the jere beasley report feb. 2004

I.CAPITOL OBSERVATIONS

EXXON

ExxonMobil has filed its post-verdictmotions, asking for either a new trial ora reduction in the $11.9 billion juryverdict obtained by the State. Themotions will be heard by Circuit JudgeTracy McCooey on March 11, 2004.Thejudge set aside 2 days to hear themotions. Nothing was raised in themotions of the defendant that gives usany real concern. The record is com-pletely free from error, and that shouldresult in a favorable ruling from thecourt. In that event, an appeal byExxon to the Alabama Supreme Courtis expected. It has been shocking toread the spin put on the outcome ofthis case by Exxon. Anybody whodoubts that Exxon intentionallydefrauded the State should take a lookat the written documents obtainedfrom Exxons internal files.Those docu-ments establish a plan by Exxon tocheat the State. In fact, the companydid a risk analysis to determine what itwould cost Exxon if they ever gotcaught. Since the fraud was carried outat the highest levels of the company,Exxon cant blame the wrongdoing onsome lowly employee.This was corpo-rate fraud at its very worst.

POLL REVEALS ECONOMY KEY ISSUEFOR ALABAMIANS

A recent poll indicates that Alabami-ans still care most about familiar bread-and-butter issues. According to a

Mobile Register-University of SouthAlabama poll, the state of the economyis the main issue in our state. It is notsurprising that health care problemsrun a close second. Either the economyor health care should be the federalgovernments top priority this year,according to almost 60% of thosesampled. Slightly more than one-thirdsaid the same about the situation inIraq or the war on terrorism. Theresults, similar to those of nationalsurveys, continue to give goodapproval ratings to President Bush.Two-thirds said he is doing a good orexcellent job overall. It is significant,however, that only half gave the Presi-dent high grades for his oversight ofthe economy.As casualties continue tomount in Iraq, poll numbers maychange drastically on the Presidentspopularity. The number of Americantroops killed in combat, accidents andother causes is over 500, with the ranksof the wounded more than 2,800. Ofcourse, this is according to a Websitethat compiles Pentagon figures.

ALL CRITICAL STUDIES MUST BECONSIDERED

The fight over whether to allowExxonMobil to build a terminal inMobile to handle liquefied natural gas(LNG) imports has now has taken astrange turn. It now appears thatExxonMobil has put the project on aslower track. In fact, it may be dead. Ifso, I believe that is good news forAlabama and specifically the Mobilearea.There are studies indicating that aLNG tanker spill could evolve into acatastrophic loss of the ship and itscargo. However, the real risk would beto people living in the area.While the

JEREBEASLEYREPORTJEREBEASLEYREPORTBeasley,Allen, Crow, Methvin, Portis & Miles, P.C., Attorneys at Law FEBRUARY 2004

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T H E

IN THIS ISSUEI. Capitol Observations . . . . . . . . . . . . 1

II. Legislative Happenings . . . . . . . . . . 4

III. Court Watch . . . . . . . . . . . . . . . . . . 5

IV. The National Scene . . . . . . . . . . . . . 6

V. The Corporate World . . . . . . . . . . . 9

VI. Business Litigation . . . . . . . . . . . . 14

VII. Congressional Update . . . . . . . . . . 15

VIII. Campaign Finance Reform . . . . . . . 16

IX. Product Liability Update . . . . . . . . 17

X. Premises Liability Update . . . . . . . 19

XI. Workplace Hazards. . . . . . . . . . . . 20

XII. Tobacco Update . . . . . . . . . . . . . . 20

XIII. Transportation . . . . . . . . . . . . . . . 22

XIV. Arbitration Update . . . . . . . . . . . . 23

XV. Mass Torts Update. . . . . . . . . . . . . 24

XVI. Environmental Concerns . . . . . . . . 25

XVII. Insurance and Finance Update . . . 28

XVIII. Predatory Lending Update. . . . . . . 31

XIX. Nursing Home Update. . . . . . . . . . 31

XX. Healthcare Issues . . . . . . . . . . . . . 32

XXI. The Consumer Corner. . . . . . . . . . 34

XXII. Recalls Update . . . . . . . . . . . . . . . 38

XXIII. Firm Activities . . . . . . . . . . . . . . . . 41

XXIV. Closing Remarks . . . . . . . . . . . . . . 42

Arbitration

federal government and officials fromExxonMobil have minimized the poten-tial danger of a fire and explosion, a spilland ensuing fire could cause wide-spread damage and put people in gravedanger. Public officials at the national,state, and local levels must take allactions necessary to protect life andensure that the Mobile terminalifapprovedwould be as safe as possible.

Governor Bob Riley, Senator RichardShelby, and others have worked hard inefforts to make sure the terminal, ifbuilt in Mobile, will be safe. The MobileRegister has done a tremendous job ofeducating the public on the risks andhazards associated with the ExxonMo-bil project. Governor Riley, in particu-lar, has taken a strong stand for safety.He should be commended for demand-ing that Alabama State Docks officialsand federal regulators take all stepsnecessary to make sure the proposedLNG terminal is safe.The Governor letit be known that he would block thesale of the Mobile property unless theneeded safety studies are completed. Ina letter to Docks officials and thefederal regulators, Governor Rileywrote that he would not allow the $38million transaction to be finalized untilsuch time as an adequate independent,individualized, site-specific safety studyhas been conducted. The potentialthreats posed by both the LNG facilityitself and by the transportation of LNGthrough Mobile Bay must be dealt with.The Governor stated that only after asafety study has been conducted andanalyzed would he decide whether thisis a project he could support. Thatcame under the heading of goodnews for people living in the Mobilearea. Subsequently, on January 23rd, theDepartment of Energy made anannouncement that indicates that Gov-ernor Rileys stand paid off.The safetyreview will now be expanded and willgo much further than originallyplanned. ExxonMobils announcementon January 27th that it was reducing itslevel of activity in Mobile, however,was even better news.

A RECENT TRAGEDY IS CAUSE FORCONCERN

The accident that occurred in Algeriaon January 19thin which LNGcomplex was leveled by an explo-sionhas caused a great deal ofconcern in Mobile and at the statecapitol.The death toll from this disasterwill be at least 30 and perhaps manymore. The explosion, resulting in amassive fire, occurred at the facilitylocated in the port city of Skikda.Threeof the facilitys six LNG conversionplants were completely destroyed. I amnot sure how similar the Algerian facil-ity was to that proposed for Mobile.However, it clearly deals with some ofthe same issues as would be faced inMobile if the LNG terminal were to beapproved. In any event, this disastergave both the federal government andthe State of Alabama some realconcern. It points out that everythingpossible must be done to make sureany facility built is safe. Personally, Ibelieve that ExxonMobil will build itsterminal in another Gulf Coast location,and that should be more good news forAlabama.

U.S. SUPREME COURT LETS WORLDCOMSUIT STAY IN ALABAMA

The suit that Alabamas pensionsystem filed against securities firmsover the WorldCom bankruptcy will beheard in Alabama.The Wall Street firmswanted the case moved to a federalcourt in New York. The U.S. SupremeCourt rejected an appeal by the defen-dants.The federal court in New York isdealing with WorldComs bankruptcy.Afederal judge in Alabama and the U.S.Court of Appeals for the EleventhCircuit in Atlanta had ruled in favor ofthe Retirement Systems of Alabama,saying its suit could be pursued in statecourt in Montgomery where thepension fund is based. The U.S.Supreme Court refused to consideroverturning those rulings.This is a mostsignificant victory for Dr. DavidBronner and the Retirement Systems ofAlabama.

