Archive for the ‘Litigation’ Category

The 2012 Corporate Rap Sheet

Thursday, December 20th, 2012

Monopoly_Go_Directly_To_Jail-T-linkCorporate crime has been with us for a long time, but 2012 may be remembered as the year in which billion-dollar fines and settlements related to those offenses started to become commonplace. Over the past 12 months, more than half a dozen companies have had to accede to ten-figure penalties (along with plenty of nine-figure cases) to resolve allegations ranging from money laundering and interest-rate manipulation to environmental crimes and illegal marketing of prescription drugs.

The still-unresolved question is whether even these heftier penalties are punitive enough, given that corporate misconduct shows no sign of abating. To help in the consideration of that issue, here is an overview of the year’s corporate misconduct.

BRIBERY. The most notorious corporate bribery scandal of the year involves Wal-Mart, which apart from its unabashed union-busting has tried to cultivate a squeaky clean image. A major investigation by the New York Times in April showed that top executives at the giant retailer thwarted and ultimately shelved an internal probe of extensive bribes paid by lower-level company officials as part of an effort to increase Wal-Mart’s market share in Mexico. A recent follow-up report by the Times provides amazing new details.

Wal-Mart is not alone in its behavior. This year, drug giant Pfizer had to pay $60 million to resolve federal charges related to bribing of doctors, hospital administrators and government regulators in Europe and Asia. Tyco International paid $27 million to resolve bribery charges against several of its subsidiaries. Avon Products is reported to be in discussions with the U.S. Justice Department and the Securities and Exchange Commission to resolve a bribery probe.

MONEY LAUNDERING AND ECONOMIC SANCTIONS. In June the U.S. Justice Department announced that Dutch bank ING would pay $619 million to resolve allegations that it had violated U.S. economic sanctions against countries such as Iran and Cuba. The following month, a U.S. Senate report charged that banking giant HSBC had for years looked the other way as its far-flung operations were being used for money laundering by drug traffickers and potential terrorist financiers. In August, the British bank Standard Chartered agreed to pay $340 million to settle New York State charges that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators about its actions; this month it agreed to pay another $327 million to settle related federal charges. Recently, HSBC reached a $1.9 billion money-laundering settlement with federal authorities.

INTEREST-RATE MANIPULATION.  This was the year in which it became clear that giant banks have routinely manipulated the key LIBOR interest rate index to their advantage. In June, Barclays agreed to pay about $450 million to settle charges brought over this issue by U.S. and UK regulators. UBS just agreed to pay $1.5 billion to U.S., UK and Swiss authorities and have one of its subsidiaries plead guilty to a criminal fraud charge in connection with LIBOR manipulation.

DISCRIMINATORY LENDING. In July, it was announced that Wells Fargo would pay $175 million to settle allegations that the bank discriminated against black and Latino borrowers in making home mortgage loans.

DECEIVING INVESTORS. In August, Citigroup agreed to pay $590 million to settle a class-action lawsuit alleging that it failed to disclose its full exposure to toxic subprime mortgage debt in the run-up to the 2008 financial crisis. The following month, Bank of America said it would pay $2.4 billion to settle an investor class-action suit charging that it made false and misleading statements during its acquisition of Merrill Lynch during the crisis. In November, JPMorgan Chase and Credit Suisse agreed to pay a total of $417 million to settle SEC charges of deception in the sale of mortgage securities to investors.

DEBT-COLLECTION ABUSES. In October, American Express agreed to pay $112 million to settle charges of abusive debt-collection practices, improper late fees and deceptive marketing of its credit cards.

DEFRAUDING GOVERNMENT. In March, the Justice Department announced that Lockheed Martin would pay $15.9 million to settle allegations that it overcharged the federal government for tools used in military aircraft programs. In October, Bank of America was charged by federal prosecutors with defrauding government-backed mortgage agencies by cranking out faulty loans in the period leading to the financial crisis.

PRICE-FIXING. European antitrust regulators recently imposed the equivalent of nearly $2 billion in fines on electronics companies such as Panasonic, LG, Samsung and Philips for conspiring to fix the prices of television and computer displays. Earlier in the year, the Taiwanese company AU Optronics was fined $500 million by a U.S. court for similar behavior.

ENVIRONMENTAL CRIMES. This year saw a legal milestone in the prosecution of BP for its role in the 2010 Deepwater Horizon drilling accident that killed 11 workers and spilled a vast quantity of crude oil into the Gulf of Mexico. The company pleaded guilty to 14 criminal charges and was hit with $4.5 billion in criminal fines and other penalties. BP was also temporarily barred from getting new federal contracts.

ILLEGAL MARKETING. In July the U.S. Justice Department announced that British pharmaceutical giant GlaxoSmithKline would pay a total of $3 billion to settle criminal and civil charges such as the allegation that it illegally marketed its antidepressants Paxil and Wellbutrin for unapproved and possibly unsafe purposes. The marketing included kickbacks to doctors and other health professionals. The settlement also covered charges relating to the failure to report safety data and overcharging federal healthcare programs. In May, Abbott Laboratories agreed to pay $1.6 billion to settle illegal marketing charges.

