From corporation-watch at countercorp.org Mon Apr 12 15:52:04 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Mon, 12 Apr 2010 12:52:04 -0700 Subject: [Corp. Watch] Texas says Exxon deliberately sabotaged abandoned oil wells Message-ID: <1B299A39-FEF2-4A30-8189-EA751639CC39@countercorp.org> Exxon Sabotage May Merit $1 Billion Fine, Agency Says By Joe Carroll (Bloomberg News, July 17, 2009) -- Exxon Mobil Corporation, the largest U.S. oil company, may be fined more than $1 billion for "malicious" sabotage of wells to prevent other producers from tapping fields it no longer wanted, the Texas General Land Office said. Jerry Patterson, commissioner of the land office that oversees oil leases that help fund Texas schools, asked the Texas Railroad Commission to conduct hearings into an alleged 1990s program at Exxon Mobil of plugging abandoned wells with trash, sludge, explosives, and cement plugs. The barriers made it impossible for other producers to revive the wells, Patterson said in a statement to Bloomberg News. Under Railroad Commission rules, Exxon Mobil could face fines of $10,000 a day per well, Patterson said. He said those penalties could add up to more than $1 billion on wells the company abandoned in 1991 after a disagreement over royalties with the owners, the O'Connor family, a Texas oil dynasty. "The allegations paint a false and misleading picture of Exxon Mobil's involvement in the O'Connor oil and gas leases," said Margaret Ross, an Exxon Mobil spokeswoman. "The area in which the wells are located has a water table very close to the surface. It was critical that Exxon protect the groundwater by plugging the wells solidly and thoroughly." In March, the Texas Supreme Court dismissed lawsuits against Irving, Texas-based Exxon Mobil for damaging the wells, ruling that too much time had passed. O'Connor heirs and Emerald Oil & Gas Company, which took over some of the former Exxon Mobil leases, were plaintiffs in the suits. 'Flagrant Violations' Alleged "Exxon committed irrefutable, intentional, and flagrant violations of state rules regulating the oilfield," Patterson said in the statement. "The senseless waste of our natural resources, sabotage of a producing oilfield, and cover-up by Exxon is a malicious act that must be dealt with by the state of Texas." The Railroad Commission hasn't decided whether to hold hearings on the well closings, said Ramona Nye, a spokeswoman for the agency. The three commissioners are next scheduled to meet on July 21. Nye confirmed the agency has the authority to fine companies $10,000 a day for improperly plugging a well. The 118-year-old commission has been responsible for regulating oil production in the state since the 1930s, when rampant drilling caused a supply glut that collapsed crude prices, according to the Texas State Historical Association. Relationship Soured From the 1950s to the late 1980s, the O'Connors earned more than $40 million in royalties on crude and gas pumped from 121 wells that Exxon and a predecessor, Humble Oil & Refining Co., drilled on the family's land near Corpus Christi, according to court filings. The relationship deteriorated in the late 1980s, when Exxon's request for a cut in the 50 percent royalty rate was rejected, court documents showed. Exxon said the field was no longer profitable and began shutting wells, a process that ended in August 1991, according to the documents. Two years later, Emerald Oil, an energy company based in Refugio, Texas, agreed to lease one-third of the area formerly operated by Exxon. When Emerald drilled into the plugged wells to revive production, drill bits collided with cement, severed pipes, and explosive charges normally used to perforate rock formations, Patterson said. Exxon failed to accurately describe the obstacles it had dumped into the wells in reports known as W-3s that it filed with the Railroad Commission, Patterson said in a letter to the agency. Those reports gave Emerald a false picture of how difficult it was going to be to resume output, he said. "You don't foul your own nest," Patterson said. "And that is exactly what Exxon has done." Impact Potential A $1 billion fine would be about one-fifth as costly to Exxon Mobil as the 1989 oil spill by the Exxon Valdez tanker off the coast of Alaska. The company paid $4.84 billion in clean-up costs, fines, punitive damages, and interest for the incident that dumped 11 million gallons of crude into Prince William Sound, damaging wildlife and the fishing industry. "The negative PR in their home state is probably more damaging than perhaps any potential costs," said Gianna Bern, president of Brookshire Advisory & Research in Flossmoor, Illinois. "For most oil producers in the world, a $1 billion fine would inflict a lot of pain, but because of Exxon's size and significant cash reserves, they could deal with it." $25 Billion in Cash Exxon Mobil had $25 billion in cash and cash equivalents at the end of the first quarter, more than the Hague-based Royal Dutch Shell and London's British Petroleum. The 62-year-old Patterson, a former U.S. Marine Corps fighter pilot, said he's trying to maximize royalty payments to the state's Permanent School Fund by encouraging more petroleum production. "This isn't coming from a Birkenstock-wearing environmentalist," Jim Suydman, a Patterson spokesman, said in a telephone interview. "He's a gun-toting Republican who wants to make sure the rules are followed and the state's natural resources are properly developed." Exxon Mobil, which pumps more oil than every member of the Organization of Petroleum Exporting Countries except Saudi Arabia and Iran, posted a record $45.2 billion profit in 2008, or more than $6 for every man, woman and child on the planet. The company has been shifting its exploration and production focus for more than a decade from traditional oil areas such as Texas and the North Sea to places such as West Africa and Brazil, where prospective discoveries are larger. Last month, the company agreed to pay $470 million in interest on a $507.5 million judgment to victims of the Valdez spill. That's in addition to $3.86 billion spent over several years on the clean-up, penalties, and other related costs. From corporation-watch at countercorp.org Tue Apr 13 15:42:23 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Tue, 13 Apr 2010 12:42:23 -0700 Subject: [Corp. Watch] Wall Street corporations use shadow firms to hide losses Message-ID: <72F171F6-D05A-434C-8BD1-BDF22EA2D188@countercorp.org> Lehman Channeled Risks Through 'Alter Ego' Firm By Louise Story and Eric Dash (NY Times, April 12) -- It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers. In the years before its collapse, Lehman used a small company -- its "alter ego," in the words of a former Lehman trader -- to shift investments off its books. The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy. While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees. None of this was disclosed by Lehman, however. Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are. Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to sub-prime mortgages and commercial real estate. Even now, a year and a half after Lehman's collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle's, are rarely mentioned outside of footnotes in financial statements, if at all. The Securities and Exchange Commission (SEC) is examining various creative borrowing tactics used by some 20 financial companies. A Congressional panel investigating the financial crisis also plans to examine such deals at a hearing in May focusing on Lehman and Bear Stearns, according to two people knowledgeable about the panel's plans. Most of these deals are legal. But certain Lehman transactions crossed the line, according to the account of the bank's demise prepared by an examiner of the bank. Hudson Castle was not mentioned in that report, released last month, which concluded that some of Lehman's bookkeeping was "materially misleading." The report did not say that Hudson was involved in the misleading accounting. At several points, Lehman did transactions greater than $1 billion with Hudson vehicles, but it is unclear how much money was involved since 2001. Still, accounting experts say the shadow financial system needs some sunlight. "How can anyone -- regulators, investors, or anyone -- understand what's in these financial statements if they have to dig 15 layers deep to find these kinds of interlocking relationships, and these kinds of transactions?" said Francine McKenna, an accounting consultant who has examined the financial crisis on her blog, called 're: The Auditors'. "Everybody's talking about preventing the next crisis," MacKenna said, "but they can't prevent the next crisis if they don't understand all these incestuous relationships." The story of Lehman and Hudson Castle begins in 2001, when the housing bubble was just starting to inflate. That year, Lehman spent $7 million to buy into a small financial company, IBEX Capital Markets, which later became Hudson Castle. From the start, Hudson Castle lived in Lehman's shadow. According to a 2001 memorandum given to the New York Times, as well as interviews with seven former employees at Lehman and Hudson Castle, Lehman exerted an unusual level of control over the firm. Lehman, the memorandum said, would serve "as the internal and external 'gatekeeper' for all business activities conducted by the firm." The deal was proposed by Kyle Miller, who worked at Lehman. In the memorandum, Miller wrote that Lehman's investment in Hudson Castle would give the bank and its clients access to financing while preventing "headline risk" if any of its deals went south. It would also reduce Lehman's "moral obligation" to support its off-balance sheet vehicles, he wrote. The arrangement would maximize Lehman's control over Hudson Castle "without jeopardizing the off-balance sheet accounting treatment." Miller became president of Hudson Castle and brought several Lehman employees with him. Through a Hudson Castle spokesman, he declined a request for an interview. The spokesman did not dispute the 2001 memorandum, but said that Hudson Castle's relationship with Lehman had evolved. After 2004, he said, "all funding decisions at Hudson Castle were solely made by the firm's management team, and neither the board of directors nor Lehman Brothers participated in or influenced those decisions in any way," adding that Lehman represented only a tenth of Hudson's revenue. Still, Lehman never told its shareholders about the arrangement. Nor did Moody's, one of the leading bond-rating services, choose to mention it in its credit ratings reports on Hudson Castle's investment vehicles. Former Lehman workers, who spoke on the condition that they not be named because of confidentiality agreements with the bank, offered conflicting accounts of the bank's relationship with Hudson Castle. One said Lehman bought into Hudson Castle to compete with the big commercial banks like Citigroup, which had a greater ability to lend to corporate clients. "There were no bad intentions around any of this stuff," this person said. But another former employee said he was leery of the arrangement from the start. "Lehman wanted to have a company it controlled, but to the outside world be able to act like it was arm's length," this person said. Typically, companies are required to disclose only material investments or purchases of public companies. Hudson Castle was neither. Nonetheless, Hudson Castle was central to some Lehman deals up until the bank collapsed. "This should have been disclosed, given how critical this relationship was," said Elizabeth Nowicki, a professor at Boston University and a former lawyer at the SEC. "Part of the problems with all these bank failures is there were a lot of secondary actors" involved, Nowicki said. "There were lawyers, accountants, and here you have a secondary company that was helping conceal the true state of Lehman." Until 2004, Hudson had an agreement with Lehman that blocked it from working with the investment bank's competitors. But in 2004 that deal ended, and Lehman reduced its number of board seats from five to one, according to two people with direct knowledge of the situation and an internal Hudson Castle document. Lehman remained Hudson's largest shareholder, however, and the firm's management remained close to important Lehman officials. Hudson Castle created at least four separate legal entities to borrow money in the markets by issuing short-term IOUs to investors. It then used that money to make loans to Lehman and other financial companies, often via repurchase agreements (known as repos), in which banks sell assets and promise to buy them back at a set price in the future. One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including as the investment bank foundered in the summer of 2008. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman estate, after JPMorgan Chase. Hudson Castle, which is still in business doing similar work for other banks, bought out Lehman's stake last year. The firm's spokesman said Hudson operated independently in the Fenway deal in the summer of 2008. Hudson Castle might have walked away earlier if not for Fenway's ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman's investments with a California property developer, SunCal, and those investments also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman. Further complicating the arrangement, Lehman later pledged those Fenway notes to JPMorgan as collateral for still other loans as Lehman began to founder. When JPMorgan realized the circular relationship, "JPMorgan concluded that Fenway was worth practically nothing," according the report prepared by the court examiner of Lehman. From corporation-watch at countercorp.org Wed Apr 14 04:14:29 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Wed, 14 Apr 2010 01:14:29 -0700 Subject: [Corp. Watch] Big Credit is watching you Message-ID: <620D5E15-18B0-4C6C-B724-B2D862C67940@countercorp.org> Data Mining Still Targeting Card Users? Banks claim they don't profile who's a risk based on purchases by Betty Lin-Fisher (Akron Beacon Journal, Oct 25, 2009) -- Let's say you, like a lot of people, are watching your money closely these days. So while a year or so ago, you might not have shopped at a thrift store or