Archive for December, 2014

The 2014 Corporate Rap Sheet

Wednesday, December 31st, 2014

gotojailThe bull market in corporate crime surged in 2014 as large corporations continued to pay hefty fines and settlements that seem to do little to deter misbehavior in the suites. Payouts in excess of $1 billion have become commonplace and some even reach into eleven figures, as seen in the $16.65 billion settlement Bank of America reached with the Justice Department to resolve federal and state claims relating to the practices of its Merrill Lynch and Countrywide units in the run-up to the financial meltdown.

This came in the same year in which BofA reached a $9.3 billion settlement with the Federal Housing Finance Agency concerning the sale of deficient mortgage-backed securities to Fannie Mae and Freddie Mac and in which the Consumer Financial Protection Bureau ordered the bank to pay $727 million to compensate consumers harmed by deceptive marketing of credit card add-on products.

The BofA cases helped boost the total penalties paid by U.S. and European banks during the year to nearly $65 billion, a 40 percent increase over the previous year, according to a tally by the Boston Consulting Group reported by the Wall Street Journal.

Among the other big banking cases were the following:

  • France’s BNP Paribas pleaded guilty to criminal charges and paid an $8.9 billion penalty to U.S. authorities in connection with charges that it violated financial sanctions against countries such as Sudan and Iran.
  • Citigroup paid $7 billion to settle federal charges relating to the packaging and sale of toxic mortgage-backed securities.
  • U.S. and European regulators fined five banks — JP Morgan Chase, Citigroup, HSBC, Royal Bank of Scotland and UBS — a total of more than $4 billion after accusing them of conspiring to manipulate the foreign currency market.
  • Credit Suisse pleaded guilty to one criminal count of conspiring to aid tax evasion by U.S. customers and paid a penalty of $2.6 billion.
  • JPMorgan Chase paid $1.7 billion to victims of the Ponzi scheme perpetuated by Bernard Madoff to settle civil and criminal charges that it failed to alert authorities about large numbers of suspicious transactions made by Madoff while it was his banker.

Banks were not the only large corporations that found themselves in legal trouble during the year. The auto industry faced a never-ending storm of controversy over its safety practices. Toyota was hit with a $1.2 billion criminal penalty by U.S. authorities for concealing defects from customers and regulators. The National Highway Traffic Safety Administration fined General Motors $35 million (the maximum allowable) for failing to promptly report an ignition switch defect that has been linked to numerous deaths. Hyundai and its subsidiary Kia paid $300 million to settle allegations that they misstated the greenhouse gas emissions of their vehicles.

Toxic dumping. Anadarko Petroleum paid $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.

Pipeline safety. The California Public Utilities Commission proposed that $1.4 billion in penalties and fined be imposed on Pacific Gas & Electric in connection with allegations that the company violated federal and state pipeline safety rules before a 2010 natural gas explosion that killed eight people.

Contractor fraud. Supreme Group BV had to pay $288 million in criminal fines and a $146 million civil settlement in connection with allegations that it grossly overcharged the federal government while supplying food and bottled water to U.S. personnel in Afghanistan.

Bribery. The French industrial group Alstom consented to pay $772 million to settle U.S. government charges that it bribed officials in Indonesia and other countries to win power contracts. Earlier in the year, Alcoa paid $384 million to resolve federal charges that it used a middleman to bribe members of Bahrain’s royal family and other officials to win lucrative contracts from the Bahraini government.

Price-fixing. Japan’s Bridgestone Corporation pleaded guilty to charges that it conspired to fix prices of anti-vibration rubber auto parts and had to pay a criminal fine of $425 million.

Defrauding consumers. AT&T Mobility had to pay $105 million to settle allegations by the Federal Trade Commission and the Federal Communications Commission that it unlawfully billed customers for services without their prior knowledge or consent.

The list goes on. Whether the economy is strong or weak, many corporative executives cannot resist the temptation to break the law in the pursuit of profit.

Note: For fuller dossiers on some of the companies listed here, see my Corporate Rap Sheets.

Corporate Subsidies and Economic Inequality

Tuesday, December 16th, 2014

inequality_graphicThe intensification of economic inequality, one of the defining issues of our times, has many causes, ranging from the weakening of labor unions to the decimation of inheritance taxes. In Tax Breaks and Inequality, a report my colleagues and I at Good Jobs First have just published, we argue that another factor belongs on the list: subsidies given by state and local governments to large corporations in the name of economic development.

This conclusion is based on a mash-up of data from our Subsidy Tracker with two groups of corporations: firms linked to members of the Forbes 400 list of the wealthiest Americans and a list we created of large low-road employers.

