Criminal Enterprises

October 20th, 2016 by Phil Mattera

Most cases of corporate misconduct are forgotten soon after a fine or settlement is announced, but the Wells Fargo phony account scandal seems to have real staying power. The company had to pay $185 million in penalties. CEO John Stumpf was forced to resign and pay back $41 million in compensation after being lacerated in two Congressional hearings. The city of Chicago and the California Treasurer cut some business ties with the bank.

Now Wells is facing a more serious legal challenge. It’s been reported that California Attorney General Kamala Harris is considering criminal identity theft charges against the bank over the millions of bogus accounts and the related fees that were improperly charged to customers. The AG’s office has demanded that Wells turn over a mountain of documents about accounts created not only in California but also in other states when California employees were involved.

It’s too soon to say for sure, but this case and other potential criminal actions could have a catastrophic effort on Wells. Criminal cases against major banks are rare, and most of those are resolved through deferred prosecution or non-prosecution agreements that allow the corporation to avoid a conviction. An exception came last year when Citicorp, JPMorgan Chase and two foreign banks pleaded guilty to charges of manipulating the foreign exchange market. They had to get special waivers to continue operating in certain areas that normally exclude felons.

The Wells case may do more damage, given the scope of the misconduct and the fact that it involves the bank’s core business. In this way it is comparable to the scandal surrounding Volkswagen and its systematic fraud concerning emissions testing.

These two situations pose a challenging question: What should be done about a large corporation engaged in flagrant misconduct? Another monetary penalty is not going to make much difference. As Violation Tracker shows, even before the recent case Wells had paid out more than $10 billion in fines and settlements in some two dozen cases involving a variety of abuses.

Stumpf’s ouster was an important step, but is there any reason to think that the executives who remain are all that different? A boycott of the company’s services is merited, but it would have to be much bigger in scope to have a real impact.

The usual way that regulators and prosecutors handle criminal enterprises is to force them out of business, but these are usually relatively small operations. What should be done with an institution such as Wells, which has more than 260,000 employees, some 8,600 branches and offices, and 70 million (presumably real) customers?

The answer for dealing with Wells Fargo might be to break it up into a number of smaller companies that are kept under close supervision and barred from operating in riskier areas. In other words: use a variation of Glass-Steagall as a way of discouraging fraudulent behavior. Even better would be if these smaller institutions operated under employee ownership.

My point is that we need to get more creative in dealing with systemic corporate crime so we’re not forced to endure an endless series of scandals.

Tech vs. Jobs

October 13th, 2016 by Phil Mattera

On those rare occasions when the current presidential race deals with policy rather than personalities, the focus tends to be on trade and immigration. Yet there is a potentially much greater threat to the well-being of U.S. workers that is receiving little attention: the technology revolution.

Corporations such as Apple and Facebook promote the idea that digital technology is enriching our lives. In some ways it has: it is easier than ever to keep in touch with far-flung friends and acquaintances, to purchase a vast array of products, to access an endless variety of music and video, and much more.

Yet one thing the tech industry has failed at miserably is giving people opportunities to make a decent living. A front-page article in the Wall Street Journal presents the dismal facts: The tech industry has enriched its investors but does little for the U.S. workforce. In fact, the Journal points out, domestic employment in the computer and electronics hardware industry has fallen nearly 50 percent since the beginning of the century, while the much smaller software workforce has seen only modest increases.

More evidence can be found in a report on data centers just published by my Good Jobs First colleague Kasia Tarczynska. It shows that these facilities, which make up what is known as the cloud, each create only a few dozen jobs. Yet state and local officials, desperate to show they are doing something to encourage employment growth, shower tech giants with subsidies that average nearly $2 million per job.

One tech company that has been hiring a lot is Amazon, which has doubled its workforce (to more than 200,000) over the past couple of years while creating the distribution network necessary for rapid delivery. There are two problems, however. The first is that most of these new positions are lousy warehouse jobs. Amazon has developed a reputation for brutal working conditions — and is aggressively fighting unionization. The second is that many of these jobs will not last for long. Amazon is investing heavily in automation, including the purchase of Kiva Systems, a firm specializing in warehouse robotics. And it continues to experiment with drones designed to replace UPS drivers.

