Category: Regulation

Full Graphic Disclosure

Forget Joe Camel and the Marlboro Man. Federal regulators want people to think of disease, birth defects and death when they pick up a package of cigarettes. The Food and Drug Administration, implementing legislation passed by Congress last year, has just released three dozen proposed enhanced warning labels that manufacturers would have to print on each pack of cancer sticks.

In the place of the plain text warnings that have appeared on tobacco packaging for years, these labels would be much larger and much more visually striking. The proposals include, for example, photos of a smoker in an open coffin, a mother blowing cigarette smoke at her infant child, and a sickly cancer victim.

The main objective of the warnings is to encourage existing smokers to quit and the dissuade children from picking up the dangerous habit. But apart from consumer behavior modification, the labels can be seen as a form of disclosure—disclosure of the harmful effects of a product.

The need for bold messages about deleterious aspects of the things we buy is not limited to cigarettes. It might make sense to apply the FDA’s approach to a whole range of goods and services. For example:

  • SUV models shown to be prone to rollovers should come not just with a plain-text sticker showing miles per gallon, but also full-color photos of mangled vehicles with bleeding drivers and passengers.
  • Electric bills sent by utilities relying on coal-fired power plants should be required to include photographs of floods, droughts and other effects of catastrophic climate change.
  • The pumps at gas stations should be adorned with photographs of oil spills and refinery disasters.
  • A variety of products sold by Wal-Mart should have packaging containing images of the oppressive Chinese sweatshops in which they were produced.
  • Stores selling gold jewelry should display photographs showing the despoiled land around the cyanide-leaching facilities in which the precious metal is mined.
  • Producers of dangerous pharmaceuticals should be required not just to mention possible injurious side effects, which most people have tuned out, but to show images of actual victims.
  • Health insurance providers should have to send out pictures of policyholders who died because an expensive treatment was rejected by the company.
  • Perhaps manufacturers of the worst junk food should be required to air commercials with actors who are morbidly obese.
  • And, of course, gun sellers should have to hand out gory photos of victims of accidental discharges.

Given the exalted status of commercial free speech in this country, these ideas could never come to pass. Yet there is still a serious issue to address: How do we turn dry data about corporate harms into messages people pay attention to?

The objective, however, is not just to change consumer behavior but also that of producers. All disclosure is meant to highlight an activity that is subject to abuse and hopefully curb those abuses. The Environmental Protection Agency’s Toxics Release Inventory is designed to get manufacturers to clean up their production processes – and has had a positive impact. Campaign contribution disclosure is meant discourage the big-money takeover of elections (there’s obviously been a lot less progress on that front, especially now that much corporate electoral spending can take place anonymously). Disclosure of executive compensation is supposed to check the relentless march toward lavish CEO salaries, bonuses and stock options (another less than rousing success).

The fact that disclosure does not immediately cure the problem it is meant to highlight does not undermine the case for transparency. It may simply mean that the form of the disclosure is not compelling enough. That’s the beauty of the FDA approach to cigarettes.

In replacing the misleading feel-good images that marketers have long sought to associate with even the most noxious products, the aggressive warning labels begin to force corporations to be honest about what they sell and consumers to come to grips with the true nature of much of what they consume. This form of anti-advertising may begin to liberate us from the illusions of our manufactured desires.

The Dark Side of Family Business

Americans love entrepreneurship, and no form of it is more celebrated than the family business. Most of us distrust big banks and giant corporations, but who doesn’t have warm feelings about mom and pop companies or family farms? These are the types of firms that politicians of all stripes want to shower with tax breaks and other forms of government assistance.

The problem is that family enterprises, like pet alligators, may start out as small and cuddly but can grow into large and dangerous monsters. We’ve seen two examples of this recently in connection with the family-owned oil company Koch Industries and the egg empire controlled by the DeCoster Family.

Koch Industries and its principals David and Charles Koch are the subject of a detailed article in The New Yorker by Jane Mayer. Much of the information in the piece has previously come out in blogs, websites and muckraking reports by environment groups, but she does a good job of consolidating those revelations and presenting them in a prestigious outlet.