NEW POLITICAL GROUP FORMED

A new political group has beenorganized in Alabama. The group, theFoundation for Educational and Eco-nomic Development, backed by themain opponents to the failed tax planput to the voters on September 9th. Itshouldnt be too surprising that thenew group appears to be wellfinanced. Media reports indicate thatthe group is drafting legislation thatwill be designed to trim waste and oth-erwise change the way state govern-ment operates in Alabama. Capitolinsiders say that the groups funding isbeing provided primarily by theAlabama Farmers Federation andSouthTrust Corp. I dont guess thatstoo surprising either. Since the statebudget will be short hundreds of mil-lions of dollars, it will be interesting tosee if the newly formed group willsupport any type tax increase. Clearly,accountability in government andreform of the system have become hottopics around the state capitol.Whether or not the new group willhave any success in passing legislation,however, remains to be seen. I suspecttheir lobbying efforts will be aimedmore at killing tax bills. In my opinion,they will be successful in that effort. Inany event, it will be interesting towatch this political organizationoperate over the next few months.

RILEY APPOINTS FORMER WALLACE AIDE

Kenneth Wallis, a former legal adviserto Governor George Wallace, has joinedGovernor Rileys Cabinet as LegislativeAffairs Director. Ken will replaceQuentin Riggins, who left the Governorto work for the Business Council ofAlabama. Ken served on GovernorWallaces staff from 1983-87. He alsoworked for Alfa Insurance, where hewas executive vice president of opera-tions and general counsel.At the timeof his appointment, Ken was a partnerwith the Montgomery law firm ofCapell and Howard. I have known Kenfor years and can say without reserva-tion that he is a good man. In myopinion, this was a good move by the

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Governor. Ken knows how state gov-ernment works and is very familiarwith the legislative process. He will bean asset to the Administration.

STATE LOSES ANOTHER GOOD MAN

State Fire Marshal John Robison hasretired and will be very difficult toreplace. Fortunately, John will leavebehind an office that has grown bothin size and importance. He hasworked in the fire marshals office formore than 31 years, serving as StateFire Marshal for 15 years. During histerm as Fire Marshal, John servedunder five governors. Resources forfire safety were significantly increasedunder this dedicated state employeesleadership and hard work. Forexample, there are now 24 deputy firemarshals throughout the state. John, apast president of the International FireMarshals Association, is recognized asone of the premier fire safety expertsin the country. He has been a goodstate employee and will be sorelymissed. I suspect that John will be ingreat demand as a fire safety expert.The States loss will be the privatesectors gain.

MONTGOMERY BUYS DRUGS FROMCANADA

Somebody in Washington needs toexplain to the American people whyprescription drugs in this country areso excessively expensive. Withoutquestion, the pharmaceutical industryis extremely powerful and exercisestremendous influence in our nationscapitol. While some states have beenarguing for the right to bring incheaper prescription drugs fromCanada, the City of Montgomery hasbeen quietly doing so for more than ayear. Since December of 2003, Mont-gomery has offered city employeesand retirees a voluntary mail-orderprogram to obtain Canadian drugsthrough a Texas-based company. Theprogram began as a pilot program andwas expanded this year. Apparently,this was unknown to the Food andDrug Administration.

Montgomery, just like most individu-als, has had to combat spiraling healthcare costs.The program has saved thecity over $500,000 during the last year.It has been particularly popular amongretirees who face staggering and ever-increasing drug bills. However, theFDA says the drugs from Canada areillegal. I understand that FDA officialshave talked to the City about itsprogram and have threatened to takelegal action. While importing drugsfrom Canada has long been illegal,senior citizens cross the Canadianborder on a regular basis and havemade big savings on their drug bills.Apparently, they have had no fear ofprosecution. Montgomery interpretedthe FDAs routine inaction as a yellowlight to proceed with caution.Presently, somewhere between 300and 400 people participate in Mont-gomerys program.The City has some3,000 employees and about 1,000retirees.

It has been reported that Expedite-Rx, the USA-based vendor, has guaran-teed that the drugs being purchasedare safe. The City deals with a phar-macy, and I understand prescriptionsare reviewed and filled by licensedpharmacists. The FDA contends thatdrugs from Canada could be counter-feit, tainted or old.There is one thingfor certain, however, and that is thatthe drugs are much cheaper than whatwe have to pay for identical drugs inthis country.The Bush Administrationhas threatened to sue cities and statesthat set up programs such as Mont-gomerys. The Alabama PharmacyBoard has shut down seven businessesin the state that were helping peopleobtain Canadian drugs. Why doesntthe FDA control the wholesale cost ofprescription drugs in the UnitedStates? That question remains unan-swered. Retail drug stores are not theproblem since they operate on a verysmall retail mark-up. It doesnt takelong to figure out that the realproblem is the power and influence ofthe pharmaceutical industry in thiscountry. With all of their campaignmoney and well financed front-groups

set up to influence public opinion,there is little hope that drug prices inthe U.S. will come down. The issueshould be on the minds of voters thisfall. If anybody doubts that the Ameri-can public is upset over the high priceof drugs, that person has been onanother planet.

ALABAMA STATE TROOPERS NEED HELP

The Alabama State Troopers have amost serious problem and thatadversely affects all Alabama citizens.The plight of the Alabama Departmentof Public Safety and the troopers whoserve our state has been well docu-mented in media reports over the pastseveral months. Currently, the depart-ment has 320 state troopers assignedto patrol our interstates and rural high-ways.The minimum number of person-nel assigned to those duties should bebetween 700 and 1,000 troopers. Tosay the Department is understaffed is agross understatement.

Recently, I received some informa-tion from Captain Neal Tew, Presidentof the Alabama State Trooper Associa-tion, which I will pass on for your edi-fication. A contrast of the situationnow with that in 1968, some 35 yearsago, is most revealing. Since 1968, themiles of highway for troopers to patrolhave increased 29%. The number ofregistered vehicles since that time hasincreased 251%, with the number oflicensed drivers increasing by 93%.Our state population in the past 35years has increased by a whopping37%. However, the total number ofarresting officers within the highwaypatrol division of the Department ofPublic Safety has actually decreased by13%.There were 369 troopers assignedto the highway patrol division in 1968.There are only 320 today and that isshocking.

Not only are we putting personswho travel our highway system inAlabama at risk, we are also puttingthe men and women who patrol ourhighways in grave danger.The Depart-ment of Public Safety faces a financialcrisis and that crisis affects everyAlabamian. The politicians who talk


tough on crime and say they back lawenforcement should take immediateaction.We dont pay law enforcementofficers a decent wage and we puttremendous demands on them. Theyput their lives on the line every day.Now, its time for us to put our moneywhere our mouths have been. TheAlabama State Troopers need immedi-ate help and there can be no justifica-tion for delay.