Not only is the tech industry failing to create many jobs in its own operations, but it also is on the verge of destroying large numbers of positions in other sectors. The prime example is the rush toward self-driving vehicles. While there has been some (probably not enough) debate on safety, little has been said about the employment impacts. According to the Bureau of Labor Statistics, some 9.5 million people work in occupations relating to transportation and material moving. A substantial portion of these — especially truck, bus and taxi drivers — are threatened by the rush to autonomous vehicles.

After being decimated by offshoring, the U.S. manufacturing sector has been recovering, but as a consequence of digital technology and robotics today’s plants require far fewer warm bodies.

Advances in artificial intelligence mean that automation-induced job loss will not be limited to blue collar occupations. Even the professions are not immune.

The tension between technological progress and the needs of workers is, of course, an old story. Yet one lesson never seems to sink in: society needs to prepare for the upheaval and make sure that there is a just transition for the workers who are displaced.

Trump’s Accountant, Bogus Tax Shelters and My Lost Inheritance

October 4th, 2016 by Phil Mattera

Jack Mitnick

Jack Mitnick may end up denying the presidency to Donald Trump. He also helped deprive me of my inheritance.

As the world now knows, the accountant confirmed to the New York Times the authenticity of leaked Trump tax return documents prepared by him that reported an annual loss of some $916 million in 1995 that may have allowed the mogul to avoid federal taxes for nearly two decades.

Trump was not Mitnick’s only client in the 1990s. He and his firm Spahr Lacher & Sperber also did work for my maternal grandfather Julius Nasso, who owned a concrete construction company in New York City. That firm did quite well for its work on projects such as Madison Square Garden and the Javits Convention Center.

My grandfather, who died in 1999, prospered from the business, but his wealth, I regret to say, was also enhanced through the use of dubious tax shelters involving coal leases. That’s where Mitnick comes in. From what I know, Mitnick’s firm either set up my grandfather in the shelters or at least prepared tax returns in which they were used to greatly reduce his tax liabilities.

The Internal Revenue Service eventually challenged the shelters, but my grandfather, apparently with Mitnick’s help, refused to settle. It was only after his death that the dispute was resolved by my family with a substantial payment to the IRS. One consequence of this was that the bequests in his will to me and the other grandchildren could not be fulfilled.

I long treated this as a private family matter, but after Mitnick’s name appeared in the Times story I did some research on him. I found that in 1981 Mitnick and other parties were sued by William Freschi Jr. in his role as trustee of the estate of his father, who like my grandfather had invested in coal lease tax shelters. The suit accused Mitnick, who was described as the administrator of Grand Coal Venture, and others of defrauding his father.

The case had a long and complicated legal history, including a racketeering charge and an action by the U.S. Supreme Court. In 1985 Mitnick and the other defendants were found guilty of securities fraud and ordered to pay Freschi $266,500 in damages, plus $126,681.75 in pre-judgment interest. The Court of Appeals, however, later overturned the award against Mitnick but did not completely exonerate him.

Given Mitnick’s close working relationship with Trump — the accountant is mentioned in The Art of the Deal — one cannot help wonder whether he also arranged for Trump to participate in the phony coal tax shelters. Given the other tax dodging tricks available in connection with his real estate holdings, Trump may not have needed them, but this is another question that will be answered only when Trump releases his full tax returns.

In the interest of full disclosure, I should mention that my grandfather’s company operated at times in a joint venture with S&A Concrete, a firm with alleged mob connections that separately did substantial business on Trump projects.

False Claims and Other Frauds

September 26th, 2016 by Phil Mattera

ViolationTracker_Logo_Development_R3The False Claims Act sounds like the name of a Donald Trump comedy routine, but it is actually a 150-year-old law that is widely used to prosecute companies and individuals that seek to defraud the federal government. It is also the focus of the latest expansion of Violation Tracker, the database of corporate crime and misconduct we produce at the Corporate Research Project of Good Jobs First. The resource now contains 112,000 entries from 30 federal regulatory agencies and all divisions of the Justice Department. The cases account for some $300 billion in fines and settlements.