COVERING UP SAFETY PROBLEMS. In April, Johnson & Johnson was ordered by a federal judge to pay $1.2 billion after a jury found that the company had concealed safety problems associated with its anti-psychotic drug Risperdal. Toyota was recently fined $17 million by the U.S. Transportation Department for failing to notify regulators about a spate of cases in which floor mats in Lexus SUVs were sliding out of position and interfering with gas pedals.

EXAGGERATING FUEL EFFICIENCY. In November, the U.S. Environmental Protection Agency announced that Hyundai and Kia had overstated the fuel economy ratings of many of the vehicles they had sold over the past two years.

UNSANITARY PRODUCTION. An outbreak of meningitis earlier this year was tied to tainted steroid syringes produced by specialty pharmacies New England Compounding Center and Ameridose that had a history of operating in an unsanitary manner.

FATAL WORKFORCE ACCIDENTS. The Bangladeshi garment factory where a November fire killed more than 100 workers (who had been locked in by their bosses) turned out to be a supplier for Western companies such as Wal-Mart, which is notorious for squeezing contractors to such an extent that they have no choice but to make impossible demands on their employees and force them to work under dangerous conditions.

UNFAIR LABOR PRACTICES. Wal-Mart also creates harsh conditions for its domestic workforce. When a new campaign called OUR Walmart announced plans for peaceful job actions on the big shopping day after Thanksgiving, the company ignored the issues they were raising and tried to get the National Labor Relations Board to block the protests. Other companies that employed anti-union tactics such as lockouts and excessive concessionary demands during the year included Lockheed Martin and Caterpillar.

TAX DODGING. While it is often not technically criminal, tax dodging by large companies frequently bends the law almost beyond recognition. For example, in April an exposé in the New York Times showed how Apple avoids billions of dollars in tax liabilities through elaborate accounting gimmicks such as the “Double Irish with a Dutch Sandwich,” which involves artificially routing profits through various tax haven countries.

FORCED LABOR. In November, global retailer IKEA was revealed to have made use of prison labor in East Germany in the 1980s.

Note: For fuller dossiers on a number of the companies listed here, see my Corporate Rap Sheets. The latest additions to the rap sheet inventory are drug giants AstraZeneca and Eli Lilly.

Who Pays for Extreme Weather?

Thursday, November 1st, 2012

As the northeast begins to recover from the ravages of Sandy, there are estimates that the giant storm caused some $20 billion in property damage and up to $30 billion more in lost economic activity.

The question now is who will pay that tab—as well as the cost of future disasters that climate change will inevitably bring about.

It’s already clear that the private insurance industry, as usual, will do everything in its power to minimize its share of the burden. Insurers take advantage of the fact that their policies often do not cover damages from flooding, passing that cost onto policyholders. Most of them are unaware of the fact and fail to purchase federal flood insurance until it is too late.

Insurers also exploit clauses in their policies that impose much higher deductibles for non-flood damages during hurricanes. Fortunately, governors in New York, New Jersey and Connecticut are blocking that maneuver by giving Sandy a different official designation (which is consistent with the National Weather Service’s use of the term “post tropical storm”).  It remains to be seen, nonetheless, to what extent the insurance industry manages to create new obstacles for its customers.

The challenges for homeowners are just one part of the problem. Sandy also did tremendous damage to public infrastructure—roads, bridges, subway stations, etc. Although these are government assets, should the public sector bear the cost of rebuilding?

Many people are arguing, in the words of a New York Times editorial, that “a big storm requires big government.” That’s certainly true when it comes to initial disaster response.  Many more people would have died and much more damage would have occurred but for the efforts of public-sector first responders and even the Federal Emergency Management Agency, which has been remade since its debacle during the aftermath of Hurricane Katrina.

But the challenges associated with extreme weather go far beyond those relief functions. There’s now discussion of the need for New York City to build a huge flood-prevention system along the lines of that in the Netherlands.

Taxpayers, especially those of the 99 percent, should not be forced to assume the entire cost of such a massive undertaking. Extreme weather is clearly linked to climate change, which in turn has been largely caused by the growth in greenhouse gas emissions caused by large corporations, especially those in the fossil fuel industry.

Holding corporations responsible for the consequences of climate change is not a new idea. Yet it is one that all too frequently gets drowned out amid the bloviating of the climate deniers, much of whose funding comes from the very corporate interests they are working to get off the hook.

Back in 2006 BusinessWeek wrote that lawsuits targeting corporations for global warming were “the next wave of litigation,” following in the footsteps of the lawsuits that forced the tobacco industry to cough up hundreds of billions of dollars in compensation. Such cases did materialize. For example, in 2008 lawyers representing the Alaska Native coastal village of Kivalina, which was being forced to relocate because of flooding caused by the changing Arctic climate, filed suit against Exxon Mobil, BP, Chevron, Duke Energy and other oil and utility companies, arguing that they conspired to mislead the public about the science of global warming and this contributed to the problem that was threatening the village.

Such suits have not had an easy time in the courts. The Kivalina case was dismissed by a federal district judge, and that dismissal was recently upheld by the federal court of appeals. A suit brought by the state of California against major automakers for contributing to global warming was also dismissed.

It is far from certain that corporations will continue to get off scot free. In fact, groups such as the Investor Network on Climate Risks argue that the potential liability is quite real and that this should be a matter of concern for institutional shareholders. The Network, a project of CERES, pursues its goals through initiatives such as appeals to the SEC to require better disclosure of climate risks and through friendly engagement with large corporations.

