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Senators last week approved Rep. Christopher Cox (R-Calif.) to head the Securities and Exchange Commission on voice vote without much opposition, sending the free-market ideologue with a history of supporting the rights of big business over small investors to head the regulatory agency in charge of protecting small investors.
As expected, the Senate also approved the nomination of Democrat Annette Nazareth and the re-nomination of Democrat Roel Campos to fill the two Democrat seats on the five-member commission. Nazareth's nomination was opposed by the U.S. Chamber of Commerce.
During last week's hearings, Cox tried to counter criticisms that his free-market ideology and his anti-investor protection record in Congress would undermine his ability to serve as head of the SEC, whose mission is to protect investors and regulate the securities market.
"My top priority will be vigorous enforcement of our securities laws," Cox told Senators. "The commission must be vigilant on behalf of investors and stalwart against fraud and unfair dealing."
Though he has vigorously opposed requiring companies to honestly account for their stock options in the past, Cox did say he would not attempt to block a Financial Account Standards Board rule that will soon require companies to count stock options as expenses ("The rule is going forward," Cox said). He also promised that he would not undo recently enacted SEC regulations, but rather "build on them." (the most hotly-contested recent SEC rule is one that requires three-quarters of mutual fund boards to be independent).
As for his critics, he said that: "Some people's guesses of what I might do as chairman, which I've read in the newspaper, are just wrong."
He also laid on the Washington platitudes, telling the Senate, "I will bring not only a bipartisan spirit but a nonpartisan spirit to this enterprise."
Cox deflected charges that he had played a major role in First Pension Corp., a 1980s California investment pyramid scheme whose founder, William E. Cooper, later went to jail. Cox, then a lawyer for the firm Letham & Watkins, did some work for Cooper, but the extent of his work is unknown. Cox was initially named in an investor lawsuit, but his name was later dropped. His firm, however, settled for an undisclosed amount. Cox said he had only done "preliminary work" for a First Pension securities offering.
Though there was little opposition to Cox, a large coalition of investor, consumer, labor, and citizen groups, including Citizen Works, publicly opposed Cox's confirmation.
The coalition held a press conference last Monday before hearings got underway. Meanwhile, in a Los Angeles Times op-ed, Why are the Dems caving in on Cox?, Jamie Court of the Foundation for Taxpayer and Consumer Rights, laid out the case against Cox.
Some highlights:
Consider his record: As a congressman, Cox voted repeatedly in the interests of Wall Street investment houses to undermine conflict-of-interest standards protecting investors and pension plans. He has voted against post-Enron proposals that would require executives to certify financial statements, strip bonuses from CEOs who falsify statements, and stop stock analysts from holding shares in the companies they cover (although he did ultimately vote for the Sarbanes-Oxley corporate reform bill when it became a fait accompli).
None of this is particularly surprising given that Cox's campaigns have collected more than a quarter of a million dollars from the securities and investment industry he soon may be regulating. WorldCom was the 10th biggest contributor to Cox in 2002, the year that auditors revealed the company's fraud. WorldCom Chief Executive Bernard Ebbers was recently found guilty of deceiving investors in an $11-billion accounting fraud.
Cooper and First Pension Corp. took investors—largely from Orange County—for up to $130 million. Doesn't Cox need to answer for his role as Cooper's attorney and for his statements later that he did not know about Cooper's crimes? Shouldn't we demand full disclosure before entrusting Cox with policing the stock market in which Americans have invested their nest eggs and college savings?
For more, see:
Sens. Carl Levin (D-Mich.) and Norm Coleman (R-Minn.), who have for years been exposing and highlighting extensive tax shelter activity through their work on the Senate Permanent Subcommittee on Investigations, last week introduced comprehensive legislation to crack down on tax shelters.
"These tax advisors are getting hundreds of millions of dollars in fees, while robbing the U.S. Treasury of billions of dollars in revenues each year," said Levin in a press release. "We need to strengthen the laws and enforcement mechanisms to stop promoters of abusive tax shelters. We also need to take stronger measures to stop use of offshore tax havens for tax dodges."
"Abusive tax shelters and uncooperative tax havens undermine our tax system, forcing honest taxpayers to pay more than their fair share," Coleman said in a press release. "We need to give honest, hardworking Americans a better deal - by cracking down on those who choose not to pay their fair share in taxes."
