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The Big Fish Always Get AwayN. Y. Times – by R. Foster Winans - May 3, 2003
My case was brought by an ambitious United States attorney, Rudolph Giuliani, then cultivating a reputation for being tough on white-collar crime. The public was just becoming interested in business news, and suddenly here was a sordid, inside look at how Wall Street really worked.
By the time the stock market scandals of the mid-1980's had played out, a few rich guys had paid hefty fines, done a year or two in jail, and re-entered society with their fortunes intact. The scandals crippled several brokerage houses so badly they had to be sold off, or they simply imploded.
But the big fish got away, as big fish tend to. Insider trading was epidemic at the time, thanks to a buoyant market and a merger mania that gave investment bankers control over the fates of large corporations. Nobody complains when prices are going up, and business crimes are hard to detect and harder still to prosecute successfully. So the cop on the beat — Mr. Giuliani — grabbed the slowest and dimmest-witted miscreants, like me, and came out a hero.
Two decades later, history may not be repeating itself, but it is rhyming: an ambitious New York State attorney general, Eliot Spitzer, grins broadly for the cameras as he seals the $1.4 billion deal that brings Wall Street to justice. A handful of this cycle's bad guys will be drummed out of the business, and a few will do time. The fines being paid stagger the imagination but, in the context of Wall Street, they're nuisance fees. Some reports suggest that $1 billion of it may even be tax deductible.
Research analysts were just the pawnbrokers for a much larger scam. Trading desks at major brokerage houses, where the real money is made, harvested and exploited inside information about analysts' recommendations to reward their most profitable accounts, the institutional investors like mutual and pension funds. Among the thousands of documents that regulators made public this week was this e-mail message from an analyst to an institutional investor: "Yes, the 'little guy' who isn't smart about the nuances may get misled."
A subculture sprung up just to cash in on corporate "whisper numbers," those salacious-sounding quarterly profit forecasts leaked to analysts before the rest of the investing public. Handouts of sure-thing initial public stock offerings to favored clients have been well documented, but don't expect billion-dollar settlements.
For the moment, Mr. Spitzer is the hero of the little guy. The most obvious villains — once powerful, now completely discredited analysts like Henry Blodget and Jack Grubman, and the corrupt system of stock research as it was practiced in the 1990's — have been vanquished. But don't be lulled by a few public hangings into thinking the bubble and its aftermath were their fault, or that Wall Street has been reformed and it won't happen again. It may take a few years for the public to forget how it was thoroughly misled, but you can bet that the next greedy market will produce another crop of scandals, another would-be hero, and a fresh supply of dimwits, like me, to make them look good.
R. Foster Winans is author of "Trading Secrets: Seduction and Scandal at The Wall Street Journal.''
Xerox Pension LitigationAssociated Press – May 1, 2003
STAMFORD, Conn. (AP) -- Xerox Corp. said Monday it plans to record a first-quarter charge of $183 million, or 25 cents a share, for litigation involving its pension plan.
The company, which plans to release its first quarter earnings report on Wednesday, said its operational performance in the first quarter exceeded expectations, excluding the charge. Analysts surveyed by Thomson First Call project, on average, earnings of 8 cents a share for the Stamford-based provider of copiers, printing systems and software.
The litigation charge refers to Berger v. Retirement Income Guarantee Plan, which is a case brought against Xerox's primary U.S. pension plan for salaried employees. The pension plan is appealing a ruling made in September 2002 by the U.S. District Court for the Southern District of Illinois.
A Xerox spokeswoman said the plaintiffs are challenging the method used to calculate lump-sum retirement benefits since 1990. The charge reflects the amount of the damages, the spokeswoman said.
External counsel and RIGP continue to believe that the appeal has merit and that the district court's judgment should be overturned.
However, following the April 9 oral argument of the plan's appeal to the Seventh Circuit Court of Appeals, Xerox reassessed the level of probability for a favorable outcome. Under accounting standards, this reassessment requires the company to take a charge for the value of the judgment.
If the district court ruling is upheld on appeal, any final judgment would be paid from the plan's assets. Should Xerox need to make a cash contribution to compensate for any potential shortfall in the plan related to this litigation, it wouldn't have to begin doing so until 2005…
Power Company Loses Asbestos VerdictEmployee Advocate – DukeEmployees.com – April 11, 2003
Employees have recently won two asbestos verdicts against corporations, according to The National Law Journal. In both cases, the corporations did not use asbestos as a raw material or mine it. They exposed employees to asbestos, which was contained in products.
A Con Edison employee was awarded $47.1 million by a New York jury. (Croteau v. Consolidated Edison, No. 118793/01.)
A U.S. Steel employee was awarded $250 million. U.S. Steel promptly settled after the verdict was rendered.
