Business Success and Economic Failure

September 11th, 2014 by Phil Mattera

familydollarWhat does it say that an all-out takeover battle is being waged for a chain of no-frills stores selling cheap merchandise at outlets typically located in the most downscale parts of town? The answer is that deep-discount retailing, which entered the mainstream during the recession of the late 2000s, remains a lucrative business as much of the country struggles with stagnating income levels.

The focus of the current bidding war is Family Dollar Stores, the second largest chain of deep discounters, also known as dollar stores. A couple of months ago, Dollar Tree, the third largest chain, announced plans for an $8.5 billion purchase of Family Dollar, which had been targeted by several corporate raiders such as Carl Icahn, who bought a 9 percent stake in the firm.

Family Dollar’s management seemed willing to throw in its lot with Dollar Tree and create a combined company with about 13,000 stores that could not only neutralize Icahn but also challenge the current leviathan of the industry, Dollar General with its 11,000 stores.

Dollar General, which long had its eye on Family Dollar, did not take kindly to the prospect of being relegated to second place. It launched its own fatter bid for Family Dollar, and after being rebuffed, it is now going hostile. It has announced a tender offer under which Family Dollar investors could sell their shares for $80 each, well above the $74.50 that Dollar Tree said it would pay.

As interesting as this may be to analysts of mergers & acquisitions, the takeover battle is not the most significant story here. First, there is the alarming fact that it is taken for granted that the marriage of two giant dollar-store chains can receive antitrust approval. The original Dollar Tree-Family Dollar deal has been promoted by the two companies with the argument that it was likely to be blessed by the Federal Trade Commission. Dollar General argues that its promise to sell off 1,500 outlets would make its deal palatable to the federal regulators. Why shouldn’t any combination among the three chains be considered unacceptable? And what about the even more controversial possibility, as has been widely rumored, that Wal-Mart might try to take over one of the dollar chains to shore up its faltering small-store strategy? Are we to assume that would get approved as well?

At the same time, there has been surprisingly little discussion of how these companies operate. For example, there’s the matter of their labor practices. Dollar General, Family Dollar and Dollar Tree are not often mentioned alongside Wal-Mart, yet they are also low-paying, non-union employers that have been involved in numerous wage & hour controversies. The dollar stores, whose outlets have much smaller staffs than those at Supercenters, have mainly been accused of improperly denying overtime pay to so-called store managers and assistant managers who spend most of their time on non-managerial tasks such as stocking shelves and unloading trucks. Family Dollar, for instance, fought one such case all the way to the U.S. Supreme Court, where it lost and finally had to pay a $33 million judgment.

And then there’s the issue of the basic business model of the dollar stores. This is a sector that to a great extent profits from economic desperation. Although a small portion of its customers are middle-class people looking for a bargain, most are lower-income individuals who cannot afford to shop at the likes of Wal-Mart, much less non-discount chains.

The deep-discount chains were supposed to have shrunk once the economy was in recovery. Their continued growth is a symptom of ongoing wage stagnation, and their business success is a sign of a broader economic failure.

Introducing the Dirt Diggers Digest Guide to Strategic Corporate Research

September 4th, 2014 by Phil Mattera

GoodjobsdetectiveWhat is the quantity of greenhouse gas emissions coming from Duke Energy’s Hanging Rock power plant in Ironton, Ohio?

What are the terms of a typical agreement between McDonald’s and one of its franchisees?

Which insurance companies hold the most bonds issued by Monsanto?

Is BP on the list of companies excluded from doing business with the federal government?

How much are members of Verizon’s board paid and how many shares of stock does each director own?

Which watchdog groups monitor the paper industry?

If you deal with questions such as these, you are probably a corporate researcher for a union, environmental group or other progressive organization, and you will be interested to know about the new Dirt Diggers Digest Guide to Strategic Corporate Research.

This is an updated and greatly expanded version of a guide that I began publishing under the auspices of the Corporate Research Project more than ten years ago. Until now it has had three main parts covering sources of general company information, sources for analyzing a company’s key relationships (institutional investors, creditors, major customers, etc.), and sources for reconstructing a company’s accountability record (legal entanglements, labor relations, environment compliance, political influence, etc.).