II.LEGISLATIVE HAPPENINGS

THE UPCOMING SESSION

There is no doubt that the regularsession of the Alabama Legislature,which began on February 3rd, will bethe most difficult for lawmakers inmany years. In fact, longtime observersof the Legislature say they cant remem-ber a session with so many seriousproblems. The fiscal problems facingour state are much greater than peoplearound the state could possiblyimagine.These problems have built upover the years and no longer can beignored. It will be easy to spot the prob-lems, but as I have stated on numerousoccasions, finding permanent solutionswithout additional revenues will benext to impossible. Clearly, additionalrevenues must be provided or stateservices must be drastically cut. Nolonger can these problems be deferredor ignored.This Governor and Legisla-ture face a challenge that will put themto the test. Hopefully, there are enoughmen and women in the Legislature whowill join with Governor Riley and dothat which is necessary to put our stateon a sound fiscal basis and in theprocess change state government andeducation for good!

DUELING POLLSTERS

Depending on which poll you con-sider valid,Alabamians either want andwill accept new taxes or are strongly

opposed to any tax increases.A surveycommissioned by Alfa indicates thatmost Alabamians who voted in the Sep-tember 9th referendum are hesitantabout new taxes. In fact, those answer-ing Alfas survey pretty much reflectedthe exact outcome of the September9th votetwo-thirds against new taxesand one-third for increasing revenues.An interesting question put to thepersons surveyed in the Alfa poll waswhether voting for taxes by Legislatorswould affect them in any way. In thetelephone survey, 75% of those polledsaid that if their Legislators raised taxeswithout a vote of the people, theywould be inclined to vote against themin the next election. If the Legislaturewere to put another tax referendumbefore Alabama voters and it failed, 46%of those polled said that would makethem inclined to vote against their Leg-islators. When asked which is moreimportant, 77% said governmentaccountability and 16% said new taxrevenue. 7% of the responders wereundecided.

A poll commissioned by the AlabamaEducation Association came up with atotally different result. That poll indi-cated that people would accept newtaxes. especially where education isconcerned. In fact, this poll would leadus to believe that people throughoutthe state recognize the states financialcrisis and are willing to pay more taxesto solve the problem.While I supportincreases in taxes, I am convinced thatmy position isnt supported by manyAlabama citizens. I hope I am wrong. Iknow Dr. Gerald Johnston who did theAEA polling and I know he is good athis craft. So, maybe that poll is moreaccurate. I hope so.

CONSUMER GROUP CALLS FORSUBPOENA POWER FOR LAWMAKERS

Alabama Watch, a strong advocate forconsumer rights, believes that AlabamaLegislators need subpoena power. Itotally agree. Giving subpoena powerwould help lawmakers sort truth fromfalsehood as they go about their jobs inMontgomery.At present, state Legisla-

tors have to wade through a mass ofinformation, much of it from lobbyists.Unfortunately, a great deal of this infor-mation simply is not true. Special inter-est groups, through their highly-paidlobbyists, can supply false or mislead-ing information in a public hearing or acommittee meeting with no fear of anyreprisals.Alabama Watch suggests thatspeakers appearing before legislativecommittees need to realize that theymay be placed under oath by theCommittee Chairpersons and testifyunder the threat of perjury. I hopesome lawmaker will sponsor a bill togrant subpoena powers.

In its last newsletter, the consumergroup stated,It is not helpful to con-stantly criticize the Alabama Legislaturewithout solutions to problems, andAlabama Watch believes that this is agood solution to a real problem.Alabama Watch works from offices inMontgomery. Alabama Watch speaksout for consumers all over the state ofAlabama, pushing citizen involvementand government accountability. Thefact that Alabama Watch is willing totake on the powerful special interestsis in itself noteworthy. Alabama con-sumers should support the group byvolunteering and with small donations.Alabama Watch can be contacted at:The Bailey Building, 400 S Union Street,Suite 245B, Montgomery, Alabama36104 or by phone 334-263-3022 or 1-800-449-7515.The group has a Websiteat www.alabamawatch.org.

LOBBYING CHANGES NEEDED

The proposal by Governor Riley totighten up the laws regulating lobby-ists spending makes sense. Anybodywho doubts the power and influenceof the lobbyists over what takes placein Montgomery hasnt kept up withrecent happenings. It will be interest-ing to see who supports this legislationand what groups oppose it. I haventread the bills to be introduced andhope they will be as tough as adver-tised.Apparently, the Democratic lead-ership in the Legislature will have itsown package. Perhaps the Governor



and those leaders should join forcesand really do something good for ordi-nary folks who pay the bulk of thetaxes in Alabama.A good place to startis controlling the powerful fourthbranch of government made up of thelobbyists for special interest groups.

III.COURT WATCH

EXXONMOBIL ORDERED TO PAYPUNITIVE DAMAGES

On January 28th, a federal judgeordered ExxonMobil Corp. to pay$6.75 billion in punitive damages andinterest to thousands of fishermen andothers affected by the 1989 ExxonValdez oil spill. ExxonMobil says it willappeal the order by U.S. District JudgeRussel Holland.The Irving,Texas-basedcompany will have to pay $4.5 billionin punitive damages and about $2.25billion in interest if the lower courtsorder is upheld by the appellate court.The money is to go to 32,000 fisher-men,Alaska Natives, landowners, smallbusinessmen and municipalitiesaffected by the 11-million gallon spill inPrince William Sound. The spilloccurred March 23, 1989, less than 3hours after the 987-foot ship ExxonValdez left the Alyeska Pipeline Termi-nal in Valdez. The ship grounded atBligh Reef, rupturing 8 of its 11 cargotanks and spewing some 10.8 milliongallons of crude oil into the sound.ExxonMobil was guilty of at leastwanton conduct of a gross nature inthe case.The disastrous effects on theenvironment and wildlife, as well as theeconomic losses suffered, have becomequite well known.

The judge wrote that the 9.74-to-1ratio between compensatory damagesand even a $5 billion punitive awardwould be appropriate under the U.S.Supreme Courts recent rulings.However, the judge reduced the puni-tive damages to $4.5 billion. It is mostsignificant that the judge stated in hisdecision that in the Valdez case, theconduct was by reckless corporate

officials.This case has been appealedtwice before and sent back to the trialcourt each time. Observers are predict-ing that this will be the final appeal.

THE RETRIAL OF JERNIGAN V.GENERAL MOTORS

We will have to try the Jernigan caseagainst General Motors again. TheAlabama Supreme Court reversed thejudgment for us in a 68-page opinion.The case will most likely be tried onApril 19th.The Supreme Court wrotean excellent opinion on GMs liabilityin this case. In fact, the courts opinionaddressed each liability argument pre-sented by GMs lawyers and ruled forthe Jernigans on each issue. Afterreading the opinion, there can be nodoubt that we proved a very strongcase on the defect. The case wasreversed on a jury selection issue thathad nothing to do with the defect orwith GMs liability. It was very clearthat a majority of the Court would haveaffirmed on all liability issues.We willtry this case again and do the best wecan to obtain complete justice forJeffrey Jernigan and his family. Rightwill eventually win out in this matterand I am convinced of that.

