The Beltway Bandit Behind the Passport Scandal

My hunch from last night was correct: Stanley Inc. (also known by the name of its subsidiary Stanley Associates) is one of the employers of contract workers who improperly viewed the passport file of Sen. Barack Obama. It now seems that the files of Senators McCain and Clinton were violated as well, so perhaps the speculation about political skulduggery is unfounded.

Yet that still leaves a host of questions related to the growing reliance of the State Department and other federal agencies on contractors such as Stanley, which until today was far from a household name. Yet it’s been around for more than three decades, making its money—like the scores of other Beltway Bandits that populate the office buildings of the Washington, DC area—from the federal spigot.

Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing, Stanley reported getting 65% of its revenue from the Pentagon and 35% from more than three dozen civilian agencies, most notably the State Department.

Stanley used to be a pretty small operator, but over the past decade it has grown at the remarkable rate of 33% a year, reaching more than $400 million. Although the company is publicly traded, it is majority-owned by officers, directors and employees (the latter through an employee stock ownership plan).

While the passport contract is the one in the news, Stanley is largely a military contractor. It brags that some 53% of its 2,700 employees have Secret or Top Secret security clearances. CEO Philip Nolan is ex-Navy, and his board includes retired generals from the Army and the Marine Corps. Stanley doesn’t produce weapons—it provides the systems engineering, operational logistics and other services that keep the high-tech war machine running.

In the 10-K filing, where it is addressing investors rather than the public, the company is blunt about why it expects continuing growth: “increased spending on national defense, intelligence and homeland security” and “increased federal government reliance on outsourcing.” In other words, its business strategy is fundamentally based on the continuation of the “War on Terror” and the steady hollowing out of the federal workforce.

The company goes on to list the specific risk factors that might affect the value of its shares. Here’s one of particular interest (see pp.20-21):

Security breaches in sensitive government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, integrate and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. We could incur losses from such a security breach that could exceed the policy limits under our professional liability insurance program. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenues.

It will be interesting to see if the passport scandal has this negative effect, or if the federal government protects Stanley from its operational shortcomings.

Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.

CEO of Major Passport Contractor is Lieberman Contributor

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

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

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

The release also says:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lemon Socialism: Financial Division

When the British government moved last month to take over crippled mortgage lender Northern Rock PLC, the conservative New York Sun was quick to sound the red alarm. Scandalized that private assets were being seized by a government, the Sun warned that “New Labor is going to start to look an awful lot like Old Labor did. Chalk one up for New York.”

Today, New York’s capital markets are not looking very formidable in the wake of the collapse of Bear Stearns, but conservatives can presumably take solace in the fact that Bear is now in the hands of J.P. Morgan Chase rather than some Washington bureaucrats. Rather than doing anything so retro as a takeover, the Federal Reserve held a one-buyer fire sale over the weekend that allowed Morgan to pay only $2 apiece for shares that were worth more than ten times as much on Friday. Even if you assume that most of that value would have vaporized as Bear went into freefall, Morgan still made out like a bandit with its purchase price of about $240 million. The Wall Street Journal is reporting that Bear’s headquarters building alone is worth up to $1.4 billion. Not surprisingly, Bear’s shareholders are up in arms.

What’s more remarkable about the Fed’s intervention is that it, not Morgan, took responsibility for financing Bear’s most precarious assets—to the tune of up to $30 billion. The way things are going, the Fed is going to have to take that loss. In doing so, it would effectively be nationalizing Bear’s bad investments. Such is the new lemon socialism for the financial sector: the federal government takes over worthless assets while allowing a private party to grab what’s valuable. That same upstanding private party, by the way, paid a total of more than $4 billion in 2005 to settle lawsuits relating to its involvement in the Enron and WorldCom scandals.

The Fed may soon find itself arranging more shotgun marriages. The shares of other major brokerages and investment banks have been gyrating as the market, in the words of the Financial Times, “waits for the next domino to fall.”