Yet it may be that a more confrontational approach is necessary to build popular support for the idea that big business needs to be held accountable for its big contribution to the climate crisis.

Unfortunately, we are already seeing steps in the opposite direction. The Bloomberg Administration in New York has already announced new storm-related subsidies that will apply not only to struggling mom-and-pop business but also to giant corporations. Unless there is a popular outcry, the city will repeat its mistakes in the wake of the 9-11 attacks of giving huge amounts of taxpayer-funded reconstruction assistance to the likes of Goldman Sachs (see the website of Good Jobs New York for the dismaying details).

The fact that the large New York banks that stand to benefit from Bloomberg’s new giveaways helped finance fossil-fuel projects that contribute to climate change shows just how self-defeating this approach is.

Rather than using public money to help wealthy corporations pay for storm damage on their premises, we should be forcing those companies to pay the costs of addressing the climate crisis they did so much to create.

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New in CORPORATE RAP SHEETS: a dossier on the many environmental and labor relations sins of chemicals giant DuPont.

Wal-Mart and Watergate

Thursday, April 26th, 2012

Wal-Mart has been probably been accused of more types of misconduct than any other large corporation. The latest additions to the list are bribery and obstruction of justice. In an 8,000-word exposé published recently in the New York Times, top executives at the giant retailer are reported to have thwarted and ultimately shelved an internal investigation of extensive bribes paid by lower-level company officials to expand Wal-Mart’s market share in Mexico.

While Wal-Mart’s outrageous behavior is often in a class by itself, the bribery aspects of the allegations are far from unique. In fact, Wal-Mart is actually a late arrival to a sizeable group of major corporations that have found themselves in legal jeopardy because of what in corporate circles are politely called questionable foreign payments.

That jeopardy has grown more significant in recent years as the Securities and Exchange Commission and the Department of Justice have stepped up enforcement of the Foreign Corrupt Practices Act, or FCPA, which prohibits overseas bribery by U.S.-based corporations and foreign companies with a substantial presence in the United States.

It is often forgotten that the Watergate scandal of the 1970s was not only about the misdeeds of the Nixon Administration. Investigations by the Senate and the Watergate Special Prosecutor forced companies such as 3M, American Airlines and Goodyear Tire & Rubber to admit that they or their executives had made illegal contributions to the infamous Committee to Re-Elect the President.

Subsequent inquiries into illegal payments of all kinds led to revelations that companies such as Lockheed, Northrop and Gulf Oil had engaged in widespread foreign bribery. Under pressure from the SEC, more than 150 publicly traded companies admitted that they had been involved in questionable overseas payments or outright bribes to obtain contracts from foreign governments. A 1976 tally by the Council on Economic Priorities found that more than $300 million in such payments had been disclosed in what some were calling “the Business Watergate.”

While some observers insisted that a certain amount of baksheesh was necessary to making deals in many parts of the world, Congress responded to the revelations by enacting the FCPA in late 1977. For the first time, bribery of foreign government officials was a criminal offense under U.S. law, with fines up to $1 million and prison sentences of up to five years.

The ink was barely dry on the FCPA when U.S. corporations began to complain that it was putting them at a competitive disadvantage. The Carter Administration’s Justice Department responded by signaling that it would not be enforcing the FCPA too vigorously. That was one Carter policy that the Reagan Administration was willing to adopt. In fact, Reagan’s trade representative Bill Brock led an effort to get Congress to weaken the law, but the initiative failed.

The Clinton Administration took a different approach—trying to get other countries to adopt rules similar to the FCPA. In 1997 the industrial countries belonging to the Organization for Economic Cooperation and Development reached agreement on an anti-bribery convention. In subsequent years, the number of FCPA cases remained at a miniscule level—only a handful a year. Optimists were claiming this was because the law was having a remarkable deterrent effect. Skeptics said that companies were being more careful to conceal their bribes, and prosecutors were focused elsewhere.

Any illusion that commercial bribery was a rarity was dispelled in 2005, when former Federal Reserve Chairman Paul Volcker released the final results of the investigation he had been asked to conduct of the Oil-for-Food Program in Iraq. Volcker’s group found that more than half of the 4,500 companies participating in the program—which was supposed to ease the impact of Western sanctions on Iraq—had paid illegal surcharges and kickbacks to the government of Saddam Hussein. Among those companies were Siemens, DaimlerChrysler and the French bank BNP Paribas.

The Volcker investigation, the OECD convention, and the Sarbanes-Oxley law (whose mandates about financial controls made it more difficult to conceal improper payments) breathed new life into FCPA enforcement during the final years of the Bush Administration and after President Obama took office.

The turning point came in November 2007, when Chevron agreed to pay $30 million to settle charges about its role in Oil-for-Food corruption. Then, in late 2008, Siemens agreed to pay the Justice Department, the SEC and European authorities a record $1.6 billion in fines to settle charges that it had routinely paid bribes to secure large public works projects around the world. This was a huge payout in relation to previous FCPA penalties, yet it was a bargain in that the big German company avoided a guilty plea or conviction that would have disqualified it from continuing to receive hundreds of millions of dollars in federal contracts.