Designed to be a resource for a wide variety of activist researchers, the guide focused on sources that applied to a broad range of businesses. Along with dozens of additional entries in the existing parts, the new version of the guide contains a section which for the first time provides detailed lists of industry-specific sources in the following categories:

  • Specialized directories and data compilations
  • Trade associations
  • Trade publications
  • Unions representing workers in the industry
  • Watchdog groups monitoring the industry
  • Regulatory agencies and disclosure documents

The guide provides hundreds of such sources for all major industries, among them aerospace, chemicals, electric utilities, mining, pharmaceuticals, semiconductors, steel, telecommunications, and trucking. The directories, trade publications and data compilations include many resources known mainly to industry insiders. The lists of unions include both those representing workers in each sector in the United States as well as international labor federations bringing together unions from around the world dealing with the industry. The lists of watchdog groups include diverse organizations working to get companies in the sector to act in a more responsible manner.

Below is the full table of contents for the guide with links to the individual sections. Happy hunting!

PART I. GETTING STARTED: THE KEY SOURCES OF COMPANY INFORMATION

A. Sources for basic corporate profiles

B. Company websites

C. State corporation filings and property records

D. Securities and Exchange Commission filings

E. D&B and other sources on privately held firms

F. Media coverage

 

PART II. EXPLORING A COMPANY’S ESSENTIAL RELATIONSHIPS

A. Parent company/subsidiaries

B. Outside directors (plus various sources on individuals)

C. Institutional shareholders

D. Wall Street analysts

E. Creditors

F. Customers, suppliers and franchisees

 

PART III. ANALYZING A COMPANY’S ACCOUNTABILITY RECORD

A. Accountability profiles and ratings; case studies; dissident websites

B. Court proceedings

C. Federal regulatory matters

D. Labor relations and employment practices

E. Workplace safety and health

F. Environmental compliance

G. Campaign contributions and lobbying

H. Public relations, corporate philanthropy and sponsored research

I. Executive compensation

J. Government subsidies

 

PART IV. INDUSTRY-SPECIFIC SOURCES

A. Multi-Industry

B. Aerospace and Military Contracting

C. Automobiles and Auto Parts

D. Banking, Investment, Insurance & other Financial Services

E. Chemicals, Plastics and Coatings

F. Computers: Hardware and Software, Semiconductors, Consumer Electronics

G. Construction and Engineering; Real Estate

H. Energy: Coal, Oil & Gas, Nuclear, Solar & Wind, Utilities

I. Entertainment: Broadcasting, Cable, Film, Music

J. Food and Beverages; Agriculture; Tobacco

K. Forest Products

L. Pharmaceuticals, Hospitals and other Healthcare

M. Publishing: Books, Newspapers, Magazines, Internet

N. Restaurants, Hotels & Casinos

O. Retailing & Wholesaling; Apparel

P. Steel and other Metals; Mining

Q. Telecommunications

R. Transportation: Airlines, Railroads, Shipping, Trucking

Burger King’s Tax Dodge is Just the Latest of Its Restructuring Schemes

August 28th, 2014 by Phil Mattera

mergerkingNothing says America like hamburger chains such as Burger King, yet the fast-food giant is the latest company to put tax dodging above national loyalty.

The home of the Whopper wants to carry out one of the so-called inversions that are all the rage among large U.S. corporations. Burger King is proposing to merge with the much smaller Canadian doughnut and coffee chain Tim Hortons and register the combined company north of the border, where it would be able to take advantage of lower tax rates on its U.S. revenues.

An interesting twist is that a large part of Burger King’s financing for the deal is coming from Warren Buffett, who apart from his investment prowess is known for his statements calling on the wealthy (individuals, at least) to pay more in federal taxes.

While many are criticizing Buffett for hypocrisy, the sage of Omaha seems to be taking refuge behind Burger King’s claim that the deal is not tax-driven but is instead a growth opportunity. That does not pass the laugh test, but it is true that Burger King has been willing to submit to frequent restructuring in its never-ending quest to emerge from the shadow of its much larger rival McDonald’s.

In its 60-year history, Burger King has undergone many changes. In 1967 founders James McLamore and David Edgerton sold the chain to the flour giant Pillsbury, which for two decades struggled to find the right formula for the company. In 1989 Pillsbury was taken over by Britain’s Grand Metropolitan, which continued the ceaseless experimentation. After Grand Met merged with Guinness to form Diageo, Burger King did not fit well with a global company focused on alcoholic beverages.