“Greenbackwashing”: Wal-Mart Admits It’s Not Green

Wal-Mart CEO Lee Scott has finally admitted what many of us suspected all along: the company’s widely celebrated embrace of environmental principles is bogus. Responding to a question as to why his company’s carbon footprint continues to grow, Scott told the Wall Street Journal ECO:nomics conference the other day: “We are not green.” At the same event, when asked why Wal-Mart continues to sell bottled water, despite its harmful environmental effects, Scott said: “We have to stay in business…If the customer wants bottled water, we are going to sell bottled water.” To top things off, he replied to a question as to when the company might reach its professed goals of generating zero waste and using 100% renewable energy by saying: “I haven’t a clue.”

While these comments were a far cry from the company’s usual green hype, the underlying point is one that Scott has actually been making all along. Wal-Mart’s environmental initiatives are in fact nothing more than an extension of its usual obsession with efficiency. Anyone who bothered to closely read Scott’s landmark “21st Century Leadership” speech in October 2005 saw that he framed the company’s efforts as waste reduction, which would reduce costs, which in turn would raise profits.

Scott reaffirmed this idea in a separate interview with the Journal’s Alan Murray at the ECO:nomics conference, video of which Wal-Mart has posted on its website. He reiterates the idea that what the company is doing is “driving waste out of the system” and thus reducing costs. When Murray asks about trade-offs, Scott amazingly denies there are any. “There don’t have to be trade-offs,” he asserts.

This is the heart of Wal-Mart’s philosophy not only about the environment but about its entire approach to business. The giant retailer can pretend there are no trade-offs because it is the master of cost shifting. It shifts employee healthcare costs to the public sector, it avoids what should be its full labor costs by fighting unionization—and it shifts the costs of environmental transformation (and other innovation) onto its suppliers. Having used its power to avoid cost burdens and difficult decisions, it is possible for Scott to dwell in a cloud-cuckoo-land where tackling problems such as global warming requires no sacrifice and is in fact a way to fatten the bottom line.

While for most economic players there is no free lunch, Wal-Mart can gorge itself at will. When other companies make misleading statements about their environmental record, that is greenwashing. What Wal-Mart has been doing might more accurately be called “greenbackwashing”—promoting the fallacious idea that a green transition can be costless.

Another corporate speaker at the ECO:nomics conference was a bit more honest. Duke Energy CEO Jim Rogers acknowledged that there will be substantial costs in moving to a system of carbon regulation. However, he went on to argue that companies such as his—which is one of the largest CO2 emitters in the country—should get their greenhouse gas permits for free. This, he solemnly stated, was solely for the sake of his ratepayers. “I make a commitment that every one of those allowances will go straight to my customers, and I will sign that commitment in blood,” he said.

Undoubtedly, there will be blood—a lot of it—unless major corporations such as Wal-Mart and Duke Energy acknowledge that environmental transition will entail costs and that corporate profits cannot be immune from those burdens.

State Government’s Selective Disclosure

In November, the Corporate Research Project of Good Jobs First released a report called The State of State Disclosure, which surveyed the quantity and quality of state government transparency relating to subsidies, procurement contracts and lobbying.

In it, we mentioned that numerous states have been adopting new disclosure programs relating to public spending. These initiatives provide useful information but often fail to name names relating to subsidies and contracts. I have just completed a quick update of the transparency wave and found that the newest disclosure sites also have deficiencies.

Kansas’s KanView allows for searching of the names of vendors selling goods and services to any state agency. It covers the past two fiscal years. For now, though, the new site is less complete than the existing online database of the Kansas Department of Administration, which has a deeper archive and includes the full texts of contract awards.

While KanView allows for vendor searches throughout the state government, two other recent arrivals are more limiting. South Carolina’s Spending Transparency site simply provides total annual expenditures by agency. You can also view each agency’s monthly spending during the past year and drill down for details. This is more cumbersome than the existing state procurement website, which allows for general vendor-name searches.

Oklahoma’s new Open Books site also requires you to choose a specific agency or government function in order to view a list of vendors. The state already had an online list of recipients of recent contract awards as well as a list of statewide contracts, though the latter is not easily searchable by vendor name.

In short, it is unclear that new spending transparency measures provide much in the way of additional information, especially in the ability to see which companies are making the most money out of their dealings with state governments. This limitation may be a reflection of the forces that are pushing for such transparency. They are led by the likes of Grover Norquist, head of Americans for Tax Reform (whose website, by the way, has the most complete overview of legislative efforts on spending transparency).