Arbitration Agreement RetaliationEmployee Advocate – DukeEmployees.com – March 29, 2003
Credit card companies and brokers have been pushing customers into arbitration agreements for years. Why? That’s easy. Your chances of winning a dispute will decrease with arbitration. The players in the “arbitration circle” are the “good ole boys.” They deal with each other constantly. You, the customer, are the outsider and will never be dealt with again. Do you see a lopsided playing field?
The customer forfeits his right to sue by agreeing to arbitration. These agreements are a high priority for companies that are likely to face a lot of lawsuits. Honest companies, that are seldom sued, have no need for arbitration agreements.
Some companies are migrating to arbitration agreements for their employees. They do not want to have to face a jury for taking earned benefits from employees, and other such matters. As with most other changes that are bad for the workers, companies typically try to force employees into these agreements.
The article below was published in The Recorder. It gives some insight into the legal complexities involved.
One of the most interesting comments in the article was: “Bird suggested that the EEOC had changed its position after the Bush administration took over.”
Politics just cannot be avoided. The statement was very reasonable. The Bush administration is clearly out to destroy working Americans. CEO’s own G. W. Bush – particularly energy CEO’s. Bush had appointed his puppets to head the various agencies. So, do not expect too much help from any of them, unless you happen to be a CEO!
All working Americans can do is try to survive until the next election and throw G. W. Bush out of office. If the American public puts Bush back into office for a second term, they will truly deserve every bad thing that happens to them.
9th Circuit Grapples With 'Duffield'The Recorder – by Jason Hoppin – March 29, 2003
(3/28/03) - Although clearly divided, it appears an en banc panel of the 9th U.S. Circuit Court of Appeals is poised to protect employees who refuse to sign mandatory arbitration agreements.
Or at least one employee, anyway.
The court seems headed for a ruling that says axing employees for rejecting an arbitration agreement is, in fact, retaliation. But it may still overturn a precedent that has been the bane of employers. Donald Lagatree's employment offer was rescinded by San Diego-based Luce, Forward, Hamilton & Scripps when he would not agree to submit all future employment disputes, including discrimination claims, to an arbitrator.
The first question out of the box Thursday was whether the court could overrule the 9th Circuit's controversial decision, Duffield v. Robertson Stephens & Co., 144 F.3d 1182, and still hold that the law firm violated Lagatree's civil rights when he was fired for refusing to sign.
"I believe that if you agree with us on Duffield that ends the retaliation claim," said Charles Bird, a lawyer at Luce Forward.
Bird said a string of employer-friendly U.S. Supreme Court rulings on arbitration cast doubt on Duffield, which held that employers cannot condition employment on an agreement to arbitrate Title VII claims. No other court has ever so ruled -- in fact, the question does not arise often because most employees sign the agreements. Most litigation over arbitration agreements has been over the enforceability of the agreements once signed.
Judge William Fletcher had tough questions for Bird, however, suggesting that an employment offer conditioned on a waiver of rights protected under Title VII of the 1991 Civil Rights Act amounted to a form of coercion. And if an employer withdraws the employment offer when an employee asserts those rights, "Why is that not retaliation?"
That position is supported by the Equal Employment Opportunity Commission, which took up Lagatree's cause and initiated the case, EEOC v. Luce, Forward, 00-57222.
But the EEOC argued against rehearing the case even though it had lost a split three-judge panel decision. The 9th Circuit took the unusual step of hearing it en banc without any of the parties calling for it. That is probably because the three-judge panel overturned Duffield based on Circuit City Stores v. Adams, 532 U.S. 105, a Supreme Court case which everyone concedes is not directly on point. One answer to why it wouldn't be retaliation is that there is no pending proceeding. And without an assertion of the right to a judicial forum -- which at the time of hiring is merely "hypothetical," according to Bird -- there's nothing to retaliate against.
Judge Richard Tallman picked up on the argument. "How is it retaliation if there is no pending proceeding?" he asked.
Later, Tallman switched gears, wondering why an employer can't ask an employee to waive his right. He compared it to the waiver of rights asked for in guilty pleas, including the right to appeal.
EEOC lawyer Dori Bernstein said employers could ask -- but if the employee says no, they can't go ahead and fire the employee.
Bird suggested that the EEOC had changed its position after the Bush administration took over. But the EEOC's Bernstein said after the hearing that that's not true -- "no matter how many times they say it." Bernstein, in fact, was so aggressive on Lagatree's behalf (telling Tallman more than once that he was wrong), that Judge Stephen Reinhardt -- who wrote Duffield -- at one point leaned back in his chair and smiled.
Because of the ambiguity over the EEOC's position, Lagatree himself intervened in the case. He was represented by Cliff Palefsky of San Francisco's McGuinn, Hillsman & Palefsky.
If the court permits employers to condition a job offer on the waiver of Title VII rights, "You are promoting the essential repeal of the civil rights laws," Palefsky said.
Tallman said siding with the employers in this case wouldn't mean the loss of any right, but would merely affect the forum in which it can be asserted.
In response, Palefsky said there are statistics showing that employees fare much worse in arbitration than they do in court -- and pointed out that at least two major arbitration organizations oppose mandatory arbitration.