In 2002 the burger chain was taken over by private equity firms Texas Pacific Group (now TPG Capital) , Bain Capital and Goldman Sachs Capital Partners. After they extracted what they could from the company, the buyout firms arranged for an initial public offering that would allow them to profit even more. Four years after the IPO, the chain was taken over by another private equity firm, 3G Capital of Brazil. After only two years, 3G took a portion of Burger King public again. Now 3G, which partnered with Buffett on the takeover of H.J. Heinz, is at it again with the Tim Hortons deal.

One thing that is clear from this history is that Burger King is not, in fact, a purely American company. But that doesn’t legitimize the Canadian inversion. All it shows is that Burger King’s problems predated the Tim Hortons deal.

The chain has gone through a dizzying series of ownership changes that have probably done little to help its underlying business. And there’s also the issue of how that business is structured. As the Wall Street Journal points out, Burger King is essentially an “assetless company.” It owns less than 1 percent of its nearly 14,000 worldwide outlets, with the rest in the hands of franchisees.

This means that the company is largely removed from the day-to-day operations of its outlets and is instead focused on the royalties it collects from the franchisees. This means that it, even more than other fast-food chains, can claim to be uninvolved in controversial matters such as wage rates and other employment practices.

That posture may no longer be tenable. The recent ruling by the National Labor Relations Board holding McDonald’s jointly liable for labor and wage violations by its franchise operators may very well be applied to other chains.

For decades, Burger King has been treated as a pawn in the financial machinations of global corporations and buyout firms. Now its owners want U.S. taxpayers to help underwrite the latest scheme. Hopefully, they won’t get their way this time.

The Environmental Prosecution Gap

August 21st, 2014 by Phil Mattera

With reports of a $16 billion Justice Department settlement with Bank of America following on the heels of other big payouts by misbehaving banks, it may seem that corporate crime these days is mainly an issue for the financial sector. The big banks have plenty of blemishes on their record, but then again so do other large corporations when it comes to areas such as environmental compliance.

After all, it was only four months ago that Anadarko Petroleum had to pay $5.1 billion to resolve federal charges that had been brought in connection with the clean-up of thousands of toxic waste sites around the country resulting from decades of questionable practices by Kerr-McGee, now a subsidiary of Anadarko. This settlement set a record for an environmental case, surpassing the $4 billion in penalties BP had to pay in 2012 as part of its guilty plea on criminal charges relating to the Deepwater Horizon disaster in the Gulf of Mexico.

Despite high-profile cases such as these, environmental offenses are being prosecuted in a less than vigorous manner. This problem is brought home in a recent analysis by The Crime Report website produced at the Center on Media, Crime and Justice at the John Jay College of Criminal Justice in New York.

In a review of enforcement data in the EPA’s ECHO database, The Crime Report found that the agency has become increasingly disinclined to bring criminal rather than civil charges against violators. In recent years, the report notes, fewer than one-half of one percent of violations trigger criminal investigations, which require the involvement of the Justice Department to proceed in court.

Part of the problem is that criminal cases are much more difficult to pursue. The Crime Report quotes attorney Mark Roberts of the non-profit Environmental Investigation Agency as saying: “I think a criminal prosecution will be defended much harder … If you’re in that tiny percentage that gets charged criminally, you want to win.”

While delivering the bad news about weak prosecution, The Crime Report makes it easier for researchers and activists to access data about environmental violations. It took data from ECHO and created an interactive map that provides summaries by EPA region and by urban area, and also allows zooming in on specific facilities. When an urban area is chosen on the map, a table appears below showing the largest penalties overall, with breakdowns by categories such as Clean Air Act violations and Clean Water Act violations.

This is especially useful for clusters of heavily polluting facilities such as those in what is informally known as Cancer Alley between Baton Rouge and New Orleans. Yet a look at the data for this area shows the limitations not only of the EPA’s criminal prosecutions but its enforcement activity in general. Drilling down shows dozens of facilities that were often found to be in non-compliance yet were hit with little or nothing in the way of penalties during the past five years.

There are some fairly significant fines, such as the $198,000 paid by PCS Nitrogen in Geismar and the $84,000 paid by the Total Petroleum Styrene Monomer Plant in Carville. Yet, for the most part, the data paint a picture that is a far cry from the right’s depiction of the EPA as a tyrannical force preying on defenseless businesses.

