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Citizen Works' Corporate Reform Weekly, February 24, 2003
Subj: Citizen Works' Corporate Reform Weekly, February 24, 2003
Date: 2/24/2003 3:54:37 PM Eastern Standard Time
From: ldrutman@citizenworks.org
To: info@citizenworks.org
Sent from the Internet (Details)
The Corporate Reform Weekly
Vol II, #7 February 24, 2003
IN SHORT
NEWS
In Washington:
In Congress: House Democrats call for hearings on accountants role in promoting tax shelters… Republican threats pressured GAO into dropping Cheney suit
Securities and Exchange Commission: Mutual funds want SEC to rethink proxy disclosure rule… Donaldson promises a new era as he's sworn in as SEC chair
In the States:
State Attorneys General pick up the slack in fighting corporate crime
Nevada: State assemblyman wants to toughen penalties for financial fraud
In Business:
Scandals: Merrill Lynch agrees to $80 million SEC fine to settle Enron charges… Judge rules IPO suits may proceed
Accounting: Financial executives try to discredit popular stock options valuation model
Executive compensation: High pay continues for CEOs
Public Opinion:
Investor optimism hits record lows
ACTION
Fighting Back:
Busy shareholder season kicks off with El Paso revolt… Citizen Works prepares for 2nd annual Big Business Day
This Week’s Action Item:
Tell Rep. Oxley to hold hearings on the role of accounting firms in promoting tax shelters
NEWS
In Washington
Congress
House Democrats call for hearings on accountants role in promoting tax shelters
House Democrats want the House Financial Services committee to hold public hearings on how accounting firms are marketing tax shelters to corporations. Last week, 33 of them sent a letter to House Financial Services Committee Chairman Michael Oxley asking for these hearings, which would also investigate the potential conflicts of interest that could arise when those clients are audited.
"We are deeply troubled that...many accounting firms are dedicating considerable resources and manpower toward devising tax shelter strategies designed specifically for the purpose of helping companies and individuals, including audit clients and their executives, avoid paying federal income taxes," reads the letter.
A week and a half ago, hearings in the Senate Finance Committee on Enron's tax avoidance strategies revealed that accounting firms had played a key role in helping Enron pay no taxes in four out of five years. Corporate taxes, meanwhile, are at a historic low as a percentage of the national GDP, just 1.3%. Though corporate profits are taxed at 35%, corporations actually pay about 20% of their profits in taxes.
For more, see “Enron's tax cheating highlights the need for reform” By Lee Drutman and Charlie Cray, Citizen Works http://www.citizenworks.org/issues/latest_news/enrontaxcheating.php
To read the Joint Committee on Taxation’s report on Enron’s rampant tax avoidance and the role of the accounting firms, visit: To read the Enron report and written testimony about it visit: http://www.house.gov/jct/
Republican threats pressured GAO into dropping Cheney suit
On February 7, the Comptroller General of the Government Accounting Office (GAO) decided to drop a lawsuit against Vice President Cheney, who was withholding information about what was discussed in the meetings that formulated the national energy policy.
But, according to The Hill, GAO Comptroller General David Walker was pressured into dropping the suit. The Hill reports that Republicans threatened to cut the GAO's funding if Walker continued to press ahead with the suit. The Hill quotes unnamed sources saying that Sen. Ted Stevens (R-Alaska), chairman of the Appropriations Committee, "unambiguously" pressured Walker.
At issue are the meetings in which Cheney met with 714 industry representatives and only 29 non-industry people in formulating a national energy policy that calls for continued dependence on oil, offers no significant conservation measures, and recommends “that the President make energy security a priority of our trade and foreign policy.”
This was the first lawsuit against the executive branch in the 81-year history of the GAO, the investigative arm of congress.
See "GOP threats halted GAO Cheney suit" by Peter Brand and Alexander Bolton of The Hill: http://www.thehill.com/news/021903/cheney.aspx
To see the National Resources Defense Council’s review of the energy task force meetings
http://www.nrdc.org/air/energy/taskforce/bkgrd2.asp
Securities and Exchange Commission
Mutual funds want SEC to rethink proxy disclosure rule
The mutual fund industry is starting to pressure the SEC to reverse a new rule that requires funds to make public how they vote their investors' proxies on all kinds of shareholder initiatives and corporate governance issues.
Though the rule was approved by a 4-1 vote just a few weeks ago and supported by more than 7,000 comment letters, the mutual fund industry still opposes it on grounds that it would be too costly and create too much political pressure.
Last week, the Investment Company Institute (the mutual fund industry trade group) said it was going to ask both the SEC and the Office of Management and Budget to review paperwork requirements for the regulation. An Institute spokesman said the Institute would send a letter to the agencies around March 14. Last month, top mutual fund executives met with the Office of Management and Budget (OMB) to ask for a rule change.
"We remain concerned about how quickly this rule was adopted and we hope that officials take another look, specifically as it relates to the benefits for shareholders as compared to the costs," said Vincent Loopochio, spokesman for mutual fund giant Fidelity, which opposed the rule.
