Federal Antitrust Official Has Some Nice Bertelsmann Birthday Cake

Judging by the turnout for his 46th-birthday party, Bertelsmann A.G.’s chief executive, Thomas Middelhoff, has successfully tunneled his way into America’s media landscape. What a strange, brief trip it’s been. Seven months ago, Mr. Middelhoff ascended to the top spot of the world’s third-largest media conglomerate, a sprawling empire based in Gütersloh, Germany, that produces books, music, TV shows, magazines and newspapers, as well as maintaining a strong foothold in e-commerce and other on-line services. It is a company familiar to few laypeople despite a presence in more than 50 countries. And yet there he was, on Friday, May 14, in the private Bellecour Room at the Upper East Side restaurant Daniel, being feted by Peter Olson, chief executive of Random House Inc., and a cast of 31 other media lights.

Who was there? Most notably, Joel I. Klein, the 53-year-old Assistant Attorney General who heads the Justice Department’s antitrust division and who is spearheading the Government’s antitrust case against Microsoft Corporation. Attorney General Janet Reno has called Mr. Klein “the person who is most responsible for formulating and enforcing competition policy on behalf of the Administration.” Also in attendance was America Online president Bob Pittman; Steven Rattner, deputy chief executive of Lazard Frères & Company, which helped broker Bertelsmann’s 1998 acquisition of the publisher Random House; Barnes & Noble chief executive Leonard Riggio; Random House senior vice president Stuart Applebaum; Alfred A. Knopf president Sonny Mehta; BMG Entertainment chief executive Strauss Zelnick; Talk editor Tina Brown and her husband, Harry Evans, editorial director of the Daily News ; and Penguin Putnam Group chief executive Michael Lynton.

Certainly, Mr. Klein was the only dinner guest who had to clear his presence beforehand with his office’s ethics division. Even though his attendance at the dinner did not run afoul of Federal guidelines, he was, after all, a high-level Government official whose job it is to keep an eye on monopolistic practices, who was going to be a guest at a birthday party for the chief executive of one of the world’s largest media companies. While neither Mr. Klein nor Mr. Middelhoff would comment for this article, spokesmen for each man would say only that they are friends.

Since the reservation was made in the Bertelsmann name and the bill came to more than $200 a head-including a gift of Michael Korda’s publishing memoir Another Life: A Memoir of Other People and a Frank Sinatra CD-the tab exceeded the standard $20 limit allowed for gifts to employees of the executive branch, according to the Code of Federal Regulations. The regulations state that “employees shall endeavor to avoid any actions creating the appearance that they are violating the law or the ethical standards” set forth in the regulations’ general provisions.

Mr. Klein is not required to reimburse Bertelsmann for the dinner, said Ilene Block, the ethics officer for the Justice Department’s antitrust division, because Mr. Klein and Mr. Middelhoff are friends. Ms. Block added that even though he did not have to, Mr. Klein called her the day of the dinner. “Joel calls about everything to make sure it’s fine,” she said.

“Because he’s Joel, he did run it by his ethics officer out of an abundance of caution,” said Gina Talamona, a spokesman for the Justice Department.

Asked why Mr. Klein was at Mr. Middelhoff’s soiree, Ms. Talamona said, “He’s a very good friend. He went because he sees [Mr. Middelhoff] socially. Some people are work friends, some are social friends. They’re personal friends. He’s known Mr. Middelhoff for more than a year. He met him at a party at a friend’s house [in the United States] and also through a courtesy call.”

Asked about Mr. Middelhoff, Bertelsmann spokesman Liz Young said, “I’m unaware of when they first became acquainted. I’ve only been in this job a year. They’re friends and they meet socially on occasion.”

Nevertheless, according to one of the party guests, “It was a business event, really. Thomas has been extremely effective at networking.”

Bertelsmann has no cases pending before the Justice Department. And the Code of Federal Regulations defines prohibited sources as people who are seeking official action by the employee’s agency, or who have interests that may be substantially affected by performance or nonperformance of the employee’s official duties. But no company of Bertelsmann’s size is likely to avoid dealing with the antitrust division forever. And Bertelsmann has business relationships that might benefit from a weakened Microsoft: It co-owns America Online Europe and is locked into a 50 percent stake in Barnes & Noble’s on-line bookselling venture, Barnesandnoble.com, which raised $421.6 million in its initial public offering on May 25. And to add another wrinkle, Bertelsmann and Microsoft are considering bidding jointly for part of Deutsche Telekom A.G.’s cable operations.

Which leads some to believe Mr. Klein should not be sitting down to rib-eye steak and truffled marrowbone at Mr. Middelhoff’s expense, not least because Mr. Middelhoff has made his anti-Microsoft feelings known in the past.

“Joel Klein shouldn’t be eating free dinners off the corporate tab of Bertelsmann A.G. because of Bertelsmann’s competitors’ pending business before the antitrust division. It’s a conflict of interest,” said Gary Ruskin, director of the Congressional Accountability Project, a nonpartisan government watchdog group.

Back in 1995, when Mr. Middelhoff was Bertelsmann’s multimedia director and Microsoft was launching its on-line service Microsoft Network, he urged action against Bill Gates’ company. At the time, Mr. Middelhoff told the Reuter European Business Report , “The danger exists that Microsoft will block the global development of this young industry. In this regard we expect a clear decision from international antitrust authorities.” At that point, Mr. Klein was the principal deputy at the antitrust division. He was appointed to his current post by President Clinton. Mr. Klein also helped Janet Reno create a 13-member advisory panel, called the International Competition Policy Advisory Committee on antitrust. Members include the aforementioned Mr. Rattner, Zoe Baird and Vernon Jordan.

If Bertelsmann did come before the Justice Department on a business matter, Mr. Klein would seem to be free to have dinner at Mr. Middelhoff’s invitation again. “Friendship has to precede a business relationship,” said an ethics official with the Justice Department. “It can’t be that you made friends while working for the Government. Birthday party or private dinner, what counts is, Were you invited because of your official position or were you invited because of a friendship? That’s what counts.”

One senior publishing executive who was not at the dinner said, “Given the whole issue of corporate power and antitrust as it’s manifested itself, [Mr. Klein] should not be sitting at the same table with the man who could be the Bill Gates of the electronic communications revolution. What Middelhoff is doing as a European is trying to understand American culture, really trying to get to know the big machers in our culture. He wants to understand. This is what makes Bertelsmann so brilliant.” Indeed, Mr. Middelhoff has described himself as “an American with a German passport.”

One with an eye on the horizon. He is chair of the business steering committee of the Global Business Dialogue on Electronic Commerce, a free-market-friendly group of executives from companies such as Time Warner Inc., the Walt Disney Company, Deutsche Bank and MCI Worldcom, who want to band together to influence various governments’ Internet policies. At an exploratory meeting in Brussels last June, Mr. Middelhoff wrote in a follow-up letter, “The business representatives agreed that conflicting policies, rules, overregulation and regional patchwork regulations are obstacles to all companies engaged in electronic commerce on a global scale.”

Last December, Mr. Middelhoff told Marvin Kalb, the director of the Shorenstein Center on the Press, Politics and Public Policy at Harvard University’s Kennedy School of Government, that Bertelsmann was interested in investing in U.S. network television. “Over the next years, we will discuss this issue, I believe, between the American administration and the European Commission,” Mr. Middelhoff said. “We will come to a conclusion, and then it will be time for Bertelsmann to start into the American TV network business.”

The Publishing column can be reached at emanus@observer.com.