Whether it is in banking or petrochemicals, aggressive prosecutions are the only way to get large corporations to clean up their act.

 

Payday Predators Become the Prey

August 14th, 2014 by Phil Mattera

shark-week-cover2Every industry has its faults, but there are only a few for which it can be said that society would be better off if they did not exist at all. One member of that special group is payday lending, the business of providing short-term cash advances to desperate people at unconscionably high interest rates with the expectation that they will not be able to repay the money and thereby get caught in an ever-worsening debt trap.

National People’s Action and other groups fighting predatory lending are highlighting this problem with their Shark Week Campaign. An NPA fact sheet does a good job of summarizing what’s wrong with payday lending and links to some of the best research on the subject, including a 2013 report by the Center for Responsible Lending that makes the case for stronger federal regulation. The issue was also the focus of a brilliant segment on John Oliver’s HBO show that included a mock public service ad narrated by Sarah Silverman arguing that the best alternative to payday loans is “anything else.”

While stricter rules are clearly needed, the good news is that the sharks are no longer operating with total impunity. The Dodd-Frank Act opened the door to federal action on payday lending, and the Consumer Financial Protection Bureau is starting to act on that authority. Last November, the agency ordered Cash America International, one of the largest predators, to pay $19 million ($5 million in fines and $14 million in refunds to customers) for using illegal robo-signing in preparing court documents in debt collection lawsuits. The company was also charged with violating special rules involving lending to military families. In addition, Cash America was accused of destroying documents relevant to the agency’s investigation of its practices.

In the wake of that case, the CFPB took its first action against an online payday lender, suing CashCall Inc. for engaging in “unfair, deceptive, and abusive practices, including debiting consumer checking accounts for loans that were void.” In July, the bureau announced that Ace Cash Express would pay $10 million to settle charges that it engaged in “illegal debt collections tactics — including harassment and false threats of lawsuits or criminal prosecution — to pressure overdue borrowers into taking out additional loans they could not afford.”

Last March, the bureau held a field hearing on payday lending and issued a report finding that more than 80 percent of loans by the industry are rolled over or followed by another loan. The Justice Department is reported to be carrying out an investigation of the role of banks in financing payday lenders.

The sharks are also under attack at the state and local level. Manhattan District Attorney Cyrus Vance Jr. just announced the criminal indictment of a group of online payday lenders and the individuals who control them. The case is an effort to get at companies that use complicated corporate structures and offshore registration to get around the interest rate caps that states such as New York have adopted.

In June, officials in Maryland announced that South Dakota-based Western Sky Financial and CashCall would pay about $2 million to settle charges that they engaged in “abusive payday lending and collections activities” that included loans with annual interest rates of more than 1,800 percent. The settlement also permanently barred the companies from doing any business in the state that required licensing.

Last October, five payday lending companies had to pay $300,000 to settle charges brought by the New York State attorney general, and the year before Sure Advance had to hand over $760,000 to settle allegations that it charged illegal rates as high as 1,564 percent.

Payday lenders have also been targeted in class action lawsuits. Cash America agreed to pay up to $36 million to settle one such case that had been brought under Georgia’s usury and racketeering laws.

Faced with a dwindling number of states in which they can operate as they please, along with tighter federal rules, some of the payday companies are giving up. For example, giant Cash America is reportedly planning to spin off its payday lending operations and focus instead on the supposedly more reputable business of pawn shops.

Most stories about attempts to control abusive commercial practices end up with corporations finding a way to prevail. Payday lending may turn out to be that rare case in which the predators lose.

The Second Coming of Henry Ford?

August 7th, 2014 by Phil Mattera

River-Rouge-PlantElon Musk apparently wants us to think of him as the second coming of Henry Ford. The CEO of electric carmaker Tesla Motors is planning to build a $5 billion, 6,500-worker battery “gigafactory” that is being likened to Ford’s legendary River Rouge complex in Dearborn, Michigan. Musk has a group of western states desperately competing for the project.

