A lawyer who advised Conrad Black's co-defendants to keep controversial "non-compete" payments quiet said she later realized her firm had made a mistake in giving that opinion,the court heard Wednesday.

Beth DeMerchant is a former senior corporate lawyer with Toronto law firm Torys LLP, who advised Hollinger Internationalduring its sale of Canadian big-city papers to CanWest Global Communications Corp.in 2000.

She said her law firm had initially advised the Hollinger executives they need not disclose the payments in the compensation section of their public documents because they did not fall under that category.

"I said I would be surprised if it was compensation because it was a non-compete consideration," she said.

She then referred the matter to Darren Sukonick, another Torys lawyer working on the deal, who also said the fees could be kept private.

Her testimony is an important part of the defence's argument, since lawyers for Black, John Boultbee, Peter Atkinson and Mark Kipnis say their clients acted on bad advice from their lawyers when they initially failed to disclose the payments.

Prosecutors allege the defendants used the non-competes as a way to funnel money away from Hollinger International and avoid a tax hit. While non-compete payments weren't taxable in Canada at the time, performance bonuses would have been.

But when law firm Cravath, Swaine & Moore brought up concerns about the payments, DeMerchant said, she realized there had been a mistake, and spoke with Atkinson about it.

"I said I was sorry, that there was a problem and that I was there to talk about it," she said, adding she came to that conclusion after reviewing certain disclosure rules.

"Bottom is the proxy circular should have disclosure [of]all these payments."

DeMerchant said she still didn't think the payments fell under the "compensation category" at the time and only understood Cravath's take on the fees when she saw Hollinger audit committee minutes that referred to them as bonuses.

"Black and Radler negotiated $12 million to be reallocated to cover bonuses for executives …which would save the company additional bonus costs," the minutes said.

DeMerchant said she called a meeting to discuss the payments after Boultbee said calling them "bonuses" was wrong, because "as far as he was concerned, they were not bonuses."

DeMerchant testified via video recording

DeMerchant testified via video recorded in February in Toronto, after invoking her right as a Canadian citizen not to fly to Chicago for the trial.

Her testimony, like Sukonick's, was one of the conditions of a $30.25-million settlement between Hollinger International and Torys after the law firm came under fire from shareholders whoaccused it of not raising red flags over the non-compete payments. Torys did not admit any wrongdoing.

DeMerchant also testified she did not know how Hollinger and CanWest came to agree on the amount of the non-compete payments.

She learned about the individual payments, she said, through a fax from Atkinson to Black.

"David [Radler] has consistently suggested $19 million for you and $19 million for him in regard to these covenants," the fax said. "Jack [Boultbee] and I suggest $2 million for each of us.… We believe Ravelston should be paid $30 million.

"We have put a higher weighting on the restrictive covenants due to our hope that these payments can be free of tax," the memo said.

She also backtracked on a previous statement about Atkinson and Boultbee adding their own names to the non-competes, saying she had been misunderstood when questioned by a special committee investigating the fees.

"I was pressed to agree with the assertion that Jack and Peter had added themselves to the agreement," she said under cross-examination by defence lawyer Michael Schachter.

"I shrugged [and] the transcriber knit that together in the note that you see" that suggests she agreed with the claim.

Schachter also reiterated the defence's point that the CanWest non-compete payments had been approved by Hollinger International's board and by the independent directors of the audit committee.

Black and two of his three co-defendants— Boultbee and Atkinson— are accused of improperlypocketing $60 million US in payments from companies that bought Hollinger newspapers in exchange for promises not to compete with the papers in areas where they circulated.

Radler also was accused of improperly pocketing money, but pleaded guilty in return for a jail sentence of 29 months and an agreement to testify against Black.

A third co-defendant, Kipnis, is charged with helping to arrange the transactions.

Black, 62, is also accused of misusingcompany funds for personal expenses, including a vacation to Bora Bora.

The CanWest payments to Black and Radler are not in dispute.