's father died in 1958, Bunky received a 5% lifetime stake in the family trust's distributions. In 1974, the first year for which records are public, Bunky received about $7,500. Thanks to sage investments by the trustees in businesses such as ESPN, his annual take grew to an estimated $9.5 million in 2006.
Three of Bunky's cousins, with larger shares and less complicated divorces, are now tied for No. 296 on the Forbes list of the richest Americans, with net worths of $1.3 billion each.
By the time Bunky started dating Barbara in 1987, he was twice divorced and at the end of a peripatetic career. He had raced cars, worked for Hearst's New York Daily Mirror, and edited Motor Boating magazine (a Hearst publication). Boats became one of his biggest passions, and he named his favorite The Millicent in honor of his grandmother.
The couple dated for about a year before Bunky invited Barbara to move into his Bridgehampton house. About one year later, in November 1989, Barbara returned from a morning yoga class and found Bunky standing in a doorway, unable to lift his arm and slurring his words. After he spent a night at Southampton Hospital, Barbara had him helicoptered to New York-Presbyterian Hospital, where doctors told her he had suffered a severe stroke.
Bunky spent most of the next few months in hospitals and much of the next few years in rehabilitation, trying to relearn to walk. In February 1990, three months after the stroke, Barbara brought a mutual friend to see Bunky at Manhattan's Rusk Institute. The friend could see how caring for Bunky had worn Barbara down. "You're going to lose her," the friend warned.
Ten minutes later, from his hospital bed, Bunky asked Barbara to marry him. The wedding took place on June 21, 1990, at a friend's Manhattan apartment. The last surviving sons of William Randolph Hearst, Bunky's uncles Bill and Randolph, came with their wives. Barbara's mother and brother were there too.
In hindsight, Barbara's plan to dig for gold was obvious, Bunky would later claim. According to court documents, Barbara took over Bunky's finances after the couple married -- replacing his longtime attorney, Robert Littman, with a new one who drafted papers giving her unlimited power over his assets.
She purchased yet more property in the Hamptons, a series of homes in Charleston, and an apartment in Charlotte for her mother, all in her own name. She set up roughly a dozen bank and brokerage accounts for herself, closed nearly all of Bunky's, and took a 50% interest in one of his boats.
The new attorney drafted papers in which Bunky renounced any rights to a marital share of Barbara's estate upon her death, though not vice versa. Bunky signed all of those documents, he now alleges, while in a "vulnerable" and "weakened" post-stroke state.
In 1995, when the couple moved into a new, four-acre hilltop estate looking down on Bunky's old Bridgehampton cottage, Barbara moved into her own room and spent more and more time away. Bunky, on the other hand, rarely left the mansion, which Barbara dubbed Baby Versailles. The marriage deteriorated, and the arguing intensified. The couple no longer had sex.
By 2004 the relationship reached a point of no return, and in July, Bunky asked Littman, who had represented him for the better part of three decades, to come to his Hamptons house to discuss a divorce.
Soon Littman learned, and informed Bunky, that Barbara now legally owned essentially Bunky's entire estate. Littman would later discover that Bunky might have trouble getting it back. Under New York State law, it was hard to see how Bunky would qualify for a divorce. New York is the only state in the country in which there is no "no-fault" divorce (unless both sides consent to one); instead the grounds are limited to adultery, imprisonment, abandonment, and "cruel and inhuman" treatment.
Bunky considered trying to get Barbara on adultery. He accused her of two affairs -- one with a contractor she hired to renovate one of his boats, another with a neighbor whom EMTs found naked and dead in his bathroom, allegedly from a bad reaction to Viagra. The EMTs arrived shortly after Barbara called 911 from the neighbor's house. (Barbara says she was there for lunch, and the friend died during a post-gardening shower. She denies having had any affairs.)
And Bunky lacked proof. Besides, a spouse's adultery precludes the assertion of adultery, and Bunky's infidelities were well known -- Barbara's people leaked his request for a blowjob from his nurse to the New York Post's Page Six, and his own attorney admitted that Barbara permitted him "sexual surrogates."
In 2006, Bunky's lawyers came up with a new strategy that would inadvertently end up involving Hearst Corp.: Bunky would sue Barbara for fraud. If a court found that Barbara tricked him out of his assets, the decision wouldn't end the marriage, but it would probably require Barbara to return his property.
In his new effort to settle his scores with his wife, Bunky alleged that Barbara, aided by her attorney, co-defendant Leonard Ackerman, conspired to gain control over Bunky's fortune by exploiting his "emotional and physical dependency." (Both Barbara and Ackerman denied any wrongdoing.)
For the next two years Bunky's new case proceeded much like the first -- with Barbara's side winning most of the big battles. Finally, in August 2008, Barbara's attorneys filed the motion they believed would make Bunky cry uncle and bring the proceedings to a quite favorable settlement: Barbara's attorneys served Hearst Corp. with a subpoena seeking all documents, from the time of Bunky's stroke until Barbara filed for divorce, that reflected Bunky's "actions and involvement" as a trustee or as a member of Hearst's board.
"We anticipate that [the] documents will demonstrate that despite the claims ... concerning Mr. Hearst's condition in the wake of his stroke in 1989, he continued to be actively involved in ... the many complex and significant business and financial issues that were considered by the board," Barbara's team argued.
