Phil Mattera

A Culture of Corruption

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

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

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

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

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

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

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

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

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

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

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

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

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

Imposing the Ultimate Punishment

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

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

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

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

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

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

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

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

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

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

Putting Apple in Its Place

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

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

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

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

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

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

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

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

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

Generic Price Gouging

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

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

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

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

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

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

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

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

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

Eliminating All the Prison Privateers

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

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

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

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

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

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

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

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

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

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

The Real Crime Wave

Donald Trump’s recent economic policy address portrayed an economy crippled by “overregulation.” This came on the heels of his convention acceptance speech depicting a country afflicted by a wave of street crime perpetrated by “illegal immigrants.”

As with most of Trump’s statements, these comments took real issues and distorted them to the point that that they no longer had much resemblance to reality. There is a regulation crisis in the United States, but the problem is inadequate business oversight, not an excess. And there is a crime wave taking place, but the culprits are not immigrants but rather rogue corporations.

It was particularly odd that Trump chose to mention the auto industry in his rant on regulation. It has apparently not come to his attention that just about all the major carmakers are embroiled in some of the biggest safety and compliance scandals in the industry’s history.

Volkswagen exhibited contempt for the law in its long-standing scheme to circumvent auto emission standards. Since the brazen cheating came to light the company has been scrambling to make amends. It had to agree to spend nearly $15 billion (mostly to compensate customers) to resolve some of its legal entanglements, and it may still face criminal charges with larger potential penalties. While the amounts may seem high, VW is lucky it is being allowed to remain in business.

Then there’s the Japanese company Takata, whose airbags have turned out to be deadly and now is reported to have routinely manipulated test results of its products. General Motors had to pay a $900 million fine and Toyota $1.2 billion, both for safety reporting deficiencies. Electric car producer Tesla, which has taken advantage of a lax regulatory regarding self-driving technology, now faces scrutiny in the wake of several serious accidents involving vehicles operating on autopilot.

Automobiles are far from the only industry with serious regulatory compliance problems. In case we had forgotten the severity of the 2010 Deepwater Horizon catastrophe in the Gulf of Mexico, BP provided a reminder recently when it estimated that its legal and clean-up costs will reach more than $61 billion.

And we must not leave out the banks. In a report I put out in June to accompany the expansion of Violation Tracker, I found that since the beginning of 2010 there have been 144 cases settled against major banks with penalties in excess of $100 million each. In all, the banks have had to pay $160 billion in these cases to resolve allegations relating to a wide range of misconduct: mortgage abuses, defrauding of investors, manipulation of foreign exchange markets and interest rate benchmarks, assisting tax evasion, and much more.

Rampant corporate misconduct is one of the missing issues of the presidential race, especially since Bernie Sanders dropped out. Hillary Clinton’s website has some decent language on the subject but she has hardly made it a central issue in her campaign. In her convention acceptance speech she presented an upbeat picture of American business, and her reference to the auto industry was not to criticize its misconduct but to celebrate that it “just had its best year ever.”

Neither Clinton nor Trump can be expected to be a crusader for corporate accountability, but we need to make sure that whoever is the next occupant of the White House feels pressure to rein in and not unleash big business.

Insurers Show Their True Colors

healthcare-profits One of the key building blocks of the Affordable Care Act was the notion that insurance companies would compete with one another to offer good deals to the uninsured once that population was required to purchase coverage. That captive market is not working out as well as hoped.

Just the other day, Aetna became the last of the five major national carriers to project a loss on ACA business for 2016 while announcing the cancellation of a planned expansion of its participation in the ACA state exchanges and a reevaluation of its current involvement. This came in the wake of recent news that UnitedHealth and Humana would also be cutting back on their exchange offerings.

These carriers attributed their moves to higher than expected medical costs among exchange participants. For all the talk about a reformed health insurance industry, the companies still operate according to a perverse dynamic. They make money when more people don’t seek healthcare services. The insurers can’t get away with many of the tricks they used in the past to deny coverage, but they can still walk away from certain market segments such as ACA plans when profits are not as high as they would like.

The steps by Aetna and the others will intensify what is already a dwindling amount of competition in some of the state exchanges. Several are in a situation in which only one insurer is expected to offer marketplace plans. The result is a kind of single payer situation, though not in the good sense.