For more on the benefits of mutual fund proxy disclosure, see: http://www.domini.com/about-domini/News/press_releases.doc_cvt.htm
For more on the fund industry’s spin, see its letter to the SEC at http://www.ici.org/ici_frameset.html
Donaldson promises a new era as he's sworn in as SEC chair
Longtime Bush family friend William Donaldson was sworn in as the new SEC chair last week, displacing Harvey Pitt once and for all. Now we'll see what this former Wall St. insider can do to clean up the financial industry.
At his swearing in ceremony, he promised to create "a new climate of confidence."
"It is time that all those who manage and govern our corporate and financial institutions show true leadership," Donaldson said. "I will call upon them individually and collectively to create a new environment of integrity and accountability that goes way beyond adherence to laws."
Donaldson's top priority (and first big test) is to find a new chairman for the new Public Company Accounting Oversight Board. The first chairman, Wiliam Webster, had to step down because he was the chairman of the audit committee at a company being sued for financial fraud.
For more, see “Can corporate America's new gamekeeper clean up its soiled image? Business Profile: New SEC chief has the credentials to improve on Harvey Pitt, but will he be tough enough?
By Rupert Cornwell of the U.K. Independent: http://news.independent.co.uk/business/news_analysis/story.jsp?story=381027
In the States
State Attorneys General pick up the slack in fighting corporate crime
The Washington Post takes a look at how state attorneys general are pursuing big corporate criminal cases that the federal government has more or less passed over.
“Increasingly in recent years, states are joining forces and stepping in where the federal government has declined to act or done little,” The Post reports. “Virtually every kind of consumer product has come under such state scrutiny. The attorneys general targeted makers of shoes, contact lenses, compact discs, prescription drugs and even the heavily promoted George Foreman grills in multi-state price-fixing cases.”
See "Attorneys General Crusade Against Corporate Misdeeds: States Often sue when the Federal Government Won't" by Caroline Mayer. http://www.washingtonpost.com/wp-dyn/articles/A27900-2003Feb18.html
Nevada:
State assemblyman wants to toughen penalties for financial fraud
Nevada state assemblyman David Goldwater (D-Las Vegas) wants to toughen the penalties for forging, altering or destroying financial documents and protecting anybody else who does.
So he's introduced a corporate accountability measure (AB 163) that makes those crimes felonies, each punishable by one to 20 years in jail and a $100,000 fine.
"In the wake of Enron and the WorldCom scandals, corporate governing has become a major issue," Goldwater said. "In Nevada we want to be sure we are leaders."
In Business
Scandals
Merrill Lynch agrees to $80 million SEC fine to settle Enron charges
Merrill Lynch, accused of helping Enron to "manufacture earnings" through "sham transactions," last week agreed pay the Securities and Exchange Commission $80 million to end investigations into these deals and keep the SEC's findings private. (Merrill Lynch’s net earnings for 2002, by contrast, were $2.6 billion.)
The settlement only covers the company. It does not cover individual employees who helped construct the complicated energy trading transactions that allowed Enron to falsely inflate profits.
The basic structure of many of the deals was that Merrill would buy something from Enron (be it energy or Nigerian barges) at the end of the year to help Enron make its year-end profit levels. Then, Enron would buy whatever they sold back, but not record it as an expense and give a little extra to Merrill. Merrill admitted no wrongdoing.
Meanwhile, Citigroup, which also helped Enron through some questionable deals, is reportedly in settlement talks with the SEC.
For more, see: "Merrill, SEC Agree on Enron Settlement" by Carrie Johnson and Peter Behr of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A37613-2003Feb20.html
To read a Senate Government Affairs Subcommittee report on how financial institutions aided Enron’s phony accounting, see http://govt-aff.senate.gov/121102report.pdf and http://govt-aff.senate.gov/073002levin.htm
Judge rules IPO suits may proceed
A suit that charges a number of big banks with rigging the Initial Public Offering (IPO) process cleared a major hurdle last week when Federal Judge Shira Scheindlin of the Southern District of New York rejected efforts by 55 banks and 309 companies that issued IPOs to throw out the suit.
Investors charge that the banks and companies conspired to artificially inflate the prices of the IPOs through misleading research. Investors also charge that big investment firms offered IPOs in exchange for commercial deals, which is illegal.
The plaintiffs are seeking damages in the order of billions of dollars.
On a related note, Forbes Magazine looks at how securities underwriting made possible by the repeal of the Glass-Steagall Act has been nothing but trouble for commercial banks. See "Why did They Want Glass-Steagall Repealed?": http://www.forbes.com/home/2003/02/20/cz_mt_0220usb.html
Accounting
Financial executives try to discredit popular stock options valuation model
As the debate on whether to expense stock options continues to rage, the business community is working to discredit the current Black-Scholes model of stock option valuation.
Last week, the Financial Executives Research Foundation (the non-profit arm of the Financial Executives International) released a study that argues that of six models of valuing options, Black-Scholes produced the highest values. And if options are expensed, the higher the value, the higher the expense companies must report. Financial executives, naturally, would prefer a model that produces lower values for options.