In a Senate floor statement, Levin said: "The eyes of some people may glaze over when tax shelters and tax havens are discussed, but unscrupulous taxpayers and tax professionals see illicit dollar signs. Our commitment to crack down on their tax abuses must be as strong as their determination to get away with ripping off America and American taxpayers. Our bill provides our government the tools to end the use of abusive tax shelters and uncooperative tax havens and to punish the powerful professionals who push them. It's long past time for Congress to act to end the shifting of a disproportionate tax burden onto the shoulders of honest Americans."
According to Sen. Levin's press release, the Tax Shelter and Tax Haven Reform Act of 2005 proposes the following measures:
- INCREASE penalties to 150% on persons who promote abusive tax shelters or knowingly aid or abet taxpayers to understate their tax liability. Currently, promoters face only a 50% penalty, and aiders and abettors face a maximum penalty of $10,000.
- Prevent abusive tax shelters by prohibiting tax advisors from charging fees linked to alleged tax savings, mandating examination procedures to identify banks contributing to abusive tax shelters, encouraging whistleblowers who report tax schemes, and authorizing the IRS to work with federal agencies like the SEC and bank regulators to strengthen abusive tax shelter enforcement.
- Require Economic substance FOR TRANSACTIONS TO BE ELIGIBLE FOR tax BENEFITS by clarifying and codifying the economic substance doctrine and by strengthening the penalties for tax transactions lacking economic substance.
- Deter uncooperative tax havens by authorizing Treasury to publish an annual list of uncooperative tax havens, and by ending U.S. tax benefits and requiring greater disclosure for taxpayers transferring funds to such uncooperative tax havens.
For more, see:
Timothy E. Flanigan, the Bush administration's nominee to be deputy U.S. Attorney General and formerly chief counsel for Tyco International, was involved with lobbyist Jack Abramoff in an effort to keep open a Bermuda tax loophole that saved Tyco millions of dollars a year in taxes.
In hearings last week, Flanigan admitted that he had supervised Abramoff's lobbying work for Tyco, which reincorporated in Bermuda in 1997 to save hundreds of millions of dollars in taxes. But he refused to answer questions specifically about what Abramoff did for the company. Sen. Richard J. Durbin (D-Ill) said he would submit written questions seeking more details.
Abramoff reportedly lobbied on behalf of bills that would penalize American companies, like Tyco, that moved their headquarters offshore to avoid taxes. Various proposals over the years would have banned government contracts for tax traitors or closed the loophole. In 2004, Congress finally succeeded in closing the Bermuda loophole for future reincorporators, but companies like Tyco that had already made the move were grandfathered in.
Lobbying reports show that Abramoff and his law firm, Greenberg Trauring, collected $1.7 million in 2003 and 2004 from Tyco. Tyco Vice President told reporters that Abramoff "was engaged to provide certain legal services on matters relating to Tyco's business."
Before joining Tyco in 2002, Flanigan was White House deputy counsel under then White House counsel Alberto Gonzales.
For more, see:
With corporate pensions underfunded by as much as $600 billion according to Congressional Budget Office estimates, the Senate Finance Committee last week approved a bill that would force companies to fully fund their pension plans.
The proposal, supported by President Bush, would require companies operating traditional, defined-benefit pensions, to put about $430 billion more into their plans—which for some companies could mean a 75 percent increase in how much money they pay into their pension funds.
Currently, defined-benefit pension plans cover 34.6 million Americans. According to the federal Pension Benefit Guaranty Corp, the taxpayer-funded insurance program for corporate pensions, pension plans for 15 million employees at 1,108 major companies were underfunded by $353.7 billion last year, up a whopping 27 percent from the year before. The PBGC, meanwhile, is itself underfunded by $23.3 billion.
According to a GAO report, loose rules about funding corporate pensions allowed 60% of companies to not invest new money into pension plans between 1995 and 2002, which created much of the problem. Comptroller General David M. Walker said that many companies were "smoothing" pension earnings and crediting pension investments even if they lost value.
Meanwhile, the Financial Accounting Standards Board is working on new rules for accounting for pensions that will make it harder for companies to overstate the value of their benefit plans.
For more, see:
The Public Company Accounting Oversight Board last week approved a long-awaited rule banning accounting firms from providing tax shelter consulting for companies whose books they audit.
The rule is intended to put a halt to abusive tax shelter work that has been rampant at all of the Big Four accounting firms, though perhaps most so at KPMG, which is facing potential criminal charges for its tax shelter work and is taking "full responsibility for the unlawful conduct by former KPMG partners."