a place that sells things for a dollar, now you decide to stop by and charge what you buy. Are you frugal, or are you tightening your belt because you might be losing your job? Or you and a friend decide to meet for a beer or glass of wine -- something you don't normally do -- and you charge your tab to your creditcard. Are you just out relaxing or are you stressed because you're in a financial quandary? Or let's say your hubby convinces you that you need a well-deserved break. So you treat yourself to a massage at a local spa and charge it. Is your husband a great guy who appreciates you, or are you stressed out because you can't pay the bills? Monitoring creditcard purchases is a practice called ''data mining,'' a multi-billion dollar industry that has been around for years. What's different now, says creditcard expert Robert Manning, is that the consultants who used to use the data to tell creditcard issuers how to ''up-sell'' a customer to buy more things have seen business fall off sharply. Those consultants are now drawing different conclusions based on the data, lack of credit, and consumers not buying as much. They are looking for changes in someone's usual buying habits that, they argue, might indicate potential financial problems. Creditcard issuers could use that information to decrease your limits or raise your interest rates. The practice came under scrutiny this Spring and drew the attention of legislators, who requested a study by federal regulators detailing whether creditcard issuers engaged in the practice and whether it negatively affected minority and low-income card users. At least one creditcard issuer at the time, American Express, said it did use the practice, but said it had stopped. Even now, an official with a banking industry association says the practice is no longer used. But Manning says he doesn't believe it. Consumers should be aware of the practices in this new world of credit and be careful about where they're using creditcards, he said. ''The reality is, the reason they're not doing it anymore is because they're not loaning any money,'' said Manning, author of 'Credit Card Nation', in a recent phone interview. ''They're making it sound like a policy change, but it's a business environment shift," said Manning, who is on leave as a professor at Rochester Institute of Technology and director of the Responsible Debt Relief Institute. "The industry is spinning it that, 'We don't do it anymore'," he said. "They're not saying that they're not going to do it anymore. They're just not loaning money to risky people.'' Manning says the practice is unfair. ''That's not what these tools are designed to do. This is quick and dirty, and they're panicked moves to try to quickly identify people who may default, [even] if that means knocking down nine customers to find that 10th that may default. They're essentially turning on their best customers,'' said Manning. Here's some possible charges to avoid: ? Going to the dollar store or thrift store: ''Everybody is getting the message to be more prudent of their finances. The key to data profiling is, 'Is there a change in your behavior?' ? [The two scenarios are] your finances are fine, but you want to be more cautious, or it's 'Oh my gosh, this person is going to lose his job and [his wife] is trying to cut back'.'' ? Speeding tickets: ''Never charge your speeding tickets. It's suggestive of people who are irrational, impulsive or people going through stress. They don't have the money to pay for their finances, so they're charging it.'' ? Marriage counseling: ''This is the worst possible thing to charge. If you're not making it on two incomes, you won't make it on one.'' The problem with the data profilers or computers making these assumptions, Manning argues, is they can't take it literally. A computer program that doesn't know you is taking broad strokes in interpreting what it thinks is a good or bad thing, he said. Peter Garuccio, a spokesman for the American Bankers Association, said creditcard issuers have told the association they're not using data mining anymore. ''Just because consumer advocates are saying they're using this data doesn't make it so,'' Garuccio said. Creditcard issuers do know where consumers are using their cards, he said, because they need to keep track of where purchases are made in case there's potential fraud or consumers want to dispute charges. Garuccio said consumers have control over how they use their cards and where. ''If suddenly you're using your card at a place where you normally don't -- a hotel casino, for example -- the bottom line is you're running up debt and you're unable to make payments," he said. "That's clearly going to be a red flag for the issuer." Manning's advice? ''Think twice," he said. "I'd never charge anything I wouldn't want to deal with in divorce court.'' In other words, use cash or a check if it's a purchase you think your creditcard issuer could try to use against you. From corporation-watch at countercorp.org Thu Apr 15 15:19:16 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Thu, 15 Apr 2010 12:19:16 -0700 Subject: [Corp. Watch] Companies produce first, ask health and safety questions later Message-ID: <51701C0A-368B-4AE4-BF81-C4CFDDFF04D2@countercorp.org> Were They Canaries? The Too-Short Lives of Park Ji-Yeon and Yu-mi Hwang by Elizabeth Grossman (Huffington Post, April 1) -- This is what we know happened. On March 31, Park Ji-Yeon, who worked at Samsung's On-Yang semiconductor plant in South Korea, died of leukemia at age 23. According to South Korean news accounts, Park began working at the Samsung plant in 2004 and was diagnosed with acute myeloid leukemia in 2007. And it was also in 2007 that a 22-year-old woman named Yu-mi Hwang, who had worked at Samsung's Gijeung semiconductor plant since just before graduating from high school, died -- also of leukemia. A year later, another woman who worked in the same plant and shared a work bay with Yu-mi died of leukemia at age 30. There are now accounts in South Korean news media and from an international coalition of occupational health, safety, and workers' rights organizations that there are now over 20 documented cases of Samsung workers at On-yang, Giheung, and other plants in South Korea suffering from leukemia, lymphoma, and other cancers. Nine have died from such diseases, including a 30 year-old man who died of leukemia in 2004. Additional Samsung workers are known to be suffering from skin disorders, neuropathy, fertility problems including miscarriages, and chronic nosebleeds. At Samsung, Park inspected semiconductor circuits -- a job that involved using chemicals, high heat, and an x-ray machine. Yu-mi and her colleague also worked in semiconductor production, as have other stricken Samsung workers. This is what we also know: Exposure to chemicals known as organic solvents -- substances that include benzene and trichloroethylene (TCE) -- commonly used in semiconductor production, has been linked to elevated rates of cancers, including blood cancers, reproductive problems and birth defects among electronics workers. This has been recorded in the U.S., Taiwan, Scotland, and