October 2019 Archives

Underregulation

The ink was barely dry on the 1970s laws creating the EPA, OSHA and other new federal agencies overseeing business activities when a counterattack began. For the past four decades, there has been an endless drumbeat of claims about the supposedly pernicious effects of regulation and continuous calls for weakening or eliminating rules.

This ongoing anti-regulatory campaign lets up only when a major incident – such as a massive oil spill or fatal industrial explosion – contradicts the argument that things would be fine if we let corporations manage their affairs with as little interference as possible. As soon as the uproar dies down, business apologists return to their customary posture, in the same way that the NRA handles mass shootings.

We are now in another of those periods, but with a significant difference. Instead of a single situation reminding us of the value of regulation, we now have multiple scandals at the same time.

It’s been clear for quite a while that reckless behavior by opioid producers and distributors – along with insufficient oversight by the FDA and DEA — was largely responsible for many thousands of overdose deaths. The industry has been hit with a wave of lawsuits and is now beginning to pay out billions of dollars in settlements.

It’s becoming clearer by the day that it was a monumental error for the FAA to cede oversight of the development of Boeing’s 737 Max to the company itself. Newly disclosed internal corporate documents indicate that Boeing was aware of safety problems with the plane and downplayed the risks in communicating with the agency.

It’s become apparent that Juul exploited the permissive approach of the FDA and marketed its vaping products not only to adult tobacco smokers trying to quit but also to young people, hooking many of them on nicotine for the first time. Now those young people are caught up in an epidemic of lung ailments linked to vaping.

The widespread wildfires in California are attributed in part to faulty transmission lines that PG&E has not adequately repaired and upgraded. Now the company is trying to mitigate the longstanding problem by imposing frequent blackouts on millions of customers.

Tech companies such as Amazon have taken advantage of weak antitrust enforcement to expand their dominance in a growing number of markets, forcing smaller companies into subservience or putting them out of business.

How many examples of corporate misconduct and feeble government oversight will it take to get across the message that in the vast majority of cases the problem is not overregulation but underregulation?

One significant obstacle is Donald Trump, who has embraced deregulation and likes to claim that weakening oversight, especially at the EPA, will promote job growth and prosperity. At a time when many large corporations are taking a more nuanced approach to social responsibility issues, Trump is touting crude anti-regulatory positions and climate-change denialism. In its latest move, the Trump EPA is reportedly planning to roll back an Obama-era regulation limiting emissions of heavy metals like arsenic, lead and mercury from coal-fired power plants.

Fortunately, many of Trump’s regulatory rollbacks are carried out in an inept way and get tied up in court. Yet the administration could still end up doing significant damage, if only in fostering the distorted idea that regulation-bashing is a populist position rather than a central part of the corporate agenda.

Immunity Disorders

Immunity was once a term used mainly in discussing medical conditions, but Donald Trump and his defenders have seized on it as an all-purpose defense in dealing with the Mueller investigation and now the Ukraine probe. Trump’s lawyers just made preposterous claims about the scope of Presidential immunity in appellate court arguments seeking to block a subpoena for Trump Organization business records.

The claim is based on the dubious argument that having to respond to a criminal case would unduly distract the president from his duties. Given that Trump seems to relish doing battle with those who dare to investigate him, it is unlikely that an indictment would change his behavior much. If Trump is successful in his immunity claims, that would go a long way in putting the presidency above the law.

At least the debate on presidential immunity is being conducted in the open. There is another form of effective immunity that is rarely described as such but is also dangerous to our society.

That is the de facto immunity that chief executives of large companies enjoy in cases of egregious corporate misconduct. Consider some of the issues that dominate the business news these days.

Large pharmaceutical manufacturers and distributors stand accused of fostering an opioid epidemic that has resulted in tens of thousands of overdose deaths.

Johnson & Johnson is involved in a series of controversies about asbestos in baby powder, dangerous pelvic mesh and improper marketing of an anti-psychotic drug.

Boeing is facing allegations that it covered up serious safety hazards in a new jetliner that was involved in two fatal crashes before being taken out of service.

Exxon Mobil is facing lawsuits accusing it of suppressing for many years internal evidence of the costs and consequences of climate change exacerbated by its own operations.

PG&E is alleged to be responsible for wildfires in California that took scores and lives and destroyed thousands of homes.

