Phil Mattera

Will the WARN Act Become More than a Headache for Job-Cutting Employers?

The buyout industry—or private equity, as it prefers to be called—likes to give the impression that it creates new jobs rather than destroying them in the companies it takes over. Yet plant closings do occur among private equity portfolio firms, and in some cases the owners aren’t even willing to observe basic federal law governing shutdowns. The other day, the Dow Jones LBO Wire ran a story noting that several buyout firms have been sued for allegedly violating the Worker Adjustment and Retraining Notification Act, or WARN Act for short.

One of the defendants is Code Hennessy & Simmons LLC, which is charged with failing to provide the required 60 days’ warning when its portfolio company Hoboken Wood Flooring abruptly shut its doors last fall. Another case involves Reliant Equity Investors, which is said to have violated WARN when layoffs occurred recently at its company BlueSky Brands.

The Dow Jones story referred to WARN as “an obscure and somewhat toothless labor law” that was “causing headaches for buyout firms.” To reinforce the latter idea, the web version of the article was illustrated with two aspirin containers.

It is true that WARN currently leaves something to be desired in terms of effectiveness. This was made abundantly clear in a four-part series by James Drew and Steve Eder that ran in the Toledo Blade last summer. They found that the 1988 legislation “is so full of loopholes and flaws that employers repeatedly skirt it with little or no penalty.” Part of the problem is that Congress did not provide for enforcement of the act, so workers must bring their own court actions that often result in meager settlements.

While buyout firms (and other employers) would probably prefer to see the law repealed, some pro-labor members of Congress are pushing to strengthen the act. At the same time, states such as New Jersey are moving to enact their own WARN Acts that go beyond the current federal statute. (For details on both federal and state initiatives, see the website of the Sugar Law Center for Economic and Social Justice, which has worked on WARN issues since its founding in 1991.)

Layoff notification requirements by themselves are no solution for job dislocation, but given the way the economy is going, workers need all the help they can get.

Some other WARN resources:
Toledo Blade Interactive map with info on WARN lawsuits Congressional Research Service report (September 26, 2007)
GAO report (September 2003)
Directory of State Rapid Response Coordinators

Hillary Clinton is Ahead in the Wal-Mart Election

It hasn’t been a great week for Wal-Mart, what with having to back down from its demand that the family of brain-damaged former employee Debbie Shank reimburse the company’s health plan for her medical treatment.

Yet in an interview with the Financial Times published Thursday, Wal-Mart CEO Lee Scott indicated that in a wider sense the company is doing well:

Mr Scott expressed satisfaction that in spite of the union campaign, Wal-Mart’s record had not become an issue in the Democratic primaries. Hillary Clinton served on Wal-Mart’s board from 1986 to 1992 when her husband was governor of Arkansas, the retailer’s home state.

It’s easy to forget it was once thought that this presidential race would focus on the impact of Wal-Mart on the economy and the labor market. In January 2007 a columnist for U.S. News wrote: “The ginormous retailer is sure to be a frequent target for Democrats during the 2008 presidential election.” Barack Obama made an issue of Clinton’s tenure on the Wal-Mart board during a debate in January but has not had much to say about the company since John Edwards left the race. Clinton, far from attacking Wal-Mart, has had to contend with investigations, such as one done by ABC News in late January, showing that during her time as a director she remained silent about the company’s assaults on union organizing drives. Clinton responded by saying her views had changed and that she is now a strong supporter of unions.

Despite this professed change of heart about the Wal-Mart philosophy of labor relations, it appears that Clinton is the favorite presidential candidate among those working at the company. A search of individual campaign contribution data on the Open Secrets website shows that Wal-Mart executives and other employees have contributed far more to Clinton— $22,000—during the current election cycle than to John McCain or Obama, each of whom has received $3,700. (Note that only those contributing $200 or more have to list an employer. The totals were derived by searching both “Wal-Mart” and “Walmart” in the employer field.)

The Wal-Mart contributions are a minuscule portion of the more than $160 million Clinton has raised, but it is notable that among those giving their individual maximums to the New York Senator are two of Wal-Mart’s executive vice presidents—Thomas Hyde and PR guru Leslie Dach. Either they know something we don’t about Clinton’s current views, or this, like the company’s previous hard line in the Debbie Shank case, is an example of how Wal-Mart executives are often thick-headed about what is really in the company’s best interests.

