From corporation-watch at countercorp.org Mon Apr 26 18:13:36 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Mon, 26 Apr 2010 15:13:36 -0700 Subject: [Corp. Watch] Who Watches the Watchers? Agencies sold ratings to inflate fees Message-ID: Will the Teflon Ratings Agencies Start Losing Fraud Suits? By Abigail Field (Daily Finance, April 26) -- As the financial crisis unfolded in 2007 and 2008, and many investment-grade mortgage-backed securities -- even those with top AAA ratings -- turned out to be junk, popular anger understandably flared against ratings agencies Moody's, Standard & Poor's, and Fitch. And much of that anger has been channeled into lawsuits against the agencies for their role in the global credit melt-down. No less than former Federal Reserve Chairman Alan Greenspan recently testified before the Congressional Financial Crisis Inquiry Commission that the AAA ratings on mortgage-backed securities were "grossly inflated," and "inaccurately high." And he suggested that market participants, voraciously hungry for "securitized sub-prime mortgages" but overwhelmed by the complexity of these securities, relied heavily on the ratings agencies to sort out the risks for investors. "We have a fundamental problem that the credit-rating agencies gave triple-A valuations ... which in retrospect were nonsense. ... If instead of giving AAA designations to these securities, they received BBB instead, many in the U.S. and Europe would not have bought them." (Note, however, that Greenspan does not doubt the agencies' sincere belief in their ratings at the time they were issued.) Similarly certain that the ratings agencies share the blame for crisis, the Securities and Exchange Commission (SEC) has proposed and adopted new rules to prevent them from reprising their role in the future. Inflated Ratings for Juicy Fees: A Slam-Dunk Legal Case? As the SEC's investigation, three Congressional hearings, and lots of investigative journalism have revealed, the underlying story appears to be that the ratings agencies catered to the big banks that were flipping so many ludicrously underwritten residential and commercial mortgages into securities. That is, the agencies allegedly gave the securities inflated ratings in order to secure the inflated fees such securities commanded. With a story like that -- ratings agencies pocketing big profits by selling rosy ratings that duped innocent investors into throwing away their money -- you'd think it would be easy to win lawsuits against them. But so far, at least, you'd be wrong. The ratings agencies are currently undefeated in lawsuits that accuse them of making "material misstatements" in the documents used to sell the securities -- such misstatements being the core of federal securities fraud claims. The agencies' success has led one commentator to call the group "untouchable." Needed: A Change of Legal Strategy Did the most recent recent Congressional hearing on Friday, which revealed hundreds of pages of juicy emails and involved damning testimony from former rating agency employees, including one who thinks Moody's committed securities fraud, add anything to the story that will make the ratings agencies more vulnerable? No, and yes. But first, why do the ratings agencies keep winning? The problem isn't the pattern of facts in these cases -- it's the plaintiffs' choice of law. To win a federal securities fraud claim, plaintiffs have to fit the ratings agencies into one of the categories of people who can be held responsible for misstatements in the securities' selling documents. And so far, plaintiffs' can't do that, and nothing that came out at Friday's hearing will help plaintiffs do that. However, that doesn't mean plaintiffs are out of luck. Other types of lawsuits, using the same basic story but pressing claims under other laws, are moving forward. And that's where Friday's hearing may help the plaintiffs. One of the defenses the ratings agencies hope to rely on in other types of cases is the First Amendment. The argument is this: Like newspaper editorials, ratings are just opinions about current and future events of public concern, and thus protected speech. Protected, that is, unless the ratings agencies didn't really believe what they were saying when they said it. That wouldn't be protected speech -- that would be fraud. And the written and oral testimony of the witnesses on Friday suggests that it may be possible to prove that the agencies didn't really believe in the ratings they were giving. Indeed, one of the ex-employees specifically charges that about a 2009 deal. Moreover, if plaintiffs can show that the ratings agencies didn't believe the ratings at the time they were issued, then the ratings themselves could be material misstatements supporting a securities fraud claim. The Fatal Flaw in the Cases So Far Under federal securities laws, purchasers can sue the people responsible for the securities' sales documents. However, the law is very specific about who