It remains to be seen whether the Tesla plant will rise to the level of Ford’s integrated industrial wonder (photo), which in the 1920s was the largest manufacturing site in the world. Yet the two facilities will have something in common: being built in part with taxpayer money. As Robert Lacey tells it in his 1986 book Ford: The Men and the Machine, Ford arranged for the federal government to pay $3.5 million for the deepening of the Rouge River and the draining of marshes at the plant site as part of the contract Ford had been granted to produce Eagle boats for the U.S. Navy.

Tesla has also received help from Uncle Sam — in the form of a $465 million loan it repaid last year — but now the company has its hand out to those states vying to be chosen for the gigafactory. It’s been understood for months that the winner of the competition would have to put serious money on the table, but now Musk has indicated exactly how much in the way of subsidies will be required: 10 percent of the cost of the plant, or about $500 million.

The company and its apologists insist that the demand is not excessive, noting that Volkswagen got a bit more for its assembly plant in Tennessee despite the fact that it is employing a lot fewer workers than Tesla promises. That’s true. Volkswagen got $554 million from state and local agencies, and that is far from the largest subsidy package ever awarded in the United States. In the Good Jobs First Megadeals compilation, it ranks 24th.

Yet such a comparison is problematic, because it is far from clear that the $500 million figure will be the total subsidy burden the winner of the Tesla auction would take on. In all likelihood, the $500 million would be only the up-front cost, while state and local governments would also probably have to offer long-term tax benefits that would end up being much more expensive.

This happens all the time. In the case of Volkswagen, public officials were initially mum about the estimated total size of the package, and it was only through reporting by the Chattanooga Times Free Press that the real costs came to light. By the way, VW is now getting $274 million more for a plant expansion.

Another egregious case of low-balling subsidy estimates happened in Mississippi, where officials initially put the cost of the package given to Nissan in 2000 at $295 million. Yet, as my colleague Kasia Tarczynska and I showed, when all was said and done, state and local agencies in the Magnolia State gave the carmaker subsidies worth more than $1.3 billion.

The odds that Tesla will seek to maximize its subsidy payoff are increased by the fact that it just announced a partnership with Panasonic. The Japanese company managed to extract a subsidy worth more than $100 million from New Jersey to move its North American headquarters a short distance.

Along with underestimated costs, there is a chance that projections about the Tesla project are overstating potential benefits. Particularly suspicious is the claim of 6,500 jobs. Given current manufacturing practices, a workforce of that size is highly unlikely. I can’t help but suspect that the number may include temporary construction jobs or supplier jobs. It’s worth noting that the heavily subsidized advanced battery projects in Michigan mostly created jobs only in the hundreds, the best case being the 1,000 positions created at A123 Systems before it went bankrupt.

And even if Tesla beats those figures, there’s the question of how good the jobs will be. The Japanese and German auto assembly transplants have had to set their wages close to those of the Detroit automakers (though benefits are substantially lower). Will Tesla feel any pressure to create decently paying jobs, or will it take advantage of a struggling area such as Reno, Nevada (one of the possible sites) or the low-wage, anti-union climate of Texas (another contender) to keep compensation levels low?

Fortunately, it is not entirely up to the company. The upside to the insistence on a big subsidy package by Tesla is that states attach some job quality standards to their awards. From this perspective, the best outcome would be for Tesla to choose Nevada, which ranked first in the rankings my colleagues and I at Good Jobs First did on state practices in this area.

Even if Elon Musk does not agree with Henry Ford’s famous wage boosting policy, he won’t be able to exploit his workers as thoroughly as he is doing to taxpayers.

Handouts for Corporate Tax Deserters

July 31st, 2014 by Phil Mattera

moneybags_handoutPresident Obama says “I don’t care if it’s legal—it’s wrong.” Even Fortune magazine calls it “positively un-American.” But will Congress do anything to block the brazen moves by a growing number of large U.S. companies to reincorporate abroad to dodge federal taxes?

One group of Democratic lawmakers is trying to discourage the trend by tightening the restrictions on federal contract awards to so-called inverted companies, but such firms still receive another form of financial assistance from Uncle Sam.

The lawmakers have drafted a bill with the appropriately provocative title of No Contracts for Corporate Deserters Act. It would bar contract awards to reincorporators which are at least 50-percent U.S.-owned and which do no substantial business in the country in which they are nominally based.

