Dirt Diggers Digest

Slapping Corporate Wrists a Little Harder

Governments will go to ridiculous lengths to punish criminals. States that cling to the death penalty now resort to back-alley methods for obtaining the drugs used in lethal injections, leading to grotesque results such as the recent botched execution of Clayton Lockett in Oklahoma.

When it comes to corporate crime, a very different standard is applied. Prosecutors go out of their way to soften the impact on offenders. Criminal charges are often not filed, and when they are companies are offered deferred prosecution agreements that allow them to pay fines and make promises not to sin again.

Federal prosecutors are now feeling pressure to take a harder line, especially with global banks that may have flouted U.S. laws relating to tax evasion and international sanctions. The New York Times reports that the Justice Department is pushing to get guilty pleas from Credit Suisse, which has faced charges of helping wealthy Americans dodge taxes through secret bank accounts, and BNP Paribas, which is being investigated for violating U.S. economic sanctions against countries such as Sudan and Iran.

Getting a guilty plea from a major bank (rather than from one of its obscure subsidiaries, as happened in the LIBOR-manipulation case involving UBS) would be an important step in affirming that these institutions are not above the law. The problem is that the Justice Department does not seem to want to impose the kind of penalties that normally go along with a criminal conviction.

According to the Times, prosecutors are meeting with banking regulators “about how to criminally punish banks without putting them out of business and damaging the economy.”

We would never hear such a statement made about, say, an illegal gambling ring. There is no concern that going after such an operation would eliminate jobs and harm the economy.

As for banks, even when they are found to have engaged in egregious behavior, they are treated as legitimate institutions that must be preserved. It is true that not every employee may have been involved in criminal misconduct, but that is no reason why the continued survival of the bank in its existing form has to be regarded as an essential component of any resolution of criminal charges.

Corporate crime will not disappear until prosecutors are willing to consider truly punitive penalties for companies that engage in serious misbehavior. By this I mean consequences that go well beyond fines that a company can easily afford (and can often deduct from its taxes).

It’s often said that bringing criminal charges against corporations is pointless, since a company cannot be put in prison. Leaving aside the question of the feasibility of putting corporate executives behind bars, this view fails to acknowledge the other ways in which a firm’s liberty can be restricted.

We see such an example in the current scandal involving Los Angeles Clippers owner Donald Sterling, who is being fined $2.5 million and banned for life by the National Basketball Association for making racist statements but who also may be forced to sell the team. Why is the Justice Department not talking about forcing banks such as Credit Suisse and BNP Paribas to divest themselves of the operations in which the prohibited practices took place? I would prefer to see such criminal enterprises confiscated outright, but that may be too much to hope for.

Prosecutors have to weigh the economic impact of cases that might, for instance, lead to the revocation of a bank’s license to operate, which is considered the corporate equivalent of the death penalty. This is apparently behind the caution being exhibited in the Credit Suisse and BNP Paribas negotiations.

The lesson that prosecutors seem to have taken from the 2002 conviction of Arthur Andersen, the accounting firm that abetted Enron’s frauds, is that putting a company out of business is a big mistake. I don’t understand why.

The demise of Andersen and Enron and Drexel Lambert did not bring about economic calamity. In fact, the economy was probably better off without these corrupt institutions. We might also be better off if today’s miscreants met a similar fate, or at least had to undergo radical restructuring. And that would send a clear message to other corporations that they have to clean up their act.

Note: For an analysis of an industry that has a lot to clean up, including widespread wage theft, see the report just issued by the Restaurant Opportunities Center United and other groups on the National Restaurant Association and its members. I contributed the Rogues Gallery section.

Will Big Pharma Cripple Healthcare Reform?

big-pharma-pills-and-money For those of us who criticized the Affordable Care Act for not going far enough, a big part of the concern was the law’s reliance on the private insurance industry to handle much of the expanded coverage. That industry, with its history of denying coverage and inflated premiums, deserved to be phased out rather than being awarded a large new captive customer base.

It now looks like an even more serious problem for healthcare reform will be another industry with a checkered past: Big Pharma. The drugmakers are generating a growing crisis not only for Obamacare but also for more established programs such as Medicare and Medicaid.

When the federal government recently released data on Medicare billings by individual providers, many of the top amounts were linked to doctors who administer expensive drugs in their offices and thus include the cost of those treatments in their Medicare claims. For example, some 3,000 ophthalmologists billed an average of $1 million each (one billed $21 million by himself), reflecting heavy use of an expensive medication for macular degeneration injected into the eye.

Another challenge comes from Sovaldi, a new hepatitis C drug sold by Gilead Sciences with a list price of $1,000 per pill, or $84,000 for a typical course of treatment. The product is doing great things for Gilead, which recorded $2.3 billion in sales for the drug’s first full quarter on the market — a pharmaceutical industry record.

It is causing problems for those entities that have to pay for use of the drug, including state Medicaid programs, the Department of Veterans Affairs and private insurance companies. One of the largest of those companies, UnitedHealth Group, recently cited the cost of hepatitis C treatments such as Sovaldi as one of the reasons for a drop in its earnings in the first quarter of 2014.