is considered responsible. Unless you fit into one of the magic definitions -- which include the underwriters, sellers, experts and "control persons" -- you can't be sued. So far, plaintiffs have tried and failed to define the agencies as underwriters, sellers, and control persons. Generally, they've avoided suing the agencies as "experts," even though it sure seems like it describes them. The law defines an expert as "? any person whose profession gives authority to a statement made by him, who has ... prepared or certified any report or valuation which is used in connection" with the security selling document -- but SEC regulations specifically exempt the ratings agencies from that definition. For similar reasons, the ratings agencies have gotten several federal securities lawsuits against them dismissed for good. The first to rule was Judge Lewis A. Kaplan, when he dismissed the ratings agencies from a suit involving mortgage securities issued by Lehman Brothers Holdings' affiliates and subsidiaries. In his Feb. 1 opinion, Judge Kaplan rejected plaintiffs' efforts to cast the ratings agencies as underwriters, noting that their alleged roles -- which included helping to decide what mortgages to buy and securitize and at what price, and how many classes of securities to issue with what levels of credit enhancement -- didn't include purchasing securities from the issuer to re-sell them to investors. When Judge Harold Baer Jr. assessed the same issue in a March 26 opinion, he concluded: "I agree with Judge Kaplan." Judge Jed Rakoff recently dismissed the ratings agencies from a similar suit, but he hasn't yet issued an opinion explaining his April 1 order. However, it will likely contain similar reasoning. Who's a "Seller"? Judge Kaplan also took on the claim that the ratings agencies were "sellers" because they had such a substantial role in drafting the selling documents. Kaplan compared the transaction to the sale of a house, casting the ratings agencies as architects or builders who design or construct a house for the homeowner who later goes on to sell the house. Only the homeowner is actually involved in the sale, reasoned Kaplan. (Judge Baer's case didn't involve a seller allegation, nor did Judge Rakoff's.) Finally, both Judge Kaplan and Judge Bear (but not Judge Rakoff) faced the claim that the ratings agencies were "control persons," in that they directed the activities of others who made actionable false statements. Both judges also dismissed this claim. Judge Kaplan found that the ratings agencies had influence but not control, and Judge Baer asserted that because the agencies didn't have primary liability (they weren't underwriters), they couldn't have control liability. A couple of weeks after he dismissed the ratings agencies from the suit, Judge Kaplan issued another opinion that may affect litigation, even though it involved only claims against individual defendants. In that dismissal, Judge Kaplan held that failing to disclose the conflict of interest inherent in having the issuers pay the ratings agencies for their ratings wasn't actionable, since the information was already in the public domain, and there's no duty to disclose what is already known. But the evidence uncovered at last Friday's hearing might enable plaintiffs to persuade other judges to disagree. The apparent depth of ratings agency subservience to the investment banks goes far beyond what was previously in the public domain. New Ammunition? Judge Kaplan had also decided that the ratings agencies' role in structuring the transactions wasn't material as a matter of law, so that the failure to disclose their structuring role couldn't result in liability. While this conclusion isn't likely affected by last Friday's hearing, it's not obvious that other judges will agree with him. Lastly, Kaplan decided that the ratings themselves were opinions that could not be characterized as misstatements, unless plaintiffs could show that the ratings agencies themselves -- as opposed to a handful of individuals at the agencies -- did not believe the opinions at the time the ratings were issued. Not easily discouraged, the attorneys on the losing side of Kaplan's and Baer's opinions have gone after the ratings agencies again under the federal securities laws, by trying to make them fit the "control persons" definition by including even more detail about the ratings agencies' involvement in the deals. Abu Dhabi Commercial Bank and King County (Washington State) decided to sue under similar circumstances -- they bought highly rated securities only to discover they were junk and made the same basic allegations against the agencies -- but they avoided the problems discussed above by bypassing the federal securities laws. Instead, they sued under New York common law. One of their fraud claims has survived a motion to dismiss, because Judge Shira Scheindlin didn't have to consider the definitions of underwriter, seller or control person. Rather, she