ALABAMA COURT UPHOLDSPUNITIVE DAMAGE VERDICT

In December of last year, the AlabamaSupreme Court upheld a $500,000punitive damages award that a ladyreceived in a lawsuit against anAlabama motel. The plaintiff wasinjured in the Ramada Inn of Annistonwhen a sharp metal object sticking outof the bed frame in her motel roominjured her leg. A jury in CalhounCounty, Alabama, awarded her$176,572 in compensatory damagesand $500,000 in punitive damages.Themotel owner appealed to the AlabamaSupreme Court, claiming that the$500,000 for punitive damages wasexcessive.The owner also sought to getthe court to reinstate the old cap onpunitive damage awards of $250,000.This cap had been struck down by theAlabama Supreme Court in 1993 as

being unconstitutional.Writing for themajority, Justice Bernard Harwood saidthe ratio between the punitive damagesand compensatory damages of slightlyless than 3-1 was not excessive becauserecords of the motel showed there hadbeen problems with other bed frames.The court further refused to resurrectthe old $250,000 cap, which came asno surprise. Because the SupremeCourt is currently one member short,retired circuit judge Bill Gordon wasappointed to serve on this case. JudgeGordon, an experienced and highlyrespected jurist from Montgomery,voted with the majority.

MENTAL HEALTH RECORDS KEPT PRIVATE

The Alabama Supreme Court hasrestricted access to the mental healthrecords of persons who bring lawsuits.Defendants in two civil lawsuits in Jef-ferson County had subpoenaed mentalhealth records of the plaintiffs in thesecases.The mental health center, whichhad the records, asked the SupremeCourt whether it had to turn over therequested records.The Supreme Courtsaid state law grants privacy to commu-nications between patients and theirpsychologists, psychiatrists and psycho-logical technicians.The court said thoserecords can be obtained only in limitedinstances. One example when therecords would be subject to subpoenawould be showing the mental state of adefendant in a criminal case. TheSupreme Court refused to make therecords available to the defendants inthe two civil suits.The court said thedefendants failed to show that theirdue process rights would be violatedwithout access to the mental healthrecords of the plaintiffs.This certainlyappears to be a correct decision.

GEORGIA BILL AIMS TO LIMITSETTLEMENT SECRETS

Many lawsuits are settled with part ofthe agreement requiring total secrecy.Others have limitations and restrictionson what can be said about the underly-ing case or the settlement. I havealways believed that when a settlement


deals with the public welfare, it should-nt be secret. A bill is pending in theGeorgia Legislature entitled Sunshinein Litigation Act.The bill would allowjudges to seal discovery documents orsettlements only after determining thatsecrecy wouldnt harm public health,welfare or safety.The bill, if passed, alsowould give the news media standing tocontest an order to seal information incivil cases.To seal the documents, theburden of proof would fall on the partymoving for secrecy.

There is a dangerous trend towardsecrecy in government and the courts.Two states, Florida and California, haveadopted similar proposals.Also, a SouthCarolina judge recently issued an orderincorporating some of what theGeorgia bill is proposing. In 1994, asimilar federal measure in the U.S.Senate lost by a vote of 51-49. I wouldhope that the Alabama Legislaturewould take some action on this issue. Itwould be good for Alabama consumers.

LARGE JURY VERDICTS ARE RARE

There have been relatively few largejury verdicts in Alabama over the pastseveral years. In fact, the same can besaid for the rest of the nation.When adeserving victim receives an adequateaward in a case of clear liability withsubstantial damages, however, the tortreformers put their public relationscampaign into high gear and go towork. Newspaper headlines announcethat another victim has won the lottery,totally ignoring the defendantsconduct or the victims plight.Thingssuch as injuries and losses take a backseat.When the defendants conduct isso bad that punitive damages areawarded, which is extremely rare, thecries of frivolous lawsuitsand jackpotjusticeget much louder.

Even when substantial verdicts thatare justified are awarded by a jury, thefight by victims is not over.The mediaoftentimes will report that thesepeople have won a frivolous lawsuit,regardless of the fact that the case hadmerit, and thats what the public hearsand reads. Few cases are followed bythe media through the appeals process.

However, while a case is on appeal, thecorporate defendants keep their publicrelations people at work, putting outinformation that is often totally false orat least misleading. We have experi-enced this type thing on numerousoccasions. Unfortunately, the victimsdont have public relations depart-ments.As a result, the public becomestotally misinformed, and that is a realproblem for ordinary people.

In all civil cases, judges can reduceawards or throw them out all together.An appeals court can do the same. Ithas become difficult for victims to winvalid lawsuits in Alabama. When theydo, you can rest assured that the casewas legitimate and worthy of the jurysverdict. However, recovering adeserved jury verdict is just the begin-ning of the fight. Corporate defendantshave the financial ability to financeappeals and seem to enjoy theirattempts to avoid paying verdicts thatwere justified by both the law and theevidence in cases.

IV.THE NATIONALSCENE

THE RACE FOR PRESIDENT

As this report is being written, theresults from the Iowa caucus and NewHampshire primary are receivingnationwide attention. Senator JohnKerry is clearly the frontrunner at thispoint.While some may be surprised atthe showing of Senator John Edwards,the results were predicted by theEdwards Campaign. Without a doubt,Senator John Edwards has become aserious contender for the Democraticnomination. In my opinion, the Senatorfrom North Carolina is the only Democ-ratic candidate who really has the KarlRove forces worried about November.While Senator John Kerry would be aformidable candidate and would giveBush a run for his money, John Edwardsappears to have become the Rovetarget. If John becomes the Democratic

nominee and faces President Bush inthe general election, I believe Johnwould win. He has an excellent shot atbecoming the next President. Havingknown John for years, I can say withoutreservation that he is a good man,totally honest and highly capable. Hewill make a great President if given theopportunity.

I believe the country truly needs aleader whose decisions arentdesigned by Karl Rove and DickCheney. In that regard, the more I learnabout our Vice President, the moreconcerned I become about the futureof this country. The Rove-Cheneyagenda doesnt include looking out forthe welfare of the ordinary citizen. Inany event, by the time this issue isreceived, the February 3rd primarieswill have been decided. After thosedecisions are made, the path to theWhite House for the Democratic ticketwill be much better defined. Many arepredicting a ticket with both Johns onit. The question remains: which Johnwill be at the top?

PAUL ONEILL SPEAKS OUT

Paul ONeill, who served as a keyfigure in the Bush Administration, hasmade some shocking comments con-cerning how the Bush White House isrun. ONeill, who had been a top offi-cial in the Nixon and Ford Administra-tions, and a confidant of Dick Cheney,made some extremely damagingremarks about the President and thosearound him. One thing ONeill said wassomething many Americans haveknown for a long time, and that is KarlRove really runs the show. However,ONeill made several other mostserious accusations. My comment inpassing iswhat if the accusations aretrue? For the good of our country, Ihope not!

CONSERVATIVE GROUPS BREAK WITHREPUBLICAN LEADERSHIP

It is rather interesting that nationalleaders of six conservative organiza-tions have broken ranks with theRepublican majorities in the House and



Senate, accusing them of spending likedrunken sailors.Significantly, they hadsome strong words for President Bushas well. Paul M.Weyrich, national chair-man of Coalitions for America, stated ata news briefing accompanied by theother five leaders: The RepublicanCongress is spending at twice the rateas under Bill Clinton, and PresidentBush has yet to issue a single veto. Icomplained about profligate spendingduring the Clinton years but neverthought Id have to do so with a Repub-lican in the White House and Republi-cans controlling the Congress. Itappears that the President may belosing his base.After hearing the Stateof the Union Address and realizing thatthe Bush deficit was probably tripledduring the talk, I am not surprised thatfiscal conservatives are concerned.