Earlier, several members of Congress, including Rep. Henry Waxman of California, sent a letter to Gilead expressing concern about the price of Sovaldi, but it generated little concern on the part of the company or the rest of the industry. One pharma industry analyst was quoted as saying: “We just look at this letter as a little bit of noise.”

Unfortunately, the dismissive tone was justified. Congress has done little to rein in the cost of prescription drugs and even took the absurd step of barring the federal government from negotiating with pharmaceutical providers in the Medicare Part D program.

The cost problem will only get worse. Patents are expiring on many major drugs, and the industry is creating fewer new ones, prompting companies to squeeze everything they can out of their shrinking product lines.

That means higher prices and other shady practices such as promoting drugs for uses for which they have not been approved. Many of the industry’s largest companies have paid large amounts to settle illegal-marketing charges brought against them by the Justice Department, among them Eli Lilly ($1.4 billion relating to Zyprexa), GlaxoSmithKline ($3 billion relating to Paxil and Wellbutrin) and Pfizer ($2.3 billion relating to Bextra and other medications).

Illegal marketing is just one of the serious charges brought against Big Pharma in recent years. The $3 billion GlaxoSmithKline settlement also covered allegations that it withheld crucial safety data on its diabetes drug Avandia from the U.S. Food and Drug Administration. Merck paid the federal government more than $650 million to settle charges that it routinely overbilled Medicaid and other government programs and made illegal payments to healthcare professionals to induce them to prescribe its products. Eli Lilly paid $29 million to settle foreign bribery charges.

It remains to be seen whether these cases have prompted Big Pharma to clean up its act. I remain skeptical, especially in light of recent signs that the industry is engaged in more concentration designed to allow companies to narrow their focus and thus gain bigger market share in particular sectors.

More specialization will mean less competition, which in turn will mean fewer choices and rising prices. When it comes to drugs, the Affordable Care Act will have increasing difficulty living up to its name.

A Fair Game’s Wage: Athletes Confront the NCAA

Guest blog by Thomas Mattera

The biggest star of the 2014 Men’s NCAA Basketball Tournament was not a person, but a phrase. When the event’s nearly 103 million television viewers tuned in for the first time, they were less likely to be greeted visually by any one announcer, coach or player than they were by the term “student-athlete.” The fourteen-letter camera hog was plastered all over coverage of each game, including on the elongated screen next to the court, where it was featured in a constantly rotating stream of advertisements for some of the tournament’s largest corporate sponsors.

Any why not? It is a phrase worthy of a hundred One Shining Moment montages, a romantic notion in tantalizingly hyphenated form. But what of the origin of this phrase? Did it materialize from the mind of James Naismith alongside the idea for the peach basket? Or perhaps it was a serendipitous typewriter error on the essay portion of Knut Rockne’s SAT?

Of course, the correct answer is neither of these. Rather, the term was concocted out of thin air sixty years ago by the NCAA in an (successful) effort to avoid paying worker’s compensation to the wife of a player who died from a head injury sustained playing college football.

This historical footnote serves as a perfect example of the absurdity of college sports and audacity of its bloated beneficiary, the National Collegiate Athletic Association. A term that is now the foundational marketing tool on the biggest stage of college athletics is merely another in a long line of creative NCAA solutions to continue the exploitation and deny the players a slice of the pie.

Deeming the question of whether to reconsider the status quo of collegiate athletics a “debate” is an insult to life’s real unsolvable quandaries. College athletes provide unpaid labor for a mammoth industry, often devoting nearly forty hours a week to their sport while risking serious permanent injury and operating on year-to-year scholarships that can be terminated at the school’s discretion. In many ways, it is like the American healthcare system: one of its kind, wildly unjust, and mired in stagnancy by those who benefit from the current reality. It is no wonder that Bill Maher found so many who agreed with this now famous tweet.

Of course, this is no new revelation. As the television contracts alone have grown into the tens of billions of dollars while many players remain unable to afford life’s basic necessities, the inequity has become even harder to hide and the drumbeat for change harder to silence. Just the last five years have seen crucial developments in changing public perception on the issue, highlighted by a lawsuit led by former UCLA star Ed O’ Bannon regarding video game likenesses and Taylor Branch’s scathingly brilliant piece in The Atlantic.

To counter these well-articulated and pressing criticisms of their system, the NCAA has done what those in the way of societal progress always do: stuck their fingers in their ears and screamed “lalalalala.” Well, not exactly. They have clung to a pair of stale talking points in rationalizing the way things are: the monetary value of a scholarship and the impracticality of determining individual athletic benefits.

The former assertion, championed most recently by NCAA President Mark Emmert ($1.7 million annual salary), hinges on the idea that the free tuition many athletes receive is more than adequate compensation for their sporting efforts. This argument states that these young people are primarily students pursuing a degree and that athletics are only a secondary focus of their lives on campus.

The latter point states that even if one believes in the moral validity of monetary compensation and better benefits for college athletes, there is no practical way to administer these funds. How would we figure out how much each athlete should be paid? Should the members of the football team receive the same treatment as the star-studded fencing squad? Even if we should reward these athletes, there is no equitable way to do so. Therefore, it is a pointless endeavor.