had to decide if the plaintiffs have provided enough specific details to support their claims that the ratings were material misstatements that the ratings agencies knew were false, that the ratings agencies had the motive and opportunity to deceive, and that the plaintiffs reasonably relied on the deceptive ratings. Judge Scheindlin held that the plaintiffs had successfully alleged all four elements of fraud. (Her take on the ratings agencies' conflict of interest and the agencies' role in structuring the transaction was very different from Judge Kaplan's, although her ruling preceded his and so didn't consider it.) The First Amendment Doesn't Always Protect the Agencies Judge Scheindlin also addressed the rating agencies' claim that their ratings were opinions about the future, akin to newspaper editorials, and thus protected by the First Amendment. She rejected that argument, pointing out that the securities in the cases before her were private placements, and the ratings were intended for those investors alone. Thus, the ratings weren't "matters of public concern" and, therefore, not protected under the First Amendment. It's not clear what impact this ruling will have. For one thing, the First Amendment is no defense against fraud, so the ruling is superfluous. Second, it's application is inherently limited because it covers only cases with private securities, and many of the securities in the other lawsuits are publicly traded. Third, although some argue that the First Amendment doesn't protect the ratings agencies, at least one First Amendment scholar claims Judge Scheindlin's ruling on this issue is not persuasive, and other judges may not follow it. Whatever the impact, the holding has some odd implications. Sophisticated investors -- the only folks allowed to purchase private securities -- could be entitled to more protection from the ratings agencies than the unsophisticated public at large. Agencies May Be Liable Under State Statutes A second kind of case that is substantially similar to the lawsuits above, but not subject to the same flaws is the suit against the ratings agencies brought by Connecticut Attorney General Richard Blumenthal under the Connecticut Unfair Trade Practices Act. That law prohibits false and deceptive advertising, which Blumenthal alleges the agencies repeatedly engaged in with their public representations of their ratings and how the ratings were determined. No judge has yet assessed those claims, but the complaints against S&P and against Moody's make compelling reading. And Ohio Attorney General Richard Cordray filed suit against the ratings agencies in November 2009, alleging a common-law negligent misrepresentation claim and claims under Ohio's securities laws, but no federal securities law claims. Although federal securities law pre-empts much of state securities law, states are still allowed to bring fraud actions under their own securities laws. That suit is facing a motion to dismiss, and a decision should follow relatively soon. Southern District of Ohio Judge James L. Graham's opinion could be tremendously important for the future of state-law-based suits, because it will address key issues that cross state lines. Judge Graham will decide if the First Amendment protects the agencies from suit; whether the federal Credit Rating Reform Act of 2006 pre-empts state securities law claims against the agencies (and if not, whether they're "sellers" under Ohio securities law), and whether the negligent-misrepresentation claim based on Ohio law is nonetheless pre-empted by New York's Martin Act, and if not, whether there is sufficient evidence to go forward. The defendants cite (among other things) Judge Kaplan's decision under federal law that they are not sellers. However, the Ohio AG notes that Ohio's law is significantly different than the federal statute, in that anyone "who receives the profits accruing from [selling securities]" is liable as a seller, not merely the people who actually transfer title, like the homeowner in Judge Kaplan's analysis. And Then There Are Shareholder Suits Lastly, a third type of suit that could force the ratings agencies to pay up is based on the federal securities laws, but is brought by the agencies' shareholders, rather than purchasers of gold-rated junk. As a result, plaintiffs don't have an underwriter/seller/control person conundrum. Instead, plaintiffs have to show that the ratings agencies knowingly made material misstatements that artificially inflated their stock price, and that when the truth came out, the stock suffered. An example of this type of case that has already survived a motion to dismiss is the Moody's Corporation securities litigation. In allowing it to proceed, Southern District of New York Judge Shirley Wohl Kram held that Moody's had made two kinds of material misstatements with sufficient knowledge of their falsity. First, that it was independent of the banks creating and selling the securities and wasn't compromised