Phil Mattera

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.

CEO of Major Passport Contractor is Lieberman Contributor

As this is being written late in the evening of March 20, the State Department has not yet revealed the name of the contractor(s) whose employees improperly peeked at the passport files of Sen. Barack Obama.

My money is on Stanley Inc., a Virginia company that has done extensive work for the Department’s Passport Services Directorate and only a few days ago was awarded a new $570 million contract to do more of the same. The company’s announcement of its good fortune began as follows:

ARLINGTON, Va., March 17 /PRNewswire-FirstCall/ — Stanley, Inc. (NYSE: SXE), a leading provider of systems integration and professional services to the U.S. federal government, today announced that it was awarded a five-year, $570 million contract to continue support of the U.S. Department of State, Bureau of Consular Affairs/Passport Services Directorate. Services include production, operational and business process support training, procurement, administration and evaluation of critical supplies, and facilities management support at the four Centers and 14 Passport Agencies nationwide along with the Headquarters’ support offices.

The release also says:

“Stanley is honored to continue its support services to the Department of State,” said Phil Nolan, Stanley chairman, president and CEO. “We will dedicate all resources necessary to assist Passport Services during this time of unprecedented growth and increasing demand…”

Even if it turns out that the workers involved in the electronic trespassing into Obama’s records were indeed Stanley employees, it is too early to say whether the company was in any way culpable in the matter.

But one thing that would add to the appearance of impropriety is that CEO Nolan has, according to the Open Secrets database, been a campaign contributor to Sen. Joe Lieberman, a leading supporter of Obama’s Republican adversary John McCain. In March 2005 Nolan gave $1,000 to Lieberman’s reelection campaign.

Since 2005, Nolan has also contributed a total of $5,350 to the election campaigns of Republican Rep. Tom Davis of Northern Virginia, where Stanley is headquartered and where Nolan apparently lives. He also gave $1,000 to Republican Senator Susan Collins of Maine last December. Nolan’s only other federal contributions were to the political action committee of his trade association, the Professional Services Council. According to Open Secrets, during the 2006 election cycle (which is when Nolan made his contributions), the Council gave 70 percent of its money to Republicans.

Whether or not Stanley Inc. is named in the Obama matter, the company may find itself answering questions about its passport operations. And members of Congress will hopefully also be asking whether the whole affair is, among other things, yet another reminder of the perils of outsourcing.

UPDATE (March 22): After this post was written, additional information appeared on the Open Secrets site indicating that Nolan recently contributed $1,000 to the presidential campaign of Sen. Hillary Clinton. And, as has been widely reported, it turns out that the passport files of Senators Clinton and McCain were also accessed improperly.

Rev. Wright May be Right About Race–in Corporate America

Barack Obama made a heroic effort this week to defuse the racial tensions caused by the attention now being given to fiery sermons once delivered by his pastor Rev. Jeremiah Wright. In order to do that, Obama gave a speech that acknowledged the legitimacy of Rev. Wright’s indictment of racism in America while simultaneously arguing that such discrimination was to a significant extent a thing of the past. Obama said: “The profound mistake of Reverend Wright’s sermons is not that he spoke about racism in our society. It’s that he spoke as if our society was static; as if no progress has been made…”

It’s often taken for granted that the corporate world is one arena in which such progress has clearly taken place, but a recent announcement by the Equal Employment Opportunity Commission undermines that assumption. The EEOC announced that during the last fiscal year complaints about racial discrimination in the private sector were up 12 percent, reaching the highest level since 1994. This was part of an overall rise of 9 percent in discrimination cases of all kinds.

Last week, the EEOC announced its latest settlement of a racial discrimination case:

The U.S. Equal Employment Opportunity Commission (EEOC) today announced the settlement of a race and national origin harassment lawsuit for $1.9 million and significant remedial relief against Allied Aviation Services, Inc. on behalf of African American and Hispanic workers who were the targets of racial slurs, graffiti, cartoons, and hangman’s nooses at a facility in the Dallas/Ft. Worth airport. The company identifies itself at the “largest American domestically owned provider of fueling services to the commercial aviation industry.”

The EEOC charged in the case that African American and Hispanic employees were subjected to a racially hostile work environment consisting of verbal and other abuse by their co-workers on a daily basis. Racial graffiti, including swastikas and the N-word, were commonplace and in plain sight in employee restrooms, on fuel tanks, and written on aircraft. An offensive cartoon belittling a Hispanic worker was placed under glass on a manager’s desk for months. Additionally, there was a so-called “hit list” targeting blacks as well as references to the “back of the bus” and “going back to Africa.” Also, a white employee married to an African American was subjected to racial abuse.

A scan of EEOC’s press release archive shows a series of other cases involving the failure of corporations to address racial problems in their workplaces, including some in which the problem was management itself. Last month, the giant investment company Vanguard Group agreed to pay $500,000 to settle a retaliation lawsuit brought by the Commission, which “had charged that following an African American employee’s complaints of race discrimination, Vanguard subjected him to a series of adverse employment actions culminating in his termination.”

And the month before that, the EEOC announced it had settled a race discrimination and retaliation lawsuit against Lockheed Martin, the country’s largest military contractor. The company agreed to pay $2.5 million and provide other relief “on behalf of an African American electrician who was subjected to a racially hostile work environment at several job sites nationwide – including threats of lynching and the ‘N-word.’”

During 2007, the companies involved in the settlement of race discrimination cases with the EEOC included Ford Motor, Target Corp., the Walgreen drug store chain and AK Steel. And all this is from an agency that critics such as Maryland Sen. Barbara Mikulski charge has been falling down on the job. There were also race discrimination cases in which the EEOC was not involved, including one in which FedEx agreed last April to pay $55 million to settle charges that it systematically paid black and Latino workers less than whites.

Rev. Wright’s rhetoric may not be in fashion these days, but the racism he railed against is far from extinct in Corporate America.