Mayer describes how the Kochs, who are worth billions, have for decades used their fortune to bankroll a substantial portion of rightwing activism and are currently the big money behind groups such as Americans for Prosperity that are helping coordinate the purportedly grassroots Tea Party movement. What makes the Kochs especially insidious is that they use the guise of philanthropy to fund organizations promoting policy positions – environmental deregulation and global warming denial – that directly serve the Koch corporate interests, which include some of the country’s most polluting and greenhouse-gas-generating operations. The Kochs also contribute heavily to mainstream philanthropic causes such as the Metropolitan Opera and the Sloan-Kettering Cancer Center to win influential allies and gain respectability.

The DeCosters, whose egg business is at the center of the current salmonella outbreak, are not in the same social circles as the Kochs, but they have an even more egregious record of business misconduct. Hiding behind deceptively modest company names such as Wright County Egg, the family, led by Jack DeCoster, has risen to the top of the egg business while running afoul of a wide range of state and federal regulations.

As journalists such as Alec MacGillis of the Washington Post have recounted, the DeCosters have paid millions of dollars in fines for violating environmental regulations (manure spills), workplace health and safety rules (workers forced to handle manure and dead chickens with their bare hands), immigration laws (widespread employment of undocumented workers), animal protection regulations (hens twirled by their necks, kicked into manure pits to drown and subjected to other forms of cruelty), wage and hour standards (failure to pay overtime), and sex discrimination laws (female workers from Mexico molested by supervisors).

Their lawlessness dates back decades. A November 11, 1979 article in the Washington Post about Jack DeCoster’s plan to expand from his original base in Maine to the Eastern Shore of Maryland states that he was leaving behind “disputes over child labor, union organizing drives and citations for safety violations.” In 1988 the Maryland operation was barred from selling its eggs in New York State after an outbreak of salmonella. In 1996 the Occupational Safety and Health Administration fined the DeCosters $3.6 million for making its employees toil in filth. Then-Labor Secretary Robert Reich said conditions were “as dangerous and oppressive as any sweatshop we have seen.”

The DeCosters were notorious enough to be featured in a 1999 report by the Sierra Club called Corporate Hogs at the Public Trough.  The title referred to the fact that concentrated animal feeding operations (CAFOs) such as those operated by the DeCosters were receiving substantial federal subsidies despite their dismal regulatory track record.

Articles about Jack DeCoster invariably describe him as self-made and hard-working. “Jack doesn’t fish, he doesn’t hunt, he doesn’t go to nightclubs,” a farmer in Maine told the New York Times in 1996. “He does business — 18 hours a day.” He was recently described as a “born-again Baptist who has contributed significant amounts of money to rebuild churches in Maine and in Iowa.”

Like the Kochs, DeCoster apparently thinks that some philanthropic gestures will wipe away a multitude of business transgressions. Yet no amount of charitable giving can change the fact that these men grew rich by disregarding the well-being of workers, consumers and the earth. Such are the family values of these family businessmen.

Stealth Disclosure

The Congressional practice of quietly attaching an unrelated provision to a larger piece of legislation at the last minute has all too often been used to benefit powerful corporate interests. In two recent cases, however, the stealth amendment process has resulted in changes that will make it easier to monitor questionable business practices by energy companies and federal contractors.

Extractive industries are complaining about language (Section 1504) slipped into the new financial reform bill that will require them to report on royalties and other payments to governments. The aim is to make it harder for those corporations to conceal bribes and other illegal transfers used to obtain petroleum or mining concessions and that often prop up corrupt regimes such as the one in Equatorial Guinea. The provision, based on a bill that had been introduced by Senators Benjamin Cardin of Maryland and Richard Lugar of Indiana, applies to publicly traded oil, gas and mining companies whose shares trade in the United States.

The law is a victory for groups such as Publish What You Pay, which has long campaigned to increase the transparency of energy corporation dealings with governments around the world. The campaign has already succeeded in getting some firms to disclose the information voluntarily, but it will be much better to have it mandated and overseen by the Securities and Exchange Commission, which will write rules covering the inclusion of the information in financial statements.

That’s why trade associations such as the American Petroleum Institute and companies such as Exxon Mobil are grousing about the law. An API spokesperson told the Wall Street Journal that Russian and Chinese oil companies not subject to the requirement “could use the data to outfox U.S. companies in deals.”

Dubious complaints are also being heard from Beltway Bandit mouthpieces in response to a swift move by Sen. Bernie Sanders of Vermont to insert a provision in the recently passed supplemental appropriations bill giving the public access to a database about contractor performance – which in many cases means contractor misconduct.