In February 2009 Halliburton and its former subsidiary Kellogg Brown and Root agreed to pay a total of $579 million to resolve allegations that they bribed government officials in Nigeria over a ten-year period. A year later, the giant British military contractor BAE Systems reached settlements totaling more than $400 million with the Justice Department and the UK Serious Fraud Office to resolve longstanding multi-country bribery allegations. In April 2010 Daimler and three of its subsidiaries paid $93 million to resolve FCPA charges. Other well-known companies that have settled similar bribery cases since the beginning of 2011 include Tyson Foods, IBM, and Johnson & Johnson. In most cases companies have followed the lead of Siemens in negotiating non-prosecution or deferred prosecution deals that avoided criminal convictions.

A quarter century after the Watergate investigation revealed a culture of corruption in the foreign dealings of major corporations, the new wave of FCPA prosecutions suggests that little has changed. There is one difference, however. Whereas the bribery revelations of the 1970s elicited a public outcry, the cases of the past few years have generated relatively little comment in the United States—except for the complaints of corporate apologists that the FCPA is too severe. Among those apologists are board members of the Institute for Legal Reform (a division of the U.S. Chamber of Commerce), whose ranks have included the top ethics officer of Wal-Mart.

The Wal-Mart case could turn out to be a much bigger deal than previous FCPA cases—for the simple reason that the mega-retailer appears to have forgotten Watergate’s central lesson that the cover-up is often punished more severely than the crime. A company that has often avoided serious consequences for its past misconduct may finally pay a high price.

Toxic Legacies

Thursday, June 16th, 2011

Bunker Hill smelter circa 1984

In his novel Bleak House, Charles Dickens invented the interminable lawsuit Jarndyce and Jarndyce to satirize the dysfunctional British court system. A real-life Jarndyce case just settled in U.S. federal court illustrates the glacial pace at which hazardous waste cleanup disputes get resolved and undermines the arguments of those who want to weaken environmental enforcement.

Hecla Mining Company has agreed to pay $263 million plus interest to resolve a lawsuit dating back 20 years. In 1991 Hecla and other mining companies were sued by the Coeur d’Alene Tribe over damages to natural resources in Idaho’s Silver Valley caused by some 100 million tons of toxic mining waste released into local waterways over the decades.  A smelter used by the companies caused massive lead emissions that contaminated soil and showed up at high levels in the bloodstream of local children. The federal government joined the case in 1996.

The lawsuit was filed after years of efforts by the mining companies to evade responsibility for cleaning up one of the country’s most polluted areas, which was designed the Bunker Hill Superfund site in 1983. The federal government began spending several hundred million dollars on the cleanup—costs that the lawsuit was meant to recoup. (The eventual cost would surpass $2 billion.)

The corporate defendants made that recovery process as difficult and time-consuming as possible. One company, Gulf Resources and Chemical, went bankrupt in the 1990s, leaving little in the way of assets. Another, Asarco, also filed for bankruptcy in 2005 in an apparent attempt to sidestep huge environmental liabilities around the country, but the U.S. Justice Department was later able to get the company that took it over, Grupo Mexico, to pay $1.8 billion for cleanup costs at more than 80 toxic sites in 19 states, including $436 million for the Bunker Hill site.

The new Hecla settlement is welcome news, but the fact that it has taken nearly three decades from designation of the Bunker Hill site to this financial resolution indicates there is something seriously wrong with the Superfund system (and the courts).

Ironically, the Bunker Hill story is in many ways a best-case scenario in that the federal government was able—eventually—to recover a substantial portion of its cleanup costs.  In numerous cases, responsible corporate parties no longer exist or don’t have adequate assets.

Congress anticipated this problem when it established the Superfund program in 1980. It created a trust fund for the program that received revenues generated by excise taxes on two highly polluting industries—petroleum and chemicals—as well as a corporate environmental income tax. The sources boosted the trust fund balance to nearly $4 billion by end of 1996.

The authority for these “polluter pays” taxes expired in 1995, and the balance began to dwindle, reaching zero in 2004. In recent years, Congress has kept the fund alive through modest appropriations, but these are subject to political whims.

Last year the Obama Administration called for reinstatement of the Superfund tax, giving a boost to the lonely efforts of Oregon Rep. Earl Blumenauer and New Jersey Senator Frank Lautenberg. However, given the current composition of Congress, that proposal seems to be going nowhere.

Unfortunately, the choice is not simply between a Superfund program financed by polluting industries and one funded by the general public. If some conservative groups had their way, the Superfund program would be eliminated outright or weakened by transferring responsibility to the states.

Think how that would have played out in Idaho, where state officials kept their distance from the Bunker Hill case until the last minute, when they signed on to get a cut of the money from Hecla. For years, those officials (along with members of the state’s Congressional delegation) vilified the Environmental Protection Agency for aggressively pursuing the Bunker Hill cleanup while they said little about the companies that caused the mess.

That anti-EPA attitude is, alas, all too common today among corporate apologists both in Washington and in many states. The Superfund program, for all its limitations, remains one of our main tools for dealing with the legacy of corporate environmental irresponsibility. It needs to be on as firm a footing as possible.

A Business Backlash?

Friday, June 25th, 2010

By all rights, the laissez-faire crowd should be silent these days. Recent months have been marked by one example after another of the perils of deregulation and the folly of trusting large corporations to do the right thing. From Toyota to Goldman Sachs to Massey Energy to BP, 2010 has been the year of big business irresponsibility.