"This will keep auditors out of aggressive tax work that has so damaged investor confidence," said PCAOB Chairman William J. McDonough, said.
Sen. Carl M. Levin (D-Mich.), who has led several Senate probes into KPMG's aggressive tax shelter work, said the new rules "would help restore auditor independence, increase investor confidence in corporate financial statements, and rein in abusive practices within the U.S. tax shelter industry."
Under the new rules, auditors will not be allowed to sell abusive tax shelters or prepare tax returns for top executives at companies whose books they audit. This ends the long-standing conflict-of-interest whereby accounting firms who are supposedly vouching for the honesty of a company's books are also helping the company deceive the IRS.
Accounting firms will, however, be allowed to continue to conduct routine tax preparation and compliance and general tax planning.
For more, see:
Corporations that pay their CEOs excessively are more likely to default on their bonds, according to a new study by Moody's Investors Services.
According to the report, "large, positive, unexplained bonus and option awards are predictive of both default and large rating downgrades."
Of 43 companies that defaulted between 1993 and 2003, 22 paid their CEOs above what would be expected for a company of its size. And of 214 companies that experienced major bond rating downgrades, 140 (about two-thirds) had higher-than-expected CEO pay.
Christopher Mann, a Moody's senior vice president and author of the report, said told reporters that the study "is confirming that there is a relationship between high pay and extra risk for the company. It's been seen in other ways, and now we are showing that for the debt markets it's apparently a significant factor."
"It may incentivize the wrong action," said Kenneth A. Bertsch, managing director, corporate-governance analysis, told reporters. "The larger the pay, the more you have to worry the incentives might lead someone to cross the line to make sure they meet the numbers. It may encourage someone to shoot for the moon and take a riskier strategy."
For more, see:
Federal prosecutors last week sought leniency for former WorldCom CFO Scott Sullivan, whose testimony against former WorldCom CEO helped to convict Ebbers, who was recently sentenced to 25 years in jail.
Sullivan, who pleaded guilty to fraud and conspiracy charges, will be sentenced on August 11. Prosecutors called him a "model cooperator" and recommended leniency (Sullivan reportedly sought out the Justice Department even before his August 2002 arrest). Though Sullivan could face up to 25 years in jail, he will probably get a much lighter sentence.
Sullivan last week also agreed to turn over $5 million from the sale of his 30,000-square-foot Florida mansion to settle a shareholder lawsuit. Two other WorldCom executives, the former chief financial officer; Buford Yates Jr., the former accounting director; and David F. Myers, the former controller, also settled with investors last week.
For more, see:
In many ways, the story that Greg LeRoy tells in The Great American Jobs Scam is a familiar one. Wherever it is we live, we have probably witnessed our local city council members doing summersaults and back flips to win the hearts and minds of some multinational corporation that promises to build an office or a factory or a store in our community, bringing with it jobs—or a corporation that already has a presence in the community threatening to move away unless it gets some special benefits.
The summersaults and back flips are more conventionally known by such names ad property tax abatements, corporate income tax credits, sales and excise tax exemptions, tax-increment financing, free land and land grant write-downs and so on, and collectively, they allow large corporations to take local communities for $50 billion a year. Yet, very few communities demand anything close to accountability and as a result, very few get any. As LeRoy documents, many of these corporations take their gifts, say thank you very much, and a few years later are gone, along with the jobs and economic development they so coyly promised.
"How do corporations get away with this?" asks LeRoy. "Because the system is rigged. Corporations have it down to a science. They have learned how to chant 'jobs, jobs, jobs' to win huge corporate tax breaks—and still do whatever they wanted to all along."
This "science" of how corporations take communities shake down communities for tax breaks makes up a good part of the Great American Jobs Scam. One of the major culprits are the "site location consultants," some of whom work on commission—getting as much of 30 percent of subsidy packages. These consultants are experts in playing off communities against each other to get the best deal, and as LeRoy explains, "Given how this system is rigged, all the power rests with the site consultants and their corporate power."
Yet, despite the huffing, puffing and bluffing that typically takes place in these deals, LeRoy lets the reader in on a very big secret—subsidies don't actually matter all that much. Most companies decide where they want to locate based on other things, like workforce or quality of life. Factor in all the costs of running a company, and state and local taxes actually make up less than one percent of the a company's expenses. As LeRoy reports: "Candid site location consultants will admit that the only time subsidies can actually tilt the scales is when a company has two equally compelling choices."