Yes, the same Grover Norquist who was on the Daily Show the other night promoting his new book Leave Us Alone: Getting the Government’s Hands Off Our Money, Our Guns, Our Lives. For Norquist, transparency is apparently a tool in the effort to shrink government to its bare minimum. His priority seems to be highlighting the true extent of social spending rather than fully exposing those corporations that are milking the public sector through lucrative contracts.

The news is more encouraging on the subsidy disclosure front, where progressive groups are taking the lead and have brought about new transparency measures in states such as New Jersey and Wisconsin.

Note: this item is also being posted on the new Good Jobs First blog CLAWBACK.

The South or the Global South? – BMW in South Carolina

The overall U.S. economy may be headed for the crapper, but today there were celebrations in South Carolina after BMW announced plans to invest an additional $750 million at its auto assembly plant in Spartanburg County and add 500 new jobs.

These days, any American job creation, especially in manufacturing, is going to be seen as good news. But BMW’s announcement cannot be seen as a vote of confidence in the vitality of the U.S. economy, Instead, it seems to be ploy to take advantage of the cheap dollar—and more importantly, cheap labor. Manufacturing workers in South Carolina earn only about one third of what autoworkers are paid in Germany, where BMW is simultaneously cutting employment by more than 7 percent.

Today BMW officials were praising South Carolina’s distribution infrastructure, but what they were really lauding was the anti-union climate in the state, where only 5.4 percent of manufacturing workers (and none at BMW) are represented by union contracts. Cheap labor and weak or non-existent unions: the U.S. South is looking more like the Global South all the time.

Another similarity is compliant government. Ever since the early 1990s, when BMW chose South Carolina as the location of its U.S. assembly operation, the state has been more than accommodating. The German company was given some $150 million in tax breaks and other subsidies in connection with its initial investment, and its subsequent expansions have been rewarded with many millions more in giveaways. BMW said today it may yet seek job development tax credits in connection with the new expansion. The company is apparently so confident of getting what it wants that it doesn’t bother nailing down the details ahead of time. That’s [Global] Southern hospitality.

The Outsourcing Threat Behind the Southwest Airlines Scandal

As I write this, Google News says it contains nearly 900 current stories about the scandal over maintenance lapses at Southwest Airlines—lapses that prompted the Federal Aviation Administration yesterday to propose a record $10.2 million civil penalty against the carrier. Yet fewer than ten of those stories make any reference to the broad threat against airline safety: outsourcing.

Among the handful of items mentioning outsourcing is a statement put out today by Teamsters President James Hoffa. (The mechanics at Southwest are actually represented by an independent union.) Less than a month ago, the Teamsters and the Business Travel Coalition co-sponsored what they called a national summit on aircraft maintenance outsourcing. In addition to a video presentation by Rep. James Oberstar of Minnesota—who today revealed more dirt about Southwest and the FAA—the event included a speech by William McGee of Consumer Reports, whose March 2007 article on maintenance outsourcing was titled “An Accident Waiting to Happen?”

The safety threats from outsourcing have also been cited for years by the Inspector General of the Department of Transportation (FAA’s parent agency).  A 2003 report by the IG found that major carriers were outsourcing some 47 percent of their total maintenance costs. The IG’s examination of conditions at a sample of repair stations used in the outsourcing found that 86 percent had “discrepancies” such as the use of improper parts and equipment and outdated manuals. A 2005 follow-up report found that the majors had upped the outsourced portion of their maintenance spending to 53 percent, with Southwest well above the average at 64 percent (see page 8).

Last June, the IG told Congress that the majors were now spending 64 percent of their maintenance dollars on contractors. He went on to point to the “challenges” facing the FAA in dealing with the continuing growth of outsourcing, including the fact that it did not have a good system for assigning its inspectors. But the agency told the IG it was addressing the problem—by commissioning a study from…a contractor.

Congress Scrutinizes Compensation of Financiers and Contractors

Through war and peace, recession and expansion, bear market and bull—there is one constant in the American economy: Large corporations will pay their top executives ridiculous amounts of money. As the country focuses more on a weakening economy, some members of Congress are raising questions about the eternal boom in CEO compensation.