The database is the Federal Awardee Performance and Integrity Information System (FAPIIS), which was mandated as a result of 2008 legislation enacted thanks to the efforts of groups such as the Project On Government Oversight (POGO), which has its own Federal Contractor Misconduct Database covering the 100 companies doing the most business with Uncle Sam. FAPIIS is supposed to make it easier for federal agencies to review the track record of a much wider range of companies bidding on new contracts worth $500,000 or more. In addition to contract performance information collected from various federal sources, FASPIIS includes data submitted by companies with more than $10 million in contracts or grants on any criminal, civil or administrative proceedings brought against them during the previous three years.

FAPIIS was an important step forward, but it was able to get through Congress only after its sponsors agreed to restrict access to the database. POGO tested the provision by filing a FOIA request with the Pentagon for its FAPIIS information but was shot down.

A short time later, however, it came to light that the Sanders amendment survived in the supplemental spending bill President Obama signed on July 29. The provision will give the public access to FAPIIS information about contractor track records, but unfortunately it excludes past contract performance reviews by federal agencies.

Already, the Professional Services Council, the leading trade association of federal contractors, is warning that making parts of FAPIIS public “could create a politically motivated blacklist of vendors.” The PSC seems to believe that the public should not have the ability to pressure the federal government to stop doing business with crooked companies.

Speaking of blacklists, the FAPIIS change comes on the heels of an announcement by the Obama Administration that it is creating a master Do Not Pay database covering individuals and businesses that should not be receiving payments from federal agencies. At a time of growing hysteria about the federal deficit, it is good to see that attention is being paid to ways of cutting costs that are truly wasteful.

Obama’s Oil Magic

BP has been selling off small pieces of itself to help pay for its liability costs in the Gulf of Mexico. Here’s another way it can economize: eliminate its public relations staffers and outside consultants such as the well-connected Podesta Group. The oil giant doesn’t need them any longer, now that the Obama Administration has taken over responsibility for burnishing the image of the beleaguered oil giant.

BP’s new mouthpieces include Carol Browner, whose official title is Director of the White House Office of Energy and Climate Change Policy, and Jane Lubchenco, head of the National Oceanic and Atmospheric Administration. Browner has taken to the airwaves to deliver the mind-boggling message that the BP mess — which had just been declared by federal scientists to be the largest oil spill in history — has largely disappeared: “The vast majority of the oil is gone,” she told NBC’s Matt Lauer. “It was captured. It was skimmed. It was burned. It was contained. Mother Nature did her part.”

Lubchenco presided over the preparation of a five-page report claiming that one-quarter of the 200 million gallons of crude released from BP’s Macondo well “naturally evaporated or dissolved”; another quarter was dispersed “naturally” or chemically; and a third quarter was either directly recovered, burned off or skimmed from the surface, leaving a “residual” of 26 percent, among which is whatever BP collects from the shore.

In other words: Abracadabra, the oil is gone.

If BP had tried this kind of magic trick, it would have been laughed off the stage. The administration, exploiting the legitimacy of NOAA and Browner, a former head of the Environmental Protection Agency, is being taken (somewhat) seriously. In doing so, it is acting as a sort of front group for BP, giving more credence to the company’s claims of having carried out an effective clean-up operation. The remarkable claims about evaporation and dissolution could also help to reduce BP’s ultimate liability costs.

At the same time, the White House is clearly trying to protect itself. The NOAA report can be seen as a justification for the administration’s capitulation to BP on the issue of chemical dispersants. Only a few days before the announcement of the NOAA calculations, the House Select Committee on Energy Independence and Global Warming had released documents showing that the Coast Guard had repeatedly approved BP requests to apply large quantities of Corexit, despite EPA’s claim to have ordered the company to restrict its use of the controversial chemicals.

It is difficult to avoid the impression that BP and the administration have conspired to disguise the full extent of the disaster through the use of the dispersant, which reduces the amount of sludge arriving on shore but is having as yet unknown effects on the ecology of the gulf. The White House is so compromised in this situation that it seems unable to recognize the dissonance between the President’s statement that this is the “worst environmental disaster America has ever faced” and the new message, which is essentially “don’t worry, be happy.”

The positive spin is giving ammunition to figures such as Rush Limbaugh, who have been claiming for some time that the impact of the BP spill has been exaggerated. By encouraging these disaster deniers, the administration is undermining the rationale for continuing the deepwater drilling moratorium and even for the transformation of the former Minerals Management Service into a real regulatory watchdog.