THE NOOSE TIGHTENS

With the guilty plea of AndrewFastow, one of the architects of thecorrupt deals that brought downEnron, and that of his wife, Lea, Isuspect that there are a number ofnervous individuals who once were inthe top echelons of the company.Thefact that Fastow is now assisting prose-cutors means the noose is definitelygetting tighter. I hope the net will bringin some of the big fish who so farhave appeared to be escaping prosecu-tion.The Enron debacle will go downin history as the single event thatbrought to the nations attention howcorrupt and greedy some of the peoplewho run large corporations really are. Italso made clear that government regu-lation is very weak. It is shocking tolook back and see how the governmentactually condoned much of what theEnron Gang was doing. Finally, thingsappear to have changed.

It will be interesting to see whetherAndrew Fastow was in fact the master-mind behind the fraudulent accountingpractices at Enron that cost investorsbillions of dollars and Enron employeestheir jobs and virtually all of theirsavings. I suspect he had some big timehelp. In addition to serving jail time andAndrew Fastow agreeing to testify for

the prosecution, both Fastows mustalso forfeit approximately $29 milliondollars to the government. I hope thismoney can be used in some way asrestitution for the victims of Enronsgreed.The Enron chapteras bad as ithas been so faris not over by anystretch of the imagination. Everyperson who violated the law must beprosecuted, tried, and sent to prison.

EFFORTS TO DESTROY THE JUDICIALSYSTEM

For years, the American Tort ReformAssociation (ATRA) has spearheadedefforts to destroy the judicial system inthe name of tort reform.ATRAs keytort reform efforts have been carefullyplanned, well-organized, and extremelywell-financed.The reform of laws gov-erning class actions, noneconomicdamages, product liability, and punitivedamages have been the main objec-tives.All right-thinking persons believethat the American legal system is worthsaving.The foundation of that system isthe jury box, and it is the civil jury thathas been under constant attack. Tortreform is designed to completelydestroy the system. A healthy civiljustice system is essential for the well-being of American citizens. We haveseen so much corporate wrongdoingover the past 10 years that it is real easyto understand why Corporate Americapushes tort reform so hard. It is not toodifficult to understand now why corpo-rate bosses such as Ken Lay pushed andfinanced tort reform.

PUBLIC CITIZEN CALLS FORINVESTIGATION

Recently, Public Citizen issued aletter of complaint to the Office ofInspector General (OIG) of the U.S.Department of Health and Human Ser-vices (HHS) concerning SecretaryTommy Thompsons waiver exemptingformer Center for Medicare and Medic-aid Services (CMS) AdministratorThomas Scully from ethics laws. Thewaiver allowed Scully to represent theBush Administration in negotiationswith Congress over the recently-

enacted Medicare prescription druglegislation while Scully simultaneouslynegotiated possible employment withthree lobbying firms and two invest-ment firms that had a major stakes inthe legislation.

A Public Citizen investigation hasrevealed that these firms own or repre-sent dozens of health care companies,trade associations, and physiciansorganizations with billions of dollars atstake in the new law. That ethics lawswere brushed aside in the face of suchconflicts of interest is highly question-able, said Frank Clemente, director ofPublic Citizens Congress Watch.Thatthe public and Congress were kept inthe dark about the conflicts of interestuntil the Medicare bill was passed isabsolutely disgraceful. In the com-plaint Public Citizen urges the OIG toinitiate an investigation into possibleimpropriety by Secretary Thompsonand the HHS Associate General Counselof Ethics in the granting of the waiver,which was signed by Thompson onMay 12, 2003. The waiver allowedScully to seek private employmentwith firms that represent or ownparties with clear financial interests inScullys official duties, an otherwiseclear violation of federal ethics laws.The waiver gives the self-serving justifi-cation that it is neither practicable, norin the interest of the Department, forMr. Scully to remain disqualified, ignor-ing clear guidelines set out in federalregulations and law that list specific cri-teria for such waivers.

Those criteria specify that a waiverfrom conflicts of interest laws are justi-fied primarily on the grounds that theprivate benefit to the public employeeand the employees potential employ-ers and their clients or subsidiaries areso insubstantial as not to affect theintegrity of the employees services. [5CFR 2640.301(c)] The three lobbyfirms with which Scully negotiated pos-sible employment, lobby for at least 30companies or associations that areaffected by the new Medicare law.Thetwo investment firms own substantialstakes in at least 11 companies that areaffected by the Medicare changes.


Among those 41 entities are 12 phar-maceutical companies and the tradeassociation for the pharmaceuticalindustry. Pharmaceutical companieswere widely considered the biggestwinners in the passage of the Medicarebill; the bill subsidizes private insurersto provide prescription drug coverageto seniorsthereby increasing demandfor drugsbans the Medicare adminis-trator from bargaining for lower drugprices, and effectively prohibits thereimportation of lower-priced drugsfrom Canada.The entities with whichScully discussed employment alsoincluded many representatives fromthe health care provider industry thathas estimated it will receive $3.5 billionin increased Medicare physician pay-mentsincluding 10 health careprovider companies, 4 of their tradeassociations, and 3 professional organi-zations representing their doctors.None of these interests were disclosedby HHS in its waiver, despite regula-tions that require the waiver todescribe the disqualifying financialinterest, the particular matter ormatters to which it applies, [and] theemployees role in the matter ormatters. [5 CFR 2640.301(c)] Scullyresigned from the Centers for Medicareand Medicaid Services on December16th. Two days lateron December18thhe announced that he would bejoining two of the five firms he hadbeen negotiating with while CMSadministrator. Each of the firms hasstrong ties to the healthcare industry.Somehow, this sort of thing just doesntmeet the smell test.

FEDERAL GOVERNMENT SHOULDNT PAYLEGAL BILLS FOR WRONGDOERS

Congressional investigators havereported that the Energy Departmentspent $330 million in taxpayer moneyto reimburse its private contractors forlegal bills during a span of over 5 years,involving lawsuits they lost and settle-ments of sexual harassment andwhistleblower allegations.The Depart-ment claims the reimbursements werelegal.A key congressman has told theAssociated Press, however, that the

reimbursements amount to a get-out-of-court free card for contractors whoengage in wrongdoing. It was reportedthat when a contractor for the DOEgets sued, 95% of the time its legal feesand settlement costs get reimbursed bythe federal government.This informa-tion comes from RepresentativeEdward Markey (D-Mass.), a member ofthe House Energy and Commerce Com-mittee. I must say that is a shocking rev-elation and one that cannot possibly bejustified.

The Energy Department is somewhatunique among federal agencies becauseprivate contractors run so many of itsfacilities, including national defenselabs and former sites where nuclearweapons production activity tookplace. The Departments reimburse-ments came in 1,895 cases from late1997 through March of this year,according to a report released by theGeneral Accounting Office, the investi-gatory arm of Congress. According tothe GAO, there were 814 cases involv-ing workers compensation, 268 involv-ing denial of equal employmentopportunity, 100 brought by whistle-blowers, 99 stemming from personalinjury,50 alleging wrongful terminationof employment, 40 arising from radia-tion and different types of toxicity, and524 on other matters. It is difficult tounderstand how the federal govern-ment could legally pick up the costs ofits contractors when wrongdoing bythe contractors causes the expense.