Today, the House Committee on Oversight and Government Reform, chaired by Rep. Henry Waxman of California, issued a preliminary report on the research its staff has done in preparation for a hearing tomorrow on the compensation and retirement packages awarded in recent years to the chief executives of three companies implicated in the mortgage crisis: Angelo Mozilo of Countrywide Financial Corporation, E. Stanley O’Neal of Merrill Lynch, and Charles Prince of Citigroup. (O’Neal and Prince no longer hold those jobs.)

In addition to looking at SEC filings, the committee obtained thousands of pages of documents directly from the companies, including board minutes and internal e-mails—some of which the committee has put online.

The report raises a series of pointed questions, no doubt foreshadowing tomorrow’s interrogatories, particularly about Mozilo’s personal stock sales last year, the exceptionally generous “change in control” provision in his employment contract, and the lucrative way in which his cash bonuses have been calculated. Mozilo is estimated to have received a total of about $250 million in pay over the past decade. Uncomfortable questions also appear to be in store for O’Neal and Prince about discrepancies between their personal compensation and the fortunes of their firms amid the mortgage meltdown.

Meanwhile, the Oversight Committee’s Subcommittee on Government Management, Organization and Procurement is considering a slate of contracting reforms, one of which would require all companies—whether publicly traded or privately held—that receive more than 80 percent of their revenue from doing business with Uncle Sam (and get at least $5 million in annual revenue from such contracts) to submit data on their top executives’ compensation for inclusion in a public database. The disclosure bill, H.R. 3928, was introduced by Rep. Christopher Murphy (D-Conn.) in response to the controversy surrounding contracts held by the mercenary supplier Blackwater.

Although the bill would cover only a limited number of larger companies that are heavily dependent on government business, industry representatives testifying at a hearing last week strongly opposed the measure. Their dubious argument, echoed by a Bush Administration official, was that the disclosure would have a “chilling effect” on the willingness of companies to compete for contracts. The idea that companies receiving more than three-quarters of their revenue from the federal government would walk away from that market is laughable.

For a good assessment of the disclosure bill and the other contractor reform measures being considered by the subcommittee, see the prepared testimony submitted by Scott Amey, General Counsel of the Project On Government Oversight.

The “Toxic Ten” – The Start of an Antidote to Greenwashing

Portfolio, the Condé Nast business magazine that debuted last year, started out looking as if it would be little more than a glossy celebration of the corporate world’s movers and shakers. It has, however, shown a willingness at times to address the seamier side of capitalism, such an October 2007 story on links between Chiquita Brands and death squads in Colombia.

The new (March) issue of the publication has another article that shows business at its worst. “The Toxic Ten” by Harry Hurt III is a welcome antidote to the endless stories published these days about the ways in which big business has supposedly gotten religion about the environment. Hurt shows that there are still large companies that are dumping toxic substances in rivers, spewing mercury out of power plants, using harmful materials in their products and contributing mightily to global warming. His list is not meant to be a ranking but instead an assortment of companies that “could be doing better, given their resources and position in their industry.”

The “Toxic Ten” consists of:

  • J.R. Simplot (the potato king generates lots of waste products)
  • Cargill (the $88 billion agribusiness giant contaminates air and water)
  • Ford Motor (has dragged its feet on producing truly fuel-efficient vehicles)
  • Boeing (has been evasive about its carbon footprint and has been involved in water pollution)
  • Apple (uses toxins such as polyvinyl chloride and brominated flame retardants)
  • Southern Co. (operates some of the dirtiest power plants in the country)
  • American Electric Power (operates some of the other dirtiest power plants)
  • Massey Energy (mines coal via mountaintop removal)
  • Chevron (is involved in more than 90 active Superfund sites)
  • Alcoa (operates power plants for its smelters that are heavy polluters)

The list could have gone on much longer. To begin with, how did Exxon Mobil not make the cut? Most of the top air polluters on a list assembled by the Political Economy Research Institute at the University of Massachusetts are also missing. In fact, several of the companies on the Institute’s list—including DuPont and General Electric—appear (along with the likes of Wal-Mart) in a sidebar to Hurt’s article called “The Green 11: Some of America’s Most Eco-Savvy Corporations.”

If by “eco-savvy” Portfolio means those companies that have been most successful in giving the appearance of environmental responsibility, then those slick purveyors of greenwashing do indeed deserve to be singled out.