If spills — including gigantic ones such as BP’s — can be brought under control so easily with dispersants and Mother Nature, why bother to restrict offshore drilling? After an incident that should have discredited that activity once and for all, the Obama Administration has in effect paved the way for a return to “Drill, Baby, Drill.” Quite a magic trick.

A Business Backlash?

By all rights, the laissez-faire crowd should be silent these days. Recent months have been marked by one example after another of the perils of deregulation and the folly of trusting large corporations to do the right thing. From Toyota to Goldman Sachs to Massey Energy to BP, 2010 has been the year of big business irresponsibility.

As in 2002 (after the accounting scandals involving Enron, WorldCom et al.) and 2008 (the meltdown of Wall Street), we’re now at one of those moments, following an outbreak of corporate misconduct, in which public sentiment about business is up for grabs, as is public policy.

The business camp is already working hard to regain support, in ways ranging from BP’s seemingly benign vow to “make things right” to Rep. Joe Barton’s shameless “shakedown” outburst designed to turn the Obama Administration into the villain. Here are some other signs that corporations and their defenders are already going back on the offensive:

  • A federal judge with personal investments in the petroleum industry struck down the Obama Administration’s moratorium on deepwater drilling, despite evidence brought to light by Congressional investigators that the practice is much more dangerous than we had been led to believe and none of the oil giants have adequate accident response plans. The challenge to the moratorium had been brought by smaller oil service firms, but the judge’s decision was hailed by majors such as Chevron and Royal Dutch Shell.
  • Massey Energy, apparently hoping for a like-minded judge, has filed suit against the federal Mine Safety and Health Administration in a brazen effort to pin the blame on regulators for the April explosion at the Upper Big Branch mine in West Virginia that killed 29 workers.
  • Verizon Communications CEO Ivan Seidenberg, the current head of the Business Roundtable, recently gave a speech in which he challenged regulatory initiatives in the telecom and financial sectors, criticized efforts to limit tax avoidance by multinational companies, and declared: “It’s time for us all to raise our game and embrace the power of the private sector that will create real value and real growth for our country.”

If business advocates are emboldened to speak out so soon, that suggests that corporations have not been reprimanded adequately for their misconduct. The criticism expressed by the Obama Administration and Congressional Democrats has had a ritualistic quality about it—a Kabuki dance of disapproval that may not result in any real change.

Even the $20 billion BP escrow fund feels inadequate, given the fact that there is no end in sight to the disaster. Although BP’s shareholders are agonizing over the suspension of the dividend payment, the company itself does not seem very put out by the creation of the fund, especially since it is being allowed to spread out the cost over several years.

The ability of BP to buy its way out of the crisis contributes to the sense that large corporations can do the most outrageous things and emerge relatively unscathed. It is unlikely that the forthcoming criminal case against the company will cause much more discomfort. The company has already been through that process with previous disasters involving oil spills in Alaska and a deadly refinery explosion in Texas. It paid the resulting penalties with no problem, and the fact that it was put on probation has had little practical effect.

What’s needed is a more dramatic response to corporate negligence. It might be the arrest of a top executive or an announcement that the federal government will no longer do business with companies with serious regulatory violations or an antitrust initiative to try to break up large firms which think that their size somehow makes them above the law. Only then might corporations think twice about lashing back and returning to business as usual.

BP’s Partner in Crime

The liability costs stemming from the ongoing environmental disaster in the Gulf of Mexico are likely to be in the tens of billions of dollars. BP, of course, will bear the brunt of those costs, but other deep pockets should not be ignored. Transocean, the owner of the rig where the initial explosion occurred, and Halliburton, which was supposed to seal the well with concrete, will both be targeted.

But we shouldn’t forget that BP is not the sole owner of the underground well, known as Macondo, that continues to spew large quantities of crude oil into the sea. The biggest minority holder, with a 25 percent share, is Anadarko Petroleum, which is a major offshore driller in its own right and has ties to major controversies in the energy industry. The company is worth a closer look.

Anadarko was formed in 1959 as a subsidiary of Panhandle Eastern Pipe Line Company, which used the entity to get around Federal Power Commission limitations on the price it could charge on natural gas produced from properties it owned in the Anadarko Basin in Texas, Oklahoma and Kansas. Anadarko got involved in offshore exploration in 1970. Among its early project partners was Amoco, which would later (1998) be acquired by BP.