Through the addition of some 750 False Claims Act and related cases resolved since the beginning of 2010, we were able to identify the biggest culprits in this category. Drug manufacturers, hospital systems, insurers and other healthcare companies have paid nearly $7 billion in fines and settlements. Banks, led by Wells Fargo, account for the second largest portion of False Claims Act penalties, with more than $3 billion in payments. More than one-third of the 100 largest federal contractors have been defendants in such cases during the seven-year period.

Among the newly added cases involving healthcare companies, the largest is the $784 million settlement the Justice Department reached last April with Pfizer and its subsidiary Wyeth to resolve allegations that they overcharged the Medicaid program. DaVita HealthCare Partners, a leading dialysis provider, was involved in the next two largest cases, in which it had to pay a total of $800 million to resolve allegations that it engaged in wasteful practices and paid referral kickbacks while providing services covered under Medicare and other federal health programs.

Wells Fargo accounts for the largest banking-related penalty and the largest False Claims Act case overall in the new data: a $1.2 billion settlement earlier this year to resolve allegations that the bank falsely certified to the Department of Housing and Urban Development that certain residential home mortgage loans were eligible for Federal Housing Administration insurance, with the result that the government had to pay FHA insurance claims when some of those loans defaulted.

Thirty-five of the 100 largest federal contractors (in FY2015) have paid fines or settlements totaling $1.8 billion in False Claims Act-related cases since the beginning of 2010. The biggest contractor, Lockheed Martin, paid a total of $50 million in four cases, while number two Boeing paid a total of $41 million in two cases.

The database has also added new search features, such as the ability to search by 49 different types of offenses, ranging from mortgage abuses to drug safety violations. Users can view summary pages for each type of offense, showing which parent companies have the most penalties in the category. Penalty summary pages for parents, industries and agencies now also contain tables showing the most common offenses. Users can add one or more offense type to other variables in their searches.

Among types of offenses, the largest penalty total comes from cases involving the packaging and sale of toxic securities in the period leading up to the financial meltdown in 2008. The top-ten primary case types are as follows:

  1. Toxic securities abuses: $68 billion
  2. Environmental violations: $63 billion
  3. Mortgage abuses: $43 billion
  4. Other banking violations: $18 billion
  5. Economic sanction violations: $14 billion
  6. Off-label/unapproved promotion of medical products: $12 billion
  7. False Claims Act cases: $11 billion
  8. Consumer protection violations: $9 billion
  9. Interest rate benchmark manipulation: $7 billion
  10. Foreign Corrupt Practices Act cases: $6 billion

We also added a feature allowing for searches limited to companies linked to parent companies with specific ownership structures such as publicly traded, privately held, joint venture, non-profit and employee-owned. That’s in addition to updating the data from the agencies already covered and increasing the size of the parent company universe to 2,165.

The uproar over the Wells Fargo sham accounts scandal is heightening the discussion of corporate crime. Violation Tracker hopes to be a tool in efforts to turn that discussion into lasting change.

Grandstanding Without Results

September 22nd, 2016 by Phil Mattera

John Stumpf of Wells Fargo

Members of Congress subjected the CEOs of a pair of rogue corporations to much-deserved castigation in recent days, but the executives will probably turn out to be the victors. John Stumpf of Wells Fargo and Heather Bresch of Mylan endured the barbs knowing that they will not lead to any serious consequences.

The periodic grilling of business moguls amid corporate scandals is a longstanding feature of Congressional oversight. In the 1930s the Senate Banking Committee, led by investigator Ferdinand Pecora, questioned Wall Street titans such as J.P. Morgan about the causes of the stock market crash. In the late 1950s Sen. Estes Kefauver asked pharmaceutical executives about rising drug prices. In the 1960s Sen. Abraham Ribicoff, with the help of a young lawyer named Ralph Nader, interrogated auto industry executives about their seemingly cavalier attitude toward safety.

Jumping to the recent past: In 2010 the CEO of BP was hauled before a House hearing to testify about the Deepwater Horizon disaster. In 2013 the Senate’s Permanent Subcommittee on Investigations questioned Apple CEO Tim Cook about his company’s international tax avoidance. And so forth.

Yet there is a big difference between the older and the more recent hearings. In the 20th Century these events were preludes to legislative reform. The Pecora hearings led to the passage of the Glass-Steagall Act separating speculative activities from commercial banking. Kefauver tried but failed to pass price restrictions but was able to enact stricter drug manufacturing and reporting rules. The Ribicoff hearings led to the passage of the National Traffic and Motor Vehicle Safety Act and the Highway Safety Act.