What all these situations have in common is that the defendants are the corporations themselves rather than the individual executives ultimately responsible for the actions or policies that created the harms. We have come to take it for granted that corporations can shield their officers and board members from liability and use the company’s coffers to buy their way out of legal jeopardy.

This is, of course, nothing new. Top executives of the big banks escaped individual prosecution for their role in the financial meltdown, as did CEOs in many other scandals.

There have been a few exceptions. Enron CEO Jeffrey Skilling was sentenced to 24 years in prison for his role in that company’s giant fraud, but he used his resources to fight the sentence and ended up spending only half that amount of time behind bars.

In Violation Tracker we have 380,000 cases of corporate misconduct, including 84 in which a company paid a penalty of $1 billion or more. If we had chosen to compile data on convictions of corporate executives rather than companies, the list would fit on a single page.

If we are lucky, the courts will strike down the spurious claims of presidential immunity. Yet we must also find ways to make sure that rogue chief executives also remain within the reach of the law.

Inflicting Financial Pain on the Pain Pill Pushers

The proceedings in a Cleveland courtroom are addressing issues about the fundamental nature of a major American industry. The case consolidates more than 2,000 lawsuits brought mainly by state and local governments against all the major parties responsible for the opioid crisis: the drug manufacturers, the drug distributors, the pharmacy benefit managers, the large drugstore chains and major supermarket chains whose stores contain pharmacies.

What is known as Multidistrict Litigation 2804 is scheduled to begin trial proceedings on October 21 in a partial action involving two Ohio counties and a handful of the corporate defendants — unless Judge Aaron Polster (photo) succeeds in his effort to get the parties to reach a settlement. Reports on potential deals have been emerging at frequent intervals. The New York Times reports that several of the defendants, including the three big drug distributors – AmerisourceBergen, Cardinal Health and McKesson – together with two of the pharmaceutical producers, have been offering a deal worth nearly $50 billion.

That sounds like a lot of money, but there may be less to it than meets the eye. For one thing, only about half the total consists of cash payments, with the rest taking the form of addiction treatment drugs, supplies and delivery services. It would be easy for the companies to inflate the value of the in-kind compensation and thus lower their burden.

Moreover, the cash payments would probably be paid out over time, again making things easier for the defendants and reducing the resources that state and local governments need in the short term. Those costs are massive. The Times quotes a report by the Society of Actuaries estimating the cost to society of the opioid epidemic at roughly $188 billion this year alone.

This suggests that a reasonable settlement should be some multiple of the $50 billion figure currently being considered. The 1998 Master Tobacco Settlement showed that a large profitable industry could handle payments that were estimated to cost $206 billion, spread out over time. The industry has paid out more than $132 billion over the past two decades, with annual payments in recent years amounting to about $6 billion.

The plaintiffs should not focus on the total theoretical size of the settlement but instead on how much will be available to each jurisdiction each year to address a problem that remains overwhelming.

It is also worth remembering the size of the industry in question. The big three drug distributors alone have combined annual revenues of more than $500 billion. Their deep pockets and those of the other defendants should be depleted as much as possible.

The drug industry giants have caused massive pain and suffering in the opioid epidemic. They should be made to feel substantial financial pain of their own.

Back Pedaling on Kickbacks?

It’s hard not to be suspicious when the Secretary of Health and Human Services promotes a supposed reform by stating that “President Trump has promised American patients a healthcare system with affordable, personalized care, a system that puts you in control, provides peace of mind, and treats you like a human being, not a number. But too often, government regulations have stood in the way of delivering that kind of care.”

Secretary Alex Azar used those dubious statements in a press release about his department’s plan to “modernize and clarify” the regulations that interpret the Physician Self-Referral Law (known as the Stark Law) and the Federal Anti-Kickback Statute.

Azar claims that the rule changes would promote new methods of delivering healthcare based on greater coordination among providers, including those with financial relationships with one another.

The changes are technical in nature, but I cannot help but worry that the scheme would serve to legitimize dubious dealings and enable providers to avoid prosecution under laws that have been in place for several decades.

I have become more familiar with these laws in the course of collecting data for Violation Tracker. The database currently contains more than 360 cases in which kickbacks and bribery are involved as the primary or secondary offense. These cases have resulted in more than $14 billion in fines and settlements involving many of the largest names in pharmaceuticals (Merck, Amgen, Bristol-Myers Squibb, Pfizer, et al.), hospitals (Tenet, HCA, among others) and pharmacies (such as CVS).