But later, Bird returned to the language of Circuit City, saying the Supreme Court has said that arbitration and civil suits are absolutely on "equal footing."
Corporate Mischief CrackdownN. Y. Times – by Patrick McGeehan - March 20, 2003
In a legal settlement that may signal that the battleground for corporate reform has shifted to the courts, the Sprint Corporation said yesterday that it had agreed to several changes in governance, including how its directors are chosen and when its executives can sell shares.
The changes were part of a settlement of lawsuits filed by Sprint shareholders over the company's unusual treatment of executive stock options during a scuttled merger, according to a plaintiff and his lawyer. Sprint said it had agreed to pay $50 million to shareholders to settle one suit, a class action filed in federal court in Kansas City, Kan. Sprint, based in Overland Park, Kan., said most of that amount would be covered by insurance.
To settle the second shareholder suit, which was filed in state court in Missouri, Sprint agreed to changes that would make its board more independent and more accountable, said Robert Monks, a shareholder advocate who advised the plaintiffs. Amalgamated Bank, which is owned by labor unions and holds about 600,000 shares of Sprint, filed the suit in Missouri.
Pushing for changes in corporate governance "is the emerging trend in shareholder litigation," said William S. Lerach, a partner in Milberg Weiss Bershad Hynes & Lerach, the law firm that represented the plaintiffs. He said his firm, which represents plaintiffs in hundreds of suits, would seek similar changes at other companies.
Starting next year, Sprint's directors will stand for election every year, instead of every three years, Mr. Monks said. Two-thirds of them must meet a tougher standard of independence and one independent director will serve as the lead director, he said.
In what he called a first for a big corporation, Mr. Monks said Sprint had agreed to ban its directors and senior executives from selling shares in Sprint while the company is buying back its own stock. Sprint did not mention the policy in either of the two news releases it issued yesterday. A spokesman declined to comment.
"They can't use company money to prop up the stock while they sell their own stock," Mr. Lerach said.
That agreement, he said, "to me, is one of the most important parts of the settlement."
The court has not decided how much of the $50 million will go to Mr. Lerach's firm, but he said the lawyers usually kept 20 percent to 30 percent.
Sprint said the board had chosen Irvine O. Hockaday Jr., the retired chief executive of Hallmark Cards, to be the lead independent director. Mr. Hockaday, was a longtime friend and neighbor of William T. Esrey, Sprint's chairman and former chief executive. But he was credited with leading the charge to oust Mr. Esrey after Mr. Esrey and Sprint's president, Ronald T. LeMay, ran into financial trouble over tax shelters they used to protect gains on stock options.
Some of the options were at the heart of the suits Sprint settled. Shareholders complained that the company had accelerated the vesting of options held by executives when the company agreed to merge with WorldCom two years ago. The executives kept that benefit even though regulators blocked the merger.
Sprint said late Tuesday that it had hired Gary D. Forsee, former vice chairman of BellSouth, to succeed Mr. Esrey as chief executive. Mr. Forsee is expected to become chairman when Mr. Esrey leaves the company after what Sprint called a "transition period."
Mr. Monks said the plaintiffs had sought to persuade Sprint to split the roles of chairman and chief executive but the company resisted.
"We didn't get all we wanted," Mr. Monks said. "What you see today was not voluntarily given."
He said the plaintiffs sought stricter limitations on the tenure and obligations of Sprint's directors than Sprint eventually accepted. The company agreed that no director, other than the chief executive, would serve for more than 15 years, Mr. Lerach said. Directors who are employed can sit on no more than four corporate boards and directors who do not have full-time jobs can sit on no more than six boards.
Damon Silvers, associate general counsel of the A.F.L.-C.I.O., said he welcomed the changes at Sprint, but bemoaned the necessity of achieving them through litigation.
"In dealing with bad companies, companies that have massive resistance to reform, litigation may be the only way to get them to change," Mr. Silvers said. "But it's kind of a blunt instrument and it's not suited to every situation."
He said the A.F.L.-C.I.O. might still call for one more change at Sprint's annual shareholders meeting, which has been postponed to May 13. It wants Sprint to choose a new auditing firm, replacing Ernst & Young, the accounting firm that set up the tax shelters for Mr. Esrey and Mr. LeMay.
Supreme Court Sides with Asbestosis VictimsAmerican Lawyer Media – by Tony Mauro – March 12, 2003
(3/11/03) - Adding fuel to the debate over asbestos litigation, the U.S. Supreme Court on Monday ruled by a 5-4 vote that railway workers who suffer from asbestosis should also be able to recover damages for fear of asbestos-related cancer.
Rail workers would still have to prove that their fear is "genuine and serious," but the Court did not specify how that can be shown or refuted.
In a separate section of the ruling in Norfolk & Western Railway Co. v. Ayers, No. 01-963, the Supreme Court unanimously agreed that under the Federal Employers' Liability Act (FELA), railroads can be held completely liable for work-related asbestos claims, even if other companies or causes contributed to the disease.