Those earlier hearings may have been political theatre, but they were followed by serious regulatory changes. Today’s hearings, on the other hand, seem to be nothing more than theatre. For many members of Congress, they are opportunities to pretend to be concerned about corporate misconduct while having no intention to do anything about it.

That’s not surprising, given that the party in control of both chambers of Congress is rabidly anti-regulation. The 2016 Republican National Platform is filled with critical comments about regulation, including an assertion that the Obama Administration “triggered an avalanche of regulation that wreaks havoc across the economy.”

The Consumer Financial Protection Bureau, the lead regulator in the Wells Fargo fake accounts case, is a favorite target of conservative lawmakers. Right after the CFPB’s Wells Fargo announcement, Speaker Paul Ryan sent out a tweet claiming that the agency “tries to micromanage your everyday life.” Senate Banking Committee Chair Richard Shelby tried to block the appointment of Richard Cordray to head the CFPB and subsequently sought to weaken the agency. And during his opening statement at the hearing, he took a pot shot at CFPB for not being aggressive enough in pursuing the case.

Congressional grandstanding against corporate miscreants has been going on for decades, but what was once a device to build public support for real legislative change now serves mainly to conceal the fact that too many legislators are in office to do the bidding of corporations, even the most corrupt ones.

A Culture of Corruption

September 15th, 2016 by Phil Mattera

The chief executive of Wells Fargo would have us believe that more than 5,000 of his employees spontaneously became corrupt and decided to create bogus accounts for customers who were then charged fees for services they had not requested.

John Stumpf has earned himself a place in the corporate hall of shame for putting the blame on underlings for carrying out a fraud that must have been sanctioned by top officials at the bank, which has a reputation for pushing new products on customers. He may have been inspired by Volkswagen, whose senior people have been claiming that they knew nothing about systematic cheating on auto emissions tests.

After the announcement that Wells would pay $185 million to settle the case, Stumpf did a self-protective interview with the Wall Street Journal in which he insisted that the misconduct was in no way encouraged by management and was inconsistent with the bank’s internal culture. Few seem to be buying that argument, and Wells is facing various federal investigations.

The notion that Wells had been a paragon of virtue is preposterous. The dishonesty begins with its name, which evokes the legendary stagecoach line. The company is actually the descendant of Norwest, a bank holding company based in Minneapolis which changed its name after acquiring the old Wells Fargo in 1998.

Four years later, the combined company had to pay a penalty of $150,000 to settle SEC charges of improperly switching customers among mutual funds. In 2005 the securities industry regulator NASD (now FINRA) fined Wells $3 million for improper sales of mutual funds.

When Wells acquired Wachovia Bank amid the financial meltdown of 2008 it acquired a bunch of legal problems, including a municipal securities bid rigging case that required a $148 million settlement.

Recent years have seen a long list of additional scandals and settlements. In 2009 Wells had to agree to buy back $1.4 billion in auction-rate securities to settle allegations by the California attorney general of misleading investors. In 2011 it agreed to pay $125 million to settle a lawsuit in which a group of pension funds accused it of misrepresenting the quality of pools of mortgage-related securities. That same year, the Federal Reserve announced an $85 million civil penalty against Wells Fargo for steering customers with good qualifications into costly subprime mortgage loans during the housing boom.

In 2012 Wells Fargo was one of five large mortgage servicers that consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. Later that year, the Justice Department announced that Wells Fargo would pay $175 million to settle charges that it engaged in a pattern of discrimination against African-American and Hispanic borrowers in its mortgage lending during the period from 2004 to 2009. Also in 2012, Wells agreed to pay $6.5 million to settle SEC charges that it failed to fully research the risks associated with mortgage-backed securities before selling them to customers such as municipalities and non-profit organizations.

In 2013 Wells was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve claims of foreclosure abuses; it settled a lawsuit alleging that it neglected the maintenance and marketing of foreclosed homes in black and Latino areas by agreeing to spend at least $42 million to promote home ownership and neighborhood stabilization; and it agreed to pay $869 million to Freddie Mac to repurchase home loans the bank had sold to the mortgage agency that did not conform to the latter’s guidelines.