By the 1990s Anadarko was a major player in the Gulf of Mexico. During the following decade the company became better known (and much larger) after acquiring Union Pacific Resources and then Kerr-McGee, which had pioneered offshore petroleum exploration in the late 1940s. The latter acquisition, in particular, saddled Anadarko with a dubious legacy.

In the 1970s Kerr-McGee was embroiled in a scandal over accusations of serious safety violations and falsification of records at its nuclear fuel plant in Oklahoma. The controversy escalated after the whistleblower in the case, technician and union activist Karen Silkwood, died under suspicious circumstances in 1974.  Silkwood’s family sued the company for causing her to be contaminated with plutonium.  In 1986 Kerr-McGee paid $1.38 million to settle the case after a jury award of $10.5 million had been overturned on appeal.

Two decades later, Kerr-McGee mounted a court battle to prevent the federal government’s Minerals Management Service from restoring royalty rates paid by offshore drillers to reasonable rates after they had been reduced by Congress when energy prices were low in the mid-1990s. The case, which was resolved after Anadarko completed its acquisition of Kerr-McGee, could cost U.S. taxpayers, according to a Government Accountability Office estimate, more than $50 billion.

While Kerr-McGee was pursuing its case it was also defending itself against a whistleblower suit charging that the company had cheated the federal government out of millions of dollars in offshore drilling royalties by underreporting its output. In January 2007 a federal jury found the company guilty, but the judge in the case later overturned the verdict on a technicality.

Anadarko’s own record is not unblemished. Last year it and two related companies paid $1.05 million in civil penalties and agreed to spend $8 million in remedial actions to resolve charges that they violated the Clean Water Act by discharging harmful quantities of oil from a production facility in Wyoming. Two years earlier the company was fined $157,500 by the EPA for destroying wetlands in southwest Wyoming. Anadarko is also heavily involved in natural gas drilling in the Marcellus Shale in the northeastern United States, which is viewed as a serious threat to drinking water supplies. Its joint venture partner in the shale operations is Mitsui, which is also the third partner (with a 10 percent stake) in the Macondo well.

Anadarko does not appear to have had any role in operational decisions at that ill-fated Macondo well, but the company is separately involved in its own deepwater drilling activities in the Gulf of Mexico that were temporarily shut down as a result of the moratorium announced by President Obama. While BP rightfully remains the primary target of legal and other responses to the gulf disaster, Anadarko – both by virtue of its ownership interest in Macondo and its own risky drilling – also deserves to feel some of that pain.

Federalize BP

President Obama’s declaration that the federal government is in charge of the response to the oil disaster in the Gulf of Mexico is apparently meant to deflect Katrina comparisons and show that his administration is fully engaged. With that p.r. mission accomplished, Obama now needs to turn to the question of what to do about BP.

As a helpful Congressional Research Service report points out, the Oil Pollution Act of 1990 gives the federal government three options: monitor the efforts of the spiller, direct the efforts of the spiller, or do the clean-up itself. So far, the Obama Administration has followed the second path and resisted growing pressure to “federalize” the response.

This was said to be necessary because the feds do not have the technical expertise to handle a deepwater leak. As Coast Guard Adm. Thad Allen, the National Incident Commander, put it: “To push BP out of the way would raise the question of: Replace them with what.”

The idea that the government is completely dependent on BP to stop the leak is a dismaying thought. But even if it’s true, it no longer applies once the gusher is brought under control. When the center of attention shifts from 9,000 feet below the surface to the clean-up, there is no reason why BP should continue to run things.

The simple fact is that the company cannot be trusted. As Obama himself noted, the company’s interests diverge from those of the public when it comes to assessing the true extent of the damage and deciding what is necessary in the way of remediation. Keep in mind that BP’s total liability will be determined at least in part by the final estimate of how much oil its screw-ups caused to be released into the ocean. It has every incentive to obscure the full magnitude of the catastrophe.

The company’s motivation in employing massive quantities of the controversial chemical Corexit may have had more to do with dispersing evidence of the spill than with helping the ecosystem of the gulf recover. BP had to be pressured to back off from a plan to have clean-up workers sign confidentiality agreements to prevent them from disclosing what they observed. The company resisted making public the live video feed showing the full force of the oil spewing out of the wrecked well and then delayed making a high-definition version of that video available to federal investigators.