Justice Ruth Bader Ginsburg, writing for the Court, said that in spite of the "elephantine mass" of asbestos litigation facing the judiciary, courts must not "reconfigure established liability rules because they do not serve to abate today's asbestos litigation crisis."
The Supreme Court's double blow to business will add impetus to efforts in Congress to act on the asbestos litigation crisis, said Robin Conrad, senior vice president of the National Chamber Litigation Center. "How many times can Congress and the Court fail to act?" asked Conrad. "This decision emphasizes the need for a national solution."
At a Judiciary Committee hearing last week, Sen. Orrin Hatch, R-Utah, gave industry and labor factions two weeks to come up with legislation that would establish medical standards and new funding for asbestos claims. Asbestos claims, which show no signs of waning, have already cost industry more than $50 billion and driven more than 50 companies into bankruptcy.
Justice Anthony Kennedy, dissenting on the "fear of cancer issue," voiced concern that the practical effect of the Court's ruling will be to drain funds available to pay for new and existing claims alike.
"By the time the worker is entitled to sue for the cancer, the funds available for compensation in all likelihood will have disappeared, depleted by verdicts awarding damages for unrealized fear," Kennedy wrote. Also in dissent were Chief Justice William Rehnquist and Justices Sandra Day O'Connor and Stephen Breyer. Breyer wrote separately to underscore the danger that funds to pay asbestos claims will be depleted by expanding liability. Congress' failure to act, Breyer wrote, "does not require the courts to ignore the practical problems that threaten the achievement of tort law's basic compensatory objectives."
The case at hand arose when Norfolk & Western appealed nearly $5 million in damage awards given in West Virginia to six rail workers who included fear of cancer among their claims. Five of the six also smoked, and two continued smoking after being diagnosed with asbestosis. The claims were made under FELA, a law passed by Congress in 1908 that has often been interpreted to keep rail carriers from escaping liability.
Norfolk & Western's lawyer Carter Phillips of Sidley Austin Brown & Wood said the ruling was "disappointing," but would not drastically increase the number of claims against railroads under FELA. "I don't think it will mean more cases, because it only applies if the plaintiff has asbestosis," said Phillips. "It also doesn't help decide how much proof is necessary to show emotional injury, so I don't think the railroads will easily agree to larger settlements based on this claim." He did suggest that railroad employers might be less willing to take cases to juries, because "the fear of damages claim is a wild card."
The industry's Coalition for Asbestos Justice also saw a silver lining in the decision.
"The fact that the Court confined its ruling to people who are really sick is very important," said coalition counsel Victor Schwartz of the Washington, D.C., office of Shook, Hardy & Bacon. A large number of new asbestos claims in recent years, said Schwartz, have come from workers who have no signs of injury. Those claims got no boost from the Court's ruling Monday, Schwartz said.
Whistleblowers Entitled to ProtectionThe Recorder – by Alexei Oreskovic – March 1, 2003
(2/28/03) - Whistleblowers and other workers fired in violation of public policy are entitled to the same basic arbitration protections as employees who claim their statutory rights were violated.
So ruled the California Supreme Court on Thursday in a decision that also struck down certain appellate arbitration provisions as unconscionable and reaffirmed the fact that employers must bear the costs of mandatory arbitrations.
The decision, Little v. Auto Stiegler Inc., 03 C.D.O.S. 1684, was hailed by plaintiffs' attorneys as a victory for workers as it extends the reach of a 2000 supreme court ruling that established minimal standards for mandatory predispute arbitration agreements. In Armendariz v. Foundation Health Psychcare Services Inc., 24 Cal. 4th 83, the court held that such agreements must allow for arbitrations with sufficient discovery, that entail a written decision and that do not cap the amount of damages.
Writing for a 4-3 majority Thursday, Justice Carlos Moreno said that these basic standards do not apply solely to claims alleging violations of the Fair Employment and Housing Act, as was the case in Armendariz.
Whistleblower protections, which are in the public interest, are unwaivable and cannot be contravened by a private agreement, the court found.
"An employment agreement that required employees to waive claims that they were terminated in violation of public policy would itself be contrary to public policy," wrote Moreno.
Dissenting on this point were Justices Janice Rogers Brown, Marvin Baxter and Ming Chin.
The case involved Alexander Little, a service manager at an automobile dealership. Little alleges he was terminated for investigating and reporting warranty fraud. Like many auto dealership employees, Little had signed a contract agreeing to take any disputes to arbitration.
The agreement contained a clause that any arbitration award over $50,000 could be appealed to a second arbitrator.
All seven justices agreed that this appeal provision, with its $50,000 threshold, was unconscionable, since it tilted the table in the defendant's favor. "Each of these provisions is geared towards giving the arbitral defendant a substantial opportunity to overturn a sizeable arbitration award," wrote Justice Moreno.