EMMA: Municipal Bond Documents Finally Being Made Accessible

For more than a decade, key corporate filings with the Securities and Exchange Commission have been available to the public at no charge through the EDGAR website. This has been a boon for transparency and a godsend for researchers.

During the same period, those who wanted to access analogous documents on tax-exempt bonds filed with the lesser known Municipal Securities Rulemaking Board (MSRB) have had to use commercial services such as Munistatements and DPC Data that charge hefty subscription or pay-per-view fees.

Now that is beginning to change. This week MSRB introduced EMMA (short for Electronic Municipal Market Access), which is described as “an Internet-based disclosure portal.” The key document EMMA will disclose is the Official Statement (OS), a prospectus that issuing agencies publish with details on new municipal securities.

The OS is useful not only to municipal finance specialists and investors in tax-exempt bonds. Because certain types of municipal securities such as industrial revenue bonds provide funding for private-sector projects, many OS filings shine a light on ways in which public money is being used to subsidize for-profit ventures.

EMMA starts out this week on a pilot basis covering only advance refundings of outstanding securities. The site also provides real-time trade price data — an effort to end market insiders’ monopoly on price information. Fuller access to OS filings will begin after June 30, but it remains to be seen whether EMMA will have the full search capabilities of Munistatements and DPC.

Would Paulson’s CBRA Have Fangs?

Although anything coming from the Bush Administration has to be regarded with suspicion, one aspect of the Treasury Secretary Henry Paulson’s plan to revamp the regulation of financial institutions is intriguing. As part of the replacement of the current alphabet soup of agencies with a new minestrone, Paulson called for the creation of a single entity to oversee consumer protection issues relating to all regulated financial institutions. Although the Paulson blueprint often refers to this as the “business conduct regulator,” the formal proposed name is the Conduct of Business Regulatory Agency, or CBRA for short.

The new agency would combine selected functions now handled (or neglected) by entities such as the Securities and Exchange Commission and the various bank regulators. Other SEC functions—presumably including oversight of the securities of non-financial companies—would apparently reside in a new agency formed by the merger of the SEC and the Commodity Futures Trading Commission.

CBRA’s proposed mission is described (p.19) as follows:

Business conduct regulation in this context includes key aspects of consumer protection such as disclosures, business practices, and chartering and licensing of certain types of financial firms. One agency responsible for all financial products should bring greater consistency to areas of business conduct regulation where overlapping requirements currently exist. The business conduct regulator’s chartering and licensing function should be different than the prudential regulator’s financial oversight responsibilities. More specifically, the focus of the business conduct regulator should be on providing appropriate standards for firms to be able to enter the financial services industry and sell their products and services to customers… CBRA’s main areas of authority would include disclosure issues related to policy forms, unfair trade practices, and claims handling procedures.

It’s difficult to know how seriously to take this. Is Paulson suggesting that CBRA would be able to establish strict consumer protection standards before a company is allowed to set up shop anywhere in the financial services marketplace? If so, then bring it on.

Also appealing (from a researcher’s perspective) is the emphasis on disclosure, especially relating to information apart from data that Paulson puts under the purview of the “corporate finance regulator.” Today, the disclosure needs of investors are too often put ahead of the disclosure needs of consumers, workers and the general public.

Paulson’s blueprint may go nowhere, but if it does, let’s hope that his CBRA would really have fangs.

Paulson Blueprint Promotes Insurance Industry Shell Game

There’s something peculiar in the report on financial market regulation issued today by Treasury Secretary Henry Paulson. The plan, touted by some as a bold expansion of federal control over capital markets and dismissed by others as a mere rearranging of the deck chairs on the financial Titanic, includes an incongruous section on the insurance industry.

While insurance is a financial service, it hasn’t been at the center of the implosion of the housing market or (aside from the bond insurance crisis) linked to the instability on Wall Street. The Paulson plan, nonetheless, provides a resounding endorsement of a “reform” that key players in the insurance industry have been seeking for at least 15 years—allowing large national carriers to do an end run around the current state-based insurance regulatory system. Such carriers would be permitted to adopt an “optional federal charter” and thereby put themselves under the supervision of a federal regulatory agency that does not yet exist.