Both arguments have obvious flaws in logic. While free tuition and board may be enough to reflect the value of many athletes, what of the superstars who singlehandedly prop up marketing campaigns and sell out campus merchandise stores? What about those like Johnny Manziel, who by one estimate made more than $250 million for Texas A&M over two years? Clearly, a meal plan, stack of textbooks, and unlimited free entry to a few lecture halls is not a fair trade for his services.

Furthermore, the idea that we should not compensate athletes simply because it is too complicated to figure out the wage scale is the logical equivalent of not racially integrating a school district because it would be too hard to figure out the bus routes. Or not allowing women to vote because ordering new ballots would be inconvenient. Logistical challenges can be overcome given the proper strategy, much like injustice.

Despite these deficiencies, the arguments had mostly gotten the job done for the NCAA, allowing it to claim plausible deniability and stifle change for decades even as public perception shifted. It seemed we were headed for a world in which everyone thought the NCAA should change their ways but no one could do anything about it.

That is, until the introduction of former quarterback Kain Colter and the effort to unionize the Northwestern Football Team. Seeking primarily to address the issues of medical expenses, autonomy in transfer decisions, a post-graduation player trust fund, and better protocol for brain traumas, lawyers representing the players made the case to the National Labor Relations Board that they are, in fact, employees of the university with the right to organize and collectively bargain. Peter Ohr, regional director of the NLRB, concurred with this idea and ruled in favor of the players in a strongly worded twenty-two page decision released on March 26.

Nestled in the text of Ohr’s assertions are the perfect counterpoints for both of the two arguments the NCAA has come to rely upon. First, Ohr discusses the time commitment of participating in big-time college athletics, at one point producing a schedule from Northwestern training camp in which players were forced to allocate 16 hours a day exclusively to football. So much for the sanctity of academics and the overwhelming priority of schoolwork versus sports. These young people are already working like full-time employees, Ohr asserts, so they should be treated like it too.

As for the question of how to determine how much each player should be rewarded? Say hello to the idea of collective bargaining, the tried and true method for determining the wages and benefits of a myriad of workers for centuries. If it worked for the Samuel Gompers and Walter Reuther, it can work for Johnny Football and Shabazz Napier.

So what comes next? The decision has set up a vote on April 25 in which Northwestern’s players will decide whether to formally organize. Less than gracious in defeat, Northwestern itself seems intent on confirming the veracity of Ohr’s argument, immediately assuming its role as the anti-union employer as head Coach Pat Fitzgerald does his best Bob Corker impersonation.

No matter the result of the vote or the endless string of appeals Ohr’s ruling is sure to generate, the argument of collegiate athletic compensation has been permanently altered. No longer can the proprietors of college sports hide their bounty in plain view behind canned responses and loaded phrases like “student athlete”. Colter and his allies have formulated a new game plan, executed it to perfection, and the once invincible NCAA bully may get sacked.

Comcast’s Other Sins

comcast center Comcast’s audacious proposal to acquire Time Warner Cable and thereby become a cable behemoth has been met with an appropriate degree of skepticism.

Both Republicans and Democrats on the Senate Judiciary Committee grilled a company executive at a hearing on the $45 billion acquisition.

There are good reasons to worry about the impact the merger would have on customers in an industry that already imposes inflated prices for what is often substandard service. As consumer advocate Gene Kimmelman put it in his prepared testimony for the hearing:

The merger will even more firmly entrench Comcast as the gatekeeper at the crossroads of Internet, television, and communications innovation. Because the merged company will have both the incentive and ability to thwart development of innovative Internet services that threaten Comcast’s excessively priced offerings across a much broader swath of the market than is true today, this merger must be rejected.

The impact on consumers is not the only cause for concern. The merger would give considerably more power to a company that has a long history of using its clout to mistreat workers and fight unions. Comcast has been forced to moderate its labor practices somewhat, but there is no evidence that it has changed its fundamental stance.

It’s significant that Comcast’s worst union-busting behavior emerged after its last giant cable acquisition — the purchase of AT&T Broadband in 2001. As Jonathan Tasini, then head of American Rights at Work, put it in an op-ed in the Los Angeles Times:

Comcast promised to abide by union contracts and bargain in good faith. Instead, it embarked on a carefully orchestrated campaign to destroy the unions. In Detroit, Comcast chopped off more than half the unionized workforce, moving dozens of jobs to a nonunion facility. During organizing drives, Comcast has shelled out large sums to high-priced union-busting law firms and has harshly disciplined union supporters — firing some outright. Numerous charges have been filed against Comcast before the National Labor Relations Board.

This track record prompted the Communications Workers of America to oppose Comcast’s 2004 (ultimately unsuccessful) effort to take over Walt Disney. In a press release the CWA wrote: “Comcast has earned a designation by the AFL-CIO as one of the most aggressively anti-union companies in America, for its intimidation and threats against workers who want union representation. A Comcast vice president in Beaverton, Ore., stated publicly that Comcast is ‘at war to decertify the CWA’ and the company has followed that strategy since it bought AT&T Broadband in 2002.”

That strategy led to decertification votes in more than a dozen cities. An April 2004 article in the Philadelphia Inquirer reported that the unionized portion of Comcast’s workforce had fallen to less than five percent. The paper quoted CWA official George Kohl as saying: “We believe Comcast is out to crush unions. It has to do with control and paternalism run amok.”

