Can Tech’s Tattle Tycoon Trump Thiel?
Can Tech’s Tattle Tycoon Trump Thiel?
Gawker media founder Nick Denton used dotcom money to build one of the tech industry’s biggest critics. At war with investor Peter Thiel, and facing bankruptcy, Denton may yet steal a page from Silicon Valley’s tax masters to have the last laugh.
Nick Denton stared at the six jurors before him and prepared for the worst. They had a choice: side with Denton, an English entrepreneur–turned–New York blog baron, or Terry Bollea, the American wrestling icon known as Hulk Hogan. Over the years Denton had built his small but influential company, Gawker Media, on the backs of countless reports that needled Hollywood celebrities, professional athletes, and Silicon Valley entrepreneurs. But when Gawker’s namesake website in 2012 published a grainy sex video featuring Hogan, the self-proclaimed “gossip merchant” went a bridge too far. Hogan sued in his hometown court in Florida, secretly backed along the way by PayPal (PYPL) cofounder Peter Thiel. And Thiel was willing to spend millions to show that subjects of Gawker Media’s scrutiny could fight back and drive Denton out of business.
In the courtroom, the foreman stood up and delivered a judicial body slam: a $115 million award in favor of Hogan. Three days later, on March 21, jurors tacked on another $25 million in punitive damages. (Gawker has appealed.) The sum was enough to force Gawker Media, and Denton, into bankruptcy. Thiel, an iconoclast who once described Gawker’s Valleywag website as “the Silicon Valley equivalent of Al Qaeda,” had won. A billionaire tech entrepreneur had managed to crush one of his industry’s most persistent critics.
Or so it seemed. A Fortune investigation into Gawker Media’s finances reveals that though Denton is down, he is not out. As the company’s websites assailed tech giants like Alphabet (GOOGL), Apple (AAPL), and Facebook (FB) for byzantine schemes meant to reduce their tax burden, Gawker Media quietly played the same game. Our investigation reveals that Denton is as much a creature of the tech industry as he is a critic—and that Gawker’s slippery but legal tactics may, in the end, help Denton survive Thiel’s crusade with funds to spare.
Denton founded Gawker Media in New York City in 2002. In the late 1990s the former Financial Times journalist reported on Silicon Valley before quitting the paper to start his own Internet venture in the go-go days before the dotcom crash. His efforts—among them the news-aggregation company Moreover Technologies, which sold for $30 million to VeriSign (VRSN) in 2005—gave Denton the funds he needed to explore the nascent format known as the weblog. In July 2002 he launched Gizmodo, Gawker Media’s first blog, focused on gadgets. Gawker.com, which traded in media industry gossip, was launched the following year.
From its earliest days, Denton ran Gawker Media like a technology startup. His move-fast-and-break-things ethos applied to products—sites were launched and shuttered in rapid succession—and people, who were hired and fired with abandon. The company built (and rebuilt) its proprietary publishing system and later tried to license it to other media companies. In a bid for radical transparency, its editors regularly published internal memos and sniped with one another (and Denton) in the comments beneath articles. Gawker Media cultivated the bombastic sense of mission and the naked self-interest that are hallmarks of Silicon Valley, adopting a clicks-at-all-costs approach that vilified those in power. (Denton declined to comment for this story.)
Gawker’s tactics occasionally landed the company in ethically dubious territory where it pursued titillation over relevance. A former staffer who declined to be identified for fear of reprisal described a “Just publish it” newsroom culture that actively discouraged legal review of stories about sensitive issues. Gawker’s moral low point was its 2015 publication of a story about a married Condé Nast executive seeking to arrange a tryst with a gay escort; under fire, it unpublished the story the following day.
Gawker’s headlines demonstrate how its publications always went for the jugular. “Sean Parker’s Wedding Was So Horrible He Has to Make an Apology App,” from a 2014 Valleywag post, needles the well-known Facebook investor. “I Read 10 Years of Jack Dorsey’s Tweets, These Are the Worst” cries a 2016 headline on Gizmodo about the Twitter and Square CEO. And then there’s “Why We Hate Rich Geeks,” a 2013 post penned by Denton himself.
Given his familiarity with the technology industry, Denton’s criticisms of its moguls could be especially pointed. “Tax breaks for the rich,” he wrote in a 2007 post decrying an arrangement in which Google received favorable tax treatment when it opened a data center in a poor county in North Carolina. “It is a reminder that the stock-option-rich executive class is taxed at about half the rate of the wage slaves,” Denton wrote in 2010, deriding the salary structures of Silicon Valley executives. “That’s grotesque.”
