Phil Mattera

Private Debt Collectors Can’t Reach IRS’s “Low-Hanging Fruit”

The Washington Post article this week on the poor performance of the private debt collectors working for the Internal Revenue Service is a classic story of wrong-headed federal outsourcing. The paper reported that the companies, set loose in 2006 to collect $1 billion owed to Uncle Sam by deadbeat taxpayers, “have rounded up only $49 million, little more than half of what it has cost the IRS to implement the program. The debt collectors have pocketed commissions of up to 24 percent.”

What makes the story more galling is that the contractors were handed the work on a silver platter. By the early 2000s, the IRS was being underfunded to the point that it had to ignore many scofflaws. Rather than allowing the agency to hire more employees, who typically bring in much more than they cost, the Bush Administration and the Republican-controlled Congress gave in to long-standing lobbying (and ample campaign contributions) by the private debt collection industry to get a piece of the action. The private collectors were to be given the “low-hanging fruit”—taxpayers who had not disputed their debt but were slow in paying. Nonetheless, there were widespread misgivings about giving private parties access to personal financial information and having them represent the government in an activity so prone to abuse.

The initial companies chosen by the IRS in 2006 to participate in the program included one firm that had a particularly questionable track record: Linebarger Goggan Blair & Sampson LLP, an Austin-Texas based law firm that became a leading figure in outsourced debt collection for government agencies around the country. The Houston Chronicle once wrote (10/13/2002) that the firm was frequently criticized for its “political rainmaking and hardball collection tactics.” In 2004 a former name partner in the firm was convicted in a bribery case involving payments to city councilmen in San Antonio to secure a debt collection contract. Around the same time, the Linebarger firm privately settled a lawsuit in which a competitor alleged it had engaged in bribery and bid rigging in various locations. A collection contract awarded to the firm by New Orleans was reported to have been the subject of an FBI investigation.

The IRS removed the Linebarger firm from its private debt collection program last year without explanation. That left two contractors: CBE Group of Waterloo, Iowa and Pioneer Credit Recovery of Arcade, New York. Both companies have been sued multiple times over aggressive tactics in their efforts on behalf of clients other than the IRS.

Pioneer is a unit of SLM Corporation, otherwise known as Sallie Mae, which started out as a government-sponsored enterprise but was subsequently privatized and started trading on the New York Stock Exchange. It was to have been taken private in a leveraged buyout last year but the deal collapsed. The company, which has been suffering heavy losses, is being investigated by New York Attorney General Andrew Cuomo.

Leave it to the Bush Administration: Not only does it contract out functions that by all rights should be done by public employees, it makes highly dubious choices in selecting the companies to carry out the work. So it should come as no surprise when we end up with the worst outcome, which in this case means abuse of taxpayers and poor financial results. Ah, the magic of private enterprise.

“Green” Corporations Among the Toxic 100

The appearance of a new version of the Political Economy Research Institute’s Toxic 100 is a useful reminder that, for all their feel-good green ads, large corporations are still defiling the environment in a major way. This year’s list of the biggest corporate air polluters is led by DuPont and includes household names such as Dow Chemical, Eastman Kodak, General Electric and Exxon Mobil among the top ten. The companies are ranked by their “toxic score,” which the Institute calculates by multiplying the amount of toxic air releases reported to the EPA by the relative toxicity of the chemicals involved and the size of the population at risk of exposure.

What’s new this year is the inclusion of foreign corporations with facilities in the United States. There are three such listings in the top ten portion of the Toxic 100: Nissan Motor, Bayer Group and ArcelorMittal.

It’s interesting to see that foreign companies can be no less hypocritical than their U.S. counterparts when it comes to saying one thing about the environment and doing another. Nissan USA brags on its website about its Green Program, which uses as its catch phrase “seeking a symbiosis of people, vehicles and nature.” Bayer just announced it “will partner with the United Nations Environment Programme’s Regional Office in North America to help sponsor the 36^th annual World Environment Day celebration.”

Even more awkward is the appearance on the list of steel giant ArcelorMittal. Just last month, it was one of a handful of corporate sponsors of the green jobs conference put on in Pittsburgh by the Blue Green Alliance, led by the United Steelworkers and the Sierra Club. The conference program contained a full-page ad for the company saying: “At ArcelorMittal, Sustainability is one of the company’s core values.” Under the corporation’s name is the motto “Transforming tomorrow.” Perhaps ArcelorMittal should focus a bit more on transforming its air pollution problem today.

Their Information-Gathering and Ours

The activist world is abuzz over two new articles about corporate spying on environmental and labor groups.

James Ridgeway has published an exposé in Mother Jones on a private security company called Beckett Brown International (later S2i). According to documents obtained by Ridgeway, the firm, organized and managed by former Secret Service officers, spied on Greenpeace and other environmental groups in the late 1990s. Its activities are said to have included “pilfering documents from trash bins, attempting to plant undercover operatives within groups, casing offices, collecting phone records of activists, and penetrating confidential meetings.” Because the papers seen by Ridgeway are not complete, it cannot be said exactly which groups were spied on for whom. The firm’s clients are known to have included corporations such as Allied Waste, Halliburton, Monsanto and Wal-Mart.

The other article was written by Amy Bennett Williams for the Fort Myers (Florida) News-Press. It reports on an attempted infiltration of the Coalition of Immokalee Workers farmworker advocacy group by the owner of a private surveillance company. The Coalition suspects that the company may have been hired by Burger King, which is the current target of a campaign to raise pay for tomato pickers. The article notes that a person using an e-mail address traced to Burger King’s corporate headquarters made disparaging online comments about the Coalition.