Big Insurance has not sought federal oversight because it wants more regulation. After all, this is the industry that pioneered offshoring when some carriers moved their official headquarters to tax havens such as Bermuda. While it is true that many state regulators have been toothless watchdogs, other states have been aggressive in protecting the interests of policy holders and the public.

In fact, the Paulson proposal comes just a couple of weeks after insurers were celebrating the downfall of New York Gov. Eliot Spitzer in a prostitution scandal. During his time as New York’s attorney general, Spitzer pursued major insurance companies such as Marsh & McLennan and American International Group for offenses such as bid rigging. Marsh ended up settling for $850 million in 2005, and AIG paid a whopping $1.6 billion the following year. While it is true that Spitzer went after the industry as a prosecutor rather than a regulator, he did so in the overall context of state oversight.

The insurance industry swears that it supports the optional federal charter in the name of modernization (as does the Paulson report), but it is significant that the reform has been supported by groups such as the Competitive Enterprise Institute and the American Enterprise Institute that are no friends of regulation (some Democrats in Congress are also in favor). When word of Paulson’s insurance proposal leaked out over the weekend, the American Insurance Association rushed out a press release hailing it, saying that the optional federal charter “will be more efficient, effective and rational given the ‘increasing tension’ a state-based regulatory system creates.”

Throughout its history, the insurance industry has avoided “tension” by trying to minimize government interference in its affairs. In 1945 the industry supported the McCarran-Ferguson Act, which responded to a Supreme Court ruling by affirming the regulatory role of the states. In recent times, the industry has wanted the option of federal oversight on the assumption that it would be less onerous. I’ll let the legal scholars decide whether state or federal regulation is inherently more appropriate. The issue is whether an industry not known for generous treatment of its customers (think of Katrina victims denied coverage) is going to be subjected to some strict oversight somewhere.

More on EG&G Technical Services & Controversial Parent URS Corp.

From what I can tell, almost no one in the media is paying attention to the fact, reported yesterday by the Dirt Diggers Digest, that inventory and distribution activities at Hill Air Force Base in Utah, where nuclear missile parts were mistakenly shipped to Taiwan in 2006, are under the control of a contractor—EG&G Technical Services. The one exception I could find is Matthew LaPlante of the Salt Lake Tribune, whose article today notes he was unable to get responses from officials at the company, at Hill AFB or at the Defense Logistics Agency (DLA), which was made to appear the responsible party when the Pentagon revealed the snafu earlier this week.

It’s not as if there is nothing to report. The Taiwan screw-up appears to be part of a pattern of inventory problems at various contractor-operated DLA distribution depots. In November 2006, the Defense Department Inspector General issued an audit report finding that at the depots overall:

Government and contractor personnel did not properly perform physical inventory counts during the execution of statistical sampling plans to measure dollar value and supply record accuracy; the Distribution Standard System contained inaccurate inventory information for individual storage locations; depot personnel did not complete research of inventory discrepancies in a timely manner, retain adequate supporting documentation, or use the proper error codes to identify underlying causes; and accountable officers did not perform consistent or adequate quality checks of completed inventory counts.

What also makes this story interesting is the identity of EG&G’s parent company—URS Corporation. URS is a $5 billion company that “serves” the federal government, not only through EG&G but also with its engineering services. Those latter activities expanded last year when URS took over one of its rivals, Washington Group International. Both URS and Washington Group have participated in the dismal reconstruction effort in Iraq.

The award of the Iraq contract to URS was particularly controversial, given that the company was controlled at the time by Richard Blum, husband of U.S. Senator Dianne Feinstein of California. Feinstein came under fire last year from critics who charged her with conflict of interest for sitting on a military appropriations subcommittee while her husband had financial interests in URS as well as in Perini Corp., another Pentagon contractor. In April 2007 anti-war activists protested outside the San Francisco home of Feinstein and Blum to highlight the issue. Blum ended his relationship with URS in 2005.

Was A Contractor Responsible for Snafu on Missile Fuses?