The first part of the report is in effect a rebuttal to Forbes, which in this year’s edition of the 400 plays up those individuals who supposedly built fortunes entirely on their own (rather than through inheritance). We show that many of many of the super-rich – both those Forbes calls “bootstrappers” and those labeled “silver spooners” – received help of another kind: government assistance to the corporations through which they got filthy rich.

Development subsidies – in the form of business property tax abatements, corporate income tax credits, sales tax exemptions, training grants, infrastructure improvements and the like – are supposed to promote job creation and broad-based economic growth. Yet they are often awarded to profitable, growing companies that do not need tax breaks to finance a project, meaning that the subsidies serve mainly to increase profits. When these companies are owned in whole or substantial part by wealthy individuals or families, especially the billionaires in the 400, the subsidies are serving to enlarge those private fortunes — directly in privately held firms or through stock price appreciation and dividends in publicly traded ones.

We find that more than one-third of the 258 companies currently linked to members of the Forbes list are substantial recipients of subsidies. Ninety-nine of them have received awards totaling $1 million or more. The combined value of those awards is $19.4 billion, or an average of $196 million per company.

Five of the 99 firms have been awarded more than $1 billion in subsidies, including Intel ($5.9 billion), Nike ($2 billion), Cerner ($1.7 billion), Tesla Motors ($1.3 billion) and Berkshire Hathaway ($1.2 billion).

About one-third of the individuals on the Forbes 400 are linked to one or more of the 99 highly subsidized companies, including every one of the 11 wealthiest individuals and all but two of the top 25. These include Bill Gates, whose $81 billion fortune comes mainly from his holdings in Microsoft, which has been awarded $203 million in subsidies; Warren Buffett, whose $67 billion net worth derives from Berkshire Hathaway, which has been awarded $1.2 billion in subsidies; Larry Ellison, whose $50 billion net worth comes from Oracle, which has been awarded $18 million in subsidies; the Koch Brothers, each worth $42 billion from Koch Industries, whose subsidies total $154 million; and four members of the Walton Family, each worth more than $35 billion from Wal-Mart Stores, which has been awarded more than $161 million in subsidies.

The second part of the report looks at subsidies awarded to corporations notorious for stingy pay rates and other low-road employment practices. We identify 87 such companies that have each been awarded more than $1 million in state and local subsidies, for a total of $3.3 billion. Retailers dominate the list, with 60 firms awarded more than $2.6 billion in subsidies. Twelve firms in the hospitality sector (restaurants, hotels and foodservice companies) account for more than $245 million in subsidies. The low-wage companies with the most in subsidies are: Sears ($536 million), Amazon.com ($419 million), Cabela’s ($247 million), Convergys ($202 million), Starwood Hotels & Resorts ($166 million) and Wal-Mart Stores ($161 million).

Eight companies are both linked to members of the Forbes 400 and pay low wages. Listed in order of their subsidy totals, they are: Sears, Amazon.com, Wal-Mart, Best Buy, Bass Pro, Meijer, Menard, and Allegis Group. These are all retailers except for the staffing services company Allegis.

Subsidies are not the primary source of the Forbes 400’s wealth, but they contribute to it in a way that makes things more difficult for working families. When large corporations controlled by billionaires are given lavish taxpayer subsidies, the rest of society — especially working families — gets stuck with a larger share of the cost of essential public services. And when those subsidies go to low-road employers, they are promoting the substandard jobs that keep so many people at the bottom of the income spectrum.

By enriching those at the top and helping to impoverish those at the bottom, subsidies are part of the inequality problem rather than part of the solution.

Waterboarding and Price Gouging

Thursday, December 11th, 2014

inquisitionThe shameful revelations in the Senate Intelligence Committee report on the CIA torture program are, as the New York Times editorial board put it, “a portrait of depravity.” At the same time, they constitute one of most serious federal contracting scandals of all time.

Although it sounds like an idea dreamed up by the writers of the TV series Homeland, it turns out that the creation of the “enhanced interrogation” system was left to a pair of contractors, neither of whom, as the report states, “had any experience as an interrogator, nor did either have specialized knowledge of al-Qa’ida, a background in counterterrorism, or any relevant cultural or linguistic expertise.”

The contractors had previously worked with the U.S. Air Force’s Survival, Evasion, Resistance and Escape (SERE) school, which was created to helped military personnel deal with coercive interrogation techniques to which they might be exposed if taken prisoner by a country that did not adhere to the Geneva Convention. That was before the U.S. became one of those countries.