For BP, job one is now not clean-up but cover-up. Allowing it to manage the ongoing response would be akin to allowing the prime suspect in a mass murder to assist in processing the crime scene.

Taking operational control of the clean-up away from BP should be a no-brainer, but it is not enough. This is a company that has repeatedly shown itself to be reckless about safety precautions. The gulf disaster comes on the heels of previous incidents—a 2005 explosion at a refinery in Texas that killed 15 workers and a 2006 series of oil spills at its operations in the Alaskan tundra—in connection with which it pleaded guilty to criminal charges and paid large fines. It was also put on probation that has not yet expired.

An individual who violates probation can be deprived of liberty through imprisonment. A giant corporation that violates its probation—as BP undoubtedly has done by breaking various federal and state laws in its actions precipitating the Deepwater Horizon explosion—cannot be put behind bars, but it can be deprived of freedom of action.

Federal sentencing guidelines (p.534) allow probation officers to monitor the finances of a business or other organization under their supervision. In BP’s case, the issue is safety. One way to ensure that the company acts responsibly is to station inspectors inside all of its U.S. operations (at BP’s expense) to oversee any operational decision that could impact the safety of workers and the environment. Those inspectors would also make it harder for the company to cover up the full extent of what it has done to the Gulf Region.

In other words, the Obama Administration should federalize not only the Gulf of Mexico clean-up but BP itself. That would show that the government really is in charge until we can be sure that the oil giant is no longer a public menace.

Corporate Social Irresponsibility

The catastrophic Exxon Valdez oil spill of 1989 gave rise to the modern corporate social responsibility movement; the current spill in the Gulf of Mexico marks its collapse.

The past two decades have been an experiment in corporate behavior modification. An array of well-intentioned organizations such as CERES promoted the idea that large companies could be made to do the right thing by getting them to sign voluntary codes of conduct and adopt other seemingly enlightened policies on environmental and social issues.

At first there was resistance, but big business soon realized the advantages of projecting an ethical image: So much so that corporate social responsibility (known widely as CSR) is now used as a selling point by many firms. Chevron, for example, has an ad campaign with the tagline “Will You Join Us” that is apparently meant to convey the idea that the oil giant is in the vanguard of efforts to save the earth.

What also made CSR appealing to corporations was the recognition that it could serve as a buffer against aggressive regulation. While CSR proponents in the non-profit sector were usually not pursuing a deregulatory agenda, the image of companies’ agreeing to act virtuously conveyed the message that strong government intervention was unnecessary. CSR thus dovetails with the efforts of corporations and their allies to undermine formal oversight of business activities. This is what General Electric was up to when it ran its Ecoimagination ads while lobbying to weaken air pollution rules governing the locomotives it makes.

Recent events put into question the meaning of a commitment to CSR. The company at the center of the Gulf oil disaster, BP, has long promoted itself as being socially responsible. A decade ago it adopted a sunburst logo, acknowledged that global warming was a problem and claimed to be going “beyond petroleum” by investing (modestly) in renewable energy sources.  What did all that social responsibility mean if the company could still, as the emerging evidence suggests, cut corners on safety in one of its riskiest activities—deepwater drilling? And how responsible is it for BP to join with rig owner Transocean and contractor Halliburton in pointing fingers at one another in an apparent attempt to diffuse liability?

BP is hardly unique in violating its self-professed “high standards.” This year has also seen the moral implosion of Toyota, another darling of the CSR world. It was only months after the Prius producer was chosen for Ethisphere’s list of “the world’s most ethical companies” that it came to light that Toyota had failed to notify regulators or the public about its defective gas pedals.

Goldman Sachs, widely despised these days for unscrupulous behavior during the financial meltdown, was a CSR pioneer in the investment banking world. In 2005 it was the first Wall Street firm to adopt a comprehensive environmental policy (after being pressured by groups such as Rainforest Action Network), and it established a think tank called the Center for Environmental Markets.

Even Massey Energy, which has remained defiant in the face of charges that a preoccupation with profit over safety led to the deaths of 29 coal miners in a recent explosion, publishes an annual CSR report.