Tougher rules are definitely necessary. Although Congress pats itself on the back for the restrictions first enacted during an earlier wave of reincorporations, some of the inverted companies have managed to find loopholes allowing them to continue to enjoy the benefits of extensive federal contracting. Ingersoll-Rand, which purports to be an Irish company but derives 60 percent of its revenue from the United States, has 80 percent of its long-lived assets in this country and has its “corporate center” near Charlotte, North Carolina, received $64 million in federal contracts in 2013. Eaton Corporation, which also claims to have become Irish, received $131 million that year.

In his July 24 remarks on the subject, President Obama also declared: “You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers.” Such handouts are not limited to lucrative contract awards. Inverted companies are also receiving cash grants from the federal government.

Take the case of Eaton. In 2013 it received a $2.4 million grant from the Energy Department’s Conservation Research and Development Program. That was just one of eight grants it received from Energy that year with a total value of about $4 million.

Delphi Automotive, which claims to be based on the island of Jersey in the English Channel, has also received numerous grants from the Energy Department, including $5.1 million last year through the Fossil Energy Research and Development Program.

Grants have also gone to companies involved in recent inversion deals. Pfizer, which was seeking to undergo an inversion through a merger with AstraZeneca but which has dropped the bid for now, received $3.8 million in assistance this year from the Defense Department for work on nanoparticles.

These grants are part of a controversial practice by which the federal government underwrites commercial research activity by large companies in industries such as food processing, pharmaceuticals, aerospace and electric utilities. And this, in turn, is part of the larger sphere of federal financial assistance to business that also includes direct payments, low-cost loans, loan guarantees and the like.

These activities, often labeled corporate welfare, are a frequent target of criticism from both the left and the right. Conservatives are currently engaged in a campaign to eliminate the Export-Import Bank, which provides financing for deals benefiting corporations such as Boeing and Bechtel. Bipartisan efforts such as Green Scissors and the Toward Common Ground reports issued by U.S. PIRG and National Taxpayers Union have sought to end funding for the most wasteful programs.

Those efforts are usually driven by ideology (conservatives don’t want governments “picking winners”), by a desire to cut federal spending, or by other issues (progressives point out that many federal subsidies promote environmentally destructive practices). Now there’s another reason to be up in arms over corporate welfare.

The fact that some “corporate deserters” are getting grants from Uncle Sam could provide an additional form of pressure against the tax dodgers. Seeing these companies get contracts is bad enough; realizing that they may be getting direct handouts is even more infuriating.

Dominant and Diabolical Dynasties

July 24th, 2014 by Phil Mattera

mellonFor more than 30 years, Forbes magazine has been publishing a list of the 400 richest Americans. These annual celebrations of wealth are often accompanied by text emphasizing entrepreneurship. Readers are supposed to come away with the conclusion that these tycoons earned their treasure.

Now, in a move that says a great deal about where American society is headed, Forbes has published its first ranking of America’s Richest Families. No longer is the individual striver being venerated; now we are supposed to marvel at the compilation of 185 families with accumulated wealth of at least $1 billion. Forbes, unselfconsciously using a phrase that could have been penned by ruling class analyst William Domhoff, headlines the feature “Dominant Dynasties.”

Perhaps a bit uneasy about glorifying financial aristocracies, Forbes writes: “One thing that stands out is how many of the great fortunes of the mid-19th century have dissipated. The Astors and the Vanderbilts, the Morgans and the Carnegies, none make the cut.”

The fact that not all 150-year-old family fortunes have survived hardly makes the United States a model of economic egalitarianism. Forbes has to admit that the du Ponts, whose wealth dates back two centuries, are still high on the list (to the tune of $15 billion), as are the Rockefellers ($10 billion). The magazine chose to put on its cover members of the sixth and seventh generations of the Mellon dynasty, whose wealth is pegged at $12 billion.

Even among the newer fortunes, many go back several generations. Few of the listed families include living founders. In some cases family members are living of off the success of their forebears; in other cases, they have built on the achievements of their parents and grandparents. Yet in all cases they have benefited from a tax system that increasingly favors inherited wealth.

That tilt dates back to initiatives taken by the man responsible for the fortune enjoyed by the individuals on the Forbes cover: Andrew Mellon (illustration). As Secretary of the Treasury in the 1920s he unabashedly pushed for reductions in income and estate tax rates, even though as one of the country’s richest men he had a great deal to gain personally from those cuts.