All of this is happening while the major insurers have been trying to diminish competition in another way — by trying to merge with one another. Aetna has been seeking to acquire Humana, and Anthem wants to join forces with Cigna. The two proposed deals, totaling about $85 billion, would reduce the number of major players to three.

Last month, the Justice Department and multiple states filed challenges to the two proposed mergers. It is unclear to what extent Aetna’s announcement about a pullback in the exchanges is meant to put pressure on the Obama Administration to back off from its opposition to the Humana deal.

What is clear is that Aetna has a long history of using hard-ball tactics dating back to its purchase of the notorious HMO U.S. Healthcare two decades ago. Aetna tried to apply some of the worst features of managed care — including bare-bones policies — to its health insurance business and ended up with a wave of litigation and regulatory violations. An attempt by plaintiff lawyers to bring a massive tobacco-industry-type case against the industry failed, but Aetna did have to pay $470 million to settle a class-action suit brought by physicians over inadequate payments.

Aetna’s track record was one of the main pieces of evidence showing the folly of the decision by the Obama Administration and Congressional Democrats to shun single payer (or even the public option) and embrace the big insurers. That Faustian choice is coming back to haunt the Dems, who are now trying to resurrect the public option. It may be too late.

Fighting Wage Theft in the Senate Cafeterias

Trade deals tend to be the focus of many discussions these days about stagnant wages, but it’s important not to forget the role played by old-fashioned repressive management. Such a reminder just emerged in a case brought by the Labor Department’s Wage and Hour Division involving lousy working conditions at the very heart of U.S. policymaking.

DOL found that Restaurant Associates and its subcontractor Personnel Plus have been violating the McNamara-O’Hara Service Contract Act by improperly classifying foodservice workers in U.S. Senate cafeterias in order to pay them less than their proper wage. The employer was also found to be engaging in wage theft by requiring workers to begin their duties prior to scheduled starting times without compensation. DOL announced that hundreds of the workers will receive back pay in excess of $1 million.

Credit for the case belongs largely to the workers themselves, who for the past two years have been agitating about unfair working conditions with the help of Good Jobs Nation (which has no organizational relationship to my employer Good Jobs First).

In 2015 workers staged a series of strikes, prompting friendly senators (including Bernie Sanders) to put pressure on Restaurant Associates to agree to a modification of its contract requiring wage increases. Pay rates for job categories were boosted, but at the same time the company forced many workers into lower categories. The Washington Post reported on the underhanded practices back in January, citing as an example a cook who should have seen his pay jump to $17.45 an hour (from $12.30), but he was reclassified as a “food service worker” with a wage of $13.80.

Restaurant Associates is a subsidiary of Compass Group, one of the giants of the international foodservice industry. The UK-based corporation has been involved in numerous other controversies about its labor practices. In 2014 Compass Group USA paid $5 million to settle a wage-and-hour class action case. Earlier this year, UNITE HERE filed unfair labor practice charges against a Compass unit called Eurest for its actions during an organizing drive by foodservice workers at Intel’s headquarters in California.

There are other blemishes on its record. In 2012 New York Attorney General Eric Schneiderman announced that Compass Group USA would pay $18 million to settle allegations that it overcharged school lunch programs throughout the state. In 2015 Chartwells, a Compass company, paid $19.4 million to settle another school lunch case, this one in the District of Columbia in which the allegations included poor food quality as well as excessive costs.

Some member of the Senate are now calling for the termination of the Restaurant Associates contract. Deciding what should take its place is not easy. All of the other major foodservice companies have their own accountability challenges. And conditions were certainly not better before the Senate began contracting out the management of its cafeterias in 2008. It used to be known as the “last plantation” because of the poor treatment of workers.

At the very least, the Senate cafeteria workers need a strong union like that enjoyed by their counterparts at the House facilities. The reason they don’t is complicated and involves inter-union relationships. Good Jobs Nation deserves credit for helping bring about the DOL settlement, but a solid collective bargaining agreement would be even better.

Defending Disclosure

In 2012 proponents of financial deregulation managed to generate bipartisan support for a dubious piece of legislation that became the Jumpstart Our Business Startups (JOBS) Act. Among the provisions of the law was the requirement that the Securities and Exchange Commission review the provisions of Regulation S-K, which determines what publicly traded companies need to disclose about their finances and their operations.

