Red wine in hand, Rupert Murdoch chatted with guests at his London townhouse on what would be one of the most important nights to the future of his company. Gathered for cocktails were Rupert’s son James, heir apparent to the family media empire; Rebekah Brooks, the chief­executive of News Corp.’s (NWSA) U.K. unit; and Chase Carey, the New York-based president and chief operating officer. Joining the executives were a pair of legal heavyweights: Joel Klein, former New York City schools chancellor, and Brendan Sullivan Jr., the well-connected Washington lawyer brought into the Murdoch fold at Klein’s request.

It was May 19, 2011. The senior Murdoch had flown in two days earlier for a whirlwind of meetings with his top London executives. He had called the dinner party to hash out once and for all how to handle the phone-hacking scandal that had been hanging over the company for months and was suddenly spinning out of control. A lawsuit filed by actress Sienna Miller—charging that a senior editor at the company’s British Sunday tabloid, News of the World, was behind a campaign to hack into her phone—sparked a police investigation, producing a steady drip of disclosures about repeated incidents of phone hacking at Murdoch’s British tabloids.

In the weeks leading up to the dinner, Murdoch had been presented with two opposing strategies for dealing with the mess. None of the people present at the dinner was willing to speak on the record. The events reconstructed in this story are based on interviews with four at the dinner who spoke on the condition that they not be identified. (A News Corp. spokeswoman declined to comment on the record for this article. Bloomberg L.P. competes with several units of News Corp.)

Klein, Brooks, and James Murdoch recommended that Brooks continue to manage the company’s response from London. Doing so could reduce any chance of the scandal ensnaring Rupert Murdoch or James, who had recently been posted to the U.S. ...