As in 2002 (after the accounting scandals involving Enron, WorldCom et al.) and 2008 (the meltdown of Wall Street), we’re now at one of those moments, following an outbreak of corporate misconduct, in which public sentiment about business is up for grabs, as is public policy.

The business camp is already working hard to regain support, in ways ranging from BP’s seemingly benign vow to “make things right” to Rep. Joe Barton’s shameless “shakedown” outburst designed to turn the Obama Administration into the villain. Here are some other signs that corporations and their defenders are already going back on the offensive:

  • A federal judge with personal investments in the petroleum industry struck down the Obama Administration’s moratorium on deepwater drilling, despite evidence brought to light by Congressional investigators that the practice is much more dangerous than we had been led to believe and none of the oil giants have adequate accident response plans. The challenge to the moratorium had been brought by smaller oil service firms, but the judge’s decision was hailed by majors such as Chevron and Royal Dutch Shell.
  • Massey Energy, apparently hoping for a like-minded judge, has filed suit against the federal Mine Safety and Health Administration in a brazen effort to pin the blame on regulators for the April explosion at the Upper Big Branch mine in West Virginia that killed 29 workers.
  • Verizon Communications CEO Ivan Seidenberg, the current head of the Business Roundtable, recently gave a speech in which he challenged regulatory initiatives in the telecom and financial sectors, criticized efforts to limit tax avoidance by multinational companies, and declared: “It’s time for us all to raise our game and embrace the power of the private sector that will create real value and real growth for our country.”

If business advocates are emboldened to speak out so soon, that suggests that corporations have not been reprimanded adequately for their misconduct. The criticism expressed by the Obama Administration and Congressional Democrats has had a ritualistic quality about it—a Kabuki dance of disapproval that may not result in any real change.

Even the $20 billion BP escrow fund feels inadequate, given the fact that there is no end in sight to the disaster. Although BP’s shareholders are agonizing over the suspension of the dividend payment, the company itself does not seem very put out by the creation of the fund, especially since it is being allowed to spread out the cost over several years.

The ability of BP to buy its way out of the crisis contributes to the sense that large corporations can do the most outrageous things and emerge relatively unscathed. It is unlikely that the forthcoming criminal case against the company will cause much more discomfort. The company has already been through that process with previous disasters involving oil spills in Alaska and a deadly refinery explosion in Texas. It paid the resulting penalties with no problem, and the fact that it was put on probation has had little practical effect.

What’s needed is a more dramatic response to corporate negligence. It might be the arrest of a top executive or an announcement that the federal government will no longer do business with companies with serious regulatory violations or an antitrust initiative to try to break up large firms which think that their size somehow makes them above the law. Only then might corporations think twice about lashing back and returning to business as usual.

There Will Be Damage

Thursday, June 17th, 2010

Twenty billion dollars. The amount BP agreed to put in escrow is more than 250 times the company’s maximum obligation under the Oil Pollution Act of 1990. It is a remarkable sum to get a corporation to disgorge before there has been any formal finding of guilt. But is it enough?

While it is commendable that the people of the Gulf Coast will be guaranteed compensation, there is a risk that BP’s voluntary participation in the fund will allow it to avoid what should be even higher liability costs. The Obama Administration insists that the $20 billion is not a cap, yet that is how it seems to be viewed by many in the financial markets, which reacted to the announcement with a degree of relief.

Obama is so eager for a win that he may have left money on the table. The fact that BP agreed to the $20 billion figure without much of a fight suggests that he could have gotten more. Another drawback: keeping the amount within BP’s comfort zone allowed the company to appear to be noble in cooperating, when it would have been preferable to see it squealing about an “unreasonable” demand. BP should be feeling more pain.

I also worry that BP’s acquiescence might cause the feds to go easier on the company in the criminal investigation of the gulf disaster. BP is already on probation in connection with criminal charges stemming from its previous recklessness in Alaska and at its Texas City refinery. Another conviction should get it debarred from receiving new drilling licenses or contracts from the federal government, and it would pave the way to huge payouts in the inevitable civil litigation.

The $20 billion deal is also less than fully satisfying because it applies to BP alone. The current mess in the gulf may be the doing of BP (and perhaps Transocean and Halliburton), but the Congressional testimony just given by top executives raises new concerns about other deepwater wells.

Corporate solidarity fell by the wayside as the big shots from Exxon Mobil, Chevron, Shell and ConocoPhillips distanced themselves from BP. Rex Tillerson of Exxon Mobil was especially blunt about BP’s screw-ups,  seeking perhaps to drive down the company’s stock price further and facilitate a rumored takeover bid.

Yet what was even more amazing was the admission by the executives that, four decades after the 1969 Santa Barbara accident that demonstrated the risks of offshore drilling, their companies are still not in a position to handle such occurrences. “We are not well-equipped to deal with them,” Tillerson said matter-of-factly. “There will be damage.” This came on top of revelations by the House Energy and Commerce Committee that the spill response plans of the oil majors were cookie-cutter documents with outdated and irrelevant information.

All this is a far cry from the rosy scenarios and confident assurances that the industry has been peddling to the public for decades and selling to gullible (or indifferent) federal regulators. Here was the chief executive of the world’s largest oil corporation in effect admitting that it is helpless when something big goes wrong at one of its wells beneath the sea.