CHRISTMAS COMES EARLY

The National Highway Traffic SafetyAdministrations proposed redrafting offuel economy rules is not the gift ofimproved safety and efficiency of sportutility vehicles that the agency has indi-cated it is.A preliminary proposal fromNHTSA is vague on the specificchanges. It also relies on faulty studiesand data regarding the impact ofvehicle weight on safety and fueleconomy.While the good news is thatthe agency is examining some of theloopholes in current rules, the closeties of the Bush White House to the

auto industry suggest that industry willhave disproportionate influence in thiscomplex rulemaking, potentially justdelaying meaningful increased stan-dards. Current fuel economy rules actu-ally foster weight increases in theheaviest trucks by dividing the fleetbetween cars and light trucks andSUVs, keeping mileage standards verylow.

While advances in technology yieldsteady yearly improvements in engineefficiency and other capabilities,throughout the 1990s automakers usedthis capacity to increase the bulk andacceleration of already-heavy trucks,rather than improve fuel economy.Theagency has indicated it may rewrite itsstandards based on vehicle weight orother attributes, but a weight-basedsystem would encourage heavier SUVsand pick-up trucks. Weight-basedsystems are also founded on the fallacythat reductions in vehicle weightwould occur across-the-board andthereby increase fatalities. In actuality, aweight-based standard would perpetu-ate and exacerbate the carnage fromover-weighted SUVs and pick-uptrucks, allowing automakers to con-tinue ramping up sales of highly prof-itable behemoths at the expense of theenvironment and consumer safety.

Any rewrite of the rules should bemeasured against the benchmark of asubstantial, rather than minimal,increase in the standard under thecurrent program. This would accom-plish two things: (1) save oil and (2)increase safety.A substantial hike in fueleconomy standards would concentrateany reductions in vehicle weight in theheaviest vehicles, as that is the mostcost-effective way to improve fueleconomy for those vehicles, whileusing technology to achieve greaterfuel economy in lighter vehicles.That isthe historical pattern of fuel economyimprovements through the 1970s and1980s. Similar leadership today wouldgreatly improve the safety of the occu-pants of those inside both SUVs andother vehicles. Regulators should deci-sively raise standards under the currentsystem, as was originally intended by



Congress, rather than wrapping up agift to the industry with false promisesof consumer and environmental pro-tection. I appreciate Public Citizensfurnishing this information to us foryour edification.

WAL-MART ADDS TO LEGAL TEAM

Wal-Mart has been sued in a varietyof lawsuits. Now, the retail giant hasapparently decided it needs some newfaces in its legal ranks. John PeterSuarez, the Environmental ProtectionAgencys Assistant Administrator forEnforcement and Compliance, isleaving his position to join Wal-Mart.His resignation, which came about inDecember 2003, will be effective onJune 30th.At that time, he will join Wal-Mart as its chief lawyer. It has beenreported that Wal-Marts annualrevenue was approximately $244billion dollars in 2002.This may havebeen one of the factors that caused achange in the companys legal staff.

Some capitol insiders say that Mr.Suarez has been one of the chiefdefenders of the Bush Administrationsenvironmental record when it comesto penalizing polluters. The BushAdministration has come under attackfrom multiple environmental groupsregarding its failure to protect the envi-ronment. It is interesting to note thatEPA inspections during 2003 totaled18,880.That is almost 2,000 less thanthe number of inspections thatoccurred during the final year of theClinton Administration. If Mr. Suarezhad anything to do with EPAs inactionand protection of corporate wrongdo-ers, he should fit in well at Wal-Mart. Ihope he is leaving because of hisdislike for the Bush environmental poli-cies and his desire to make thingsbetter for consumers at Wal-Mart. Weknow that some of his co-workers havehad enough of the Bush tactics andpolicy decisions and are looking for aplace to go.

WAL-MART HIRES LEGAL COMPLIANCEOFFICER

A multitude of discrimination law-suits have been filed against Wal-MartStores Inc.There is also a federal inves-tigation into the alleged use of illegalworkers.As a result,Wal-Mart is hiring afederal prosecutor to be its new legalcompliance officer.Tom Gean, the U.S.attorney for the Western District ofArkansas, went to work for the retailgiant in late January.Wal-Mart reportedthat the former prosecutor would workclosely with Wal-Marts new operationscompliance groups. Gean had beennamed as U.S.Attorney in 2001. Prior tohis appointment, he had been a localprosecutor for four years, starting in1997. It appears Wal-Mart is adding agood deal of new talent to its legalranks.

LABOR DEPARTMENT ADVISINGEMPLOYERS ON HOW TO AVOIDOVERTIME PAY

Recent reports indicate that theLabor Department is giving employerstips on how to avoid paying overtimeto some of the 1.3 million low-incomeworkers who would become eligiblefor overtime under rules expected tobe finalized in March of this year.Among the tips being given: cutworkers hourly wages and add theovertime to equal the original salary; orraise salaries to the new $22,100annual threshold, making the employeeineligible.This is troubling for millionsof Americans struggling to make endsmeet. Bureau of Labor Statistics showthat more than 20 million Americansearn less than $9.00 per hour. LaborDepartment officials have stated thatthey are merely listing well-knownchoices available to employers, evenunder current law.A spokesman for theLabor Department has said,Were notsaying anybody should do any of this.That statement seems to contradict theLabor Departments previousannouncement that approximately$895 million in increased wages couldbe earned by workers from the newovertime rules.

V.THE CORPORATEWORLD

THE TOP 100 FALSE CLAIMS ACTSETTLEMENTS

Corporations that contract with thegovernment are defrauding taxpayersof billions of dollars a year and shouldbe punished harshly, according to anend-of-the-year report by the CorporateCrime Reporter. The report ranks thetop 100 False Claims Act settlementssince the law was strengthened in1986. Under the law, private citizenswho provide information that leads to afederal prosecution of fraud for a gov-ernment contractor are entitled to areward of 15 to 25% of the settlement.This encourages citizens to comeforward and expose fraud in govern-ment contracts. Since 1986, the FalseClaims Act has helped expose $12billion in fraud.Topping the list was a$731 million settlement in 2000 withTennessee-based healthcare giant HCAfor unlawful billing practices. HCA,which was founded and is run by thefamily of U.S. Senate Majority Leaderbill Frist (R-TN), also was second on thelist with a $631 million settlement in2003 for false claims submitted toMedicare and other programs, followedby a $559 million settlement paymentby TAP Pharmaceuticals in 2001 forfraudulent drug pricing and marketing,a $400 million settlement payment byAbbott Labs in 2003 for obstructing acriminal prosecution of health careoffenses, and a $385 million settlementpayment by Fresenius Medical Care in2000 to resolve a widespread investiga-tion.