Jumping to 2016: the Justice Department announced that Wells would pay $1.2 billion to resolve allegations that the bank certified to the Department of Housing and Urban Development that certain residential home mortgage loans were eligible for Federal Housing Administration insurance when they were not, resulting in the government having to pay FHA insurance claims when some of those loans defaulted.

And a few weeks before the CFPB revealed its sham accounts penalty against Wells, the agency fined the bank $3.6 million plus $410,000 in restitution to customers to resolve allegations that it engaged in illegal student loan servicing practices.

Contrary to Stumpf, the sham accounts were much in line with the culture of Wells, which has been corrupt for years. As long as the bank’s top management denies the reality, it seems unlikely anything will change.

Note: This post draws from my newly updated Corporate Rap Sheet on Wells Fargo.

Imposing the Ultimate Punishment

September 8th, 2016 by Phil Mattera

The outcome of most cases of serious corporate misconduct is the same: the company pays a fine that is not too onerous and no one ends up behind bars. That’s what makes the fate of ITT Educational Services all the more significant.

This for-profit educational outfit just shut down pretty much all its facilities in the wake of a recent announcement by the U.S. Department of Education that the company would no longer be able to enroll new students using federal financial aid funds. In other words, the feds effectively put ITT out of business.

Before anyone begins complaining about overreaching bureaucrats, keep in mind that the company has a dismal track record. It faced accusations from state regulators of misleading students about the quality of its programs and their prospects for employment after graduation. In 2014 the Consumer Financial Protection Bureau sued ITT for predatory lending. CFPB Director Richard Cordray stated at the time: “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”

ITT is not the first dubious for-profit educator to be pushed into oblivion. In 2015 Corinthian Colleges announced the cessation of operations amid a spate of state and federal investigations, including a CFPB case that resulted in a default judgment of $530 million.

To its credit, the Obama Administration has stood fast in its tough treatment of scam schools, building on the 2010 move by Congress to push commercial banks out of the federal student loan business.

The willingness to put sleazy operators out of business is seen little outside the educational sector. It’s true that the Bureau of Prisons announced plans to phase out the use of private prison operators, but the likes of CCA will be kept alive by their state government customers.

Among federal regulators, the one agency that focuses more on shutting down rogue operators rather than imposing monetary fines is the Food and Drug Administration. It must be noted, however, that the shutdowns are often temporary (remaining in effect only while the company corrects unsafe processing plant conditions) and usually involve smaller firms. Other agencies may take action that results in the closing of fly-by-night firms, but it is rare for regulators or prosecutors to take steps that could end up in the demise of an established company, no matter how corrupt it may have become.

This hesitation seems to stem from backlash against the Justice Department’s case against accounting firm Arthur Andersen for its role in the Enron accounting scandal. In the wake of its 2002 conviction for obstruction of justice, the firm had to dismantle its auditing business and was unable to resurrect it after the Supreme Court overturned the conviction three years later. Nonetheless, the Enron accounting fraud was real, and Arthur Andersen enabled it in some way.

It is time for the DOJ and other regulatory agencies to follow the Education Department’s lead in taking the most aggressive kind of action against big companies that misbehave in a major way. A prime candidate for such treatment is Volkswagen, which engaged in a brazen scheme to cheat auto emissions tests and thus exacerbated air pollution to a shocking extent. The company is paying billions in settlement costs but apparently will remain in business. In fact, it just announced a substantial investment in Navistar to boost its position in the U.S. truck business.

A move to mandate the shutdown of a large company like VW should include arrangements for the sale of its assets and other protections for its workers. There would still be disruptions but it would send a strong signal to other large corporations that they should not expect to buy their way out of severe legal liability.

Putting Apple in Its Place

September 1st, 2016 by Phil Mattera

bad-appleApple’s indignant response to the European Commission tax ruling has nothing to do with an inability to pay. The company’s cash pile of more than $200 billion could cover the assessment several times over. Instead, it’s something more akin to the attitude attributed to the late New York hotelier Leona Helmsley: only the little people pay taxes.

Large corporations like Apple think that what they do is so important that they should be able to skirt their fair share of taxes. Some of their dodging is covert and some is done brazenly out in the open; some is done against the wishes of tax collectors and some is done with their full cooperation.