Also in 2004, American Rights at Work (which later merged with Jobs with Justice) published a report entitled No Bargain: Comcast and the Future of Workers’ Rights in Telecommunications. After documenting how Comcast abused workers and fought unions, the report called on the company to change its ways.

Under pressure from CWA, Comcast apparently did change a bit. The union was able to negotiate decent contracts in places such as Pittsburgh and Detroit. Nonetheless, the union was critical of Comcast’s 2010 move to take over NBC Universal. So far, the CWA has taken a cautious public stance on the Time Warner Cable deal, saying it should be scrutinized but not explicitly opposing or endorsing it.

As an outsider, I am not familiar with the details of Comcast’s current dealings with the CWA or its other major union, the International Brotherhood of Electrical Workers. Yet the company’s history on labor relations, especially in light of what happened after the AT&T Broadband acquisition, makes me worry about how it would behave after gaining control over an even larger portion of the cable industry.

It is telling that the Comcast official who represented the company in the recent Judiciary Committee hearing, Executive Vice President David L. Cohen, is the same person who led the anti-union campaign a decade ago. ”We take pride in providing a safe, enjoyable and productive work environment,” Cohen told the New York Times in 2005, adding that workers ”do not need to be represented by a union to gain all of the advantages.” Earlier, Cohen was quoted as dismissing critics of the company as “a few disgruntled employees that the union trots out.”

Many companies use the section on employees in their 10-K filings with the SEC to proclaim that they have good relations with their workers. Comcast does not bother to even address the issue in its 10-K. I suspect that Comcast is still at heart a unionbuster and worry that after swallowing Time Warner Cable it would feel freer to let that impulse come to the fore once again.

Congress’s Corporate Accountability Charades

In recent days we’ve seen reprises of that old stand-by from the Congressional repertoire: hearings in which members of the House and Senate express indignation at corporate misconduct. Like similar performances that have come before, these events provided some short-term gratification but in all likelihood will ultimately prove frustrating.

The designated whipping boys this week were General Motors and Caterpillar. Both are legitimate targets. GM is embroiled in one of the worst safety scandals in its history as a result of mounting evidence that for years it concealed evidence of an ignition-switch defect that has been tied to a large number of deadly accidents. Caterpillar is under the gun because of a new Senate report accusing it of using accounting gimmicks to avoid more than $2 billion in federal taxes.

At a hearing of the Senate Commerce committee, GM chief executive Mary Barra was confronted with statements such as “The public is very skeptical of GM,” “GM is not forthcoming” and “I think this goes beyond unacceptable. I believe this is criminal.”

The amazing thing is that these statements were coming from both Democrats and Republicans, who differed little in their critique of the automaker. The same can, for the most part, be said about Barra’s only slightly milder interrogation by the House Energy and Commerce investigative subcommittee. Several Republicans sought to score some political points by emphasizing GM’s previous status as a government-controlled corporation, and Tennessee Republican Marsha Blackburn asked Barra whether the company’s safety lapses were related to the federal bailout (Barra sidestepped the question). Yet they did not press too hard in that direction.

The transcripts of the two GM hearings (available via Nexis) paint a very different picture of Congress from what we usually see these days. As Rep. Peter Welch of Vermont stated in the House hearing: “I have to congratulate General Motors for doing the impossible. You’ve got Republicans and Democrats working together.”

There was a similar seriousness of purpose and absence of simple-minded partisanship in the Senate hearing on Caterpillar. Subcommittee chair Carl Levin, a Michigan Democrat who has done extensive work to highlight corporate tax dodging, was of course aggressive in grilling company executives about Caterpillar’s funneling of vast amounts of profit through a tiny Swiss subsidiary to take advantage of an artificially low tax rate.

Yet the company did not get much sympathy from the Republican members of the subcommittee either, though Wisconsin’s Ron Johnson did manage to interject a reference to “our uncompetitive tax system.”

The unfortunate truth is that hearings such as these end up being nothing but a charade in which members of Congress pretend for a while to be tough on an egregious case of corporate malfeasance before they go back to doing the bidding of the monied interests.

For example, New Hampshire Sen. Kelly Ayotte, who was the one calling GM’s behavior “unacceptable” and “criminal,” sought to weaken the Consumer Financial Protection Bureau last year. Nevada Sen. Dean Heller, who joined in the critical questioning of Barra, once introduced a bill to prevent the Environmental Protection Agency from introducing “job-crushing regulations.”

The problem extends to Democrats as well. Veteran Rep. John Dingell, who was awarded special deference at the House hearing, has long-standing ties to General Motors and the other big U.S. automakers, which have been among his strongest political supporters. His wife Debbie Dingell worked for GM for 30 years. When the 87-year-old Dingell announced earlier this year that he plans to retire from Congress, a GM spokesperson said: “As a champion of the auto industry, John Dingell had no peer.”

If anything, the inclination of members of Congress to do the bidding of business will only increase, now that the Supreme Court has struck down limits on total amounts wealthy individuals can give to candidates, party committees and PACs. Chief Justice John Roberts wrote: “Money in politics may at times seen repugnant to some, but so too does much of what the First Amendment vigorously protects.”