Presumably, this process was meant to get the SEC to weaken its transparency rules, but the Commission seems to be approaching the issue in an even-handed manner. In April it issued a document called a Concept Release that reviewed the various issues and asked for comments from the public.

Quite a few progressive policy groups have responded with comments urging the SEC to tighten rules regarding the disclosure of foreign subsidiaries. In recent years, many corporations have been using a loophole in Regulation S-K to avoid listing entities that are likely to be vehicles for engaging in large-scale tax dodging.

On the last day of the comment period, my colleagues and I at Good Jobs First and the Corporate Research Project submitted our own comments that support that position on foreign subsidiaries but also address several other disclosure issues. What follows are excerpts from those comments.

Subsidy Reporting. A key piece of information about a registrant’s finances has been missing from SEC filings, thus giving investors an incomplete picture of a company’s condition: the extent to which the firm is dependent on economic development incentives provided by state and local governments and other forms of financial assistance from the federal government.

It is estimated that companies receive a total of about $70 billion a year in state and local aid, while federal assistance is thought to total about $100 billion. Our Subsidy Tracker database contains information on more than half a million such awards with a total value of more than $250 billion.

For some companies (including their subsidiaries) the cumulative amount of such assistance is substantial. In Subsidy Tracker there are more than 60 firms that have each been awarded $500 million in assistance, and for more than half of those the amount exceeds $1 billion. The most heavily subsidized company, Boeing, has been awarded more than $14 billion. Other companies, including start-ups, may receive sums that are smaller but which account for a larger portion of their cash flow or assets. There are many cases in which a company’s total awards reach a level of materiality.

Investors should know to what extent a company is depending on subsidies — whether in the form of tax credits, tax abatements, cash grants, or low-cost loans. This is vital information for several reasons. First, many of the awards are contingent on performance requirements such as job creation and can be reduced or rescinded if the firm fails to meet its obligations. Second, investors currently face undisclosed political risk, since some state and local subsidy programs cause a significant fiscal burden and may be curtailed at times of budget stress.

We urge the SEC to use this review of Regulation S-K to correct the long-standing gap in financial disclosure relating to government assistance. Companies should be required to disclose both aggregate subsidy awards and breakdowns by type and jurisdiction.

Legal Proceedings. Like subsidies, corporate regulatory violations and related litigation have grown in size and significance. Violation Tracker, a database created by the Corporate Research Project of Good Jobs First, has collected data on more than 100,000 such cases since the beginning of 2010 with total penalties of about $270 billion. The database currently contains information on cases from 27 federal regulatory agencies and the Department of Justice.

Also as with subsidies, some corporations are significantly impacted by these penalties. In Violation Tracker there are 52 parent companies with aggregate penalties in excess of $500 million, including 26 with more than $1 billion. The most heavily penalized companies are Bank of America ($56 billion), BP ($36 billion) and JPMorgan Chase ($28 billion).

The Item 103 requirement that registrants report on material legal proceedings results in disclosure of the largest cases, but some companies fail to provide adequate details on other penalties that may not be in the billions but are still substantial. Since regulatory agencies and the Justice Department base their penalty determinations in part on a company’s past actions, companies omitting adequate data about their regulatory track record are denying investors information that may indicate a heightened risk for much larger penalties in the future.

At the very least, the Commission should do nothing to weaken the provisions of Item 103 and related provisions requiring reporting about regulatory matters and legal proceedings. It is also worth considering whether changes are needed in the Instruction 2 language allowing companies to omit cases with potential penalties that do not exceed ten percent of the firm’s current assets. Losses at or close to the ten percent level could have severe consequences for many companies and pose the kind of risk investors deserve to know about.

Current disclosures based on materiality should be expanded to also require registrants to indicate which of their cases involve repeat violations of specific regulations. Such recidivist behavior will be a matter of concern for many investors.

Subsidiaries. Good Jobs First joins with the numerous other organizations that are urging the Commission to strengthen rules regarding the disclosure of offshore subsidiaries that may be involved in risky international tax strategies.