As satisfying as is to beat up on BP for the current catastrophe, the culpability extends to the entire industry. None of the oil giants took safety seriously, and by all rights they should all be digging into their corporate pockets to clean up the mess and compensate the people of the Gulf Coast.

One hundred billion dollars: that has a better ring to it.

Would a Defunct BP Make Good On Its Liabilities?

Wednesday, June 9th, 2010

The BP deathwatch has begun. It’s not trial lawyers or environmental activists who pose an immediate threat to the continued existence of the oil giant, but rather the market. BP’s stock price is down about 50 percent since the beginning of the Gulf of Mexico disaster — a loss of more than $80 billion in capitalization — and there is rising speculation about a takeover by another petroleum behemoth such as Shell or Exxon Mobil.

The demise of a company with a track record as sullied as that of BP is no cause for mourning, but there is a serious risk that its dismantling would be done in a way that limits the resources available for cleanup and compensation in the gulf. Mainstream analysts such as those at Credit Suisse now estimate the company’s total liability at more than $35 billion. As the damaged underwater well continues to spew oil — and more indications of BP’s negligence come to light — the final dimensions of the financial blowout are likely to be much larger. BP’s current or future owners are not likely to part with that kind of money without a fight.

One maneuver they might consider is to break up the company. The New York Times is reporting that investment bankers are already working on scenarios in which BP would submit a prepackaged bankruptcy filing and split off a separate entity that would be saddled with the liabilities and given limited assets to make good on them.

Such attempts to shield assets from massive environmental liabilities are not unprecedented. In the 1980s Johns-Manville, the world’s leading producer of asbestos, restructured itself, changed its name, and then filed for bankruptcy in the face of more than 16,000 lawsuits brought by victims of asbestos disease. Mining company Asarco was accused of using a 2005 Chapter 11 filing to reduce its financial responsibility for cleaning up nearly 100 Superfund toxic waste sites.

There are also troublesome precedents that don’t involve bankruptcy filings. After taking over Union Carbide, the company responsible for the 1984 industrial accident in Bhopal, India that killed thousands, Dow Chemical disavowed any liability. After being hit with $5 billion in punitive damages in connection with the Exxon Valdez oil spill, Exxon resisted paying for more than a decade and was finally rewarded when the U.S. Supreme Court slashed the judgment.

What, then, needs to be done to prevent BP from evading its full obligations related to the present disaster? The ideal course of action would be for the federal government to seize enough of the company’s assets in the United States to cover its expected obligations. This is what the Seize BP movement is already demanding.

Such an aggressive action would probably run afoul of Supreme Court rulings such as the 1952 decision regarding President Truman’s seizure of steel mills during a strike by steelworkers. On the other hand, the government could use the fact that BP is on probation in connection with criminal charges relating to workplace safety and environmental violations in Texas and Alaska to justify a seizure. The likelihood that BP has violated laws in connection with the gulf disaster is quite high, meaning that it is technically in violation of its probation. A seizure of its property would be the equivalent of arresting an individual who violates probation.

Another alternative would be not to seize assets but to force the company to pledge enough of them to cover likely liabilities. If BP was later unable or unwilling to pay what the courts or government agencies mandate — a possibility that is more likely in light of the fact that the company is self-insured — those assets could then be taken.

It turns out that BP and other companies drilling for oil on U.S. public lands or offshore already have to make a commitment of the sort by posting bonds with the Interior Department. The bonds are meant to cover reclamation of the site after the drilling is completed; i.e., returning it to some approximation of its original condition, which in the case of offshore wells includes the removal of the drilling platform. According to a GAO report published earlier this year, the bond requirements are quite low and in some cases have not changed in decades. A company such as BP is required to post only $3 million for all of its drilling activities in the Gulf of Mexico.

The Oil Pollution Act of 1990 also requires that companies provide proof — whether in the form of insurance coverage or a bond — that they can meet their financial obligations relating to a spill, but as has been widely discussed, the liability limits mandated by the act are grossly inadequate.

The current catastrophe in the gulf demonstrates that the potential liabilities from an offshore drilling accident, especially the deepwater variety, are enormous. At the very least, the federal government should vastly increase the bonding requirements — or other ways of reserving assets — beginning immediately and including BP. Knowing that a substantial portion of their resources are immediately at risk might make oil companies think twice about employing reckless drilling practices.

The (Investment) House Always Wins

Thursday, April 22nd, 2010

Goldman Sachs, which has long prided itself on being one of the smartest operators on Wall Street, has apparently decided that the best way to defend itself against federal fraud charges is to plead incompetence. The firm is taking the position that it is not guilty of misleading investors in a 2007 issue of mortgage securities because it allegedly lost money – more than $90 million, it claims – on its own stake in the deal.

In fact, Goldman would have us believe that it took a bath in the overall mortgage security arena. This story line is a far cry from the one put forth a couple of years ago, when the firm was being celebrated for anticipating the collapse in the mortgage market and shielding itself – though not its clients. In a November 2007 front-page article headlined “Goldman Sachs Rakes in Profit in Credit Crisis,” the New York Times reported that the firm “continued to package risky mortgages to sell to investors” while it reduced its own holdings in such securities and bought “expensive insurance as protection against further losses.” In 2007 Goldman posted a profit of $11.6 billion (up from $9.5 billion the year before), and CEO Lloyd Blankfein took home $70 million in compensation (not counting another $45 million in value he realized upon the vesting of previously granted stock awards). Some bath.