The Great American Jobs Scam goes into much detail about the many ways that corporations utilize phony assessments of the "business climate," how states and communities compete against each other, how communities misapply tax abatements to propagate sprawl, how many companies use things like Delaware holding companies to significantly reduce their state tax burden, and other scams and schemes.
These sometime wonky (though always well-explained) details will appeal to those who want to know the nuts and bolts of how exactly corporations manage to play so many local communities for patsies. But the overall effect is striking: "In 1980, corporate income taxes accounted for 9.7 percent of state tax revenue; by 200, it was down to 6 percent, and for the next three years, it averaged only 5.2 percent."
What this means is that states and cities have less tax revenue to spend on what LeRoy calls "the two things that are proven job creation winners—our skills and infrastructure." As LeRoy notes, "In time, the incentive package will run out and if the location does not have the inherently favorable characteristics and the operation is not embraced by the community, the company may not fare very well long-term."
Writ large, this is potentially a huge national problem. "If our schools and workforce development systems fail to provide enough skilled labor and our aging infrastructure impedes productivity," LeRoy writes, "the United States will inevitable become a less attractive place to invest and create jobs."
The Great American Jobs Scam concludes with a list of reforms. Among them are improved disclosure of subsidies and abatements, clawback provisions for towns to get a refund if companies don't deliver the jobs, job quality standards, and unified planning and smart growth to end the "Economic War Among the Suburbs." But the bottom line is simple: "At every level of government, we need to put workforce development at the forefront of jobs policy."
Greg LeRoy has done an outstanding service by carefully documenting the scams and schemes that corporations use to collectively avoid paying $50 billion in taxes a year. He has also sounded a powerful warning about the dangerous cumulative effect—as a nation, all these corporate subsidies mean that we are left with less and less money to devote to education and infrastructure, which are actually the most important tools for long-term job creation and retention.
This is a book that every township supervisor, city councilor, and state legislator should read. So get one copy for yourself, get another for your mayor, and another for your state senator. They're going to need it.
Last week, The Bush administration's nominee for deputy attorney general, Timothy E. Flanigan, came before Senators for a hearing. Flanigan is the former general counsel for Tyco, and the yet another Bush administration nominee for a key position who has a background serving corporate special interests.
Flanigan, who as deputy attorney general would be in charge of prosecuting corporate crime, was involved with lobbyist Jack Abramoff in an effort to keep open a Bermuda tax loophole that saved Tyco millions of dollars a year in taxes.
In hearings last week, Flanigan admitted that he had supervised Abramoff's lobbying work for Tyco, which reincorporated in Bermuda in 1997 to save hundreds of millions of dollars in taxes. But he refused to answer questions specifically about what Abramoff did for the company. Sen. Richard J. Durbin (D-Ill) said he would submit written questions seeking more details.
Abramoff reportedly lobbied on behalf of bills that would penalize American companies, like Tyco, that moved their headquarters offshore to avoid taxes. Various proposals over the years would have banned government contracts for tax traitors or closed the loophole. In 2004, Congress finally succeeded in closing the Bermuda loophole for future reincorporators, but companies like Tyco that had already made the move were grandfathered in.
Please tell your senators that vote against Flanigan as deputy attorney general. The Justice Department needs to crack down on corporate criminals, not hire lawyers who worked with criminal corporations to key leadership positions.
We encourage you to tell everyone you know about the new Citizen Works book, The People's Business and to distribute promotional flyers locally. Flyers are available online, or if you would like to have some flyers mailed to you, please e-mail news@citizenworks.org.
The People's Business, which is available in stores everywhere, examines the very nature of corporate power, presenting a range of strategies to curtail it, explaining how ordinary people can restore citizen control. Bringing together the recommendations of the Citizen Works Corporate Reform Commission—a coalition of leading authors, activists, scholars, and professionals—The People's Business is a vital, clearheaded plan for strengthening individual rights, transforming corporations into engines of public prosperity, and creating a sustainable, life-respecting society where the people have the power.
Bolstered with relevant history and examples, The People's Business is a lively book that will appeal both to deeply-committed long-time activists looking for a coherent approach in the struggle for corporate accountability as well as thoughtful citizens everywhere who may be looking for immediate measures that serve as effective means of corporate reform.
It is our hope that The People's Business will serve as an important tool in educating people about what they can do to challenge corporate power. But it will only be an important tool if people actually read it. That's why we need your help in spreading the word!
Why not pick up your copy at a bookstore today if you haven't already?
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