by conflicts of interest, and second, that its ratings methodologies evaluated the quality and performance of the mortgages underlying the securities. However, Judge Kram specifically rejected plaintiffs' claims that the ratings themselves were actionable misstatements. With the evidence uncovered at last Friday's hearing, perhaps the judge in the next such suit will disagree. Indeed, the ratings agencies' shouldn't take too much solace from their current legal winning streak because those favorable decisions have all been for just one type of suit. The tide could very well turn against the agencies as plaintiffs, both private and attorneys general, pursue other lines of attack. From corporation-watch at countercorp.org Wed Apr 28 04:56:01 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Wed, 28 Apr 2010 01:56:01 -0700 Subject: [Corp. Watch] Big Pharma fined for going "off label" again Message-ID: <32170022-5279-46C3-B226-26AA03F85CBD@countercorp.org> Attorney General: Drugmaker AstraZeneca to Pay $520 Million Fine By Pete Yost (Associated Press, April 27) -- The federal government on Tuesday reached a $520 million settlement with pharmaceutical manufacturer AstraZeneca, resolving allegations of illegal marketing of the company's anti-psychotic drug Seroquel. At a news conference, Attorney General Eric Holder and Health and Human Services Secretary Kathleen Sebelius made the case a centerpiece of the federal government's crackdown on healthcare fraud. AstraZeneca allegedly marketed Seroquel for "off label" uses -- those not approved by federal drug regulators -- including insomnia and psychiatric conditions other than schizophrenia and bipolar disorder. U.S. Attorney Michael Levy of Philadelphia, where the settlement was filed, said that the company had "turned patients into guinea pigs in an unsupervised drug test." AstraZeneca faces more than 25,000 product liability lawsuits over Seroquel, with most alleging that the drug caused diabetes. Seroquel has been on the market since 1997. The government said AstraZeneca paid kickbacks to recruit doctors as authors of articles by Astra Zeneca and its agents about the unapproved uses of Seroquel. The company also made payments to doctors to travel to resort locations to advise AstraZeneca about marketing messages for unapproved uses of the drug, the government stated. AstraZeneca denied the allegations leveled by the government in the civil case settled Tuesday, saying it wanted to avoid the delay, uncertainty, and expense of a protracted legal battle. "The company is committed to meeting the expectations and obligations of a leading bio-pharmaceutical company, while continuing to provide valuable medicines to millions of patients," Glenn Engelmann, the company's U.S. general counsel, said in a statement. Partly because of the off-label use of Seroquel, the drug brought in $4.9 billion to AstraZeneca in 2009, making it the company's second-best seller. The Food and Drug Administration (FDA) approves drugs for specific uses, and drug companies are supposed to market medications only for uses that the FDA has approved. Doctors, however, are free to prescribe drugs as they see fit. Such off-label use is a gray area and a long-running controversy when it comes to drug regulation. Drug company salespeople can find lots of ways to get around the off-label restrictions. For example, they can let doctors know about research indicating that a given drug shows promise to treat a condition that the FDA hasn't yet cleared it for. Doctors are eager to get the latest treatments for their patients, especially if other physicians are also prescribing the medication. From corporation-watch at countercorp.org Wed Apr 28 15:22:31 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Wed, 28 Apr 2010 12:22:31 -0700 Subject: [Corp. Watch] Rent-a-Judge? Only if you're a corporation Message-ID: Supreme Court to Decide if Big Business Can Judge Itself Can corporations dispense their own one-sided justice? By Stephanie Mencimer (Mother Jones, April 26) -- The ever-more business-friendly Supreme Court will hear oral arguments today in a case that has the potential to shut a whole lot of regular Americans out of the justice system. The nation?s largest rent-to-own furniture company, Rent-a-Center, has asked the court to decide essentially whether huge corporate players should be able to use one-sided contracts to opt out of the civil justice system and judge themselves when customers and employees want to sue for discrimination or other abuses. The case has enormous implications for Big Business, which for years has been able to avoid legal accountability and big jury awards for employment discrimination, fraud, and even sexual assault by forcing people to sign what?s known as a "mandatory arbitration" clause as a condition of getting a cellphone, using a credit card, buying a car, or getting a job. The clauses force people to bring any complaint against the company before a private