elsewhere, explains Richard Clapp, professor of environmental health at Boston University, who has conducted such studies. Causes of these diseases are often difficult to pinpoint. Many take years to develop, and may appear long after workers have left jobs where exposure may have occurred. But the numbers are there to suggest a link between electronics industry occupational exposure and increased incidence of illnesses, including cancer. Excess leukemia has been recorded among semiconductor workers, says Professor Clapp. Can a link can be made between occupational exposure and deaths of these young women who worked at Samsung? Would such cancers develop and progress so quickly? "It's hard to be definitive," Clapp says. "But these cases may be the canaries in the mine. While it's hard to be definitive, these young women may be the sentinels." On April 2, family and friends held a funeral service to honor Park Ji-Yeon in Seoul where she had gone for medical treatment. Following the ceremony, her supporters held a press conference at Samsung headquarters that was captured on video. Shortly after the press conference began, the video shows, it was broken up by police who arrested and jailed seven activists -- including an occupational health physician. They were released two days later without charges. The rules governing public assemblies in South Korea have become increasingly restrictive and complex, says Doris Lee of the Asia Monitor Resource Center. Previously, "a press conference would not have been dispersed," Lee says, "but now they are frequently vulnerable to being dispersed as illegal assemblies. This has even happened with funeral processions." A petition and statement calling for a response -- and accountability -- from Samsung and the South Korean government to the deaths and illnesses among electronics workers are now being circulated on-line. The statement calls occupational cancers "a growing health crisis in the electronics industry" and accuses Samsung of attempting to "silence" evidence of illness among its workers exposed to chemicals. Signatories include the Communications Workers of America; International Campaign for Responsible Technology; Japan Occupational Safety and Health Resource Center; the United Electrical, Radio and Machine Workers of America; and Worksafe, along with organizations in Australia, Brazil, India, Malaysia, the Philippines, and Taiwan, among other countries. From corporation-watch at countercorp.org Fri Apr 16 23:07:55 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Fri, 16 Apr 2010 20:07:55 -0700 Subject: [Corp. Watch] Their win-win is our lose-lose: Insurance industry "invests in companies that make people sick" Message-ID: Study: Insurance Companies Hold Billions in Fast-Food Stock By Sarah Klein (Health.com, April 15) -- The fast-food industry has long been under fire for selling high-fat, high-calorie meals that have been linked to weight gain and diabetes, but the financial health of the industry continues to attract investors -- including some of the leading insurance companies in the U.S., a new study reports. According to Harvard Medical School researchers, 11 large companies that offer life, disability, or health insurance owned about $1.9 billion in stock in the five largest fast-food companies as of June 2009. The fast-food companies included McDonald's, Burger King, Kentucky Fried Chicken, and Taco Bell. Companies from both North America and Europe were among the insurers, including the U.S.-based Massachusetts Mutual, Northwestern Mutual, and Prudential Financial. The researchers say insurance companies should sell their fast-food stock or use their influence as shareholders to make fast food healthier, by pressuring big restaurant chains to cut portion sizes or improve nutrition, for instance. There's a "potential disconnect" between the mission of insurance companies and the often-unhealthy food churned out by companies like McDonald's, they write. "The insurance industry cares about making money, and it doesn't really care how," says the senior author of the study, J. Wesley Boyd, M.D., an assistant clinical professor of psychiatry at Harvard Medical School. "They will invest in products that contribute to significant morbidity and mortality if doing so is going to make money." Boyd and his colleagues used a database that draws on financial filings and news reports to estimate the fast-food investments of the 11 companies. Their findings appear in the American Journal of Public Health. Massachusetts Mutual and Northwestern Mutual -- which both offer life, disability, and long-term care insurance -- owned $367 million and $422 million in fast-food stock, respectively, much of it in McDonald's, the authors report. Prudential, which offers life insurance and long-term disability coverage, held $356 million in fast-food stock, according to the study. Insurance companies disputed these figures. Andrea Austin, the assistant director of corporate relations for Northwestern Mutual, says the company's investment in fast-food companies is only about $250 million at the time the study was conducted. That amounts to about one-fifth of 1 percent of the company's portfolio, she adds. Austin also disagrees that the company's fast-food investments represent a disconnect with its mission. "We have to determine what's going to give our policy owners value," she says. "We have to make sure we fulfill our obligations to them, and to do that we invest in a wide variety of industries." "It's that diversification that enables us to return value to them," she says. In an e-mail, MassMutual spokesman Mark Cybulski called the study's findings "absolutely incorrect" and said that as of December 31, the company's holdings of fast-food-related stock amounted to just $1.4 million, which represents less than one-hundredth of 1 percent of the company's $86.6 billion in cash and total invested assets. Austin says she has "no idea" why the figures differ and says that Northwestern Mutual doesn't use subsidiaries. Theresa Miller, the vice president of global communications for Prudential Financial, said in an e-mail that she could not discuss the specifics of the company's portfolios. But she noted that the investments in the report are within index funds, and that "a large portion" are managed on behalf of third-party clients. MassMutual, Northwestern, and Sun Life (another insurer mentioned in the report) have contested Boyd's findings in the past. Last year Boyd led a similar analysis, published as a letter to the editor in the New England Journal of Medicine, that found that seven insurance companies held some $4.5 billion in tobacco-company stock. Then, too, Cybulski said that MassMutual's holdings were just a fraction of what Boyd and his colleagues claimed. According to Boyd, the discrepancy in his figures and those cited by MassMutual may be due in part to two factors. First, insurance companies may invest in fast-food stocks through subsidiaries over which they have limited oversight (and therefore may not consider them direct investments). And some of the investments may be in index funds, a type of mutual fund tied to the