The covert portion of Apple’s tax avoidance started to come to light in 2012, when the New York Times published an investigation of the company’s use of esoteric accounting devices such as the “Double Irish With a Dutch Sandwich” to route profits in ways that minimized tax liabilities or eliminated them entirely. A year later, the Senate’s Permanent Subcommittee on Investigations issued a report providing additional details on Apple’s tax tricks. It also held hearings in which Apple CEO Tim Cook insisted what the company was doing was simply “prudent” management while Kentucky Sen. Rand Paul brought shame on himself by declaring that Apple was owed an apology.

While Congress has done little to thwart corporate tax dodging, the EC used the Senate report to launch an investigation of Apple that resulted in the recent ruling. Now some members of Congress are making fools of themselves by protesting that ruling.

As Apple’s global tax dodging has gotten the most attention, the company has been able to avoid some domestic taxes with much less bother. That because states and localities routinely offer the kind of special tax deals to individual companies that are banned in Europe, more so now that Ireland’s attempted end-run was rejected.

This is seen most clearly in the subsidy packages that Apple and other tech giants such as Facebook and Google receive when they build new data centers necessary to handle the ever-increasing volume of human activity taking place in “the cloud.” Although the decision as to where to locate the facilities is based primarily on considerations such as the availability of low-cost energy (data centers are power hogs), these companies want to receive large amounts of taxpayer assistance.

As my colleague Kasia Tarczynska points out in a forthcoming report on the subject, companies such as Apple regularly negotiate subsidy packages and special tax breaks worth hundreds of millions of dollars for data centers that typically create only a few dozen jobs.

In North Carolina, Apple successfully pressured the state to allow it to calculate its income taxes through a special formula that will save the company an estimated $300 million over the 30-year life of the agreement. Local officials provided property tax abatements worth about $20 million more. All this for a project that was to create only about 50 permanent jobs. Despite its $1 billion cost, the facility did little to boost the local economy. “Apple really doesn’t mean a thing to this town,” a resident told a reporter in 2011. Apple went on to receive generous subsidy packages for additional data centers in Oregon and Nevada.

Apple’s various forms of tax avoidance are reminders that large corporations, even those that profess to have enlightened social views, don’t have respect for government and resent having to follow its rules. Rather than pay taxes and follow regulations, they prefer to make charitable contributions and undertake corporate social responsibility initiatives. In other words, they want to do things on their own terms and not comply with the same obligations as everyone else. Kudos to Europe for beginning to put Apple in its place.

Generic Price Gouging

August 25th, 2016 by Phil Mattera

Price gouging by the producer of EpiPens has been creating a hardship for those suffering from severe allergies, but it is also revealing the truth about the one segment of the drug industry that was thought to have some decency.

Mylan, the corporation behind the EpiPen scandal, is best known as a leader in the production of generic drugs, which were supposed to weaken the stranglehold of the pharma giants. Building on the 1984 Hatch-Waxman Act, Mylan and the other generic firms began to have an impact. Mylan introduced cheaper versions of brand-name medications for Parkinson’s disease, depression, arthritis and other ailments.

In the past decade or so, however, Mylan began to stray from its mission. The company became preoccupied with growth and was soon appearing in the business news more in connection with mergers than with product announcements. In the early 2000s it got entangled in a drawn-out dispute with investor Carl Icahn over the attempted purchase of King Pharmaceuticals.

While that deal did not go through, Mylan made a string of other deals, including the 2007 purchase of the generics businesses of Germany’s Merck KGaA, among which was EpiPen producer Dey L.P.. Mylan was also acquiring legal problems. In 2010 the Justice Department announced (in a press release that did not mention Mylan) that Dey would pay $280 million to settle False Claims Act allegations. DOJ said the case resolved claims that Dey “engaged in a scheme to report false and inflated prices for numerous pharmaceutical products, knowing that federal health care programs relied on those reported prices to set payment rates. The actual sales prices for the Dey products were far less than what Dey reported.”

Mylan went on with its dealmaking, even to the point of giving up its identity as a U.S. company. In 2014 Mylan — led by CEO Heather Bresch, daughter of West Virginia Senator Joe Manchin — arranged to merge with a foreign subsidiary of Abbott Laboratories and used the deal to reincorporate itself in the Netherlands to lower its tax liabilities.