By once again equating money with speech, Roberts is ensuring that those with the most of it, including giant corporations, are the ones to which Congress, apart from brief periods of public interest grandstanding, will bow.

Coal Ash Taints a Would-Be Corporate Paradise

DanRiverAshPipe It took a spill of tens of millions of gallons of water contaminated with toxic coal ash into a river used as a source of drinking water to put a halt to what was starting to look like a corporate coup in North Carolina. Duke Energy, the owner of the retired Dan River power plant in the town of Eden where the accident took place in early February, is now under siege, as is the governor who was doing its bidding.

North Carolina’s Department of Environment and Natural Resources (DENR) cited Duke Energy for “deficiencies” at the site of the spill and later charged the company with regulatory violations at other coal ash storage locations. DENR officials accused Duke, for instance, of deliberately pumping 61 million gallons of toxic slurry into the Cape Fear River several weeks after the Dan River accident. A federal criminal investigation that also covers DENR practices is also reported to be underway.

The actions were long overdue. Based in Charlotte, Duke is one of the largest utilities in the country, and it has long intimidated state regulators. The Charlotte Observer looked into the matter and found that over the past decade the company has been fined only four times during the past decade, paying less than $4,000.

Duke gained even more sway over the agency last year after Pat McCrory took office as governor. McCrory was Duke’s guy — not just in the sense that the company supported him — but because McCrory was a manager at Duke for three decades, including the 14 years he was also serving as the mayor of Charlotte. McCrory is one of the most egregious examples of the reverse revolving door: the movement of someone from the private sector into government.

McCrory brought his corporate sensibilities with him to the governor’s job and set out to make state government even more friendly to companies such as his long-time employer. One of the areas in which this was most pronounced was in environmental policy. With the support of far-right legislators, McCrory appointed businessman John Skvarla to head DENR with the apparent intention of defanging the agency. Agency staffers were told to focus on expediting permits rather than enforcement. As the New York Times has put it:

Current and former state regulators said the watchdog agency, once among the most aggressive in the Southeast, has been transformed under Gov. Pat McCrory into a weak sentry that plays down science, has abandoned its regulatory role and suffers from politicized decision-making.

McCrory’s apparent use of public office to advance the interests of Duke goes back more than 15 years. In 1997, while mayor of Charlotte, he testified before a Congressional committee in opposition to tougher air-quality standards that would have required Duke to install costly new emission controls at its coal-burning plants. Then he flew home on Duke’s corporate jet. The North Carolina Supreme Court once raised ethical questions about McCrory’s actions in connection with a decision by Charlotte to condemn a tract of land to help Duke Power obtain an easement.

Throughout his political career, McCrory has insisted that there was no conflict of interest between his position as a manager at a major corporation and his role as a public official. The recent coal ash controversies are stretching that dubious contention to the limit. The governor has been forced to take a more positive stance toward regulation while insisting that he has not had direct communications with his former employer about its coal ash problems. The new image took a hit when it came out that the lawyer hired by DENR to represent it in the federal criminal investigation once represented Duke. Echoing McCrory’s frequent refrain about himself, an agency spokesperson insisted that this was absolutely no conflict of interest.

The coal ash spills have created a serious health problem for the people of North Carolina, but they have also served the useful purpose of debunking the corporate paradise that McCrory and his allies have tried to create. Along with the remarkable Moral Monday protests against the retrograde policies adopted by the state legislature, the new awareness of environmental carelessness on the part of companies like Duke is making it more difficult for business interest to masquerade as the public interest.

Still Unsafe At Any Speed

unsafe In a resounding affirmation of the principle that the cover-up is worse than the crime, federal prosecutors emphasized Toyota’s deceptive practices in announcing that the carmaker will pay $1.2 billion to settle a criminal charge relating to the sudden acceleration controversy. The Justice Department press release uses just about every synonym for dishonesty in describing Toyota’s misdeeds.

“The company admits that it misled U.S. consumers by concealing and making deceptive statements,” the release states, adding that the company “gave inaccurate facts to Members of Congress.” Later it says that Toyota “was hiding” critical information from federal regulators and that it made public a “false timeline.” U.S. Attorney Preet Bharara alleges that the company “cared more about savings than safety and more about its own brand and bottom line than the truth.”

Such strong talk is gratifying, but Toyota, like so many other corporate miscreants, was offered a deferred prosecution agreement in place of an outright conviction. This was made somewhat more palatable by the provision in the agreement that bars the company from deducting the penalty amount from its taxes.

Prosecutors used the announcement to convey a thinly veiled warning to General Motors that it too will have to pay a substantial amount to resolve its own legal entanglements on safety issues. Bharara declared: “Companies that make inherently dangerous products must be maximally transparent, not two-faced. That is why we have undertaken this landmark enforcement action. And the entire auto industry should take notice.”

GM’s announcement several weeks ago that it was recalling hundreds of thousands of its small cars because of an ignition switch problem mushroomed into a major scandal as information came to light suggesting that the company had dragged its feet in dealing with the issue, even though it was linked to 13 deaths. Federal regulators, which had received several hundred complaints relating to the problem, were also criticized for being slow to act. Both Congress and the Justice Department have launched investigations of the matter.