collective performance of a large group of stocks, such as the S&P 500, which may include those of fast-food companies. The database used in his analysis provides only the aggregate of a company's holdings, Boyd says. Austin says she has "no idea" why the figures differ and says that Northwestern Mutual doesn't use subsidiaries. Boyd and his co-authors emphasize that fast food -- unlike cigarette smoking -- can be safe in moderation. However, a growing body of research has linked frequent fast-food consumption to weight gain, obesity, and type 2 diabetes. As a result, the study notes, several cities and towns have restricted fast-food restaurants via zoning laws. And under the healthcare legislation passed by Congress in March, chain restaurants will have to post calorie information on their menus, as is already required in New York City. In their 2009 paper on tobacco, Boyd and his colleagues suggested that insurance companies profit twice over by investing in tobacco stocks, since they can charge higher premiums to smokers and also profit if the stock rises. A similar dynamic may be at work with fast food, according to Boyd. "They can charge you more for life insurance if you have these negative health outcomes that people have as a result of eating fast food," he says. But investing in unhealthy industries such as fast food and tobacco isn't necessarily a win-win for insurers over the long term, especially for health insurers, says Sara Bleich, Ph.D., an assistant professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health, in Baltimore, Maryland. "Health insurance companies get profits if they invest in tobacco and fast food, [but] these are some of the top drivers of mortality in the country," says Bleich, who researches obesity policy but was not involved in the current study. "They are essentially killing off their consumer base, so it's not a sustainable model in the long-term. Long-term goals should be consistent with health, because that ensures a large population from which to draw consumers." Robert Zirkelbach, the press secretary for America's Health Insurance Plans, a national association representing health insurers whose website lists three of the companies named in the study, declined to comment on the specifics of the study. "Our industry is strongly committed to prevention and wellness," Zirkelbach said in a statement. "Health insurance companies are doing things across the country that are working to address obesity, promote prevention, and encourage people to live healthier lifestyles." Gigi Kellett, the director of the anti-tobacco campaign of Corporate Accountability International, a Boston-based watchdog group, says that both tobacco and fast food are inappropriate investments for insurance companies. "Tobacco remains the leading cause of preventable death around the world, and there is growing research that diet-related diseases could soon surpass tobacco," she says. "It's irresponsible for insurance companies to invest in companies that make people sick." Corporate Accountability International recently launched a "Retire Ronald" campaign to pressure McDonald's to discontinue the Ronald McDonald clown character and rein in its marketing to children, Kellett adds. For her part, Prof. Bleich says that while health insurance companies, specifically, should be encouraged to divest their fast-food investments, encouraging self-regulation and competition in the fast-food industry may be a more effective way to make the industry healthier. From corporation-watch at countercorp.org Sat Apr 17 05:12:16 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Sat, 17 Apr 2010 02:12:16 -0700 Subject: [Corp. Watch] Goldman Sachs is a criminal enterprise Message-ID: <4E8FDB57-16B7-4C8E-98F6-9D241F63C227@countercorp.org> SEC Accuses Goldman Sachs of Defrauding Investors By Marcy Gordon (Associated Press, April 17) -- The government on Friday accused Wall Street's most powerful firm of fraud, saying Goldman Sachs sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail. And fail they did. The securities cost investors close to $1 billion, while helping Goldman client Paulson & Company, a hedgefund, capitalize on the housing bust. The Goldman executive accused of shepherding the deal allegedly boasted about the "exotic trades" he created "without necessarily understanding all of the implications of those monstrosities!!!" The civil charges filed by the Securities and Exchange Commission (SEC) are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession. The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis. Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them. The SEC is seeking to recoup the money lost by investors and impose unspecified civil fines against Goldman Sachs and the executive, Fabrice Tourre. The SEC could enter into settlement negotiations over the amount if Goldman changed its stance and decided not to fight the charges in a trial. The SEC said Paulson paid Goldman roughly $15 million in 2007 to devise an investment vehicle tied to mortgage-related securities that the hedgefund viewed as likely to decline in value. Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities' value plunged. The fraud allegations focus on how Goldman sold the securities. Goldman told investors that a third party, ACA Management, had selected the pools of subprime mortgages it used to create the securities. The securities are known as synthetic collateralized debt obligations. The SEC alleges that Goldman misled investors by failing to disclose that Paulson also played a role in selecting the mortgage pools and stood to profit from their decline in value. Two European banks that bought the securities lost nearly $1 billion, the SEC said. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," SEC Enforcement Director Robert Khuzami said in a statement. But Goldman said in a statement that it never mischaracterized Paulson's strategy in the transaction. It added that it wasn't obliged to "disclose the identities of a buyer to a seller and vice versa." The charges name only Goldman Sachs and Tourre, who was a vice president in his late 20s when the alleged fraud was orchestrated in 2007. Tourre, the SEC said, boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007. In an e-mail to the friend, he described himself as "the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!" Tourre, 31, has since been promoted to executive director of Goldman Sachs International in London. Stanford University spokeswoman Elaine Ray said a student by the name of Fabrice Tourre received a master's degree in management science and engineering from the school in 2001. A call to a lawyer for Tourre wasn't returned. Asked why the SEC did not also pursue a case against Paulson, Khuzami said: "It was Goldman that made the representations to investors. Paulson did not." Paulson & Co. is run by John Paulson, who reaped billions by betting against sub-prime mortgage securities. (He is not related to former Treasury Secretary Henry Paulson, a former Goldman CEO.) John Paulson was among the first on Wall Street to bet heavily against sub-prime mortgages. His firm earned more