Citizen Works' Corporate Reform Weekly, May 12, 2003

Subj: Citizen Works' Corporate Reform Weekly, May 12, 2003
From: [email protected]
The Corporate Reform Weekly Vol II, #18 May 12, 2003

NEWS - In Washington - Congress
Senators attempt to intimidate FASB at roundtable on "saving stock options"

What was billed as a roundtable on "Preserving Partnership Capitalism Through Stock Options For America's Workforce" last week turned into three senators and a stacked deck of tech executives ganging up on Financial Accounting Standards Board chairman Robert Herz, who supports expensing options. FASB, which sets rules for the accounting industry, recently decided that options should be expensed, much to the horror of many tech executives, who have gotten rich off stock options in recent years.

The battle over expensing stock options is turning nasty, with tech lobbyists pouring all their efforts into keeping options unexpensed. Some of their arguments were on display last week at the forum, hosted by Sens. Mike Enzi (R-Nev.), George Allen (R-Va.) and Barbara Boxer (D-Calif.)

Allen essentially argued that the innovation of our economy depended on keeping stock options unexpensed. He even said that the success of the recent Iraq war was due to American innovation, which depends on keeping stock options unexpensed. Boxer, whose home state includes options stronghold Silicon Valley, said she wanted to preserve stock options for the middle class and rank-and-file employees. However, according to the Bureau of Labor statistics, just 1.7% of U.S. employees have any stock options. Approximately 90% of all options go to the top five executives at companies that issue options.

The panelists included Netscape CEO Jim Barksdale, venture capitalist John Doerr, Cisco Vice President Dennis D. Powell, and a handful of other executives, professors, and industry types against expensing options. Herz was one of only three of 17 panelists in favor of expensing. Senators chided Herz for not coming into the roundtable with an open mind. Legislation has been introduced in both the House and the Senate (both called Broad-Based Stock Option Plan Transparency Act of 2003 ) to block FASB's decision to expense options and instead direct more disclosure and mandate years of study on the issue.

Ultimately, it should be up to the Securities and Exchange Commission to enforce the rules. SEC Chairman William Donaldson said last week that "The Financial Accounting Standards Board has put itself on the line and said there's an expense attached to stock options. I am waiting restlessly for this to happen…As far as I'm concerned, we have crossed the Rubicon."

Stock options were one of the key engines of corporate greed in the late ?'90s. Because they don't count as an expense that dips into profit, corporations gave boatloads of options to top executives. With millions of options in company stock, executives were essentially given incentives to cook the books to push stock prices high. Meanwhile, companies were able to take a tax deduction for exercised options, which is helping to keep corporate taxes low for many corporations.

To read the statement that Herz wasn't given the opportunity to read at the hearing: http://accounting.rutgers.edu/raw/fasb/full_text.pdf
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Senators say Wall Street settlement didn't go far enough

Senators last week chided regulators for letting 10 Wall Street banks off the hook with a paltry $1.4 billion settlement that failed to enact tough structural reforms.

"Without holding executives and CEOs personally accountable for the wrongdoing that occurred under their watch, I do not believe that Wall Street will change its ways or that investor confidence will be restored," said Senate Banking Committee Chairman Richard Shelby (R-Ala.), at a Senate Banking Committee hearing.

Shelby joined Senator Paul Sarbanes (D-Md) in suggesting that the fines were too low considering the damage that these banks did by offering misleading and conflicted advice to millions of small investors. Both worried that under the settlement, Wall Street would not be able to police itself.

Securities and Exchange Commission Chairman William Donaldson defended the penalties, saying that they were "just the beginning."

New York State Attorney General Eliot Spitzer, meanwhile, said that lawmakers deserved part of the blame for their lax regulation of Wall Street in the ?'90s and for their chronic underfunding of the Securities and Exchange Commission.

For more, see "Senators urge tougher action on Wall St.," by Joshua Chaffin of the Financial Times:
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1051389842971

Also see: "Senators Cast Doubt on Self-Policing By Wall Street" by Kathleen Day of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A27645-2003May7.html

For a good overview of where the Wall Street settlement fell short, see "Wall Street Accountability" by Ralph Nader: http://www.nader.org/interest/050203.html
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Senate tax cut bill would crack down on offshore corporate tax cheating

There is little to cheer about in the $421 billion tax cut bill that the Senate Finance Committee passed last week. It is mostly a tax cut for the wealthy and corporations.