In recent days, GM has tried to spin the situation to its advantage, with CEO Mary Barra putting herself out front and making extravagant promises that such a safety lapse would never happen again. Living up to such a commitment will be even more difficult for GM than it was for Toyota, which used similar p.r. stratagems during earlier phases of its controversy and ultimately failed.

After all, the history of GM is filled with examples of irresponsibility on safety issues. It is now 50 years since Ralph Nader exposed the defects of GM’s Corvair, prompting the company to spy on him and thus inadvertently give a boost to the nascent corporate accountability movement.

Later, GM failed to act when presented with reports that poorly sealed panels on some of its cars could cause dangerous levels of carbon monoxide to leak into the passenger compartment. After some deaths were attributed to the problem in the late 1960s, the company finally recalled 2.5 million cars to repair the defect.

During the 1970s and 1980s the company was frequently criticized by environmentalists and consumer advocates for its efforts to weaken federal rules on emissions and for its resistance to regulations requiring passive restraints such as airbags in all automobiles. In 1990 GM finally agreed to put air bags in all of its U.S. cars starting in 1995.

In 1992 the New York Times published an investigation concluding that GM had recognized as early as 1983 that its pickup trucks with side-mounted gas tanks were highly dangerous but took no action until 1988, even then saying the change was for design rather than safety reasons. During that period, more than 300 people were killed in collisions in which the tanks exploded.

GM resisted recalling trucks with the side-mounted tanks even after the federal government asked it to do so. Instead, it launched a campaign against safety advocates and plaintiffs’ lawyers. In 1994 the company reached a settlement with the U.S. Transportation Department under which the federal government gave up on its effort to get GM to recall the trucks in exchange for which the company agreed to contribute $51 million to auto safety programs. GM still faced a series of personal injury lawsuits in connection with the exploding gas tanks, including one in which a Los Angeles jury awarded victims $4.9 billion in damages. GM appealed, and the case was later settled out of court for an undisclosed amount.

It remains to be seen how much GM has to pay in fines and settlements for its current ignition switch scandal, but it will take a lot of punishment to get a company with such a long history of safety lapses to change its ways for good.

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New in CORPORATE RAP SHEETS: a profile of Yum Brands and its controversies relating to wage & hour violations, sanitation lapses and animal cruelty.

Injustice Incorporated

Pages from pol300012014en It’s been clear for a long time that oil drilling in Ecuador’s rain forests dating back to the 1960s caused severe environmental damage. Yet for more than two decades a lawsuit against the lead drilling company, Texaco, and its new owner, Chevron, has meandered through Ecuadoran and U.S. courts.

Chevron, fighting a $19 billion judgment against it in Ecuador (later reduced to $9.5 billion), has sought to turn the tables on the plaintiffs and their U.S. lawyer, Steven Donziger. Recently, a U.S. court ruled in favor of the company, bolstering its refusal to pay anything in compensation.

The challenges faced by the plaintiffs in the Chevron case are, unfortunately, the rule rather than the exception. It is often next to impossible to get a large transnational corporation to fully rectify serious environmental, labor or human rights abuses.

This frustrating reality is analyzed at great length in a new 300-page report from Amnesty International entitled Injustice Incorporated. The study begins with a primer on the relationship between corporations and international human rights law. Amnesty points out a key dilemma:

In some respects the corporate model is antithetical to the right to effective remedy; by admitting and addressing human rights abuses companies expose themselves to financial liability and reputational harm which shareholders (if not the directors and officers of the company themselves) see as entirely contrary to their interests.

Consequently, Amnesty points out, corporations tend to respond in ways that can compound the abuse: “deals with governments, denying victims access to vital information and using vastly greater financial means to delay and frustrate attempts to bring cases to court.”

Another problem highlighted by Amnesty is that large companies tend to be structured as a collection of separate legal entities whose liability is compartmentalized. While recognizing that it is not realistic to try to change this well-entrenched feature of corporation-friendly legal systems, Amnesty argues that “a counter-balance is needed to protect public interest and the international human rights framework.”

Amnesty amplifies its analysis through four detailed case studies. The first is the 1984 Bhopal catastrophe, in which a massive leak of toxic methyl isocyanate gas at a facility owned by a subsidiary of Union Carbide killed thousands and caused debilitating illnesses in tens of thousands more. Union Carbide paid what the victims considered grossly inadequate compensation while its CEO, with the help of the U.S. government, evaded extradition on criminal charges. Dow Chemical, which acquired Union Carbide in 2001, has refused to do anything more to help the victims.

The other situations examined in the Amnesty report are not as well known. The first is the Omai gold mine in Guyana, where the rupture of a tailings dam in 1995 spilled a vast quantity of effluent laced with cyanide and heavy metals into two rivers. The mining operation and the dam were run by Omai Gold Mines Limited, a company controlled at the time by Canada’s Cambior Inc. Soon after the accident, Cambior paid out modest amounts in compensation to local residents while vigorously contesting legal actions brought both in Guyana and in Canada. The company, which later merged with another Canadian firm, Iamgold, never paid out anything more.

