Faced with a corporate decision last May on how to handle the still-troubling, but not yet disastrous, phone-hacking allegations that had been dogging his British newspapers, Rupert Murdoch assembled key lieutenants in London and weighed his options.

According to a new, detailed account of the meeting published by Bloomberg BusinessWeek, Murdoch was presented with two options: let his London office continue to deal with the police and Parliamentary inquires, neither of which up to that point had done grave damage to News Corp., or Murdoch could shift responsibility to New York, to News Corp.'s corporate headquarters and allow key executives there to give the pressing problem a fresh, independent look.

According to BusinessWeek, Murdoch chose to keep the phone hacking focus in London (i.e. the “containment strategy”), in part to inoculate his son James Murdoch, a key News Corp. executive who had been positioned to become his father's successor.

Two months later though, the hacking scandal exploded when it was revealed Murdoch's News of the World had hacked into the phone messages of Milly Dowler, a 13-year-old girl who disappeared in April 2002 and was later found murdered. Since July, more than a dozen hacking arrests have been made, News of the World was shuttered, and executives were summoned before Parliament for a series of hearings, including James whose reputation has been badly damaged.

By August, it was evident that Murdoch had made exactly the wrong decision in opting for the London containment strategy.

Writes Greg Farrell in BusinessWeek:

If Rupert Murdoch had chosen a different path at that dinner in London, the company might have dodged theworst consequences of the Milly Dowler revelations.

...

James would still have suffered in the short term for heading News International at a time when it was obscuring the extent of phone hacking, but he could have avoided the embarrassment of making firm claims before a parliamentary committee that were eventually contradicted by e-mail evidence.

In making his fateful choice, Murdoch overruled his longtime general counsel, Lon Jacobs, who urged his boss last spring to move aggressively on the pressing problem and transfer the focus from London to New York.

From BusinessWeek:

At the far end of the [dinner] table, Jacobs slumped in his chair. Despite his history advising Murdoch, his counsel in this matter had been ignored. The next day, Murdoch boarded his corporate Boeing 737, along with his New York team and the Williams & Connolly lawyers, for the trip back home. Jacobs later lamented to a friend that he felt like someone who was made of “cellophane” during the trans-Atlantic flight.

...

Two weeks later, Jacobs resigned his post with News Corp.

What's interesting about the internal legal and personnel maneuvers though, and what is not mentioned in the BusinessWeekpiece, is that Jacobs at the time of the May meeting may have lost his boss's trust because as general counsel he had overseen the settlement of three very costly anti-business lawsuits targeting News Corp. in the United States; lawsuits that interestingly enough, would soon be connected with the phone-hacking scandal that consumed News Corp. in Britain last year.

In fact, one of the three lawsuits Jacobs agreed to settle featured the allegation of News Corp. employees at News America Marketing (NAM) in the U.S. repeatedly hacking into a secure website of a competitor and stealing proprietary information. The FBI is currently investigating that computer hacking charge as part of a larger probe of News Corp.'s business practices.

At the time of Jacobs' resignation last year, MoneyWatch's Jim Edwards, who had covered the three lawsuits, made the persuasive case that they were reason Murdoch's general counsel was making his surprise exit from the company.

Wrote Edwards:

During his tenure, Jacobs supervised this trifecta of failure

-$125 million: To tiny Insignia Systems (ISIG), which accused NAM of anticompetitive practices.

-$500 million: To Valassis (VCI), which accused NAM of forcing clients to choose its services or face price rises if they gave business to Valassis.

-$29.5 million: To Floorgraphics Inc., which alleged NAM hacked into its computer systems (sound familiar?) to steal competitive information.

In other words, those lawsuits likely caused Murdoch to lose confidence in Jacobs and to then reportedly disregard his advice on the British hacking scandal. By disregarding Jacobs' advice, Murdoch then weakened News Corp.'s hacking defense.