Of the top 100 settlements, 56 werewith health care corporations and 23were with defense contractors. In allthe top 100 cases, whistleblowersearned at least $1 million. CorporateCrime Reporter editor RussellMokhiber said that governmentsshould consider dissolving companiesthat defraud the government. At thevery least, these companies should be


banned from further government con-tracts. Mokhiber stated: The federalgovernment has the authority to pro-hibit corporations convicted of seriouscrimes from doing business with thefederal government.This debarment orexclusion authority is considered theequivalent of the death penalty,because for major health care corpora-tions and defense corporations whichrely on federal contracts, denying themfederal contracts would effectively putthem out of business.

WHAT TO EXPECT IN 2004 FORCORPORATE SCANDALS

The number and magnitude of cor-porate scandals have been at an all timehigh. Even the tort reformers wouldhave to concede that to be true.Tyco,Enron, WorldCom, Parmalat, Health-South, and many others have all beenunder investigation. Now mutual fundsare being added to the mix.The ques-tion many are asking now is: will wesee fewer scandals in 2004? Manybelieve, for good reason, that we willnot. Frankly, I dont believe there willbe a decline in fraud cases this year. It isdisturbing that so many major corpora-tions have been under investigationover the past few years. It is even moredisturbing that the federal governmentfailed to detect the magnitude of theproblem for a long time. Finally, investi-gations have become commonplace.Atone time, some 25 major corporationswere under some type criminal orquasi-criminal investigation. It hasgotten so bad that major scandals areno longer front-page news.

I am convinced that a powerful deter-rent to future corporate scandals willcome from the tremendous number oflawsuits that have already been filed byinvestors.The criminal prosecution ofseveral executives scheduled to cometo trial during this year will also get theattention of those in Corporate Americawho have believed they were above thelaw. If cases against former executiveswho have violated the law and the trustof persons who depended on them leadto prison sentences, managers andexecutives will be less likely to cut

corners to make their earnings lookbetter. Pm the other hand, if these exec-utives who have been charged are notpunished, other executives will con-tinue to believe that they can cheatwithout any fear of punishment.Investors will lose faith in the Americansystem of criminal justice if CEOs canescape prosecution or convictionregardless of how bad their conduct hasbeen. I hope investors will continue topursue their civil court cases and theexecutives that have been charged willreceive justice.Then and only thenfaith in both our system of justice andfinancial institutions will be restored.

STEALING THE PUBLIC BLIND

Many knowledgeable observers,again with good reason, have con-cluded that the entire financial industryof this country is riddled with fraud.When the Enron scandal broke, initiallymost of us believed that to have beenan isolated case. As it turned out,however, it was just the tip of theiceberg. So many corporations havebeen charged with cheating and fraudthat few people could name them all.AWashington lawyer and expert inmoney-laundering and other forms oftax evasion, wrote the following for anacademic conference held last year atthe University of Texas at Austin:

Corporate managers have spent thelast century developing tools foravoiding regulation and taxation.They brag that acts of tax avoid-ance are part of corporate produc-tivity. For them, each dollar of taxnot paid because of their machina-tions is the added value they bringto a company. Tax avoidance is aprofit center. Avoidance of regula-tion and supervision is an equallyhigh priority. Corporate contribu-tions and the personal contribu-tions of senior corporate managershave funded anti-regulatory thinktanks and anti-regulatory scholar-ship. Political contributions haveturned theory into reality.

The tools used to avoid taxes andregulationshell subsidiaries, partner-

ships and joint ventures, foreign sub-sidiaries, special-purpose entities andsophisticated transfer pricing tech-niqueshave long been in use.Whenthey were first used, their purpose wasto avoid state regulation and hide fromstate law enforcement.The differencenow is that over the past few years, thetechniques have been used to avoidwhat is left of federal taxation and regu-lation. Corporations have turned inter-national borders into barriers thatblock national level taxation and regu-lation. Unfortunately, the internationalcommunity has failed to produce effec-tive machinery for cooperation in theareas of regulation and taxation. As aconsequence, the social control of cor-porate behavior stops at the border.Even more unfortunate is that our gov-ernment hasnt done its job.

I dont believe that any of us had anyidea in the late 1990s that things inCorporate America were as bad as theyturned out to be. Even though our firmhad handled a number of consumerfraud cases against corporations, I cer-tainly had no concept of the depth ofthe corporate corruption that actuallyexisted. In this country, we have experi-enced a corporate culture gonehaywire, with arrogance and greedbeing the rule rather than the excep-tion.To protect its members, the bossesin Corporate America have literallybought the political system or at leastrented it. As a result, the CEOs havebeen able to exploit the system withlittle fear of any bad consequences.

Lets look at a few recent examplesof how effective the lobbyists for cor-porate interests have been. We haveexperienced Medicare reform result-ing in a huge windfall for the drug com-panies and HMOs. The energy bill inCongress is loaded down with corpo-rate subsidies. The pharmaceuticalindustry has pretty well run the Foodand Drug Administration and is a primeexample of the tail wagging the dog.The automobile industry doesnt haveto worry about any real regulation.CEOs such as Ken Lay and others havelooted their corporations with no fearof being caught.We are now witnessingthe looting of an entire country. Some



say we are being stolen blind.The largecorporations in this country are escap-ing taxation, with the burden of payingfederal taxes being pushed more andmore on the backs of ordinary folks.The Bush White House and the leader-ship in both Houses of Congress haveallowed all of this to happen and actu-ally seem to have encouraged the scan-dals.The American people are fed up,and I believe we will see how mad theyare this fall when they go to the polls.

A CODE FOR CORPORATE RESPONSIBILITY

A proposal to make California com-panies more socially responsible ispending in that states Senate JudiciaryCommittee.The Bill, called the Direc-tors Duties bill or the Code for Corpo-rate Responsibility, would broaden theduties of corporate directors to includeprotecting the public interest in fivespecific areas:

environment

human rights

public health and safety

dignity of employees

the welfare of the communities inwhich the corporation operates

Under current California law, corpo-rate directors, who control the behav-ior of the corporation, are only legallyresponsible to act in the best interestsof the corporation and its shareholders.This generally requires them to maxi-mize financial profits, whick usually isgood. However, this narrow focus onfinancial profit can be the source ofmuch of the harmful behaviors inwhich corporations engage. By makingdirectors more responsible for otheraspects of the public interests, corpora-tions will become more sociallyresponsible. I would add one more itemto the list of duties, and that is arequirement that all who run majorcorporations be made to follow theGolden Rule. If that is added and thefolks running Corporate Americafollow it, the rest of the list would beunnecessary. It will be interesting tosee how this legislation fares. It willalso be interesting to see who all

opposes the bill. As we went to theprinter, the bill appeared to be stalledin a legislative committee.