than $15 billion in 2007, and he pocketed $3.7 billion. He has since earned billions more, largely by betting against bank stocks and then buying them back after their shares plunged. In a statement, Paulson & Co. said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges." Founded more than 140 years ago, Goldman built a reputation as a trusted adviser to investment banking clients, and for top executives landing presidential cabinet posts. In recent years, however, it shifted toward taking more risks with its clients' money -- and its own. Goldman's trading allowed the firm to weather the financial crisis better than most other big banks. It earned a record $4.79 billion in the last quarter of 2009. The complaint filed in federal court in Manhattan "undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout. I don't think anybody really values being connected to Goldman at this point." "There are many people who -- until this morning -- thought Goldman Sachs was well-run," Johnson said. The SEC's enforcement chief said the agency is investigating a wide range of practices related to the crisis. The prospect of possible legal jeopardy for other major financial players roiled the stock market. The SEC appears to be taking a particularly aggressive approach with Goldman. Typically, cases are resolved by firms agreeing to a settlement before the charges are made public, said John Coffee, a securities law professor at Columbia University. "The SEC has changed its style," Coffee said. "They wanted to tell the world what they thought Goldman had done wrong." The charges come as lawmakers seek to crack down on Wall Street practices that helped cause the financial crisis. Congress is considering tougher rules for complex investments like those involved in the alleged Goldman fraud. President Obama vowed Friday to veto a financial overhaul bill that doesn't regulate mortgage-backed securities and other so-called derivatives. Legislation in Congress would for the first time regulate derivatives, whose value depends on an underlying asset, such as mortgages or stocks. Senate Republicans oppose the bill. Rep. Barney Frank (D-Mass.), chairman of the House of Representatives' Financial Services Committee, is "pleased that the SEC is departing from the lax enforcement of the Bush administration and is returning to the SEC's proper role of protecting investors in the marketplace," spokesman Steven Adamske said. The biggest loser in the alleged fraud was ABN Amro, a major Dutch bank, and the Royal Bank of Scotland, which acquired major portions of it in 2007. The SEC said the Royal Bank of Scotland paid Goldman $841 million to unwind ABN transactions. IKB Deutsche Industriebank AG, a German commercial bank, lost nearly all its $150 million investment, the agency said. Most of the money the banks lost went to Paulson in a series of transactions between Goldman and the hedge fund, the SEC said. IKB was an early casualty of the financial crisis. It issued a profit warning in 2007 saying it had been hurt by U.S. sub-prime mortgage investments. IKB was sold in 2008 to Dallas-based Lone Star Funds. Ed Trissel, a spokesman for Lone Star Funds, declined to comment on the case. The SEC charges come after Goldman Sachs denied last week it that bet against clients by selling them mortgage-backed securities while reducing its own exposure to them. In an annual letter to shareholders, Goldman said it began reducing its exposure to the U.S. mortgage market in late 2006. From corporation-watch at countercorp.org Sun Apr 18 22:13:50 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Sun, 18 Apr 2010 19:13:50 -0700 Subject: [Corp. Watch] They Knew: Far from a surprise, the financial crisis was based on fraud and deception Message-ID: <3D757E5C-DEA8-4782-B4F5-D42B3CB2D75E@countercorp.org> The Rule of Law and Wall Street By Senator Ted Kaufman (D-Del.) (U.S. Senate, March 15) -- Last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm's accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis. Now that we're beginning to learn many of the facts, at least with respect to the activities at Lehman Brothers, the country has every right to be outraged. Lehman was cooking its books, hiding $50 billion in toxic assets by temporarily shifting them off its balance sheet in time to produce rosier quarterly reports. According to the bankruptcy examiner's report, Lehman Brothers' financial statements were "materially misleading", and its executives had engaged in "actionable balance sheet manipulation." Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing. According to the examiner's report, Lehman used accounting tricks to hide billions in debt from its investors and the public. Starting in 2001, that firm began abusing financial transactions called re-purchase agreements, or "repos." Repos are basically short-term loans that exchange collateral for cash, in trades that may be unwound as soon as the next day. While investment banks have come to over-rely upon repos to finance their operations, they are neither illegal nor questionable; assuming, of course, they are clearly accounted for. Lehman structured its repo agreements so that the collateral was worth 105 percent of the cash it received -- hence the name "Repo 105." As explained by the New York Times, "That meant that for a few days ... Lehman could shuffle off tens of billions of dollars in assets to appear more financially healthy than it really was." Even worse, Lehman's management trumpeted how the firm was decreasing its leverage so that investors would not flee from the firm. But inside Lehman, according to the report, someone described the Repo 105 transactions as "window dressing," a nice way of saying they were designed to mislead the public. Ernst & Young, Lehman's outside auditor, apparently became "comfortable" with, and never objected to, the Repo 105 transactions. Lehman couldn't find a U.S. law firm to provide an opinion that treating Repo 105s as a sale for accounting purposes was legal, but the British law firm Linklaters provided an opinion letter that under British law they were sales and not mere financing arrangements. And so Lehman ran the transactions through its London subsidiary and used several different foreign bank counterparties. The Security and Exchange Commission (SEC) and Department of Justice (DOJ) should pursue a thorough investigation, both civil and criminal, to identify every person who had knowledge that Lehman was misleading the public about its troubled balance sheet. That means everyone from the Lehman executives to its board of directors to its accounting firm, Ernst & Young. Moreover, if the foreign bank counterparties who purchased the now infamous Repo 105s were complicit in the scheme, they should be held accountable as well. Returning the Rule of Law to Wall Street It is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our federal agencies over the past 30 years, a process I described at length in my speech on the floor last Thursday. We became enamored of the view that self-regulation was adequate, that "rational" self-interest would motivate counterparties to undertake stronger and better