The court did not nullify the entire arbitration agreement, however. Instead it held that the overall agreement was still valid once the appellate provision had been removed.
Christopher Hoffman, an Orange County, Calif., attorney for the defendant, cast the decision as a victory for employers since the arbitration agreement at issue was held to be enforceable in its modified form.
Allstate Pays for DelayThe National Law Journal – by Tresa Baldas – March 1, 2003
(2/28/03) - An insurance company's delay in settling a $50,000 claim with a car crash victim turned into a $1 million liability.
That's what an Ohio jury has ordered Allstate Insurance Co. to pay the mother of a young woman temporarily rendered comatose by a car crash five years ago.
The Summit County jury found that Allstate acted in bad faith, awarding the victim's mother $1,010,000 in her claim against Allstate on behalf of her daughter, Kara McLaughlin, now 20, who suffered brain injuries that permanently affect her speech and walking abilities. The jury also awarded $1 in punitive damages. Calich v. Allstate Insurance Co., No. 2001-03-1400 (Summit Co., Ohio, Ct. C.P.).
The plaintiff's lawyer, John Smalley, said the mother was initially willing to accept $50,000, the driver's maximum coverage. However, Allstate kept putting the claim off, saying it needed more facts about the accident before it could settle.
"They treated it like they treat all cases, in a cookie-cutter fashion," alleged Smalley of Dyer, Garofalo, Mann & Schultz in Dayton, Ohio.
"In many cases, you do want to say, 'I need medical records,'" Smalley asserted. "But that wasn't necessary with a girl who was in a coma. There was no reasonable justification for Allstate to refused to have offered to resolve a brain-damage claim."
Marilyn Singer, an attorney for Allstate, said the company plans to appeal, but would not comment further on the case.
According to Smalley, his client, Rebecca Calich, initially filed her lawsuit against Allstate after failing to settle the claim with an adjuster 28 days after the crash.
The accident occurred on Jan. 2, 1998, when the teen-age driver of the car McLaughlin was in began speeding and lost control. The car flipped and hit a utility pole.
McLaughlin, who was in a coma for six weeks with severe brain injuries, was one of five teens injured in the crash.
Smalley said that Allstate initially refused to settle, claiming it needed more time to review medical claims and the claims of others injured in the crash.
At the time, another attorney, Scott Stewart of Cleveland's Stewart & DeChant, was handling the case and had given Allstate a March 1, 1998, deadline to settle. But when the deadline passed, Stewart ended up suing the driver.
According to Smalley, Allstate eventually agreed to pay the $50,000 in August 1998, but by then Calich had already filed her suit against the driver, Jeremiah McCoy, and his family, which settled for $1,060,000. But instead of paying, Smalley said, McCoy's family reached an agreement with Calich where it transferred its right to sue Allstate to her. Calich then sued Allstate.
Smalley, who specializes in insurance cases and lectures throughout Ohio on bad-faith cases, ended up handling the case because Stewart ended up being called as a witness in the case.
According to Smalley, what makes this case unique is Stewart's persistence in going after the insurance giant.
"If you think about it, the attorney for Calich was offered the $50,000 in August of 1998," Smalley noted. "How easy would it have been to say, 'I've been jerked around for $50,000. Let me take it.' "
However, he refused to do that because he knew that they had wronged his client early on." Meanwhile, Smalley, who is handling three other suits against Allstate, said he hopes this verdict sends a message to the entire insurance industry.
"I hope they think about each claim individually and consider what's in the best interest of the insured, not what's in the best interest of the insurance company," Smalley said. "[Allstate] could have and should have settled."
Fat CEO Pay, Even in BankruptcyAssociated Press – by Dave Carpenter – February 24, 2003
CHICAGO (AP) -- A bankruptcy judge allowed United Airlines to go ahead Friday with its multimillion-dollar pay package for chief executive Glenn Tilton despite acknowledging that the timing may send a questionable message to employees.
Judge Eugene Wedoff said rejecting the company's bid for prompt adoption of the compensation package in bankruptcy would have raised questions about the court's confidence in its restructuring. He said the financial impact on United should be comparatively negligible.
Tilton's five-year deal was contested by the Association of Flight Attendants as premature and unfair at a time when United employees have taken interim pay cuts and are being asked for longer-term concessions.
The flight attendants argued that United should send a message of shared sacrifice by revising or delaying the plan rather than its stated message of full confidence in its CEO, to which Wedoff responded that "you may be right." They said Tilton's compensation should be tied to the success of the company's restructuring.
United said the original $11.4 million pay and benefits package for Tilton - the terms of which were lowered somewhat this week – was "eminently reasonable" and even below market average for a company its size.
Tilton got a $3 million signing bonus last September as part of a pay package that also included an annual salary of $950,000, $4.5 million in pension benefits, 1.15 million stock options in United parent UAL Corp. and relocation expenses.