We believe that better disclosure is necessary with regard to domestic subsidiaries as well. In the course of our work on the Subsidy Tracker and Violation Tracker databases, we have looked at hundreds of the Exhibit 21 subsidiary lists included in 10-K filings. We make extensive use of these lists in the parent-subsidiary matching system we developed to link the companies named in individual subsidy awards and violations to a universe of some 3,000 parent corporations. This enables us to display subsidy and penalty totals for the parent companies and thus provide our users, including investors, with what we think is valuable information about the finances and compliance records of these companies.

When looking at these Exhibit 21 lists we have seen a great deal of inconsistency. Using the Item 601(b)(21)(ii) exception, some companies are listing few if any subsidiaries, whether domestic or foreign. We find it hard to believe that any large corporation has no subsidiary of significance. The omission of subsidiary names makes it more likely that we will miss an important linkage in our databases relating to a significant subsidy award or violation. It also means that investors doing their own analyses may be working with incomplete information.

In addition to making sure that all registrants provide complete subsidiary reporting, the Commission should mandate that the information is the Exhibit 21 lists be presented in a standardized format. Currently, some companies list all subsidiaries in alphabetical order, while others group them by country. Some companies list second-tier and other levels of subsidiaries under their immediate parents, while others place the various tiers in one alphabetical list or exclude the lower levels entirely. Whichever standardized format is mandated should also have to be made available in machine-readable form.

Employees. Another area of widespread inconsistency is in the reporting on employees. Numerous companies seem to be omitting this piece of information, and a larger number have abandoned the traditional practice of indicating how many of the employees are based in the United States and how many are at foreign operations. An even smaller number of firms maintain the once widespread practice of providing information on collective bargaining.

The size of a company’s workforce is information that investors deserve to know. Given the widespread discussion in the political arena about offshore outsourcing and the talk of compelling firms to bring jobs back to the United States, the foreign-domestic breakdown is of great importance to investors. They should also be told about the extent to which both types of employees are covered by collective bargaining agreements.

And given the growing controversy over employment practices and the potential for stricter regulations, companies should also be required to provide details on the composition of their labor force, including the number of workers who are part-timers, temps or independent contractors.

Racism in Corporate America

Recent events have brought increasing attention to the persistence of racism in American life. While policing and criminal justice are currently in the spotlight, there are many more institutions that continue to exhibit systemic bias and must be held accountable.

Among them is Corporate America, which usually says the right things but often harbors dirty secrets. For example, African-American motorists stopped by police for dubious reasons – sometimes with deadly consequences – may have already been victims of racism when they purchased the vehicle they are driving. During the past few years, several major auto financing companies have paid tens of millions of dollars to resolve accusations that they routinely charged higher interest rates to minority customers.

In 2013 the Consumer Financial Protection Bureau (CFPB) announced that Ally Financial (formerly GMAC) would pay $80 million in consumer relief and an $18 million penalty to settle such a case involving more than 235,000 minority borrowers. In similar cases in 2015, American Honda Finance Corporation agreed to pay $24 million in restitution and Fifth Third Bank was required to pay $18 million.

Racial discrimination in commerce is not limited to auto loans. It’s well known that major mortgage lenders steered minority borrowers into predatory mortgages in the period leading up to the financial meltdown and that many of those customers ended up losing their homes. In 2011 Countrywide Financial (which by that time had been taken over by Bank of America) had to pay $335 million to resolve allegations of racial discrimination. The following year, Wells Fargo paid $234 million and SunTrust $21 million in their own mortgage discrimination cases.

Since the beginning of 2010, ten additional banks and mortgage brokerage firms have settled racial discrimination cases brought by the CFPB and the Civil Rights Division of the Justice Department. Race accounted for nearly all of the high-penalty discrimination cases included in the recent expansion of Violation Tracker. There are also dozens of cases involving discrimination based on nationality, gender, age, disability, etc. Among the major corporations involved in such cases in recent years are McDonald’s, IBM, Carnival cruise lines, Continental Airlines (now part of United Continental) and Greyhound bus lines. These don’t cover workplace discrimination cases, which we are still collecting.

Along with matters explicitly involving racial bias, the CFPB has brought numerous cases against payday lenders and other predatory financial services firms whose unsavory practices disproportionately harm African-Americans and other minorities.

While corporate discrimination does not involve the life and death issues of unequal policing, it is another aspect of systemic racism that must be eradicated.