Aside from the questions relating to the perpetuation of class structure, there is the issue of where the fortunes came from in the first place. That subject cannot be avoided when the family at the very top of the list, the Waltons, enjoys wealth estimated at $152 billion thanks to their affiliation with a retail empire built on cheap labor, union-busting and a variety of other sins.

The Kochs, number two with $89 billion, have grown rich through the exploitation of fossil fuel-based industries that are threatening the planet, as did the Rockefellers and many others on the list. The du Pont fortune was originally based on gunpowder and was later enhanced by inventions that included dangerous chemicals such as perfluorinated compounds (used in Teflon) linked to serious health and environmental problems.

Lower down on the list is the Steinbrenner fortune ($3.1 billion), which is based not only on the absurd appreciation in the value of the New York Yankees but also from a shipping business whose interests were furthered by illegal campaign contributions to Richard Nixon in the 1970s. There’s also the Lindner fortune ($1.7 billion), which was built in part by Carl Lindner’s close association with the junk bond empire of the felonious Michael Milken.

Balzac is credited with the statement that “behind every great fortune is a great crime.” Further research will be required to know if that is true of all the entries on the Forbes list, but there are no doubt plenty of examples. And along with any specific crimes is the offense against democracy generated by the unbridled accumulation of intergenerational wealth.

Real Abuses, Sham Reforms

July 17th, 2014 by Phil Mattera

bosses_900It is now a full century since the Progressive Era ended some of the worst abuses of concentrated economic power. This year is the 100th anniversary of the Clayton Act and the Federal Trade Commission Act.   It is 103 years since the dissolution of the Standard Oil trust, 108 years since the passage of the Pure Food and Drug Act.

Yet even a casual reading of the business news these days suggests that we live in an economy disturbingly similar to the age of the robber barons.

Back then, the trusts shifted their incorporation to states such as New Jersey and Delaware that were willing to rewrite their business laws to accommodate the needs of oligopolies. Today large corporations are reincorporating themselves in foreign tax havens to dodge taxes. The practice is reaching epidemic proportions in the pharmaceutical industry.

Back then, unscrupulous drug companies and meatpackers sold adulterated products that could sicken or even kill their customers. Today General Motors is caught in a growing scandal about ignition switch defects that resulted in at least 13 deaths. The news about the automaker’s recklessness grows worse by the day, with the New York Times now reporting that company withheld information from federal regulators about the cause of fatal accidents.

Back then, wheeler-dealers such as James Fisk peddled dubious securities in companies that later collapsed, impoverishing investors. Today we’re still trying to get over the impact of the toxic mortgage-backed securities that the big banks packaged and sold during the housing bubble. Just the other day, Citigroup became the latest of those banks to settle charges brought by the Justice Department. Yet the $7 billion extracted from Citi, like the amounts obtained from the other banks, will cause little pain for the mammoth institution and will thus do little to deter future misconduct. The provision in the settlement for “consumer relief” is too little, too late.

And, of course, back then, the trusts got to be trusts by eliminating their competition. Today concentration is alive and well. Recently, the second largest U.S. tobacco company, Reynolds American, proposed a takeover of Lorillard, the number three in the industry. If this deal goes through, it won’t be long before Reynolds tries to marry Altria/Philip Morris, putting virtually the entire carcinogenic industry in the hands of one player, the way it was a century ago during the reign of the American Tobacco Company, aka the Tobacco Trust.

The movement toward a Media Trust just accelerated with the revelation that Rupert Murdoch’s 21st Century Fox, already huge, is seeking to take over Time Warner. The deal would put a mind-boggling array of entertainment properties under one roof. Murdoch offered to sell off Time Warner’s CNN – a meaningless concession given that the news network has struggled to survive against Murdoch’s despicable Fox News. Murdoch’s move comes as another media octopus, Comcast, is awaiting approval for its deal to take over Time Warner’s previously spun off cable business.

While we have all too many indications of a new Gilded Age, still scarce are signs of an effective response. We’ve got a good amount of muckraking journalism and a fair number of people (and even a few elected officials) who calls themselves progressives. Yet somehow this does not add up to a movement that can take a real bite out of corporate crime.