Amnesty’s third case study deals with the Ok Tedi mine in Papua New Guinea, where for many years waste products were dumped into a river used by some 250 communities of indigenous people. In 1994 a lawsuit on behalf of local residents was filed in Australia, the home country of the company, Broken Hill Proprietary, which at the time was the primary operator of the mine. BHP, now part of BHP Billiton, eventually agreed to an out-of-court settlement that included the equivalent of $86 million in compensation but did not require it to build a long overdue tailings dam.

The final case study in the Amnesty report is also the most recent. In 2006 the Dutch oil trading company Trafigura signed a dubious agreement with a small firm in Ivory Coast that allowed it to dump petroleum waste products at various sites in the city of Abidjan. Thousands of residents exposed to the substances suffered from nausea, headaches, breathing difficulties, stinging eyes and burning skin. At least 15 were reported to have died. Trafigura reached a settlement that Amnesty labels as insufficient.

Amnesty finishes its report with an analysis of what it calls the three biggest obstacles in such cases: the legal hurdles to extraterritorial action, the lack of information needed to support claims for adequate reparations and the unwillingness of the governments of the countries involved to hold foreign corporations to full account. While offering a set of reforms aimed at alleviating these challenges, Amnesty harbors no illusions about the difficulty of bringing about such changes. Legal systems, it admits, exist primarily to protect powerful corporate interests.

Private Equity and Public Assistance

schwarzman Everything seems to be coming up roses for the barons of private equity. A front-page article in the Wall Street Journal headlined BLOWOUT HAUL FOR BUYOUT TYCOONS proclaims: “Private equity’s top moguls took home more than $2.6 billion last year as booming markets allowed their firms to cash out of investments and notch blockbuster gains.”

Leon Black, the founder and chief executive of Apollo Global Management, led the pack with $546 million in compensation. Stephen Schwarzman of Blackstone received $465 million and William Conway of the Carlyle Group $346 million. These three men are also well-placed on the new Forbes list of the world’s billionaires. Schwarzman comes in at No.122 with a net worth of $10 billion; Black at No. 240 and a net worth of $5.8 billion; and Conway No. 520 with $3.1 billion in net worth.

Vibrant stock markets are not the only reason for these massive paydays and accumulated fortunes. It’s well known that these firms and their principals also make out like bandits because of the favorable federal tax treatment of the revenue they extract from their portfolio companies. Now it is possible to demonstrate the extent to which the buyout kings are also being subsidized by state and local governments.

My colleagues and I at Good Jobs First recently unveiled a major enhancement of our Subsidy Tracker database. The main refinement in version 2.0 is the addition of parent-subsidiary linkages for more than 25,000 individuals entries accounting for 75 percent of the dollar value of the entire Tracker universe. These entries have been linked to nearly 1,000 parent companies, including many of the world’s largest corporations.

Included among the parent companies are the big private equity firms. In our matching process, we made sure to check which of the portfolio companies of those buyout firms were among the subsidy recipients included in Tracker. We found a lot.

Of the 50 largest buyout firms on the Private Equity International ranking of the largest players in that field, 30 were found to have subsidized portfolio companies. (Many of the other 20 either don’t reveal their portfolios or don’t do business in the United States.) Those companies had received a total of 1,332 subsidies worth $1.8 billion (dollar values are not available for some awards).

Here are the buyout firms whose portfolio companies have received the most in cumulative subsidies:

Silver Lake Partners is No. 35 on our list of top parent companies, with total associated subsidies of $482 million. This is mainly a reflection of the fact that Silver Lake took over the computer company Dell, which has received giant subsidies in places such as North Carolina and Tennessee. (We attribute past subsidies to a company’s current parent, since awards often stretch over many years and usually transfer with a change of ownership.)
Onex is No. 45 on the list with subsidies of $388 million, the largest amounts coming from the large packages Spirit AeroSystems received in North Carolina and Kansas.
Blackstone is No. 91, with 141 subsidy awards totaling $203 million awarded to several dozen of its portfolio companies.
Apollo Global Management comes in at No. 111, with 107 subsidies amounting to $158 million. Among its most heavily subsidized portfolio companies are Berry Plastics and Verso Paper.

Other major buyout firms are also on the list, including TPG Capital ($68.6 million), KKR ($54.9 million), Bain Capital ($51.6 million) and the Carlyle Group ($36.6 million).

By themselves, state and local subsidies are usually not the predominant factor in the profitability of a portfolio company, but they certainly can contribute to a fatter bottom line. In a recent article about Subsidy Tracker, the investor website Motley Fool wrote:

Companies which are clearly adept at seeking out incentives are much more likely to be able to keep more of their hard-earned income as these subsidies often take the form of a multi-year tax break. Lower effective taxes within a state can allow for more research and development as well as hiring, which can lead to even faster growth for these companies. In other words, seeking out companies with large subsidies is another way of giving yourself an edge over the uninformed investor. Keep in mind that a large subsidy alone is no guarantee of a companies’ success, but it often translates into lower taxes and higher profits.

And when that company is in the portfolio of a buyout firm, those higher profits means that the operation can more easily be taken public and further enrich the likes of Black, Schwarzman and Conway.