When the Pentagon admitted yesterday that high-tech electrical fuses for Minuteman nuclear warheads were mistakenly shipped to Taiwan from Hill Air Force Base in Utah in 2005 2006, military officials gave the impression that the Defense Logistics Agency was responsible for the snafu. What the Pentagon did not bother to mention is that three four years earlier, management of distribution activities at Hill was placed in the hands of a private contractor—EG&G Technical Services. The contract was awarded after the company was deemed to have won an A-76 public-private competition for the work. Shortly after the contract award, EG&G was acquired by URS Corporation, which later consolidated EG&G’s operations with its Lear Siegler Services operation.

In June 2002 the Defense Logistics Agency put out a press release that reads in part:

DLA Affirms Distribution Depot A-76 Competition Result

Fort Belvoir, Va. — The Defense Logistics Agency announced today the final decision on the public-private competition for performance of distribution operations at Defense Distribution Depot Hill, Utah (DDHU).

On April 5, 2002 a tentative decision was announced selecting EG&G Technical Services Inc., headquartered in Manassas, Va. to perform the distribution operations at the depot.

The DLA Administrative Appeal Authority received and considered appeals of the tentative cost comparison decision from the DDHU employees, AFGE Local 1592, and EG&G Technical Services, Inc.

A few weeks earlier, after a tentative decision to award the contract to EG&G had been made, the company issued its own release, which specifically referred to Minuteman missiles:

EG&G Technical Services, Inc. Selected To Perform Distribution Operations Contract At Utah’s Hill Defense Distribution Depot

MANASSAS, VA — April 16, 2002 — EG&G Technical Services, Inc., Installations and Logistics Division, is pleased to announce it has been tentatively selected by the U.S. Defense Logistics Agency (DLA) to provide storage and distribution services at Defense Distribution Depot Hill, Utah (DDHU).

Under the proposed contract, EG&G will provide parts and materials storage and distribution services to support the U.S. Air Force, Hill Air Force Base, Ogden Air Logistics Center and other military customers. Specifically, EG&G will store and distribute parts and materials for F-16 “Fighting Falcon” and C-130 Hercules aircraft; Minuteman and Peacekeeper missiles; the Emergency Rocket Communication System and other general maintenance functions.

EG&G previously has won three similar contracts at DLA Depots at San Antonio, Texas; Warner Robins, Georgia; and Barstow, California. As at the other locations, EG&G anticipates that virtually all employees at the Utah depot would come from the existing Department of Defense workforce and the local community.

Lex Allen, Vice President and General Manager of EG&G Installations and Logistics Division, said, “We are very excited about being selected for the Hill Depot award. It represents another key step in fulfilling our strategic vision to be the premier provider of logistics support to the Defense Logistics Agency. We are eager to work with the current Government employees at Hill and our plans include offering them jobs first – the workforce at Hill Depot is known for its work ethic and commitment to customer satisfaction. We have demonstrated success at other depot operations in offering employment to all existing employees who were interested in joining EG&G.”

Following a routine contract process, expectations are that the DLA will finalize the contract award sometime in June.

Like the passport scandal of last week, this may turn out to be another case of contractor mismanagement.

Contractor in Passport Scandal Called Anti-Union

Stanley Inc., one of two federal contractors implicated in the scandal over unauthorized viewing of the passport records of presidential candidates, has also been embroiled in a controversy over its labor practices. The United Electrical workers union (UE), which got involved in organizing Stanley workers who process immigration records, called the company’s opposition to the drive “one of the most intense and brutal anti-union campaigns UE has faced.” UE is a rank-and-file-oriented union not affiliated with the AFL-CIO or Change to Win.

Stanley, a $400 million company that depends entirely on the federal government for its business, won a contract last year to take over operations at a 400-employee processing center of the U.S. Citizenship and Immigration Services (USCIS) in St. Albans, Vermont. The contract also covered another center in Laguna Niguel, California. The facilities handle citizenship applications for USCIS, which is part of the Department of Homeland Security.

As it was about to assume control late last year, Stanley announced that it would be changing job classifications at the facilities, resulting in a pay decrease of about 12 percent for up to half the workers. Vermont Sen. Bernie Sanders called on the Labor Department to investigate what he charged was a violation of the Service Contract Act.