But even as Gawker Media railed against such tactics, it adopted some of them. The most common method, used by tech giants like Uber and Apple (AAPL), lets a company shovel its profits offshore in order to defer paying U.S. corporate tax. Gawker took that idea one step further—for the lion’s share of its profits, it didn’t just defer its U.S. taxes, but eliminated them altogether.
When Denton started Gawker Media 14 years ago, it was a U.S. taxpayer just like any other American small business. Its headquarters were in downtown Manhattan; its employees were mostly local. Today Gawker Media still operates primarily from New York City offices—it also has an office in Budapest—but it is now a Cayman Islands–based holding company with two subsidiaries: one in the U.S., one in Hungary. (Denton speaks Hungarian and has ancestral ties to the nation. The country also has highly favorable corporate tax policies.) For clarity, we’ll call the combined operation—U.S., Hungary, Cayman Islands—Gawker Global. According to various financial documents—among them U.S. tax returns, disclosures from Hungary, and documents released by the company in and out of court—Gawker Global used three tactics to reduce its U.S. tax burden.
The most common involves royalties. The overseas arm of a company bills its U.S. operation for licensing its intellectual property, such as website code or corporate trademarks. The arrangement allows the company to reduce its U.S. tax burden because there are fewer profits to tax. Gawker adopted this mechanism.
Gawker Global saved even more on taxes by outsourcing some of its U.S. functions—“editorial services,” “content creation services,” and others, according to bankruptcy filings—to its Hungarian subsidiary. Hungary would provide the U.S. with those services in exchange for substantial service fees, which counted as a cost against the U.S. subsidiary.
Lastly, as the legal costs of fighting the Hulk Hogan lawsuit piled up, Gawker Global raised the service fees and royalties that its U.S. arm was paying to its Hungarian arm—from $6.7 million in 2013 to $8 million in 2014—and immediately loaned the funds back to the U.S. with interest. That interest represents additional Gawker Global profit leaving the U.S.
Between 2010 and 2015, Gawker Global tallied more than $200 million in revenue and $59 million in profit, according to various financial records. Just 20% of Gawker Global’s profits were taxed in the U.S.; 80% escaped the clutches of the IRS. Of the total, 55% were U.S. profits diverted to Hungary, and 25% were profits that never entered the U.S. and were recorded in Hungary. Gawker’s U.S. tax rate during this period was 34%; its average tax rate in Hungary was 5%. With this scheme, Gawker Global managed to retain 29% of profits that it would have lost if it had reported the entire sum in the U.S.
Heather Dietrick, president of Gawker Media, defends the company’s profit parking. The company really does have an overseas tech operation of more than a dozen developers, she says, and the license payments are legitimate.
Meanwhile Gawker’s noisy editorial operation flourished as it skewered the rich and powerful, including corporate tax dodgers, with headlines like “Apple Avoided Paying Billions in Taxes” and “Airbnb, Just Pay Your Taxes and Follow the Law and Shut Up.”
The hypocrisy was not lost on Gawker’s employees. One former staffer says they used to joke frequently about how the company paid no taxes. (The ex-employee, like several others contacted for this article, declined to be identified for fear of reprisal.)
Others were ambivalent. Choire Sicha, who edited Gawker.com from 2003 to 2004 and owns less than 1% of the company, viewed it as a strategy befitting a startup. “Gawker was a standalone independent media company in an age where there were very few,” he says. “I can see how stealing an idea [about taxes] from larger companies made a ton of sense.” He also described Denton as “sweet” for offering employees stock in lieu of bonuses and holding internal shareholder meetings that allowed staff to question him as they would any other corporate executive.
Owen Thomas, who edited Valleywag from 2007 to 2009 and owns a tiny amount of Gawker shares, also defended Denton. The company’s willingness to reinvest its profits in technology development helped it survive at a time when the media industry as a whole was turning into a financial dumpster fire, he says. “In an age when most publications are dependent on Facebook and Twitter (TWTR), it gives you a way to own your own destiny.”
In May, Denton published an open letter to Peter Thiel, asking the entrepreneur to lay his financial weapons down and opt for a “more constructive exchange” than the Hogan case.
“Even were you to succeed in bankrupting Gawker Media, the writers you dislike, and me, just think what it will mean,” Denton wrote. “The world is already uncomfortable with the unaccountable power of the billionaire class, the accumulation of wealth in Silicon Valley, and technology’s influence over the media.”
It made little difference. In August, Denton declared personal bankruptcy to shield himself after a Florida court ruled that Hogan did not have to wait until appeal to begin collection efforts. (According to the verdict, Gawker Media must pay $130 million, and Denton, who owes $10 million in his own right, is on the hook if the company can’t pay.) Among the assets set against the $140 million liability: Denton’s monochromatic SoHo apartment, which long served as the backdrop for parties for Manhattan’s media elite.