Subsidizing the Corporate One Percent

As a result of substantial enhancements Good Jobs First has made to our Subsidy Tracker database, it is possible for the first time to estimate the share of total state and local economic development awards going to big business. The data show a very high degree of concentration: we estimate that at least 75 percent of cumulative disclosed subsidy dollars have gone to just 965 large corporations, even though these companies account for only about 10 percent of the number of announced awards.

In Subsidy Tracker 2.0 we can also for the first time identify which companies have received the most cumulative awards, both in dollar terms and number of awards. In dollar terms, the biggest recipient by far is Boeing, with a total of more than $13 billion, reflecting the giant deals it has gotten in Washington and South Carolina as well as more than 130 smaller deals around the country. The others at the top of the cumulative subsidy dollar list are: Alcoa ($5.6 billion), Intel ($3.9 billion), General Motors ($3.5 billion) and Ford Motor ($2.5 billion). A total of 17 companies have received cumulative subsidy awards worth more than $1 billion; 182 have received awards of $100 million or more. A list of the top 100 parent companies can be found here.

These awards have gone not only to the corporate parents but also to their divisions and subsidiaries. For example, subsidy awards worth more than $1 billion have been given to Warren Buffett’s Berkshire Hathaway by way of its holdings such as Geico, NetJets, Nebraska Furniture Mart, General Re Corporation, Lubrizol Advanced Materials, and Webb Wheel Products.

The company with the largest number of awards is Dow Chemical, with 416. Following it are Berkshire Hathaway (310), General Motors (307), Wal-Mart Stores (261), General Electric (255), Walgreen (225) and FedEx (222). Forty-eight companies have received more than 100 individual awards. The award numbers include some for which no dollar amount has been disclosed (reflecting the inconsistent quality of state and local disclosure).

These totals and many more have just been made possible by a painstaking, several-month effort to link the data on individual subsidy awards we collect from state and local agencies to their respective corporate parents (the agencies almost never provide this information). Using a variety of sources (such as the Croctail compilation of the subsidiary lists which publicly traded companies are required to include in their 10-K filings with the Securities and Exchange Commission), we have matched more than 25,000 of the individual entries in Subsidy Tracker to 965 parents. These awards together account for $110 billion, or about 75 percent of the total value of the Tracker universe.

To cover the greatest number of deals as quickly as possible, our matching process focused first on subsidies awarded to units and subsidiaries of large corporations. The 965 parents we currently cover come from examining all the companies on the following lists: the Fortune 500, the Fortune Global 500, the Forbes list of the (224) largest private companies in the United States, and the Private Equity International list of the 50 largest private equity firms. We have also matched a portion (the top 150) of the Fortune Second 500 list.

In addition, we identified parents for many of the largest remaining subsidy awards, including all the entries in our May 2013 Megadeals report, which catalogued all 240 subsidy deals worth $75 million or more in U.S. history. We will add more parent coverage in the future, but for now the roughly 1,300 companies we have checked represent a good proxy for big business. Nearly three-quarters of these companies were found to have received at least one subsidy award; the rate would be even higher if we were to exclude the numerous companies on the Fortune Global 500 that do not operate in the United States.

Among the 965 parents we identified as subsidy recipients, the average number of awards is 26 and the average total dollar amount (from awards for which this information is disclosed) is $102 million. The aggregate value of their awards—$110 billion—is 74.8 percent of the total value of the Subsidy Tracker universe. The parent companies on the Fortune 500 alone account for more than 16,000 subsidy awards worth $63 billion, or about 43 percent of total Tracker dollars.

The list of most-subsidized parent companies overlaps considerably with the companies in our Megadeals report, which focused on the largest individual deals as opposed to the largest amounts by company we are examining here. Among those on the new list of 100 Top Parents, 89 are linked to at least one Megadeal. That is, only 11 had no individual deal worth $75 million or more.

Given the decline of manufacturing in the United States, it is interesting that the list of top parent companies is dominated by industrial firms. Of the ten biggest recipients, only one – Cerner – is primarily a service provider. As for specific industries, auto is well represented, with GM, Ford, Fiat (which now owns Chrysler) and Nissan in the top ten. Toyota is no. 16 and Volkswagen is no. 22. Other heavy industries represented include aerospace (Boeing, no.1), semiconductors (Intel, no.3), petroleum (Royal Dutch Shell, no.7), chemicals (Dow, no.12) and steel (ArcelorMittal, no.13).

Also significant is the presence of foreign-based corporations. There are three in the top ten (Fiat, Royal Dutch Shell and Nissan) and another five in the next 15. Since we include private equity firms as big-business parents, the list includes several of those firms. The most-subsidized is Silver Lake Partners, which now controls the computer company Dell and thus has Dell’s Megadeals in North Carolina and Tennessee attributed to it.

Although our parent company matching is a work in progress, one conclusion is already clear: large corporations account for an overwhelming share of the tax breaks and cash grants state and local governments have given out in the name of job creation. Our Megadeals study also found that since 2008, the number and cost of megadeals has spiked, even as the total number of new development deals has remained depressed. That is, both our new findings our Megadeals study clearly suggest a “corporate rich getting richer” trend.

Note: The text above is a slightly edited version of a report entitled Subsidizing the Corporate One Percent which I wrote and was just published by Good Jobs First.