Last year, the new Mylan launched a takeover bid for its rival Perrigo and then found itself targeted by yet another generic producer, Teva Pharmaceuticals, which had its own legal problems. Neither of these deals panned out, but this year Mylan acquired the Swedish company Meda for some $10 billion.

Among its other businesses, Meda is the European distributor of EpiPens. It is unclear to what extent Mylan’s recent EpiPen price hikes are meant to pay for the Media acquisition. They may also be designed to cover the steep increases in executive compensation at the company. In 2012, when Bresch became CEO, she was paid annual compensation of just under $10 million and realized more than $6 million in paper profits from the exercise of stock awards and options.

In 2015 Bresch’s annual compensation jumped to nearly $19 million and her profits from the exercise of stock awards and options soared to nearly $32 million, putting her total compensation for the year at more than $50 million.

Perhaps Mylan and the other generic drug companies never were real crusaders, but now it is difficult to distinguish them from the worst rogues of Big Pharma.

Eliminating All the Prison Privateers

August 18th, 2016 by Phil Mattera

The decision by the Justice Department to end its use of privately operated prison facilities is a long overdue reform and one that should also be adopted by the states. Yet the for-profit prison scandals are not limited to those involving companies such as Corrections Corporation of America that are in the business of managing entire correctional facilities.

There is also now a widespread practice of contracting out specific functions at government-run prisons, often with disastrous results. Numerous states and localities have, for instance, handed over responsibility for feeding prisoners to large foodservice companies such as Aramark operating under lucrative contracts.

Like other providers of outsourced services, Aramark has made grandiose promises about the savings that private operation would provide. Many public officials, especially conservative governors looking to shrink the size of the state workforce, have taken these claims at face value and ignored the dismal track record of privatization.

A case in point is Michigan, where in 2013 the administration of Gov. Rick Snyder gave Aramark a three-year contract worth about $150 million covering the state’s correctional facilities. The plan eliminated some 370 state jobs and was supposed to save $12 million a year.

Instead, it led to a nightmare situation in which Aramark was found to be serving maggot-infested food and employing low-paid and poorly trained workers, some of whom fraternized with prisons and smuggled in contraband. These problems were described at great length in thousands of state documents obtained by the Detroit Free Press through an open records request. One of those documents was an e-mail message from the state official in charge of the contract saying he was “at my wit’s end.”

At one point the state department of corrections fined Aramark $86,000 for violations of the terms of its foodservice contract and another $12,000 for fraternization between company employees and prisoners, but those fines were quietly cancelled. Later the state imposed another $200,000 in fines that apparently were collected. Yet a former Aramark worker later filed a whistle-blower complaint alleging that she was fired for objecting to the falsification of records about unhygienic kitchen practices. In 2015 the state bowed to public pressure and terminated Aramark’s contract.

Michigan is just one of numerous states in which Aramark’s performance under correctional foodservice contracts has been less than sterling. In 2000 it was reported that Aramark secretly negotiated with state corrections officials in Ohio to obtain $1.5 million in additional payments on a pilot contract to provide food services at the Noble Correctional Institution, even though other state officials were recommending that the contract be rebid. In the wake of the controversy, the state decided to return the function to public control yet later switched course. In 2013 Aramark won a foodservice contract for the state’s entire prison system. The following year the company was fined $142,100 for violations that included failing to hire enough employees. More fines followed, including a $130,200 penalty for ongoing problems such as food shortages and a lack of cleanliness.

A 2007 audit by the Florida Department of Corrections Inspector General of Aramark’s contract to provide foodservice for the state’s prisons found that the company was serving fewer meals than anticipated and was using less costly ingredients but was not passing along the savings to the state. Officials later fined the company more than $240,000 for slow meal delivery, insufficient staffing and other violations. In 2013 investigative journalist Chris Hedges reported that Aramark served spoiled food to inmates at prisons in New Jersey.

There was a time when much of the public was indifferent to prison conditions and cared little whether inmates were being food that was inedible. But now that there is much wider understanding of the problem of over-incarceration, we need to make sure that those still behind bars are treated with dignity and not abused by privateers.


Note: this post draws from my new Corporate Rap Sheet on Aramark, which can be found here.