arbitrator, hired by the company, whose decisions can?t be reviewed by a judge in most cases. Not surprisingly, those arbitrators rarely find in favor of the little guy. But over the past couple of years, the little guy has been fighting back and occasionally winning important victories. People like Jaime Leigh Jones have, against great odds, prevailed over much more powerful entities once they?ve gotten inside a regular courtroom. Leigh is the KBR/Halliburton employee who alleged that she was gangraped by her co-workers in Iraq, and then confined to a storage container by her employer. She recently prevailed in a challenge to the arbitration clause in her contract that would have forced her to have her rape case heard by a Halliburton-hired arbitrator rather than a jury. After years of litigation, Deborah Williams and Richard Welshans also won a ruling in federal court last year allowing them to finally bring a fraud lawsuit against the Coffee Beanery, which they allege duped them into sinking hundreds of thousands of dollars into a doomed franchise. (The victory, unfortunately, came too late to save their house.) But if the Supreme Court rules for Rent-a-Center in the case argued today, even those rare victories will become non-existent. That's because, as Public Citizen?s Robert Weissman has written, "The question presented to the Supreme Court in the Rent-A-Center case is, essentially: Can a corporation's hand-picked arbitrator decide whether it is fair for the company to hand-pick its arbitrator?" Rent-a-Center West v. Antonio Jackson got its start back in 2004, when the nation?s largest "rent-to-own" furniture store hired Jackson, an African-American, as an account manager. Jackson eventually sought promotion, but each time, Rent-a-Center hired a non-black employee with less seniority. Jackson was finally promoted after he complained to various higher-ups, but then after two months, Rent-a-Center fired him without cause. In February 2007 he sued in federal court for racial discrimination. But when he went to court, Rent-a-Center argued that the arbitration clause Jackson had signed when he was hired required him to go to private arbitration -- and to pay half the cost. Jackson countered that the arbitration clause was so one-sided that it was completely unconscionable, and thus unenforceable. For instance, although the provision forced Jackson to take any complaints against the company to arbitration, it allowed Rent-a-Center to sue Jackson in a real court should he disclose trade secrets or other confidential company info. The agreement also put strict limits on how much information Jackson could procure from Rent-a-Center [as part of the arbitration process], and said he could depose two people for his arbitration, a laughably small number compared to what he would need to prove discrimination. Nonetheless, a federal district court ruled against him, basically saying it was okay for Rent-a-Center to ban judicial review simply by writing it into a contract that Jackson had no choice but to sign if he wanted a job. The court also said that if Jackson wanted to challenge the arbitration clause as unconscionable, he had to do it before a Rent-a-Center-paid arbitrator, not a judge, as is standard practice. But the 9th Circuit Court of Appeals overturned the decision, arguing that questions about unconscionability were definitely something for the court to oversee. Rent-a-Center appealed, and the Supreme Court took the case up on an expedited basis and will hear arguments today. What the court will do is anyone?s guess. Given its decidedly pro-business tilt these days, as seen in its recent Citizens United decision allowing unlimited corporate money into elections, it's not out of the realm of possibility that it will side with Rent-a-Center. At the same time, though, Rent-a-Center is hardly a model corporate citizen. It could provide a case study for why people need access to unbiased courts. Last year, the state of Washington sued the company for allegedly abusing its customers who made late payments on rent-to-own furniture and electronics. Investigators turned up customers who'd had Rent-a-Center employees kicking their doors in and threatening to arrest them and send their children to fostercare because they were a day late making a payment on their big screen TVs. The state found that the company had engaged in unfair and deceptive practices that left consumers unable to figure out exactly how much renting it would take before they finally got to own their stuff (which no one ever did). State investigators found people who'd paid more than $6,000 for a used TV, for instance. Even this Supreme Court might have to think twice before letting companies like Rent-a-Center hire arbitrators to decide whether they are behaving badly enough to be sued before a jury. From corporation-watch at countercorp.org Sat May 1 20:46:46 2010 From: corporation-watch at countercorp.org (Corporation Watch) Date: Sat, 1 May 2010 