The biggest penalty is a $2.2 billion agreement signed by Johnson & Johnson in 2013 to resolve civil and criminal charges of paying kickbacks to physicians to encourage them to prescribe several of its drugs for uses not approved by the Food and Drug Administration.

One of those drugs was the anti-psychotic medication Risperdal, which was only approved for schizophrenia but which J&J was allegedly promoting for other less serious conditions among elderly patients through financial inducements to providers.

In an interesting coincidence, the announcement of the new HHS proposal came at almost exactly the same time that a jury in Philadelphia hit J&J with an $8 billion verdict over its marketing of Risperdal for use by children.

It will be interesting to see whether the new HHS rules on kickbacks, if they go through, manage to distinguish between more innocent financial dealings among providers and the corrupt practices that have been so common among the larger players. Given this administration’s track record on healthcare and so many other issues, we cannot give it the benefit of the doubt.

Capital Punishment

Some corporate critics have argued that the only way to deter egregious misconduct by companies may be to give prosecutors the option to seek the “death penalty”—revocation of the firm’s charter and the closing of the business.

Ever since the dismantling of Arthur Andersen after its conviction on criminal charges relating to its auditing of Enron, prosecutors at the federal level have avoided seeking that harsh remedy. In fact, they moved sharply in the other direction by adopting dubious arrangements known as deferred prosecution and non-prosecution agreements that allow companies essentially to buy their way out of criminal jeopardy. A recent report from Public Citizen found that these arrangements have been a failure in deterring corporate wrongdoing.

Yet what has received less attention is the fact that the corporate death penalty is alive and well at the state level. Numerous state AGs have been using this method to deal with those firms considered unredeemable bad actors.

For example, the Delaware AG Kathy Jennings recently announced that she had filed actions in the state Court of Chancery to dissolve 15 Delaware business entities for involvement in criminal activities. Her press release stated: “State law allows the Attorney General to petition for cancellation of an entity’s Delaware formation document when its powers, privileges, or existence have been abused or misused.”

Among the firms she moved to dissolve were LOAV Ltd., Davis Manafort International LLC, DMP International LLC, BADE LLC, Jupiter Holdings Management, LLC, and Davis, Manafort & Stone, Inc. The principals of these companies, the AG noted, were Paul Manafort and Richard Gates, who pleaded guilty in 2018 to charges involving money laundering, failing to register as a foreign agent, failure to report bank transactions, and making false statements. Manafort was also convicted in 2018 by a jury of tax and bank fraud charges. The charges against the two men included allegations that they used the named businesses to illegally conceal from the United States government millions of dollars in income received from the Ukrainian government as well as evading roughly $1.4 million in personal income taxes owed to the IRS while funding lavish personal expenditures.

The AG also proposed to dissolve Essential Consultants LLC, which was used by former Trump fixer Michael Cohen to facilitate a hush-money payment of $130,000 to Stormy Daniels.

Previously, the Delaware AG was successful in forcing four LLCs linked to the now defunct website Backpage.com to relinquish their state certificates of formation in the wake of allegations that the site promoted prostitution and human trafficking.

Not all the companies forced to dissolve are quite so well known. In the course of collecting data for our recent report on state AGs, my colleagues and I came across numerous cases in which obscure firms such as home contractors or used-car dealers were forced out of business.

For example, in July 2011 the Oregon AG announced that a company called S&S Drywall Assemblies was ordered dissolved as part of the resolution of criminal racketeering and antitrust charges brought against the company and its owner.

In some cases a state AG would carry out what amounted to a partial death sentence by banning an out-of-state company from continuing to operate in the AG’s state while it may continue to function elsewhere. We found numerous cases of this in North Dakota, which rarely penalized in-state companies but did not hesitate to ban misbehaving out-of-state ones. One of these targets was a traveling asphalt paving company.

We did not include these cases in our report or the state AG data we added to Violation Tracker because the dissolutions or state bans usually did not include monetary penalties, the common denominator among the varied cases contained in our database.

Clearly, it’s much easier for state AGs to dissolve smaller firms than it would be for federal prosecutors to do the same to large corporations with thousands of employees and shareholders. States also have the advantage that corporate chartering is a function that they, not the feds, control.

There is a feeling of satisfaction that comes from seeing a rogue company shut down that does not go along with a deferred prosecution agreement and a far-from-confiscatory monetary penalty. There has to be some way to bridge the gap.