forms of due diligence than any regulator could perform, and that market fundamentalism would lead to the best outcomes for the most people. Transparency and vigorous oversight by outside accountants were supposed to keep our financial system credible and sound. Instead, the allure of deregulation led to the biggest financial crisis since 1929. And now we're learning, not surprisingly, that fraud and lawlessness were key ingredients in the collapse as well. Since the Fall of 2008, Congress, the Federal Reserve, and the American taxpayer have had to step into the breach -- at a direct cost of more than $2.5 trillion -- because, as so many experts have said: "We had to save the system." But what exactly did we save? A system of overwhelming and concentrated financial power that has become dangerous. It caused the crisis of 2008-2009 and threatens to cause another major crisis if we do not enact fundamental reforms. Only six U.S. banks control assets equal to 63 percent of the nation's gross domestic product, while oversight is splintered among various regulators who are often overmatched in assessing weaknesses at these firms. Second, we saved a system in which the rule of law has broken yet again. Big banks can get away with extraordinarily bad behavior -- conduct that would not be tolerated in the rest of society, such as the blatant gimmicks used by Lehman, despite the massive cost to the rest of us. The Lessons of Lehman Brothers and Other Examples What lessons should we take from the bankruptcy examiner's report on Lehman, and from other recent examples of misleading conduct on Wall Street? I see three. First, we must undo the damage done by decades of deregulation. That damage includes financial institutions that are (as former Federal Deposit Insurance Corporation [FDIC] Chairman Bill Isaac has described them) "too big to manage and too big to regulate", a "Wild West" attitude on Wall Street, and colossal failures by accountants and lawyers who misunderstand or disregard their role as gatekeepers. The rule of law depends in part on manageably-sized institutions, participants interested in following the law, and gatekeepers motivated by more than a paycheck from their clients. Second, we must concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street. We must treat financial crimes with the same gravity as other crimes, because the price of inaction and a failure to deter future misconduct is enormous. Third, we must help regulators and other gatekeepers not only by demanding transparency, but also by providing clear, enforceable "rules of the road" wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides a cover for financial wrongdoing. The bottom line is that we need financial regulatory reform that is tough, far-reaching, and untainted by discredited claims about the efficacy of self-regulation. The Fraud Enforcement and Recovery Act When Senators Leahy (D-Vt.), Grassley (R-Iowa), and I introduced the Fraud Enforcement and Recovery Act (FERA) last year, our central objective was restoring the rule of law to Wall Street. We wanted to make certain that the Department of Justice and other law enforcement authorities had the resources necessary to investigate and prosecute precisely the sort of fraudulent behavior allegedly engaged in by Lehman Brothers. We all understood that to restore the public's faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street. FERA, signed into law in May, ensures that additional tools and resources will be provided to those charged with enforcement of our nation's laws against financial fraud. Since its passage, progress has been made, including the president's creation of an interagency Financial Fraud Enforcement Task Force, but much more needs to be done. Many have said we should not seek to "punish" anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values. This is not about retribution. This is about addressing the continuum of behavior that took place -- some of it fraudulent and illegal -- and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become. As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes. When crimes happened in the past (as in the case of Enron, when aided and abetted by -- among others, Merrill Lynch -- and not prevented by the supposed gatekeepers at Arthur Andersen), there were criminal convictions. If individuals and entities broke the law in the lead up to the 2008 financial crisis (such as at Lehman Brothers, which allegedly deceived everyone, including the New York Federal Reserve Bank and the SEC), there should be civil and criminal cases that hold them accountable. If we uncover bad behavior that was nonetheless lawful, or that we cannot prove to be unlawful (as may be exemplified by the recent reports of actions by Goldman Sachs with respect to the debt of Greece), then we should review our legal rules in the U.S. and perhaps change them so that certain misleading behavior cannot go unpunished again. Systemic issues in Uncovering and Prosecuting Fraud This will not be easy. As the Wall Street Journal noted last week, "Give Wall Street a rule and it will find a loophole." This confirms what I heard in December of last year, when I convened an oversight hearing on FERA. As that hearing made clear, unraveling sophisticated financial fraud is an enormously complicated and resource-intensive undertaking, because of the nature of both the conduct and the perpetrators. Rob Khuzami, head of the SEC's enforcement division, put it this way during the hearing: > "White-collar area cases, I think, are distinguishable from terrorism or drug crimes, for the primary reason that, often, people are plotting their defense at the same time they're committing their crime. They are smart people who understand that they are crossing the line, and so they are papering the record or having veiled or coded conversations that make it difficult to establish a wrongdoing." In other words, Wall Street criminals not only possess enormous resources, but also are sophisticated enough to cover their tracks as they go along, often with the help, perhaps unwitting, of their lawyers and accountants. Assistant Attorney General Lanny Breuer and Khuzami, along with Assistant FBI Director Kevin Perkins, all emphasized at the hearing the difficulty of proving these cases from the historical record alone. The strongest cases come with the help of insiders, those who have first-hand knowledge of not only conduct but also motive and intent. That's why I've applauded the efforts of the SEC and DOJ to use both carrots and sticks to encourage those with knowledge to come forward. At the conclusion of that hearing in December, I was confident that our law enforcement agencies were intensely focused on bringing to justice those wrongdoers who brought our economy to the brink of collapse. Going forward, we need to make sure that those agencies have the resources and tools they need to complete the job. But we are fooling ourselves if we believe that our law enforcement efforts, no matter how vigorous or well funded, are enough by themselves to prevent the types of destructive behavior perpetrated by today's too-big, too-powerful