The chairman and chief executive volunteered early in United's 10-week-old bankruptcy reorganization to take an 11 percent pay cut, which would lower that sum to $845,500 if adopted. United did not immediately disclose the terms of the revised package.
A spokeswoman for the flight attendants' union, Sara Nelson Dela Cruz, said the group remains fully committed to United's success "regardless of whether we agree with the judge's decision." She said the judge will have an opportunity to "balance" his decision on CEO compensation with that of employee wages when renegotiated contracts come before the court.
Wedoff also sided with the company Friday in extending the ban on further sales of employee-owned stock in the airline. After hearing arguments from both United and the independent trustee for its employee stock ownership plan, State Street Bank & Trust Co., he said he would issue a new injunction blocking the sale.
United will lose what could amount to a billion-dollar tax writeoff if employee ownership falls below the 20 percent level it's at now.
State Street argued that employees' 12 million remaining shares could be worthless if not allowed to be sold soon. Its attorneys called United's plan for a low-cost carrier at the heart of its restructuring strategy "more an exercise in hope than in reality."
But Wedoff said the tax benefit could have "very substantial significance" as an element of United's restructuring. He said employees can benefit more from a revived United than from cashing in their remaining shares, which at current value are worth about $13 million - an average of about $170 for each of 75,000 participants, based on the company's figures…
Protecting Corporate CriminalsCorp-Focus Digest, Vol 1 #28 – by R. Mikhiber, R. Weissman – February 23, 2003
For corporations, reputation is everything.
If they lose it, they stand to lose everything.
See Andersen, Worldcom and Enron.
If they can keep their dirty laundry out of the public eye, all the better.
They do this by destroying incriminating documents, by lying, by covering up.
If they are caught red-handed by the cops, there's another way – plead guilty or negotiate a deferred prosecution agreement and ask the government not to publicize the agreement.
We've always suspected that these kinds of secret settlement side deals are happening, but never could put our finger on it.
Until earlier this week, when we attended a "media nosh" at the Washington Legal Foundation.
That's the group that takes out ads in the New York Times ripping into the Justice Department for prosecuting corporate criminals.
The title of the session: Is Creative Enforcement of White Collar Criminal Laws in the Public Interest?
The message that the corporate-funded think tank wanted to get out, as one paper put it: "criminalizing business judgment could stagnate the U.S. economy."
In the question-and-answer session, we asked the distinguished panel of white collar crime defense lawyers whether they could name a recent criminal prosecution of a corporation that should not have been brought because the theory of enforcement was too "creative."
Ira Raphaelson, a former federal prosecutor, and now a white collar defense attorney at O'Melveny & Myers, said he had one, but couldn't talk about it.
What do you mean, you can't talk about it?
I promised my client that I won't talk about it, he says.
It was a criminal prosecution and it's on the public record, right?
Yes, but I'm not going to tell you any more about it.
Was the case settled?
Yes, he says.
Did the Justice Department notify the press that the case was settled?
No, he says.
The company completed the negotiations. A lot of money was paid. I could tell you about the case, but it would be to the detriment of my client, so I won't, he says.
Raphaelson said that the case involved a corporation that was charged with crimes under the collective knowledge doctrine. That's a doctrine that holds that a corporation can be held criminally liable for the collective knowledge of its employees -- even though no one individual has sufficient knowledge to hold that individual culpable.
Raphaelson said that use of the collective knowledge doctrine is on the increase.
And that's a bad thing, he says.
So, it's a good thing that the Justice Department didn't publicize the case, because it would make the Department look bad.
Raphaelson said that there have always been these kind of "side deals" between the government and defense attorneys not to publicize a case.
"There are settled criminal cases that the government and the defense attorneys agree not to talk about in public," he says. "There always have been these side deals. If there is a prosecution that is a bad prosecution that is settled, and I have a side deal with the prosecutors not to talk about the prosecution, I'm not going to talk about it. In my case, the government put out no press release. There was no publicity to the case."
Lanny Breuer, the former special counsel to President Clinton and currently a partner at Covington & Burling, agreed with Raphaelson that such a secret settlement practice exists.
"There is this kind of practice of keeping information about criminal cases out of the press," Breuer said.
Breuer says he's seeing it increasingly with deferred prosecution agreements. That's where the government will tell a defendant -- if you are a good boy for a year, the charges will be dropped. The criminal slate will be wiped clean.
The U.S. Attorney's Manual says that a major objective of deferred prosecutions -- also known as pretrial diversion -- is to "save prosecutive and judicial resources for concentration on major cases."
Deferred prosecution agreements were never intended for serious corporate crime cases. But that's where they are increasingly being applied.
"Hardly anybody knows about them," Breuer said. "In fact, these are settled very quietly. Lawyers find out through the rumor mill about these settled cases that have no publicity, they'll be tipped off to it, and they'll start digging in the court records to try and find them."
Breuer said that a defense attorney "will go into the Department of Justice and say -- okay, we can't prevent you from giving this to the press, but we are going to say nothing, and we're hopeful that you will say nothing."
