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Murdochs to Testify in U.K. on Phone-Hacking Scandal as FBI Opens Investigation

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July 12: British Prime Minister David Cameron leaves 10 Downing Street. (AP)

Rupert Murdoch and his son James first refused, then agreed Thursday to appear before U.K. lawmakers investigating phone hacking and police bribery, while in the U.S., the FBI opened an investigation into allegations the Murdoch media empire sought to hack into the phones of Sept. 11 victims.

Those two developments -- and the arrest of another former editor of a Murdoch tabloid -- deepened the crisis for News Corp., which has seen its stock price sink as investors ask whether the scandal could drag down the whole company.

A law enforcement official in New York said the FBI was investigating allegations that employees of News Corp. tried to hack into the telephones of victims of the Sept. 11, 2001, terrorist attacks in the United States.

The official spoke on condition of anonymity because he was not authorized to speak publicly.

The FBI's New York office hasn't commented, and there was no immediate response Thursday from News Corp. or the U.S. attorney's office in Manhattan. News Corp. stock fell more than 3 percent on the news.

News Corp. executives could be at risk of being found criminally or civilly liable under federal wiretapping and state privacy laws if investigators find that American citizens were targeted, analysts said. The company could also face sanctions in the U.S. for phone hacking that originated in Britain under the 1977 Foreign Corrupt Practices Act.

Still, experts said they doubt such actions could jeopardize News Corp.'s U.S. newspaper holdings such as The Wall Street Journal or result in the revocation of the license it needs to own Fox TV stations in America.

"I think we're a long way from that," said Philip Raible, a partner at New York law firm Rayner Rowe LLP, which specializes in corporate law affecting media companies.

News Corp. has been in crisis mode in the U.K. since a rival newspaper reported last week that its News of the World tabloid hacked into the phone of teenage murder victim Milly Dowler in 2002 and may have impeded a police investigation into the 13-year-old's disappearance.

The company closed the 168-year-old News of the World and abandoned a bid for control of the lucrative British Sky Broadcasting network in a so far fruitless attempt to halt the crisis.

U.S.-based media industry analyst Richard MacDonald said the scandal was undermining Murdoch's 30-year bid to convince investors that News Corp. was "a blue chip diversified media company."

"Without question, the revelations and subsequent penalties either criminal, civil or strategic will impair earnings performance, earnings multiples and asset value for who knows how long," he said.

British lawmakers took the dramatic step Thursday of issuing a summons to the once all-powerful Murdochs after the father and son said they would not appear before Parliament's Culture, Media and Sport Committee on Tuesday.

Within hours, the Murdochs made room in their schedules after all. It was another victory for politicians over the Murdochs -- something that would have been all but unthinkable just two weeks ago.

It is highly unusual for witnesses to refuse to appear before parliamentary committees, which quiz everyone from business leaders to prime ministers on a wide range of issues.

Rebekah Brooks, who heads the company's British newspaper division, did agree to testify. She was editor of the News of the World at the time of some of the hacking, but says she knew nothing about it.

Murdoch began his media career in Australia in 1952 after inheriting The News newspaper after the death of his father, and has built News Corp. into one of the world's biggest media groups, with market capitalization of $46 billion. Assets include Fox News, the 20th Century Fox movie studio, The Wall Street Journal, The New York Post and three newspapers in Britain -- down from four with the death of the News of the World.

Murdoch controls 40 percent of News Corp.'s voting stock, mostly through a family trust.

For decades, British lawmakers lived in fear of the influence of Murdoch's media empire. With the revelation of widespread criminal hacking, and the public revulsion that followed, Parliament has been liberated, flexing its muscles in a display of freedom some are calling the "British Spring."

Business Secretary Vince Cable said Thursday the fast-moving events were "a bit like the end of a dictatorship."

James Murdoch initially told the Culture, Media and Sport Committee he would be willing to appear Aug. 10 or 11, without explaining why he was not free on Tuesday.

Rupert Murdoch said he would not appear at all, offering instead to speak before a separate inquiry initiated by Prime Minister David Cameron and led by a judge.

Defiance of a parliamentary summons is illegal, and can in theory be punished with a fine or jail time. In practice, such measures have been all but unknown in modern times; the House of Commons last punished a nonmember in 1957. And it was not immediately clear whether Parliament could enforce its summons on Rupert Murdoch, a U.S. citizen.

Committee chairman James Whittingdale said he especially wanted to question James Murdoch, who said last week in announcing the closure of News of the World that Parliament had been misled by people in his employment, without his knowledge.

"We felt that to wait until August was unjustifiable," Whittingdale said.

News Corp. faced more pressure Thursday with the arrest of former News of the World executive editor Neil Wallis -- the ninth person involved with the News of the World to be detained by police probing phone hacking.

Police said Wallis, 60, was arrested on suspicion of conspiring to intercept communications.

He was News of the World deputy editor between 2003 and 2007 under Andy Coulson, who resigned from the paper when a reporter and a private detective were jailed in January 2007 for hacking into the phones of royal aides.

Wallis was executive editor until 2009; Coulson was Cameron's communications director from 2007 until January, when he quit as the hacking scandal resurfaced. He was arrested on July 8.

In another sign of what Cameron has called the overly cozy relationship between politicians, the media and the police, the Metropolitan Police confirmed that Wallis had been employed as a part-time consultant to the force.

Wallis' firm was employed to provide "strategic communication advice" for two days a month while its own staffer was on medical leave, the Metropolitan Police said. The contract ended in September.

The way Murdoch runs his empire has come under renewed criticism.

"Rupert Murdoch is finally on the wrong side of the tipping point, make that the 'tipping over' point, and it's his own fault," Nell Minow of Governance Metrics International said in a blog post this week. "Not for allowing the violations of law, ethics, and privacy at his newspapers, but for setting up a governance structure so ineffective that major failures were inevitable."

Media analyst Claire Enders said News Corp. might be tempted to sell its other British newspapers -- The Sun, The Times and the Sunday Times.

That is an outcome favored by some analysts and shareholders, who see the papers as financially inconsequential and reputationally burdensome -- as well as by many British politicians.

"The politicians want the Murdochs' role in public life to be greatly diminished," Enders said. "They would like them to move to New York and stay there.

"Since the papers have no political value any more, then their economic value must be questioned as well."