Goldman is not the only one rewriting financial history. Many of the firm’s mainstream critics are talking as if it is unheard of for an investment bank to act contrary to the interests of its clients, as Goldman is accused of doing by failing to disclose that it allowed hedge fund operator John Paulson to choose a set of particularly toxic mortgage securities for Goldman to peddle while Paulson was betting heavily that those securities would tank.

In fact, the history of Wall Street is filled with examples in which investment houses sought to hoodwink investors. Rampant stock manipulation, conflicts of interest and other fraudulent practices exposed by the Pecora Commission prompted the regulatory reforms of the 1930s. Those reforms reduced but did not eliminate shady practices. The 1950s and early 1960s saw a series of scandals involving firms on the American Stock Exchange that in 1964 inspired Congress to impose stricter disclosure requirements for over-the-counter securities.

The corporate takeover frenzy of the 1980s brought with it a wave of insider trading scandals. The culprits in these cases involved not only independent speculators such as Ivan Boesky, but also executives at prominent investment houses, above all Michael Milken of Drexel Burnham. Also caught in the net was Robert Freeman, head of risk arbitrage at Goldman, who in 1989 pleaded guilty to criminal charges. When players such as Freeman and Milken traded on inside information, they were profiting at the expense of other investors, including their own clients, who were not privy to that information.

During the past decade, various major banks were accused of helping crooked companies deceive investors. For example, in 2004 Citigroup agreed to pay $2.7 billion to settle such charges brought in connection with WorldCom and later paid $1.7 billion to former Enron investors. In 2005 Goldman and three other banks paid $100 million to settle charges in connection with WorldCom.

In other words, the allegation that Goldman was acting contrary to the interest of its clients in the sale of synthetic collateralized debt obligations was hardly unprecedented.

What’s not getting much attention during the current scandal is that in late 2007 Goldman had found another way to profit by exploiting its clients, though in this case the clients were not investors but homeowners.

Goldman quietly purchased a company called Litton Loan Servicing, a leading player in the business of servicing subprime (and frequently predatory) home mortgages. “Servicing” in this case means collecting payments from homeowners who frequently fall behind in payments and are at risk of foreclosure. As I wrote in 2008, Litton is “a type of collection agency dealing with those in the most vulnerable and desperate financial circumstances.” At the end of 2009, Litton was the 4th largest subprime servicer, with a portfolio of some $52 billion (National Mortgage News 4/5/2010).

Litton has frequently been charged with engaging in abusive practices, including the imposition of onerous late fees that allegedly violate the Real Estate Settlement Procedures Act. It has also been accused of being overly aggressive in pushing homeowners into foreclosure when they can’t make their payments.

Many of these complaints have ended up in court. According to the Justia database, Litton has been sued more than 300 times in federal court since the beginning of 2007. That year a federal judge in California granted class-action status to a group of plaintiffs, but the court later limited the scope of the potential damages, resulting in a settlement in which Litton agreed to pay out $500,000.

Meanwhile, individual lawsuits continue to be filed. Many of the more recent ones involve disputes over loan modifications. Complaints in this area persist even though Litton is participating in the Obama Administration’s Home Affordable Modification Program and is thus eligible for incentive payments through an extension of the Toxic Assets Relief Program.

There seems to be no end to the ways that Goldman manages to make money from toxic assets.  On Wall Street, as in Las Vegas, the house always wins.

BONUS FEATURE: Federal regulation of business leaves a lot to be desired, but it is worth knowing where to find information on those enforcement activities that are occurring. The Dirt Diggers Digest can help with our new Enforcement page, which has links to online enforcement data from a wide range of federal agencies. The page also includes links to inspection data, product recall announcements and lists of companies debarred from doing business with the federal government.

A “Poster Child for Corporate Malfeasance”

Thursday, March 25th, 2010

One of the cardinal criticisms of large corporations is that they put profits before people. That tendency has been on full display in the recent behavior of transnational mining giant Rio Tinto, which has shown little regard for the well-being not only of its unionized workers but also of a group of executives who found themselves on trial for their lives in China.

The China story began last July, when four company executives — including Stern Hu, a Chinese-born Australian citizen — were arrested and initially charged with bribery and stealing state secrets, the latter offense carrying a potential death penalty. The charges, which most Western observers saw as trumped up, were made during a time of increasing tension between Rio and the Chinese government, one of the company’s largest customers, especially for iron ore.

Earlier in the year, debt-ridden Rio had announced plans to sell an 18 percent stake in itself to Chinalco, the state-backed Chinese aluminum company, for about $20 billion. Faced with strong shareholder and political opposition, Rio abandoned the deal in June 2009. The arrests may have been retaliation by the Chinese for being denied easier access to Australia’s natural riches.

Although Rio claimed to be standing by its employees, the case did not curb the company’s appetite for doing business with the deep-pocketed Chinese. Rio continued to negotiate with Beijing on large-scale iron ore sales. It seems never to have occurred to the company to terminate those talks until its people were freed. In fact, only weeks after the arrests, Rio’s chief executive Tom Albanese was, as Canada’s Globe and Mail put it on August 21, “trying to repair his company’s troubled relationship with China.”