When the members of a corporate rogues’ gallery such as this all profess to be practitioners of CSR, the concept loses much of its legitimacy. The best that can be said is that these companies may behave well in some respects while screwing up royally in others—the way that Wal-Mart is supposedly in the forefront of environmental reform while retaining its Neanderthal labor relations policies. Selective ethics, however, should be no more tolerable for corporations than it is for people.

Heaven forbid that we violate the free speech rights of CSR hypocrites, but there should be some mechanism—perhaps truth-in-image-advertising laws—to curb the ability of corporations to go on deceiving the public.

Using Financial Reform to Promote Deregulation

Growing public rage over Wall Street misbehavior has snapped the Senate out of its lethargy on financial reform. Amid the get-tough posturing, however, the impulse to lighten the regulatory “burden” on business has not completely disappeared.

When Senate Republicans unveiled their alternative approach to reform on April 26, buried in the document was a provision that called for less rather than more regulation. The GOP proposal would make smaller publicly traded companies exempt from a key provision of the Sarbanes-Oxley Act (Sarbox, for short), the corporate accountability law enacted in 2002 in response to the accounting scandals at companies such as Enron and WorldCom.

The provision in question, Section 404, requires firms to maintain a system of internal controls to ensure the integrity of their financial statements, which must include an audited assessment of the adequacy of those measures. A breakdown in such controls is an invitation to financial fraud.

Senate Republicans would like to provide an immediate exemption to companies with a market capitalization of $150 million or less and would instruct the Securities and Exchange Commission to explore the possibility of setting the cutoff even higher. The SEC has already delayed implementation of the Section 404 requirement for smaller firms, and it convened a business-dominated advisory committee that recommended consideration of Sarbox relaxation for firms with market capitalization up to $787 million. The Commission, however, has refused to create a permanent exemption.

Truth be told, it is not just Republicans who are pushing the exemption idea. The financial reform bill that passed the House in December contains a Section 404 small-business exemption that was proposed – against the wishes of Financial Services Committee Chair Barney Frank – by Democrat John Adler along with Republican Scott Garrett, both of New Jersey. The amendment passed with the blessing of the Obama Administration, with White House Chief of Staff Rahm Emanuel personally lobbying members of the Committee on its behalf.  Senator Dodd, however, did not include a small-business exemption in his financial reform bill.

The Sarbox small-firm carve-out may win some friends in business circles, but it entails serious risks. Chief among them is that the exemption could serve as a stepping stone to further weakening or abolition of the entire law.

This is more than a remote possibility. Republicans make no secret of their distaste for Sarbox in general and have used this as a theme in criticizing the Dodd bill. South Carolina Senator Jim DeMint called that bill “Sarbanes-Oxley on steroids,” adding: “Like Sarbanes-Oxley, it is reactionary legislation that’s more likely to hurt U.S. businesses than reform the financial system.” A recent Wall Street Journal editorial denounced Dodd’s bill as “a souped-up version of the Sarbanes-Oxley bill of 2002 – that is, a collection of ill-understood reforms whose main achievement will be to make Wall Street even more the vassal of Washington.”

Congress is not the only arena where Sarbanes-Oxley is under assault. The U.S. Supreme Court is expected to rule soon on a challenge by the rabidly anti-regulation Competitive Enterprise Institute to the legitimacy of the Public Company Accounting Oversight Board, which was created by Sarbox by regulate public accounting firms. Some legal observers believe that a high court ruling against the Board could lead to the demise of Sarbox in its entirety.

Even if this dark scenario does not come to pass, does it make sense to loosen the controls on smaller firms? Fraudulent behavior is hardly unknown among public companies of modest size. In fact, such companies have long been used as vehicles for criminal enterprises. A 1996 Business Week investigation found that “substantial elements of the small-cap market have been turned into a veritable Mob franchise, under the very noses of regulators and law enforcement.”

Lately, the focus has been on the sins of the financial giants, but that’s no reason to dilute oversight of smaller players. Now’s a time for tightening regulation across the board.

The (Investment) House Always Wins

Goldman Sachs, which has long prided itself on being one of the smartest operators on Wall Street, has apparently decided that the best way to defend itself against federal fraud charges is to plead incompetence. The firm is taking the position that it is not guilty of misleading investors in a 2007 issue of mortgage securities because it allegedly lost money – more than $90 million, it claims – on its own stake in the deal.