Stock options, the so-called "steroids of corporate greed," have been cited as a key fuel for reckless corporate behavior. Companies are not required to expense options in financial reports, which means they can give out as many as they like. As a result, executives receive massive options grants, a powerful incentive to cook the books to keep stock prices high.
One of the popular arguments against expensing stock options is that they are extremely difficult to value as an expense. However, companies somehow manage to produce a value for options when taking a tax deduction for issuing options.
Executive Compensation
High pay continues for CEOs
In the wake of recent corporate scandals, it seems a good CEO is hard to find. And so, it seems, to get a good CEO, companies are willing to pay. Which means that CEO salaries, which have grown from 42 times the average employee to more than 400 times the average employee in just 20 years, are staying high.
A USA Today analysis of corporate filings finds that many CEOs are getting paid more than $100 million to help turnaround sinking companies.
See "Troubled firms entice CEOs with platinum pay," by Gary Strauss: http://www.usatoday.com/money/companies/management/2003-02-20-exec-pay_x.htm
Public Opinion
Investor optimism hits record lows
The Index of Investor Optimism hit a new low in February, falling to 9 – down 29 points from January’s level of 38. The Index, which began in 1996, reached 178 in January of 2000.
The latest Gallup Poll finds that only 18% of the public thinks the economy is in good condition. But 34% of the public rates the economy as poor. Meanwhile, 63% of consumers say economic conditions are getting worse, while only 26% say they are getting better.
For more, see http://www.gallup.com/poll/releases/pr030224.asp
ACTION
Fighting Back
Busy shareholder season kicks off with El Paso revolt
With a record 893 resolutions filed at top companies, this coming season of shareholder meetings is likely to produce plenty of contentious debate about corporate governance and other issues.
As the New York Times reports it: “State pension funds, unions and other investors, big and small, are clamoring for their say on executive compensation packages, board elections, even choosing where companies are incorporated. They want General Electric to trim severance packages, Citigroup to eliminate golden parachutes, Sprint to stop repricing the stock options granted to management and Delta Air Lines to charge stock options against earnings. They want Qwest Communications to link options to performance, Wal-Mart to split the job of chairman and chief executive into two posts and General Motors to protect the environment.”
For more, see “Revolt of the Shareholder” by Claudia Deutsch http://www.nytimes.com/2003/02/23/business/yourmoney/23PROX.html
Also see: “Shareholders flexing muscles in push for corporate reform” by Rachel Beck of the Associated Press. http://newsobserver.com/24hour/business/story/776218p-5575533c.html
Meanwhile, at El Paso Corp., an energy services company that has fallen on hard times after being involved in manipulating California markets, a wealthy shareholder wants to replace the entire board. That shareholder, Selim K. Zikha, owns less than 2% of the shares, but wants to put an entire new board of nine directors in place. El Paso’s stock is down nearly 90 percent from its March 2002 high of $46.89.
For more on El Paso, see “Holder Seeks Ouster of El Paso Board” By PATRICK McGEEHAN of the New York Times: http://www.nytimes.com/2003/02/19/business/19PLAC.html
Citizen Works prepares for 2nd annual Big Business Day
Hundreds of citizens and communities are joining with Citizen Works’ Corporate Reform Campaign to demand a shift from a suicidal to sustainable economy, from profit to human-centered values and from corporate to popular rule.
On Saturday, April 5th, hundreds of communities will participate in Big Business Day by organizing local events that communicate our message of challenging corporate power. This year’s theme is Challenging the Business of War. You can add your voice to a host of others by organizing an event in your community.
Citizen Works is also jump starting a national dialogue about the appropriate rights and responsibilities of corporations by organizing discussion groups in communities across the country.
For information about either of these projects, contact Jennifer Tucker (jtucker@citizenworks.org) or Katie Selenski (kselenski@citizenworks.org) at Citizen Works, 202-265-6164
THIS WEEK’S ACTION ITEM:
Tell Rep. Oxley to hold hearings on the role of accounting firms in promoting tax shelters
The recent hearings on Enron’s tax avoidance revealed that accounting firms played a major role in helping Enron pay no taxes in four out of five years. But what role have accounting firms played in tax avoidance throughout corporate America?
Last week, 33 Democrats wrote a letter to House Financial Services Committee Chairman Michael Oxley (R-Ohio), asking Oxley to hold hearings on the role of accounting firms in promoting tax shelters. As this week’s action item, keep putting pressure on Oxley. Call up the leadership office of the House Financial Services Committee at 202-225-7502 and demand that Oxley hold hearings on how accounting firms are helping corporations cheat Uncle Sam.
Oxley also has an e-mail contact form: http://oxley.house.gov/contact.asp
For more background, see “Enron's tax cheating highlights the need for reform” By Lee Drutman and Charlie Cray, Citizen Works http://www.citizenworks.org/issues/latest_news/enrontaxcheating.php
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News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.
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