Before long, Rio was negotiating with Chinalco about participating in a copper and gold mining project in Mongolia. One thing apparently led to another. In March 2010 — after its still-imprisoned employees had been officially indicted and were about to go on trial — Rio announced that it and Chinalco would jointly develop an iron ore project in the West African country of Guinea.

When that trial began a couple of weeks later, the Rio managers admitted guilt, but not to the more serious charge of stealing trade secrets. Instead, they said they had engaged in bribery — but as recipients rather than payers. While the four defendants may have been guilty of some impropriety, it is likely that the admissions were a calculated move to gain a lighter sentence in a proceeding whose outcome was predetermined. And that was the case in large part because their employer decided that its business dealings were more important than demanding justice for its employees.

Rio is no more interested in justice when it comes to its operations outside China. It has been accused of human rights violations in countries such as Indonesia and Papua New Guinea. And it has a track record of exploiting mineworkers in poor countries such as Namibia and South Africa while busting unions in places such as Australia. Recently, Rio showed its anti-union colors again in the United States.

On January 31 its U.S. Borax subsidiary locked out more than 500 workers at its borate mine in Kern County, California. The workers, members of Local 30 of the International Longshore & Warehouse Union had the audacity of voting against company demands for extensive contract concessions. The company wasted no time busing in replacement workers.

In a press release blaming the union for the lockout, U.S. Borax complained that ILWU members earned much more than workers at the company’s main competitor Eti Maden. The release conveniently fails to mention that Eti Maden’s operations are in Turkey.

Also missing from the company’s statement is the fact that the biggest driver of demand for boron – a material used in products ranging from glass wool to LCD screens – is the Chinese market. If U.S. Borax busts the ILWU in a way that keeps down boron prices, then the ultimate beneficiary may be Rio Tinto’s friends in China.

It is no surprise that mining industry critic Danny Kennedy once wrote that Rio Tinto “could be a poster child for corporate malfeasance.”

Blurring the Bailouts

Wednesday, March 4th, 2009

This is the time of year when most U.S. public companies file their 10-K annual reports with the Securities and Exchange Commission, which in turn makes them available to the public through its IDEA web page (formerly EDGAR). These reports include sections in which management discusses the firm’s performance over the past year and tries to put the best face on the financial results.

Many companies are, of course, reporting disappointing results this time around, but perhaps the most awkward filings are the ones being made by companies that had to get bailed out by the federal government to get through the year. Let’s take a look at how they are talking about being wards of the state.

We don’t yet know how General Motors is dealing with this challenge, since it notified the SEC that its 10-K will be late. So let’s focus on two of the other biggest supplicants: Citigroup and AIG. The first lesson, apparently, is not to use the term “bailout” when talking about being bailed out. The term appears nowhere in either firm’s 10-K.

Citi instead employs the bland statement that “the Company benefited from substantial U.S. government financial involvement.” Substantial, indeed. Citi matter-of-factly describes the capital infusions, loss-sharing agreements and loan guarantees through which the feds have made a commitment potentially costing several hundred billion dollars to keep the giant bank holding company afloat. With all the references to UST and USG, a casual reader might think Citi was referring to conventional investors rather than the U.S. Treasury and the U.S. Government.

AIG adopts a more narrative approach, writing that: “By early Tuesday afternoon on September 16, 2008, it was clear that AIG had no viable private sector solution to its liquidity issues. At this point, AIG received the terms of a secured lending agreement that the NY Fed was prepared to provide.” This does not quite capture the gravity of events that the New York Times, for example, reported on in a front-page story headlined: FED IN AN $85 BILLION RESCUE OF AN INSURER NEAR FAILURE; U.S. GETS CONTROL; POLICY REVERSAL ARISES FROM GROWING FEAR OF GLOBAL CRISIS.

Aside from downplaying the gravity of their bailouts, the Citi and AIG 10-Ks are less than lucid on what led up to their troubles. In describing conditions in 2008 that led to a $27 billion net loss, Citi takes no responsibility. The causes, instead, are said to have been “continued losses related to the disruption in the fixed income markets, higher consumer credit costs, and a deepening of the global economic slowdown.” Contrast this to its 10-K of two years ago, which stated: “We enter 2007 with good business momentum, as we expect to see our investment initiatives generate increasing revenues, and are well-positioned to gain from our balanced approach to growth and competitive advantages.” In other words, when things are going well, management strategy gets the credit; when the red ink begins to gush, impersonal market forces are to blame.

AIG, which reported an astounding $99 billion net loss for the year, also paints itself as a victim of conditions outside its control, saying “the 2008 business environment was one of the most difficult in recent decades.” The difference with Citi is that AIG’s management is blunter about the continuing dismal prospects for the company. The notes to its financial statements include a section entitled “Going Concern Considerations” that raises the possibility that the company may need yet more government assistance and that, even then, its survival is far from a sure thing.

Perhaps the most telling parts of the reports are the sections in which the companies have to disclose significant legal proceedings in which they are involved. It takes more than 7,000 words for AIG to summarize all of its legal problems, including about a dozen securities fraud class action cases. Citi engages in a similar recitation.

While the two companies are still in a state of denial about their responsibility both for their own circumstances and for the larger financial crisis (as illustrated in the image above from Citi’s website), the existence of these legal proceedings may see to it that they are eventually held accountable for their financial misdeeds.