Emmis sues Hungary for political interference in radio bids

Hungary is being sued for political interference in awarding radio licenses, renewing doubts over press freedoms in the nation as the government tries to convince the European Union that it respects media independence.

The 2009 tender for the frequencies of radio stations Slager and Danubius were “scandalously flawed” and amounted to the “expropriation” of investments, according to court papers filed separately by Indianapolis-based Emmis International Holding B.V., a unit of Emmis Communications Corp., and Bermuda-registered venture capital fund Accession Mezzanine Capital LP, which owned the stations.

“The illegal transfer of the broadcast licenses from Slager and Danubius to politically favored persons was one of the first steps in the process of suppressing independent voices in Hungary,” said Eugene D. Gulland, a lawyer at Covington & Burling LLP, which represents the plaintiffs at the Washington, D.C.- based International Center for Settlement of Investment Disputes, in an e-mail.

Hungarian Prime Minister Viktor Orban, who took office in 2010, has come under international criticism for setting up a media regulator exclusively led by ruling party appointees with wide-ranging powers that European Commissioner Neelie Kroes has said may spawn self-censorship. Aid talks with the EU and the International Monetary Fund have been halted over a dispute with the 27-member bloc over a series of laws passed.

The claimants and Hungary appointed arbitrators in the case on March 26 and the tribunal will hold its first session within 60 days of when the court nominates the president of a three-member panel of judges, according to the court documents obtained by Bloomberg from the companies.

Hungary’s then-media regulator, whose decision-making body was made up of parliamentary party representatives, called a tender for seven-year radio concessions for two nationwide commercial radio frequencies in 2009, which coincided with the run-up to parliamentary elections.

The plaintiffs allege that representatives connected to Orban’s Fidesz party, then in opposition, and the leadership of the then-governing Socialist Party, urged investors to “reach accommodations” with political parties to “have a chance” at renewing their licenses, which they ultimately lost. The people named in the court document who responded to inquiries by Bloomberg denied the claims.

Emmis and Accession allege the tender procedures were “unlawful” because incumbent licensees weren’t granted a preference in the tender as guaranteed by Hungarian law. The winning bidders’ conflict of interest should have disqualified them from the tender, the plaintiffs said.

The head of the media authority at the time, Laszlo Majtenyi, resigned the day after tender results were announced, saying the body’s decision “seriously violated” the media law as the winning bidders’ conflict of interest should have led to their disqualification. The tender process was “unlawful,” Majtenyi said in a statement posted on the authority’s website.

Hungary’s Supreme Court ruled last year that the tender for Danubius was “illegal” and that the company that won its frequency, Advenio Zrt., should have been disqualified as it indirectly operated another radio station and couldn’t divest itself as required.

The National Development Ministry said in an e-mail that it never comments on ongoing legal cases.

Accession, which was the owner and operator of Danubius Radio, said it “received solicitations” from “people connected to” Fidesz, specifically Tamas Fellegi — a media entrepreneur who is now a minister without portfolio in charge of negotiations on an IMF loan — and Zsolt Nyerges, a lawyer and entrepreneur.

Nyerges and Fellegi, who previously served as the government’s development minister, jointly set up Advenio, which emerged as the winner of Danubius’ frequency. Nyerges remains the majority owner of the business after Fellegi quit when taking on a Cabinet position.

Accession and Infocenter.hu, in which Fellegi was a co-owner at the time, held “business negotiations on setting up a joint company or a consortium,” Fellegi wrote in a Feb. 22 e-mailed response to questions.

He rejected Accession’s description of the meetings, saying they were “regular business negotiations” where “no one gave ultimatums.” Talks foundered after the parties failed to agree on management control and the recognition of past investments, Fellegi said.

“I didn’t represent” Fidesz at those meetings, “I represented my own company,” Fellegi said. Nyerges didn’t respond to faxes and e-mails sent to his company, Infocenter.hu.

Emmis, which had operated Slager Radio for 12 years prior to the tender, said it “received overtures” from then-Socialist Party President Ildiko Lendvai and Laszlo Puch, a party director at the time, according to the court document.

A single meeting with the representative of Slager Radio took place at the repeated request of the investors and after receiving a supporting letter from Indiana Sen. Richard G. Lugar, Lendvai wrote in a Feb. 24 e-mail.

Lendvai and Slager’s representative discussed the investor’s concerns that local bidders may outbid the incumbents or that the media body would favor bids with more political content, Lendvai wrote. She said she turned down further requests for meetings and rejected claims that the Socialists and Fidesz reached a political agreement on the two licenses.

“I held no talks with Fidesz or any other political party regarding any sort of political deal,” Lendvai wrote.

Puch denied ever meeting the investors or conducting talks with them, according to a Feb. 25 e-mail response to Bloomberg questions.

Advenio won the tender by offering to pay 200 million forint ($907,770) and 55 percent of projected net sales each year after July 2011. The FM1 consortium, the winner of the Slager frequency, offered to pay 200 million forint and 50 percent of expected sales, according to court documents.

Both offers were “unfeasible and unrealistic,” the claimants said in the court documents.

The winners only had to pay the fees they pledged in their bids for six months, as the regulator cut the fees as of this year, citing “challenges stemming from the economic crisis” and “unfair price calculation” which advantaged some groups over others, the media regulator said in an April 2 e-mail to Bloomberg News. The regulator declined to disclose the new fees paid by Advenio and FM1, citing confidentiality agreements.

Emmis and Accession said in the court filings that they turned to the international court after several amendments to the media law “precluded any meaningful remedy” in Hungary.

In another frequency sale which wound up in court, Klubradio, the country’s largest opposition station, lost its frequency in a tender in December in a decision that was criticized by the EU and the U.S. for potentially undermining media pluralism. It is currently operating with a temporary license while fighting the decision in the courts.

A Budapest court on March 14 overruled the regulator and ordered it to start a new procedure after concluding that the winning bid didn’t comply with tender regulations, according to an audio file of the ruling posted on Klubradio’s website.