And often they don't.
Justice Department spokesperson Bryan Sierra confirmed that the Department doesn't always put out a press release announcing a criminal settlement -- even with a major corporation.
Sierra, who called our line of questioning "relatively stupid," said that "we decide when to make public announcements" and "reporters like yourself have to check with court documents."
If a defense attorney and a prosecutor have an agreement not to publicize the case, will the press office at Justice take that into account?
"That may be one of the things that is weighed in determining whether or not a press release is issued," Sierra said.
Is it appropriate for a federal prosecutor to negotiate whether or not a press release is issued?
"I'm not going to comment on that," Sierra said.
Sierra did admit that "there is a policy to publicize major corporate crime cases -- but not every case."
How do you determine which major cases get a press release and which don't?
This is where Sierra gets upset with our "stupid questions."
In fact, Mr. Sierra, the public has a right to know about criminal prosecutions of major corporations.
Sunlight is the best disinfectant.
It's a criminal charge.
Major corporations are being charged.
Let the sun shine in.
Let the public decide.
Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor, http://www.multinationalmonitor.org. They are co-authors of Corporate Predators: The Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage Press; http://www.corporatepredators.org).
Maneuvers Invite Criminal ProsecutionThe Charlotte Observer – by Tony Mecia – February 23, 2003
(2/22/03) - The N.C. Employment Security Commission plans to criminally prosecute any company that has used a controversial accounting maneuver to evade unemployment insurance taxes, an agency spokesman said Friday.
Previously, the ESC had said it was examining the legality of the technique, in which companies create subsidiaries that pay less money than they ordinarily would into a state fund for jobless workers. The ESC is investigating about a dozen firms suspected of using the practice.
After an examination of the law, the ESC has concluded that it is illegal, said Tom Whitaker, the agency's deputy chairman.
The law does not address the technique specifically. But the ESC says it can still seek to prosecute under a more general statute that forbids supplying false information. By creating subsidiaries and moving workers into them, firms pay lower unemployment tax rates because new firms typically pay a lower rate than existing firms, particularly those with a history of layoffs.
"The sole purpose of setting up a shell corporation is to falsely report wages and avoid paying taxes," Whitaker said.
And that, he said, is a misdemeanor, punishable by a maximum of a fine and 45 days in jail. The agency could also seek civil penalties.
Next week, the ESC plans to distribute its interpretation of the law, along with those possible penalties, to thousands of tax professionals and employer groups.
Some tax lawyers familiar with the technique have told The Observer they believe it to be legal. Last month, Deloitte & Touche, a major accounting firm, has said it advises clients on how to use the maneuver.
The courts could eventually decide which interpretation is correct if companies contest the ESC's findings.
The ESC has not confirmed that any N.C. company has engaged in the practice. Its first investigation is scheduled to be wrapped up next week, although the agency will not name the company it is investigating.
The technique appeals to some companies as a legitimate way to save money -- potentially hundreds of thousands of dollars a year -- in a tough economic climate.
But companies that don't create subsidiaries are stuck paying higher bills. This year, North Carolina doubled its unemployment insurance tax rates to replenish the depleted fund that pays laid-off workers.
To be sure, there are legitimate business reasons to create subsidiaries, such as providing a clearer chain of command within a corporation.
The state is developing software to help determine whether workers were shifted into subsidiaries to gain tax advantages. In particular, the state is looking into companies that have recently created multiple subsidiaries. A number of N.C. companies have done so, state records show, including textile companies, temporary agencies and Charlotte construction firms.
According to filings with the N.C. secretary of state, Greensboro-based textile company Burlington Industries Inc. created five subsidiaries in late 2000 and 2001: Burlington Industries I, II, III, IV and V.
Before then, the ESC listed Burlington Industries Inc. as the ninth-largest manufacturer in the state. It had about 6,500 employees.
Today, however, Burlington Industries Inc. -- which should still be among the state's biggest manufacturers despite recent layoffs -- is not in the top 100.
Instead, in the ESC's most recent listing, Burlington Industries IV is No. 50, and Burlington Industries V is No. 71. That indicates that Burlington split its workers into the new subsidiaries. None of Burlington's other new units are in the top 100.
None of the five companies had any sales or profits, cash flows from operations or cash on hand, and all had just $1,000 in assets and liabilities, according to bankruptcy-court filings for December. Businesses with hundreds of employees typically have sales and much more in assets.
Burlington declined Friday to say why it created the subsidiaries, or whether it was connected to lowering tax liability.
"We have no comment on that," said Burlington Senior Vice President John Englar.
It's not clear whether the company is paying less in unemployment taxes because the state does not release that data for individual companies. The ESC has not indicated that Burlington is under review.
Last month, another textile company, Charlotte-based Coats North America, said it flirted with using the technique but opted not to because it was "not consistent with internal company values."
Sen. David Hoyle, a Gaston County Democrat, says he plans to introduce a bill next month strengthening state law against the practice.