In other words, if Bunky was so incompetent that a mild-mannered photo stylist could commandeer his entire fortune, how could he be leading one of the world's great media corporations into the 21st century? Barbara's legal team, which included the wily litigator Charles Stillman of Stillman Friedman & Shectman, wanted proof -- every scrap of paper that passed through the highest echelons of Hearst Corp. during the previous 15 years.
That the documents would also reveal the secrets of a famously private company was, to believe Barbara's attorneys, merely a coincidence.
Hearst Corp. -- whose management would not comment for this story -- opposed the motion and argued that such a massive disclosure would "provide a clear road map of the Company's strategy on acquisitions and divestitures, its plans for the future, and its financial balance sheet, thus causing significant competitive concern and inevitable damage."
On the verge of being dragged into the fraud case, Hearst Corp. first stood behind Bunky, and then it seemed to throw him under the legal bus. In September 2008, Bunky and Hearst put forward a unified front and responded to Barbara's motion by drawing a line between "vulnerable" and "incompetent."
At the corporation's behest, Bunky's new lead attorney -- the litigator Thomas Quigley, a partner at Winston & Strawn who is best known for successfully defending tobacco giant Philip Morris against a series of fraud actions -- submitted an affidavit "clarifying" Bunky's allegations.
Although Bunky "contends that as a result of a debilitating stroke that he suffered, he was in a weakened and vulnerable state, [Bunky] does not contend that he was ever legally incompetent," Quigley wrote. Hearst Corp. offered to stipulate that Bunky was "legally competent" in exchange for not having to turn over any papers.
Barbara's attorneys said "No thanks" -- confident that after nearly five years of increasingly hostile litigation Hearst would prevail upon Bunky to settle. Apparently they were right. In December 2008, about four months after Barbara filed her motion, Bunky agreed to withdraw his fraud action in exchange for a divorce. He also agreed to a distribution of the assets that would leave Barbara with much of what Bunky claims she had embezzled.
Quigley is adamant that the decision to settle was Bunky's. Of course the company wanted the suit to end, he says, but it did not pressure Bunky. "Obviously we were in communication with the Hearst Corp. lawyers," Quigley says. "At the end of the day, John made his own decision. The Hearst Corp. did not make this decision. No one forced him into it one way or the other."
The trust, which has been sued by Hearsts and their ex-wives for three generations now, once again came through unscathed. Bunky and Barbara did not fare as well.
Fifty-eight years after his death, William Randolph Hearst's blueprint for keeping his company alive and in his family's hands still works. Since Hearst's death, the company's professional managers have increased the company's value by about 2,500% while paying out multimillion-dollar disbursements.
The company's mainstream titles like Food Network Magazine are thriving, while competitors including Condé Nast Publications and Time Inc. (Fortune's parent), are shuttering titles.
Hearst is rumored to have a $1 billion war chest of cash earmarked for acquisitions. What's more, the infighting that marked the Bancroft family's last days as the owners of Dow Jones couldn't have happened at Hearst, as the family doesn't have enough votes to, say, quibble over a sale.
"It's a clever structure," says Charles M. Elson, chair of the University of Delaware's Weinberg Center for Corporate Governance. "Hearst gave his descendants a voice but not control."
The trust, however, will eventually come to an end, and the company will be divided up when the last of William Randolph Hearst's grandchildren passes away. As of now, any Hearst descendant (currently there are about 65) who outlives Bunky and nine of his cousins stands to inherit about $150 million.
As for Bunky's divorce, it was finalized on April 15, 2009. By one insider's estimate, Barbara will keep assets worth a little more than $10 million -- including her homes in Sag Harbor and Charleston and a sizable amount of cash. Bunky gets his cottage, Baby Versailles, and, most important, the divorce.
To induce the courts to finally okay the split, Barbara also admitted marital fault -- most likely constructive abandonment, but most definitely nothing even remotely related to fraud. The settlement is decidedly a victory for Barbara, who still goes by Mrs. Hearst.
If the divorce had taken the standard New York path, the court might have awarded Bunky everything. And if Barbara had lost the fraud trial, her lawyers would probably be drafting her bankruptcy petition. Now 68, Barbara is newly blonde. Bunky, she says, will rank as her final husband.
"Most of my dates seem to be gay," she told Fortune when the magazine caught up with her at her home in Charleston. "I am never getting married again."
For his part, Bunky, now 75, may have reclaimed the keys to Baby Versailles, but he appears well settled into the modest cottage at the bottom of the hill. Although it is small by Hamptons standards, the cottage accommodates his wheelchair and overlooks the ocean, not far from where he docks The Millicent, which is once again all his.
The cottage contains many reminders of Bunky's roots -- a handwritten family tree, pictures of his grandfather with various dignitaries, and a replica of Rosebud, the iconic sled from the Hearst pseudobiopic, Citizen Kane. "It's a great movie in terms of production," Bunky told Fortune during a visit, though "the script needs work."
Entertaining guests last summer, Bunky spent much of the afternoon in his wheelchair in his living room, sneaking cigarettes when his nurses weren't looking. The past few years may have been trying, he said, but overall, the good times in his life have far outweighed the bad. Asked if he had the chance to do it all over again, would he come back as a Hearst, he answered without missing a beat.
"Every minute," he said. "I loved it. I had a great time. I was spoiled." He then took a puff from his cigarette and thought about the question some more, but didn't change his mind. "Every minute," he said. "Every dollar." And with that philosophical insight, Bunky asked the nurse to bring him another bloody mary.