Part of the problem is that many of those in power professing progressive values are not serious about challenging corporate power. Some historians argue that the original Progressives were, like the New Dealers who came later, mainly concerned with saving capitalism from itself rather than changing the system. Yet they still managed to impose significant restrictions on big business through antitrust and other forms of regulation.

Today’s progressive officials often seem to want nothing more than to give the appearance of reform. That’s the story at the Justice Department, which has raised settlement levels and extracted some token guilty pleas but still allows corporations to buy their way out of serious legal jeopardy. Meanwhile, antitrust enforcement is tepid, and as the GM case increasingly shows, regulation is often a joke.

A resurgence of robber-baron behavior requires real, not sham reform.

Inverted Values

July 10th, 2014 by Phil Mattera

medtronic-headquartersConservatives are up in arms about the surge of undocumented women and children coming across the border from Mexico. So great a threat is purportedly being caused by this influx that Republican members of Congress are clamoring for legislation that would allow faster deportations. Even President Obama seems to agree.

Much less urgency is being expressed about another sort of immigration crisis: the presence of a growing number of foreign-based corporations masquerading as American companies. Large-scale tax dodging by these firms does much more harm to the United States than the modest impact of those desperate Central Americans.

A recent report by the Congressional Research Service describes a new wave of companies going through a process politely known as “inversions.” What’s really happened is that these firms have renounced their U.S. “citizenship” and reincorporated themselves in tax haven countries in order to escape federal taxes.

Yet these companies go on operating as before, keeping their U.S. offices, their U.S. sales and all the other benefits of doing business here but not paying their fair share of the cost of government. They are the real illegitimate aliens.

While a few members of Congress have spoken out against this corporate treason, many adhere to the idea that the companies are blameless — that it is the supposedly oppressive tax system that is to blame. The editorialists at the Wall Street Journal, who can always be counted on to go to any length to defend corporate avarice, recently began a piece on inversions by writing: “What kind of country does this to itself?”

This is typical of the pro-corporate mindset: Big business, apparently, can do no wrong, so if a company does something controversial, it is the rest of us who are to blame.

In reality, many of the companies that have turned to inversions are not only tax dodgers; they are bad actors in other respects. Take the case of Medtronic, which is involved in the most recent re-registration deal involving a plan to merge with Covidien, a competitor in the medical devices industry that earlier turned itself into an “Irish” company.

Only a couple of weeks before the Covidien deal became public, the U.S. Justice Department announced that Medtronic would pay $9.9 million to resolve allegations under the False Claims Act that it made improper payments to physicians to get them to implant the company’s pacemakers and defibrillators in Medicare and Medicaid patients. The settlement came less than three years after Medtronic had to pay $23.5 million to resolve another False Claims Act case involving other kinds of improper inducements to physicians.

And five years before that, Medtronic paid $40 million to settle yet another kickback case. In 2010 the company had to pay $268 million to settle lawsuits claiming that defective wires in its defibrillators caused at least 13 deaths.

An even worse track record belongs to Pfizer, which attempted an inversion a couple of months ago by seeking to acquire Britain’s AstraZeneca but has backed off for now. In 2009 Pfizer agreed to pay $2.3 billion to resolve criminal and civil charges relating to the  improper marketing of Bextra and three other medications. The amount was a record for a healthcare fraud settlement. John Kopchinski, a former Pfizer sales representative whose complaint helped bring about the federal investigation, told the New York Times: “The whole culture of Pfizer is driven by sales, and if you didn’t sell drugs illegally, you were not seen as a team player.”

Like Medtronic, Pfizer has had problems with questionable payments. In August 2012 the SEC announced that it had reached a $45 million settlement with the company to resolve charges that its subsidiaries, especially Wyeth, had bribed overseas doctors and other healthcare professionals to increase foreign sales.

Or take the case of Walgreen, which is reported to be planning an inversion of its own. In 2008 it had to pay $35 million to settle claims that it defrauded the federal government by improperly switching patients to different version of three prescription drugs in order to increase its reimbursements from Medicaid. Last year, the Drug Enforcement Administration announced that the giant pharmacy chain would pay a record $80 million in civil penalties to resolve charges that it failed to properly control the sales of narcotic painkillers at some of its stores.

The examples could continue. Corporations resorting to extreme measures such as foreign re-incorporations are not innocent victims. Their tax dodging is just another symptom of corporate cultures that put profit maximization above loyalty to country and adherence to the law.