If Denton had any regrets about Gawker Media’s style of journalism, he didn’t express them at the company’s farewell party in New York in August. Clutching a glass of red wine and looking weary, Denton praised his employees and the “say anything” publishing culture that Gawker pioneered. He received a standing ovation from an audience of about 200 people, mostly former staffers. In expletive-laden remarks that followed, John Cook, executive editor of Gawker.com, called out “wealthy billionaires.” The audience roared with approval.
But one of those wealthy billionaires, Thiel, retains the upper hand. He shrewdly pinned Denton in the legal swamps of Florida state court, where jurors valued privacy over freedom of the press. (Thiel declined to comment for this story.) And he won’t stop there. Five days after Gawker’s farewell fete, the investor wrote in a New York Times op-ed that Gawker had “outed” him in 2007. (The headline: “Peter Thiel Is Totally Gay, People.” The author: Owen Thomas, who is also gay, as is Denton.)
“I am proud to have contributed financial support to [Hogan’s] case,” Thiel wrote. “I will support him until his final victory … and I would gladly support someone else in the same position.”
So who will get the money? David Houston, an attorney for Hogan, says he will not let Denton wriggle away through legal dodges or overseas cash structures. “We will pursue Mr. Bollea’s judgment to collect every dime to which Mr. Bollea is entitled,” he says. “This will include but not be limited to any funds expatriated or otherwise secreted or transferred in any fashion. Rest assured we will take all necessary steps to secure Mr. Bollea’s interest in his judgment in any lawful manner.”
It won’t be easy. First, the $135 million generated from the sale of Gawker Media’s assets to Univision in August will go into a fund overseen by the bankruptcy court. Secured creditors, including Silicon Valley Bank, will be paid about $22 million—but then the rest will sit there until the appeal is sorted out.
As for the case itself, according to media lawyer Ed Klaris, “bad facts made bad law,” and so it may be difficult to overturn on the merits. But if the court does not throw the verdict out entirely, he says, it will almost certainly slash the amount Hogan was awarded.
And then there are the other claimants in Gawker’s Chapter 11 to consider—including the shareholders, who are typically wiped out in an ordinary bankruptcy. Among them is Russian investor Viktor Vekselberg, who arranged a $15 million secured loan to the Cayman company in January in exchange for preferred shares, according to bankruptcy filings. He will probably be paid following the August sale of Gawker’s assets.
The only other significant shareholders of Gawker Media are Denton (53% of common stock) and a British holding company called Greenmount Creek, which came to own 28% of the entire operation, according to bankruptcy filings. The U.K. firm was created in 2013 by a tax lawyer with ties to Denton and is currently controlled by the Denton family trust, for which Denton’s sister, Rebecca Denton, serves as trustee.
Greenmount Creek may hold the key to Denton’s eventual triumph. The holding company is obliged to pay an unsecured note that will be worth $12.8 million, tax-free, in 15 years. The mechanism seems to be designed to shield assets, conceal ownership, and pay out at the end of that period. But to whom? It’s a bit of a mystery—one involving millions of dollars of overseas money, a bold startup, and a millionaire founder who plays by his own rules. Exactly the sort of scenario, in other words, that Denton delights in exposing. (A Gawker spokesman says the Denton family trust was created in 2010 and that Gawker shares were transferred to the children of Rebecca Denton at that time, “so there really is no mystery at all.”)
When Fortune reached out to Denton to discuss the note and his views on U.S. tax avoidance, he politely referred us to Dietrick, writing in a Twitter direct message that he really wasn’t in a position to discuss it.
As it turns out, there are some things the man who talks about everything just doesn’t talk about.
Correction and clarifications, Aug. 22, 2016: An earlier version of this article erroneously stated that Gawker “began moving to protect its assets” in 2013 and “paid out most of its profits from its Hungarian subsidiary in a massive dividend to shareholders.” That statement came from publicly available financial documents that showed a $4.6 million dividend. Documents later provided by Gawker, however, showed that the dividend entry was made in error and subsequently corrected to $1.26 million. Because the remaining sum is not unusual in the context of the company’s annual finances, the paragraph in question, which stated that Gawker “emptied its piggy bank well before a judge ruled in favor of Hogan,” has been removed. Additionally, comment from a Gawker spokesman has been added about the role of the Denton family trust in Greenmount Creek and ownership of Gawker. Finally, Owen Thomas requested to clarify the context of his comments regarding Gawker’s business strategy; we have therefore amended them.
A version of this article appears in the September 1, 2016 issue of Fortune.