17:46:46 -0700 Subject: [Corp. Watch] BP = Blood-soaked Profits: British Petroleum's greed costs others their lives Message-ID: <89FD3F96-25B0-451A-AA1B-D5E59DCD21A7@countercorp.org> BP Spends Millions Lobbying as It Drills Ever Deeper and the Environment Pays Oil major British Petroleum spends aggressively to influence U.S. regulatory oversight, and many argue this has bought it leniency By Antonia Juhasz (Guardian [UK] Observer, May 2) -- Although the explosion of the British Petroleum (BP) Deepwater Horizon drilling rig in the Gulf of Mexico last week was a horrific event, it was neither surprising nor unexpected. BP is one of the most powerful corporations operating in the United States. Its 2009 revenues of $327 billion rank BP as the third-largest corporation in the country. It spends those profits aggressively to influence U.S. policy and regulatory oversight. In 2009, the company spent nearly $16 million on lobbying the federal government, ranking it among the 20 highest spenders that year, and shattering its own previous record of $10.4 million set in 2008. In 2008, it also spent more than $530,000 on federal elections, placing it among the oil industry's top 10 political spenders. This money has bought BP great access and, many would argue, leniency. "I personally believe that BP, with its corporate culture of greed over profits, murdered my parents," Eva Rowe testified before Congress in 2007, during the investigation into the worst workplace accident in the U.S. in more than 15 years -- a massive explosion at BP's Texas City Refinery in March 2005 that killed 15 workers, including Rowe's parents, and injured 180 others. The U.S. Chemical Safety Board, an independent federal agency, investigated the blast and released a devastating indictment of BP. "The Texas City disaster was caused by organizational and safety deficiencies at all levels of the BP corporation," the 2007 report found. "The combination of cost-cutting, production pressures, and failure to invest [in preventative maintenance] caused a progressive deterioration of safety at the refinery." While enjoying the highest profits in its corporate history, BP implemented budget cuts of 25% in 1999 and 2005 at each of its five U.S. refineries. The safety board found a pervasive "complacency towards serious safety risks" at all of them. Thus, it was little surprise that the next big explosion at a U.S. oil workplace was, again, BP's fault. It also came as little surprise that the location was deep off-shore in the Gulf of Mexico. For decades, the vast majority of drilling from the Gulf of Mexico took place on simple scaffolds in just 30 to 200 feet of water. But in the past 10 years, many of the fields in shallower water have dried up, and the industry has become ever more flush with cash -- in 2009, for the first time in history, seven of the 10 largest corporations in the world were oil companies -- and more desperate for oil. So BP and the rest of the oil industry have lobbied aggressively to open new U.S. waters to off-shore drilling, and to expand the access they already had. As a result, the number of rigs drilling "deep wells" (those greater than 1,000 feet) has risen dramatically, as have ultra-deep wells -- those greater than 5,000 feet. Led by BP, the largest producer of oil in the Gulf of Mexico, the oil companies are breaking all records, and pushing ever deeper -- well past the point of technological know-how and safety. The trend is problematic for many reasons, including that drilling in depths greater than 500 feet releases methane, a greenhouse gas 20 times more potent than carbon dioxide in its contribution to global warming. In September 2009, BP drilled the deepest well ever at its Tiber field in the Gulf at in more than 35,000 feet of water (farther down than Mount Everest is up). The Deepwater Horizon rig was drilling at just over half that -- in around 18,000 feet of water -- when it exploded. Anyone in the business will tell you that drilling at such depths is incredibly risky, even with the most conscientious oversight. As Chevron Corporation says on its website, "Navigating uncertain weather conditions, freezing water, and crushing pressure, deep-water drilling is one of the most technologically challenging ways of finding and extracting oil." In the words of Chevron spokesman Micky Driver: "It's lots of money, it's lots of equipment, and it's a total crapshoot." The oil industry will continue to use its vast wealth -- unequalled by any other global industry -- to escape regulation, restriction, oversight, and enforcement. BP, now the source of the last two deadly U.S. oil industry explosions, has shown us that this simply cannot be permitted. ---------------------- Antonia Juhasz, author of "The Tyranny of Oil: The World's Most Powerful Industry ? and What We Must Do To Stop It" (2008), is director of the Chevron Program at Global Exchange, a San Francisco-based human rights organization (www.globalexchange.org/chevron).