Reports such as these are certainly a matter of concern, but it is important to distinguish between unlawful corporate espionage and legitimate information-gathering of the type that campaigners themselves do against companies all the time.

For example, in speaking about his article on Democracy Now this morning, Ridgeway mentioned that among the Beckett Brown documents he obtained was a background report on David Fenton, who runs the largest public-interest p.r. firm in the country. Ridgeway mentioned that the file included license plate numbers and property tax records.

As a corporate researcher (and licensed private investigator) for unions, environmental organizations and other activist groups, I find nothing scandalous about the presence of that kind of information, which is part of the public record (though there are often restrictions on who can access license plate numbers). The same goes for divorce, bankruptcy and other court records; criminal records and driving violations; tax liens; state corporate filings; campaign contributions; and voting records (indicating whether someone voted, not who they voted for). I’m also not scandalized by dumpster diving, assuming that it was done in a jurisdiction where it is not illegal (laws vary).

Let’s not be disingenuous. Campaigners use all legal means at our disposal to find possibly incriminating information about corporations and their executives. We should accept that they are doing the same about us.

The difference, of course, is that corporations and their agents sometimes cross the line. As the Ridgeway and Williams articles suggest, companies may use operatives who engage in burglary, infiltration, pretexting (misrepresenting oneself to obtain financial and telephone records) and other illegal or improper tactics. By all means, let’s condemn those practices, while being careful not to preclude those information-gathering techniques we need for our nobler purposes.

Will Tesco Brings Its Litigious Ways to the USA?

Say all you want about Wal-Mart—the giant retailer usually deals with its many adversaries in the court of public opinion rather than by filing lawsuits against them. The same can’t be said about Tesco, the British counterpart of Wal-Mart that has begun to enter the U.S. market.

In the past week, Tesco has brought two separate legal actions against its critics. First, it sued the Guardian newspaper and its editor Alan Rusbridger for “libel and malicious falsehood” in connection with a series of articles claiming that the company had used offshore partnerships as a way of avoiding up to £1 billion in taxes when selling UK properties. Tesco acknowledges that it may have saved £23-60 million in taxes but wants its day in court to argue that the £1 billion figure is erroneous. Playing hardball, Tesco says it is collecting communications from customers angry about the Guardian stories—and who say they are taking their business elsewhere—to justify a demand for “special damages.”

Now it’s been reported—by the Guardian—that Tesco has brought a libel suit against a former member of parliament in Thailand for criticizing the company’s expansion in that country. This follows a similar action against a Thai newspaper columnist.

Tesco may be tempted to bring similar suits in the U.S., given the negative coverage of its campaign to create a string of Fresh & Easy Neighborhood Markets. Some of the criticism is purely of a business nature. USA Today wrote recently that the stores, which it described as “about the size of a Trader Joe’s with lots of Whole Foods-type natural foods and prices that can seem Costco-esque,” don’t seem to be hitting the mark. The paper continued: “The unfamiliar combination—and a rather sterile store décor—seem to have left American shoppers confused about just what the chain is.” It’s apparently for this reason that Tesco recently decided to freeze its U.S. rollout, which began in Southern California, Las Vegas and Phoenix.

Like Wal-Mart, Tesco has started facing scrutiny—most notably in a report published last year by the Urban and Environmental Policy Institute of Occidental College—on supply-chain issues and its expected U.S. labor practices. If the rollout continues to falter, these issues may become moot. Otherwise, let’s hope the company spends more here on public relations and less on lawyers.

The Fortune (Mostly Non-Union) 500

Fortune magazine has come out with the latest edition of its list of the 500 largest publicly traded U.S. corporations, and all the attention will be paid to which companies rank higher or lower based on revenue. For the average person, another measure of the performance of those giant corporations may be more relevant: the extent to which they are depressing wage rates by getting rid of unions or continuing to keep them out of their operations.

One way to gauge this is to look at the new 10-K filings that companies have been issuing in recent weeks. Each of those documents—annual reports submitted to the U.S. Securities and Exchange Commission—has a section on employees in which companies have traditionally given an indication of the extent to which their workforce is unionized.

I decided to look at these sections for the top 50 on the new Fortune list. I found that, of that group, only five reported that a majority of their U.S. employees are covered by a collective bargaining agreement: General Motors, Ford, AT&T, Kroger and UPS. An additional half dozen reported that a minority of their U.S. workers have union protection: Verizon (40%), Boeing (36%), General Electric (15%), Costco (11%), AmerisourceBergen (4%) and Wellpoint (“a small portion”). Two companies—United Technologies and Marathon Oil—mention unions but don’t indicate the extent of their presence.

The remaining 35 companies (State Farm and Freddie Mac don’t file 10-Ks) make no reference to unions or declare they are union free. Home improvement retailer Lowe’s almost seems to be gloating when it says:

As of February 1, 2008, we employed approximately 160,000 full-time and 56,000 part-time employees, none of which are covered by collective bargaining agreements. Management considers its relations with its employees to be good.

And, in the absence of a union, who’s going to tell them otherwise?

A few of the more than 30 companies in the group that don’t mention unions are known to engage in some collective bargaining (the big oil companies, for instance), but it’s interesting that they deem it so insignificant that it need not be mentioned in a document that is supposed to warn investors of potential risks such as work stoppages. Unfortunately, the SEC rule (Regulation S-K) governing what is supposed to go into 10-Ks is not very explicit about disclosure requirements relating to labor relations, but the general principle is that matters material to the financial prospects of the company have to be reported.

It appears that most big companies have reached the point that the union presence in their workforce is not material. That may allow investors and managers to breathe easier, but it explains a lot of what is wrong with the U.S. labor market.

Look here for information on one proposed remedy for declining union density—the Employee Free Choice Act.

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.