But the Senate version of the tax cut does have a provision that would penalize companies that move their headquarters to offshore tax havens, as an increasing number of U.S. corporations have done in recent years.

The provisions have the support of Finance committee chair Charles Grassley (R-Iowa) and ranking member Max Baucus (D-Mont.).

"It strikes me that something will get done, but only because I think Grassley and Baucus are adamant that something will get done," said Rep. Richard Neal (D-Mass.), who has sponsored a bill in the House to close the loophole that allows corporations to reincorporate offshore and save hundreds of millions in taxes.
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House Committee to examine role of banker in HealthSouth fraud

What role did a banker who worked for Citigroup and UBS Warburg play in HealthSouth's $2.5 billion accounting fraud? That's what investigators from the House Energy and Commerce Committee want to know.

The committee said it was interested in business dealings of banker Benjamin Lorello, who worked at Citigroup and UBS Warburg. Both companies received billions in fees from HealthSouth. The House has requested financial records from UBS Warburg.

Meanwhile, the committee also received 60 boxes of evidence it had requested from HealthSouth and its auditor Ernst&Young.

For a good article on what's going on with Ernst&Young these days, see "Angst & Young" by Jeremy Kahn, of Fortune Magazine: http://www.fortune.com/fortune/investing/articles/0,15114,450891,00.html
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Department of Justice
Corporate fraud investigations continue to grow

The Department of Justice now has 200 ongoing investigations under the Corporate Fraud Task Force, up from 130 just a few months ago. The Federal Bureau of Investigations (FBI) is continuing to open three to five new investigations into suspect frauds of $100 million or more each. In other words, the corporate crime wave shows no signs of abating.

"I don't know that we're through the worst of it," said Keith Slotter, chief of the FBI's financial crimes section. "We thought we would have peaked by now and I don't believe we have, unfortunately. Now [Enron]'s turning out not to be such an anomaly. We're learning this is more commonplace than the average person thought."

The FBI continues to maintain a corporate fraud hotline: 888-622-0117

For more, see: "FBI Takes Up Heavy Load of Corporate Fraud Probes" by Andrew Caffrey of the Boston Globe: http://www.boston.com/dailyglobe2/126/nation/FBI_takes_up_heavy_load_of_corporate_fraud_probes-.shtml

For a look at what jail time means for white-collar criminals, see "Prison time gets harder for white-collar crooks" By Jayne O'Donnell and Richard Willing, USA TODAY: http://www.usatoday.com/money/companies/management/2003-05-11-bighouse_x.htm
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Wartime profiteering
U.S. oil involvement in Iraq deepens

Developments last week indicate that the U.S. oil involvement in Iraq may be more extensive than the Bush Administration had originally contended. (The Administration has long argued that the Iraqi oil belongs to the Iraqi people). But consider these two developments:

1. The resolution that the Bush Administration offered last week to the Security Council would put the U.S. and its military allies (not the U.N.) in control of Iraqi oil.(For details, see "U.S. Proposes Broader Control of Iraqi Oil, Funds" by Colum Lynch of the Washington Post http://www.washingtonpost.com/wp-dyn/articles/A34575-2003May9.html)

2. Rep. Henry Waxman (D- Calif.) learned last week from the Army Corps of Engineers that Halliburton subsidiary KBR's controversial no-bid contract to put out oil well fires also includes "operation" of Iraqi oil fields and "distribution" of Iraqi oil. The contract could last until 2004 at a cost to taxpayers of $7 billion. "Only, now, over five weeks after the contract was first disclosed, are members of Congress and the public learning that Halliburton may be asked to pump and distribute Iraqi oil under the contract," Waxman wrote. For details on Waxman's investigation into the Halliburton contracts, see: http://www.house.gov/reform/min/inves_admin/admin_contracts.htm .
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Amendments guaranteeing full disclosure of no-bid contracts pass in House Committee

A proposal requiring full disclosure of all Iraqi contracts was unanimously approved last week by the House Government Reform Commission as an amendment to the Services Acquisition Reform Act of 2003 (H.R. 1837), an otherwise troubling bill dealing with defense contracting reform.