Stanley’s move also prompted the union organizing drive. The National Labor Relations Board scheduled nine different elections to reflect the fact that some of the workers are employees of subcontractors such as Northrop Grumman. UE official Chris Townsend told me that Stanley employed a variety of union-busting tactics—from hiring the union-avoidance law firm Seyfarth Shaw to forcing workers to watch propaganda videos. Townsend says workers were held in captive-audience meetings for up to one-quarter of their shifts in the period leading up to the elections—this at a time when the backlog of citizenship applications remains a serious problem. Stanley also pressured its subcontractors to adopt the same tactics of intimidation, Townsend added.

Given these conditions, it is remarkable that UE won six of the nine elections held at various times over the past two months. Townsend estimates that his union now represents about 714 of the 950 workers at the two facilities.

Stanley’s website brags about its inclusion on the Fortune magazine list of the “100 best companies to work for.” Most of the workers in St. Albans and Laguna Niguel apparently beg to differ.

Passport Scandal Linked to Security Contractor Operating in Iraq

It’s bad enough that employees of a military contractor, Stanley Inc., were taking unauthorized looks at the passport records of presidential candidates. Now it turns out that the other company involved, The Analysis Corp. (TAC), is a contractor for intelligence agencies and is a subsidiary of a larger foreign-based security company that has been involved in Iraq.

Many of today’s news stories depict TAC as just another contractor, though the Wall Street Journal notes that its CEO John Brennan is the former head of the National Counterterrorism Center. TAC, the Journal adds, has done work on the State Department’s terrorist watch list.

What the Journal does not mention is that TAC, based in McLean, VA, was acquired in 2003 by SFA Inc., whose website says: “We support national security initiatives across the world by leveraging our deep domain and analytical expertise in security and defense to rapidly develop and transition technologies and systems into operational solutions.” Among its specialties is “counter-terrorism and intelligence.”

Last year, SFA was acquired by Global Strategies Group (known as GLOBAL), a British-owned “international provider of security and risk mitigation strategies.” Among other things, GLOBAL is one of the controversial private security contractors operating in Iraq. Its main activity there has been to provide security for Baghdad International Airport. In 2005 it showed its commitment to that mission by shutting down the airport for a period of time to pressure the Iraqi government in a billing dispute. Last year, the U.S. branch of Global Strategies named as its president John Hillen, who had just left his post as Assistant Secretary of State for Political-Military Affairs–the same State Department involved in the passport affair.

What’s next—will it turn out that Blackwater is also involved?

The Beltway Bandit Behind the Passport Scandal

My hunch from last night was correct: Stanley Inc. (also known by the name of its subsidiary Stanley Associates) is one of the employers of contract workers who improperly viewed the passport file of Sen. Barack Obama. It now seems that the files of Senators McCain and Clinton were violated as well, so perhaps the speculation about political skulduggery is unfounded.

Yet that still leaves a host of questions related to the growing reliance of the State Department and other federal agencies on contractors such as Stanley, which until today was far from a household name. Yet it’s been around for more than three decades, making its money—like the scores of other Beltway Bandits that populate the office buildings of the Washington, DC area—from the federal spigot.

Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing, Stanley reported getting 65% of its revenue from the Pentagon and 35% from more than three dozen civilian agencies, most notably the State Department.

Stanley used to be a pretty small operator, but over the past decade it has grown at the remarkable rate of 33% a year, reaching more than $400 million. Although the company is publicly traded, it is majority-owned by officers, directors and employees (the latter through an employee stock ownership plan).

While the passport contract is the one in the news, Stanley is largely a military contractor. It brags that some 53% of its 2,700 employees have Secret or Top Secret security clearances. CEO Philip Nolan is ex-Navy, and his board includes retired generals from the Army and the Marine Corps. Stanley doesn’t produce weapons—it provides the systems engineering, operational logistics and other services that keep the high-tech war machine running.

In the 10-K filing, where it is addressing investors rather than the public, the company is blunt about why it expects continuing growth: “increased spending on national defense, intelligence and homeland security” and “increased federal government reliance on outsourcing.” In other words, its business strategy is fundamentally based on the continuation of the “War on Terror” and the steady hollowing out of the federal workforce.

The company goes on to list the specific risk factors that might affect the value of its shares. Here’s one of particular interest (see pp.20-21):

Security breaches in sensitive government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, integrate and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. We could incur losses from such a security breach that could exceed the policy limits under our professional liability insurance program. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenues.

It will be interesting to see if the passport scandal has this negative effect, or if the federal government protects Stanley from its operational shortcomings.

Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.