The Enron of the Library World
A D V E R T I S E M E N T
A D V E R T I S E M E N T
This time the corporate shenanigans are hitting folks where they read.
By DAN MCGRAW
You don’t normally think of librarians being caught up in international fraud conspiracies. Certainly not a financial mess that has snared the likes of Michael Jordan, Oprah Winfrey’s production company, and Chicago’s Wrigley family. And certainly not Fort Worth’s very own info specialists, toiling in anonymity amid dusty stacks to make sure that hundreds of magazines and obscure academic journals are available to readers.
But the Fort Worth Public Library has found itself embroiled in a $70 million worldwide technology conglomerate collapse that is being felt by some 3,500 libraries around the world. Those who thought the dot-com bubble had burst a few years ago shouldn’t tell that to local library administrators. They’re on the hook for about $150,000 in magazine subscriptions, paid out to a company that apparently had no intention of fulfilling the orders. As a result, current issues of many magazines that the library usually offers are missing from the shelves.
“Libraries don’t deserve to be treated this way,” said Fort Worth library administrator Deborah Duke, who is handling the subscription mess. “We try to do a good job, serving the public with materials they want and need. It’s sad, but for the past six months we have been dealing with the issues — no pun intended — of trying to get our magazines back on the shelves.”
So how did the Fort Worth library become involved in what some news media have dubbed the “Enron of the library world”? First, a little bit of background on how libraries buy magazines: Most libraries get hundreds of periodicals — Fort Worth subscribes to about 1,200 — and hire subscription services to manage the accounts. The services save the libraries time and money by giving them efficiencies in the market and managing all the paperwork.
For decades, the Fort Worth library had used a company called Rowecom (formerly Faxon Library Services) and had received good service. In 2001, Rowecom was bought by an internet venture known as Divine Inc., a much-hyped Chicago internet incubator company that was trying to build itself into an e-content and software conglomerate.
The CEO of Divine was acclaimed tech guru Andrew J. “Flip” Filipowski, now 52, who in 1999 persuaded Chicago illuminati like Jordan, executives with Oprah’s Harpo Entertainment, and the Wrigley family to invest in his startup venture. Flip (he’s a one-name personality, sort of like Cher) was the type of charismatic tech guy who wore leather jackets and a graying ponytail down to his waist, like a Simpsons caricature of an internet guru, and spoke in tekkie slogans like “new paradigm dynamics” and “give yourself an edge, not a boundary.”
After buying Rowecom, Flip promised to help libraries acquire expensive content more cheaply, pointing out that libraries were “spending three times more than they need to on research publications.” But the acquisition of Rowecom was done for other purposes. Rowecom had about $348 million in annual revenues, which Flip wanted to use to increase Divine’s stock price. He also thought that Rowecom’s library subscription service would give Divine an entrée to sell e-content and software to libraries.
But in 2002, Flip and his new paradigm were hitting the wall. Divine was experiencing “severe financial difficulties,” according to company reports. Bankruptcy court documents show that Divine transferred about $70 million from Rowecom — money that libraries had paid for their 2003 subscriptions — to shore up Divine’s finances. The intention, according to Divine executives, was to later take out a loan to cover Rowecom’s shortfall. But the freefall for Divine was so swift that no lending institution would make the loan.
That left libraries and their magazine users holding the bag. In late December, the Fort Worth library learned that 930 of its 1,200 periodicals wouldn’t be coming in January (some publishers still sent subscriptions in the wake of the fallout, offering a grace period). Duke said the library immediately used $25,000 in emergency money to keep some popular titles — Time, Newsweek, Cosmopolitan, Hispanic Business, Harvard Business Review, and others. Tough decisions had to be made. Administrators decided to keep Dog Fancy but dropped Dog World, kept Golf Digest, but dropped Golf Magazine. The library put signs on the magazine racks advising the public that many titles were not available.
Duke said the whole situation has been a mess: “We had to go through every title, decide which ones were popular and we couldn’t do without. We decided to keep many titles with minority interest, many children’s titles, but couldn’t afford some of the scientific, technical, and medical journals.” Skateboarding World and World Wrestling Entertainment survived the cut, but the Journal of Applied Psychology and the Journal of Geology didn’t.
On June 4, EBSCO, a privately held Birmingham, Ala., conglomerate that operates a library services division, closed a deal to buy the bankrupt Rowecom’s U.S. operations. As part of the agreement, libraries have agreed to drop most of their claims against Rowecom. In addition, about 70 percent of the publishers have agreed to work with EBSCO to restart the lost subscriptions this summer (without charging the libraries a second time) and to pursue their claims against Rowecom in court. But some publishers are balking at the agreement and will restart subscriptions only when libraries prepay their orders.
Regina Kennamer, marketing manager for EBSCO, said the company will try to get the subscriptions restarted as soon as possible. But when and how is difficult to predict. “Some subscriptions the libraries will just lose,” Kennamer said. “It will depend on the publisher. But it is our goal to get the subscriptions back up again as soon as we can.”
Fort Worth subscriptions probably will be back up to speed in 2004, but the library probably will never see much of the $150,000 it paid to Rowecom or the $25,000 spent from emergency funds. Other libraries are out even more: The National Institutes of Health library lost $2.4 million, and the Houston Public Library is out about $500,000. Of even greater concern is the research “black hole” that will exist, since many libraries may never get the back issues of magazines published in 2003.
Divine filed for bankruptcy protection in February. According to the Chicago Tribune, a federal grand jury has been empanelled to determine whether Flip and Divine’s fleecing of the libraries should result in indictments. Divine is also facing shareholder lawsuits and an action by Rowecom claiming fraud by its former parent company. No one expects to make much from suing Divine; the company has just $25 million in cash and $108 million in liabilities.
As for Flip, Crain’s Chicago Business reports he has surfaced with a new venture, a software development company based in North Carolina. He still has a large personal fortune, according to Crain’s, and a large group of loyalists. And, as Flip told Internet World in a 2000 interview, “What’s going to happen with the internet protocol in the next two years is going to rock the heads of people who think of themselves as Internet-savvy already.”
Fort Worth library administrators may not have considered themselves all that internet-savvy, but Flip was right on one account. The librarians and their patrons did get their heads rocked.
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