In fact, Goldman would have us believe that it took a bath in the overall mortgage security arena. This story line is a far cry from the one put forth a couple of years ago, when the firm was being celebrated for anticipating the collapse in the mortgage market and shielding itself – though not its clients. In a November 2007 front-page article headlined “Goldman Sachs Rakes in Profit in Credit Crisis,” the New York Times reported that the firm “continued to package risky mortgages to sell to investors” while it reduced its own holdings in such securities and bought “expensive insurance as protection against further losses.” In 2007 Goldman posted a profit of $11.6 billion (up from $9.5 billion the year before), and CEO Lloyd Blankfein took home $70 million in compensation (not counting another $45 million in value he realized upon the vesting of previously granted stock awards). Some bath.

Goldman is not the only one rewriting financial history. Many of the firm’s mainstream critics are talking as if it is unheard of for an investment bank to act contrary to the interests of its clients, as Goldman is accused of doing by failing to disclose that it allowed hedge fund operator John Paulson to choose a set of particularly toxic mortgage securities for Goldman to peddle while Paulson was betting heavily that those securities would tank.

In fact, the history of Wall Street is filled with examples in which investment houses sought to hoodwink investors. Rampant stock manipulation, conflicts of interest and other fraudulent practices exposed by the Pecora Commission prompted the regulatory reforms of the 1930s. Those reforms reduced but did not eliminate shady practices. The 1950s and early 1960s saw a series of scandals involving firms on the American Stock Exchange that in 1964 inspired Congress to impose stricter disclosure requirements for over-the-counter securities.

The corporate takeover frenzy of the 1980s brought with it a wave of insider trading scandals. The culprits in these cases involved not only independent speculators such as Ivan Boesky, but also executives at prominent investment houses, above all Michael Milken of Drexel Burnham. Also caught in the net was Robert Freeman, head of risk arbitrage at Goldman, who in 1989 pleaded guilty to criminal charges. When players such as Freeman and Milken traded on inside information, they were profiting at the expense of other investors, including their own clients, who were not privy to that information.

During the past decade, various major banks were accused of helping crooked companies deceive investors. For example, in 2004 Citigroup agreed to pay $2.7 billion to settle such charges brought in connection with WorldCom and later paid $1.7 billion to former Enron investors. In 2005 Goldman and three other banks paid $100 million to settle charges in connection with WorldCom.

In other words, the allegation that Goldman was acting contrary to the interest of its clients in the sale of synthetic collateralized debt obligations was hardly unprecedented.

What’s not getting much attention during the current scandal is that in late 2007 Goldman had found another way to profit by exploiting its clients, though in this case the clients were not investors but homeowners.

Goldman quietly purchased a company called Litton Loan Servicing, a leading player in the business of servicing subprime (and frequently predatory) home mortgages. “Servicing” in this case means collecting payments from homeowners who frequently fall behind in payments and are at risk of foreclosure. As I wrote in 2008, Litton is “a type of collection agency dealing with those in the most vulnerable and desperate financial circumstances.” At the end of 2009, Litton was the 4th largest subprime servicer, with a portfolio of some $52 billion (National Mortgage News 4/5/2010).

Litton has frequently been charged with engaging in abusive practices, including the imposition of onerous late fees that allegedly violate the Real Estate Settlement Procedures Act. It has also been accused of being overly aggressive in pushing homeowners into foreclosure when they can’t make their payments.

Many of these complaints have ended up in court. According to the Justia database, Litton has been sued more than 300 times in federal court since the beginning of 2007. That year a federal judge in California granted class-action status to a group of plaintiffs, but the court later limited the scope of the potential damages, resulting in a settlement in which Litton agreed to pay out $500,000.

Meanwhile, individual lawsuits continue to be filed. Many of the more recent ones involve disputes over loan modifications. Complaints in this area persist even though Litton is participating in the Obama Administration’s Home Affordable Modification Program and is thus eligible for incentive payments through an extension of the Toxic Assets Relief Program.

There seems to be no end to the ways that Goldman manages to make money from toxic assets.  On Wall Street, as in Las Vegas, the house always wins.

BONUS FEATURE: Federal regulation of business leaves a lot to be desired, but it is worth knowing where to find information on those enforcement activities that are occurring. The Dirt Diggers Digest can help with our new Enforcement page, which has links to online enforcement data from a wide range of federal agencies. The page also includes links to inspection data, product recall announcements and lists of companies debarred from doing business with the federal government.