Referred to in the report by the pseudonyms Dr. Grayson Swigert and Dr. Hammond Dunbar, the two are psychologists whose real names are reported to be James Mitchell and John “Bruce” Jessen. Their firm, Mitchell, Jessen & Associates of Spokane, Washington, is said to have been paid $81 million by the CIA for its dubious services. The agency thoughtfully provided the firm “a multi-year indemnification agreement to protect the company and its employees from legal liability arising out of the program.”

Among the brutal methods promoted by Mitchell and Jessen was waterboarding, which the report says they described as an “absolutely convincing technique.”

It may have been the case that the water used for that torture was provided by another rogue contractor. The Justice Department recently announced that Supreme Group BV would pay $288 million in criminal fines and a $146 million civil settlement in connection with allegations that it grossly overcharged the federal government while supplying food and bottled water to U.S. personnel in Afghanistan, one of the countries where the torture took place.

Supreme Group, which is based in the Netherlands but has its main operating base in Dubai, had been awarded an $8.8 billion supply contract that was extended twice before coming to an end in 2013. The fraud was uncovered thanks to a whistleblower inside the company. Despite the egregious nature of the charges and the hefty penalties, Supreme is not, according to the Wall Street Journal, being barred from seeking new federal business.

The abuses of Mitchell and Jessen deserve to be judged more harshly than those of Supreme Group, but they are both examples of the loose morals of many of the parties selling their services to the federal government. Each in its own way serves as a rebuttal to those who extol outsourcing and the superiority of the private sector.

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New in Corporate Rap Sheets: a profile of Newmont Mining and its record of environmental and human rights controversies around the world.

Getting Even Tougher on Corporate Crime

Thursday, December 4th, 2014

blankenshipWest Virginia’s coal country is not very fond of the Environmental Protection Agency these days, but another part of the federal government — the Justice Department — is viewed more sympathetically.

The reason is that Don Blankenship, the most reviled man in the state, is being prosecuted. A federal grand jury recently handed up an indictment with four criminal counts against Blankenship (photo), the former CEO of Massey Energy, for conspiring with other managers to violate safety laws on a massive scale, thereby creating the conditions that led to the 2010 Upper Big Branch disaster, in which 29 miners were killed.

It is a rarity for criminal charges to reach the CEO level, and if any chief executive deserves such special treatment, Blankenship is the one. The indictment paints a picture of a manager who was utterly contemptuous of federal safety regulations and thus of the safety and well being of his employees. He is said to have called the use of workers for safety compliance “ridiculous” and “crazy.”

What’s really crazy is that Blankenship is not facing even more serious charges. He could theoretically spend as much as 31 years in prison, but if convicted he would likely serve much less time. The indictment makes a compelling case for the conspiracy charges, but they also detail activity that could easily be construed as homicide or at least negligent homicide. In fact, back in 2010 there were calls for Blankenship to be charged with murder.

Blankenship is emblematic of a type of business misconduct that brings about serious harm or even death to workers, consumers or the general public. This kind of brazen corporate behavior originated in the 19th Century and persisted in the 20th, especially in industries such as tobacco and asbestos. A new investigation by the Center for Public Integrity documents steps by the petroleum industry beginning in the late 1940s to suppress evidence linking benzene, an ingredient in gasoline, to leukemia.

It was not long ago that business apologists were claiming that such egregious cases of corporate irresponsibility were a thing of the past. We were made to believe that Big Business had cleaned up its act and was now taking the lead in promoting ethical and sustainable practices.

That notion took a beating in 2010, which saw not only the Upper Big Branch explosion but also the Deepwater Horizon disaster in the Gulf of Mexico brought about by the negligence of BP, Transocean and Halliburton.

This year corporate wrong-doing is once again in full bloom. At the center of it has been General Motors, the company whose dangerous Corvair compact gave rise to the modern public interest movement. Fifty years later, the new, post-bankruptcy GM is again facing charges of endangering lives through foolish cost-cutting measures.

GM, however, is not alone this time. We’re seeing negligent behavior by other automakers, including the Japanese, and now a scandal is growing over the practices of airbag supplier Takata, which is alleged to have covered up evidence that its products were rupturing and spewing metal debris at drivers. Now the company is resisting calls in the U.S. for a nationwide recall.

For a long time, the discussion on business misconduct has focused on the need to bring criminal charges against top executives. That’s a worthy goal, but we need to give more attention to the nature of the charges. A CEO who has knowingly placed human lives in danger should be prosecuted as toughly as street criminals who do the same. Potential penalties along the lines of life imprisonment may be the only thing that can deter the Don Blankenships of the world.