"It's immoral, and it should be illegal," Hoyle said. "It's fraud. It's wrong."
Previous article about Duke Energy’s auditor, Deloitte & Touche:
Exelon Employees Win Overtime RulingMorrisDailyHerald.com – by Jo Ann Hustis - February 18, 2003
(2/14/03) - WARRENVILLE — Despite a recent ruling, Exelon Nuclear says a case involving overtime for a group of middle managers isn’t over yet.
A Jan. 31 decision by federal court Judge Joe Billy McDade, Chicago, ruled the utility violated the overtime provisions of the Fair Labor Standards Act from January 2000 to the present time.
McDade ruled the group of middle managers were denied its legal right to overtime compensation and forced to work as hourly employees without compensation.
He found Exelon required those employees to take paid time off (PTO) or vacation days in lieu of sick leave or unpaid days taken in the event of the inability to report to work during inclement weather.
The decision affects employees at Byron and Quad Cities stations, according to a prepared release on the case.
Exelon spokesman Pete Resler, senior communications representative at the Warrenville headquarters, said the case is not yet over.
He said today McDade’s decision is a single ruling as a part of the whole case.
“We don’t know if the ruling will be appealed,” he said. “We won’t make those decisions until the case is all over with.”
Resler could not speak to the other issues involved in the case.
The class-action lawsuit was filed in January 2002, seeking to recover back pay and overtime differential allegedly due under the Fair Labor Standards Act.
The complaint may be the first of its kind against the two-year-old Exelon, which was formed in early 2000 when ComEd’s parent company, Unicom Corp., merged with Peco Energy Company of Philadelphia.
The issue alleges improper payroll practices at Exelon’s five nuclear power plants - Braid-wood Station at Braidwood, Dresden Station at Morris, La Salle Station southwest of Seneca and the Byron and Quad-Cities stations.
More than 100 management employees are affected, the complaint declared.
The complaint said Exelon created a new payroll policy in 2000, exempting almost all previously non-exempt management employees from compensated overtime, and instituted “Record Only” hours.
Also, the complaint alleged Exelon required and forced some work groups to report for routine planned and outage activities, call-outs and the like, without compensation, on their scheduled days off.
Previously non-exempt employees were required to “donate” 10 hours at no pay, over and above the normal 40-hour work week, the complaint declared.
How Corporations Fool InvestorsEmployee Advocate – DukeEmployees.com – February 15, 2003
If a corporation wants to present a distorted view of its revenue to investors, it is not difficult to do. Companies can legally tweak and adjust a variety of parameters to “make the numbers look good.” When companies run out of numbers to legally manipulate, some resort to illegal methods of massaging the numbers.
When a CEO announces to the world that the corporation will make produce certain results, he puts himself under unnecessary pressure to deliver on his promise. If a CEO uses such promises as a sales tool to peddle his stock to investors, he knows he will be punished if he fails to keep them.
CEO's become stock promoters because they have bonuses tied to the price of stock. The higher the price of stock, the more their options are worth. CEO’s are thus enticed to make decisions that are long-term foolish, but will boost the price of stock in the short-term. After the CEO has cashed in his millions of dollars worth of options, let the investors and employees worry about picking up the pieces.
Investors have grown weary of this game and have been suing the offending corporations. Many of the suits are successful. The Legal Intelligencer reports that Campbell Soup Company has agreed to pay $35 million to settle various class action securities suits. The allegation was that Campbell orchestrated the false impression that it was meeting quarterly sales projections.
Plaintiffs charged that the company offered special incentives on goods purchased near the end of the fiscal quarter or year.
But you can easily see the problem that this ploy creates. If stores are overflowing with stock, they are not likely to buy more. What could Campbell do, but offer more incentives? They could have come clean, but in the corporate world this is seldom an option. Thus, a vicious cycle was created.
It got to the point that the cost of the discounts was being hidden.
Campbell then started to warehouse products for customers, when the store warehouses could not stock any more.
Product was allegedly stored in trucks on Campbell’s property. It was alleged that Campbell went so far as to rent trucks to store products accounted for as “sold.”
Campbell started offering to take back any products not sold within 90 days.
One can only juggle 18 bowling balls for so long. Eventually the scheme crashed.
Employees allegedly warned management about these unethical maneuvers. But in true corporate fashion, the employee's concerns were dismissed. With typical corporate arrogance, senior management thought that they knew all things and could not possibly fail.
Judge Irenas wrote, "Campbell's executives and the sales force scrambled and schemed to convince their customers to purchase more and more product, far more than those customers needed. And then the company engaged in financial legerdemain to realize the sales as revenue and mask the improprieties of their sales tactics.
"Campbell's employees allegedly even raised with senior management their concerns that the practices were wrong. Meanwhile, throughout this period, defendants allegedly failed to disclose any of this information to its investors."
Such misfortunes occur when senior executives are more interested in managing the price of stock than managing the business.