The amendment, which was introduced by Rep. Carolyn Maloney (D-NY), closely tracks a similar proposal in the Senate: the "Sunshine in Iraq Reconstruction Contracting Act of 2003" (S. 876). The proposals come in response to the fact that the government awarded a contract worth up to $7 billion to Halliburton through a secretive, closed-bidding process.

"Sunlight is the best disinfectant," Maloney said. "The public has a right to know how billions of dollars will be spent in Iraq."

Maloney, however, withdrew a second and stronger amendment that would have applied federal contracting standards to seized Iraqi assets.

For more on the amendments, see: http://www.house.gov/maloney/press/108th/20030508GovReform.html

Unfortunately, the bill itself has many problems. See "Services Acquisition Reform Act (SARA) Would Fleece Taxpayer": http://www.pogo.org/p/contracts/co-030402-reform.html (For example, according to POGO, the bill "encourages use of time and material, as well as labor hour contracts, which allow contractors to engage in almost unlimited billing of the government without producing a product."
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Securities and Exchange Commission
Donaldson urges corporate boards to take a look "in the mirror"

Securities and Exchange Chairman William Donaldson last week delivered a familiar speech: he described the disillusionment with corporate America and called on managers and directors to improve their ethics, but proposed no substantial reform.

"Just as we expect that corporate boards should have a constant eye towards evaluating the performance of the company as a whole, its management, and particularly the CEO, there is another place that they should remember to look on a regular basis - in the mirror," Donaldson told a crowd gathered at the Economic Club of New York.

"As we move past Sarbanes-Oxley and the requirements," Donaldson said, "rules and regulations that have come in its wake, it's essential that corporate boards look beyond the letter of the law and be ever mindful of the spirit of the reforms."

Donaldson called for "a more fundamental examination of the core issues involved in a wholly reinvigorated concept of corporate governance." He drifted in and out of the fuzzy principles of improving the philosophy of corporate governance, of changing the "moral DNA" of corporations. He urged corporate directors to serve on fewer boards so they could pay more attention to each one. He also suggested requiring directors to hold stock grants for lengthy periods of time to align them with the long-term interests of the company.

To read Donaldson's speech in full: http://www.sec.gov/news/speech/spch050803whd.htm

For a response to Donaldson's speech, see "Bill Donaldson, Strong Follower" by Dan Ackman, of Forbes.com:
http://www.forbes.com/personalfinance/strategies/2003/05/09/cx_da_0509topnews.html

The Washington Post ran a profile of Donaldson worth reading last week. "I am surprised at how prevalent [fraud] is in the economy," Donaldson told the Post. "I am surprised at the day-in and day-out, steady level of malfeasance that comes in under the radar." See: "New Strength at the SEC's Helm" by Kathleen Day and Carrie Johnson: http://www.washingtonpost.com/wp-dyn/articles/A22627-2003May6.html
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In the States - California
Investment banks must follow new rules to do business with California

Investment banks that want to do business with the state of California must follow new conflict-of-interest and disclosure rules, state treasurer Phil Angelides announced last week.

California, which issued $32.3 billion in bonds and notes and made $143.3 billion worth of investment purchases, will require all banks to separate stock research and investment banking; pay analysts based on the accuracy of their reports instead of on their ability to attract banking business; and disclose how accurate their stock picks are.

Angelides has proposed that the state's two giant pension funds, the California Public Employees' Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) use the same standards.

"Our message today is simple and clear," the Treasurer added. "If you wish to do business with our State, you must adhere to the highest standards of integrity and disclosure. Our goal in California is to be the leading edge in the arena of corporate responsibility."

For details: http://www.treasurer.ca.gov/news/releases/2003/20030508ips.pdf
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In Business - Scandal
Judge rejects SEC's freeze of HealthSouth CEO's assets

A U.S. District Judge has rebuked the Securities and Exchange Commission's attempt to freeze the assets of former HealthSouth CEO Richard Scrushy, who has yet to be charged in connection with $2.5 billion in fraud at the company.

Judge Inge Johnson said the government had "undoubtedly manipulated simultaneous criminal and civil proceedings" in its probe. "To date, the SEC has failed to establish, as opposed to allege, that defendant Scrushy was involved in the fraud," she said.