financial institutions on Wall Street. Is Lehman Brothers an Isolated Example? I'm concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don't have the benefit of an examiner's report for other firms with a business model like Lehman's, law enforcement authorities should be well on their way in conducting investigations of whether others used similar "accounting gimmicks" to hide dangerous risk from investors and the public. The Case of Greece At the same time, there are reports that raise questions about whether Goldman Sachs and other firms may have failed to disclose material information about swaps with Greece that allowed the country to effectively mask the full extent of its debt just as it was joining the European Monetary Union (EMU). We simply do not know whether fraud was involved, but these actions have kicked off a continent-wide controversy, with ramifications for U.S. investors as well. In Greece, the main transactions in question were called cross-currency swaps that exchange cash flows denominated in one currency for cash flows denominated in another. These swaps were priced "off-market," meaning that they didn't use prevailing market exchange rates. Instead, these highly unorthodox transactions provided Greece with a large upfront payment (and an apparent reduction in debt), which they then paid off through periodic interest payments and finally a large "balloon" payment at the contract's maturity. In other words, Goldman Sachs allegedly provided Greece with a loan by another name. The story, however, does not end there. Following these transactions, Goldman Sachs and other investment banks underwrote billions of Euros in bonds for Greece. The questions being raised include whether some of these bond-offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material. These bonds were issued under Greek law, and there is nothing necessarily illegal about not disclosing this information to bond investors in Europe. However, at least some of these bonds were sold to American investors, and therefore may be subject to U.S. securities law. While "qualified institutional buyers" (QIBs) in the U.S. can purchase bonds and other securities not registered with the SEC, the sale of these bonds would still be governed by other requirements of U.S. law. Specifically, they presumably would be subject to the prohibition against the sale of securities to U.S. investors while deliberately withholding material adverse information. The point is not what happened in Greece, but the broader notion that financial transactions must be transparent to the investing public, and verified as such by outside auditors. AIG fell in large part due to its credit default swap exposure, but no one knew until it was too late how much risk AIG had taken upon itself. Why do some on Wall Street resist transparency so? The fall of Lehman shows the answer: Everyone will flee a listing ship, so the less investors know, the better off are the firms which find themselves in a downward spiral. At least until the final reckoning. Who's Responsible? The Role of Congress, Regulators, Accountants, and Lawyers Who's to blame for this state of affairs, where major Wall Street firms conclude that hiding the truth is okay? Well, there's plenty of blame to go around. As I said previously, both Congress and the regulators came to believe that self-interest was regulation enough. In the now-immortal words of Alan Greenspan, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief." The time has come to get over the shock and get on with the work. What about the professionals involved? Accountants and lawyers are supposed to help their clients obey the law. Indeed, they often claim that simply by giving good advice to their clients, they're responsible for far more compliance with the law than are government investigators. That claim rings hollow, however, when these professionals too often seem focused on helping their clients get around the law. Experts like Prof. Peter Henning of Wayne State University Law School, looking at the Lehman examiner's report on the Repo 105 transactions, are stunned that the accountant Ernst & Young never seemed to be troubled in the least about it. As Prof. Henning notes, one of the supposed major effects of the Sarbanes-Oxley Act was to empower the accountants to challenge management and ensure that transactions were accounted for properly. Indeed, it was my predecessor, then-Senator Biden, who was the lead author of the provision requiring the CEO and CFO to attest to the accuracy of financial statements, under penalty of criminal sanction if they knowingly or willfully certified materially false statements. I don't believe this is a failure of Sarbanes-Oxley. A law is not a failure simply because some people subsequently violate it. Instead, I am deeply disturbed at the apparent failure of some in the accounting profession to change their ways and truly undertake the profession's role as the first line of defense (the gatekeeper) against accounting fraud. In just a few years time since the Enron-related death of the accounting firm Arthur Andersen, one might have hoped that "technically correct" was no longer a defensible standard if the cumulative impression left by the action is grossly misleading. But apparently that standard as a singular defense is creeping back into the profession. The accountants and lawyers weren't the only gatekeepers. If Lehman was hiding balance-sheet risks from investors, it was also hiding them from rating agencies and regulators, thereby allowing it to delay possible ratings downgrades that would increase its capital requirements. The Repo 105 transactions allowed Lehman to lower its reported net-leverage ratio from 17.3 to 15.4 for the first quarter of 2008, according to the examiner's report. It was bad enough that the SEC focused on a misguided metric like net leverage, when Lehman's gross leverage ratio was much higher and more indicative of its risks. The SEC's failure to uncover such aggressive and possibly fraudulent accounting, as was employed on the Repo 105 transactions, provides a clear indication of the lack of rigor of its supervision of Lehman and other investment banks. The SEC in years past allowed the investment banks to increase their leverage ratios by permitting them to determine their own risk level. That approach should have been coupled with absolute transparency on the level of risk. The Lehman example shows that increased leverage without that transparency is yet another recipe for disaster. Conclusion The revelations about Lehman Brothers reinforce what I've been saying for some time. The folly of radical deregulation has given us financial institutions that are too big to manage, too big to regulate, and too big to fail.If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that addresses this central reality. As I said more than a year ago: > "At the end of the day, this is a test of whether we have one justice system in this country, or two. If we don't treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law?For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws." The American people deserve no less.