SEC clips wings of American vulture fund feeding off Canada’s largest newspaper chain

New Jersey hedge fund Chatham Asset Management, which owns most of Canada’s largest newspapers, paid US$19.3 million recently to settle charges of improper trading brought by the U.S. Securities and Exchange Commission. The dodgy dealings are chronicled in my new book The Postmedia Effect, but their outcome was only announced as it was rolling off the presses earlier this month. The charges provide a glimpse into the kind of questionable tactics often engaged in by hedge funds like Chatham, which is attached like a leech to Postmedia Network. It owns two-thirds of Postmedia’s shares despite a supposed 25-percent limit on foreign ownership in this culturally sensitive industry, but more central to Chatham’s business model, it is bleeding the company dry through interest payments on the massive amount of its bonds which it also holds. 

Postmedia is just one of several newspaper chains owned by Chatham, which was founded in 2003 by junk bond trader Michael Melchiorre. In 2020, it acquired out of bankruptcy the U.S. chain McClatchy, owner of major dailies such as the Miami Herald, Kansas City Star, and Sacramento Bee, by buying up its distressed debt on the bond market for pennies on the dollar. It already owned American Media Inc., publisher of the National Enquirer and magazines such as Men’s Journal and Us Weekly, which it took over in a similar way. 

Alleged manipulation of bond prices is what got Chatham in hot water with the SEC. “Trading in AMI bonds had the effect of increasing the prices of those generally illiquid securities in a way that was disconnected from economic reality,” noted an SEC spokesperson. It alleged that Chatham advised its clients to buy and sell AMI bonds back and forth at prices it proposed, which raised their value significantly from 2016 to 2018. Chatham and Melchiorre consented to the SEC's findings without admitting or denying them and agreed to pay US$11 million in compensation, $3.3 million in interest, and US$5 million in civil penalties. Similar suspicions have been raised about manipulation by Chatham of Postmedia’s bond prices, according to Fortune magazine. “The strong price of the debt is difficult to explain, traders say.” 

Its bonds rarely change hands. Yet its junior bonds offer yields comparable to more senior securities. The notes don’t pay regular interest in cash, a sign of their inherent riskiness. At least five other traders who’ve looked at the bonds say their prices seem too good to be true. 

Chatham sold the National Enquirer in 2019 after a scandal erupted over its “catch and kill” tactics used to aid the election of Donald Trump as U.S. president in 2016. Trump’s lawyer Michael Cohen was sentenced to three years in prison in 2018 on charges including campaign finance violations, tax fraud, and bank fraud over hush money paid to porn star Stormy Daniels and Playboy model Karen McDougal to cover up affairs with the presidential candidate. Trump himself now faces 34 felony charges of falsifying business records to conceal the payments. McDougal was paid $150,000 for her story by National Enquirer publisher David Pecker, who supported Trump’s election, but it was never published. Pecker, who was then a Chatham appointee to Postmedia’s board of directors, was granted immunity from prosecution in exchange for providing information about the payments. He resigned from Postmedia’s board shortly after the scandal broke.

Chatham took over Postmedia in 2016 from GoldenTree Asset Management, a New York hedge fund which had acquired it out of the 2010 bankruptcy of Canwest Global Communications by similarly buying up its distressed bonds. Canwest was deeply in debt when the 2008-09 recession dropped its advertising revenues sharply, so it issued new bonds at interest rates as high as 12.5 percent in a desperate attempt to stay afloat. GoldenTree bought many of the bonds for as little as 10 cents on the dollar, then kept the debt on the company’s books to ensure that it was paid first every month. “All it had to do was to keep the company alive long enough to collect on its loans,” as I note in The Postmedia Effect. “A bond paying 12.5 percent interest bought for 10 cents on the dollar, after all, provided a return of 125 percent a year.” 

Under GoldenTree, Postmedia bought Sun Media, Canada’s second-largest newspaper chain in 2014, giving it 15 of the country’s 21 largest dailies at last count, including the National Post, Ottawa Citizen, Vancouver Sun and Montreal Gazette. It sold out to Chatham two years later in a change of ownership that “happened so quietly,” according to the New York Times, “that Postmedia’s own financial news site described it as a debt restructuring in a report that included a single mention of Chatham as ‘one of the investors.’” Under Chatham’s ownership, the Times noted, 1,600 employees or 38 percent of its workforce were laid off over the next four years as Postmedia “centralized editorial operations in a way that has made parts of its 106 newspapers into clones of one another.” 

A former high school football star from Chicago, Melchiorre gained a reputation for playing tough while head of Morgan Stanley’s junk-bond trading group in New York. “Although not physically imposing, Melchiorre could be foul-mouthed and loud," noted Fortune, "and would berate fellow traders as he bopped around the trading floor in his stocking feet.” Chatham soon built a “formidable reputation” under Melchiorre. “Playing tough is the Chatham way,” it noted, adding that the firm and its founder had developed “a reputation for hard-edged business.” Postmedia recently closed 12 newspapers in Alberta and announced that another 11 percent of its workforce would soon be axed. It is also selling real estate as its advertising revenues continue to fall, putting it under water on its debt payments and thus facing bankruptcy soon, according to The Postmedia Effect.