Scrushy has some $150 million in assets, including 31 bank and brokerage accounts, four mansions, a 92-foot yacht and 10 other boats, 34 automobiles and two airplanes, according to testimony.

Judge Johnson's decision has essentially halted the SEC's civil lawsuit against Scrushy.

See : "HealthSouth founder gets full access to his assets" in the Chicago Tribune:
http://www.chicagotribune.com/business/chi-0305090227may09,1,4158376.story

A worthwhile article in the Atlanta Journal-Constitution suggests that the HealthSouth case "will be a testament to the teeth in Sarbanes-Oxley, which was crafted to restore investor confidence in the post-Enron world." See "HealthSouth case to test post-Enron laws," by Patti Bond: http://www.ajc.com/business/content/business/0503/11healthsouth.html
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Royal Ahold admits another $380 million in overstated earnings

Royal Ahold, the scandal-ridden Dutch retail giant, last week announced that it had overstated earnings by $880 million, more than the $500 million it had previously admitted to. The company owns grocery store chains around the world.

The problems spring from its U.S. Foodservice unit, which incorrectly booked rebates or discounts from vendors.

Investigators are looking to the role that suppliers, including ConAgra Foods Inc., Kraft Foods Inc., H.J. Heinz Co. and General Mills Inc. and Sara Lee Corp., may have played in the fraud.

For more, see: "Royal Ahold Says Fraud Was Worse than Thought" http://www.nytimes.com/2003/05/09/business/worldbusiness/09GROC.html
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Corporate Governance
CEO departures went up in 2002

According to a Booz Allen Hamilton survey, 10% of CEOs at 2,500 publicly-traded companies around the world left office in 2002. Involuntary successions were up 70% from a year ago, though still just one in 25 left involuntarily.

Booz Allen Hamilton's Charles Lucier concludes: "The CEO mystique has all but evaporated, and director activism has replaced crony capitalism in the boardroom."

Director activism, however, seems to have vanished when it comes to severance pay. According to The Corporate Library, outgoing executives' "golden parachute" severance packages have averaged $16.5 million in the last two years.

See: "As the CEOs' World Turns" by Dan Ackman of Forbes.com: http://www.forbes.com/home_asia/2003/05/12/cx_da_0512topnews.html
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ACTION - Fighting Back

Mutual Funds under pressure to take a more activist role in corporate governance

Mutual funds, which control roughly $6 trillion in assets, have been slow to take an activist role in improving corporate governance. But Martha Graybow of Reuters reports that "an angry investor movement is drawing them into the fray."

"Investor advocates say there are signs that big fund firms are starting to take more of an activist stance," Graybow reports.

See: "Fund firms under pressure to become more activist": http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=2699765
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This Week's Action Item
Call for more investigation into corporate contracts in Iraq

Rep. Henry Waxman (D- Calif.) learned last week from the Army Corps of Engineers that Halliburton subsidiary KBR's controversial no-bid contract to put out oil well fires also includes "operation" of Iraqi oil fields and "distribution" of Iraqi oil. The contract could last until 2004 at a cost to taxpayers of $7 billion. "Only, now, over five weeks after the contract was first disclosed, are members of Congress and the public learning that Halliburton may be asked to pump and distribute Iraqi oil under the contract," Waxman noted.

Meanwhile, a resolution that the Bush Administration offered last week to the Security Council would put the U.S. and its military allies (not the U.N.) in control of Iraqi oil.

All this begs a number of questions about how and why corporate contracts are being awarded for the rebuilding of Iraq.

As this week's action item, we urge you to contact your Senators and Representatives and demand that they to investigate how and why Halliburton, Dick Cheney's former company, is profiting so handsomely from the war in Iraq.

To contact your senators - http://www.senate.gov/contacting/index.cfm
To contact your representative - http://www.house.gov/writerep

For Waxman's correspondences with the Army Corp of Engineers, which includes the details of the Halliburton contracts, see:
http://www.house.gov/reform/min/inves_admin/admin_contracts.htm .

Also see: "Halliburton, Dick Cheney, and wartime spoils"
http://www.commondreams.org/views03/0403-10.htm
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Note: The Corporate Reform Weekly will be on vacation next week. Publication will resume on May 27.
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