A SCANDAL THAT MAY BE BIGGESTFRAUD EVER

We have seen some awfully badconduct in the ranks of CorporateAmerica. A major scandal is beinguncovered, however, that may be theworst ever. Reports indicate that thefraud at Parmalat, the Italian dairy giant,could be as much as $16.8 billion (farmore than WorldCom) and may havebeen the result of more than a decadeof fraudulent accounting.The scandalbegan when Bank of America revealedon December 19th that Bonlat, a Par-malat subsidiary in the Cayman Islands,was missing $4.9 billion in claimedassets (about 38% of all of Parmalatsassets). It now appears that bank state-ments had been forged. Parmalat hasfiled for bankruptcy and its CEO hasbeen arrested. A total of 20 companyofficials, including board members andlawyers, are being investigated. It is notclear yet how deep the fraud will run.Parmalat had a complex web of morethan 200 subsidiaries, many in offshoretax havens like the Cayman Islands andthe Antilles. It appears that Parmalatwas using an Enron-style accountingshell game to hide liabilities and movemoney around with these subsidiaries.Parmalat used a multi-layer ownershipstructure that is very common amongItalian corporations. Many large U.S.banks, including Bank of America, Citi-group and JP Morgan Chase, had busi-ness dealings with Parmalat. It isunclear how much these banks reallyknew. Since Citigroup and JP Morganboth paid SEC fines in the Enronscandal, it appears that they may wellhave been involved to some extent.They helped Enron engage in mislead-ing financial deals. One of the financialdeals that Parmalat struck with Citi-group was called Bucerono, whichmeans black hole in Italian.

Questions also surround US-basedGrant Thornton, the companysaccounting firm.Although Grant Thorn-ton stopped auditing Parmalats books

in 1999, it continued to audit the booksof Bonlat, the Cayman Islands sub-sidiary with the missing $4.9 billion.Grant Thornton has claimed that it wasmisled, had no role in illegal schemes,and was itself a victim.The head of theItalian unit of Grant Thornton resignedrecently and his partner was sus-pended after warrants were issued fortheir arrests. An Italian judge accusedthe auditors of suggesting the fictitiousoperations necessary to achieve thefraudulent aims of the group. Thecompanys founder has admitted thathe secretly moved $625 million of Par-malats money into a money-losingtravel business owned by his family.TheSEC has also charged Parmalat withfraudulently offering $100 millionworth of unsecured notes to U.S.investors and inflating its assets by atleast $5 billion. SEC regulators havereferred to this as one of the largestand most brazen corporate financialfrauds in history.

A MASSIVE CORPORATE FRAUD

There was another very large settle-ment arising out of more corporatefraud that did not receive a great dealof attention because of the holidays.Credit Lyonnais S.A., CDR-EntreprisesS.A. (a subsidiary of the French govern-ment entity that acquired the banksnon-performing assets in 1995), MAAFAssurances, S.A. (a major French mutualinsurance company), and an individual(chairman of MAAF) will plead guilty toserious criminal charges. The chargesarose out of false statements made tofederal banking regulators in connec-tion with the acquisition of junk bondsand the insurance business of the failedExecutive Life Insurance Company ofCalifornia. Executive Life, which wasonce the largest life insurancecompany in California, held a multibil-lion-dollar portfolio of junk bonds. In1991, Executive Life was declared insol-vent and was seized by the CaliforniaDepartment of Insurance. Apparently,through a complicated series of secretagreements, Credit Lyonnais and othersconcealed a web of illegal relationshipsand transactions. The investigation of


this fraud took 5 years and was carriedout under the supervision of the U.S.Attorneys office in California.

The plea agreements call for CreditLyonnais and CDR-E to each pleadguilty to 3 felony counts of makingfalse statements to the Federal Reserve.Credit Lyonnais will pay a $100 millioncriminal fine and an additional $100million civil penalty imposed by theFederal Reserve. An additional $375million will be paid by CDR-E into a set-tlement fund available to the CaliforniaInsurance Commissioner for distribu-tion to former Executive Life policy-holders to compensate them for lostbenefits.As part of a broader settlementagreement, Credit Lyonnais, MAAF, andArtemis, S.A., a holding company con-trolled by a French businessman, willpay a cumulative total of $770.5million. There appear to have beenseveral other smaller criminal finespaid by a number of individuals andcompanies. Other individuals associ-ated with the MAAF and Artemis haveagreed to pay an additional $1.25million, bringing the total settlementamount to $771.75 million. This isbelieved to be the largest settlement ina criminal case in U.S. history. It israther interesting to note that a settle-ment of this magnitude could go rela-tively unnoticed. Could it be thatcorporate fraudas mentionedbeforeis no longer first page news!

SEC UNVEILS WIDESPREAD ABUSESIN FUND SALES

The Securities and Exchange Com-mission (SEC) has announced that itfound mutual fund share sale abuses at13 of 15 Wall Street brokerages targetedin a probe. The agency said 13unnamed firms took cash from mutualfund investment advisers. In return forthese payments, the SEC says that 13 ofthe 15 firms appear to have favored thesale of the revenue sharing funds.TheSEC investigation of revenue sharingbetween brokerages and mutual fundsbegan in April 2003.The Commissionsaid it found that revenue sharing is acommon practice. In November, invest-ment bank and brokerage Morgan

Stanley agreed to pay $50 million tosettle charges that it failed to tellinvestors about compensation itreceived for selling certain mutualfunds. Morgan Stanley agreed toprovide more disclosure about its rela-tionships with mutual fund groups.Atthat time, the SEC had said it waslooking at possibly similar abusesinvolving as many as 15 brokerages.Asa part of its settlement, Morgan Stanleypledged to no longer accept softdollar paymentspayments for bro-kerage services through commissionrevenues rather than direct feesonretail sales of mutual funds. It is mostdistressing to see all of the corruptionthat exists in Corporate America. I hopewe will eventually see an end to thissordid chapter in our countrys history.

WADDELL & REED CHARGED WITHVIOLATIONS

NASD has filed a complaint chargingWaddell & Reed, Inc. of Overland Park,Kansas, with recommending 6,700 vari-able annuity exchanges to its cus-tomers without determining thesuitability of the transactions. Theseexchanges, known as switching, gen-erated $37 million in commissions andcost Waddells customers nearly $10million in surrender fees. NASD alsoalleged that according to its quantita-tive analysis, at least 1,400 of the firmscustomers were likely to lose moneyby making these switches. Chargeswere also brought against the firmsformer President, Robert Hechler, andits National Sales Manager, RobertWilliams. In addition to other sanctions,NASD is seeking an order requiring thefirm to disgorge commissions and com-pensate customers.

NASD has charged the firm with suit-ability and supervisory violations,Hechler with causing the firms suit-ability violations by encouraging thesales force to switch customers, andWilliams with supervisory failures inconnection with the variable annuityexchanges. Under NASD rules, the indi-viduals and the firms named in thecomplaint can file a response andrequest a hearing before an NASD disci-

plinary panel. Possible sanctionsinclude a fine, suspension, bar, or expul-sion from the NASD.

Investors can obtain more informa-tion and the disciplinary record of anyNASD-registered broker or brokeragefirm by calling NASDs BrokerCheck.NASD makes available BrokerCheck atno charge to the public. In 2003,members of the public used thisservice to conduct more than 2.9million searches for existing brokers orfirms and requested almost 180,000reports in cases where disclosableinformation existed on a broker orfirm. Investors can link directly to theprogram by going online to www.nasd-brokercheck.com. Investors can alsocontinue to access this service bycalling 1-800-289-9999. For more infor-mation,you may visit the NASD Websiteat www.nasd.com.

FORTUNE 500 CORPORATIONS ANDOFFSHORE TAX-HAVEN SUBSIDIARIES

Many large corporations in thiscountry have utilized offshore taxhavens and have successfully avoidedpaying taxes in this country. Someinteresting data was compiled byCitizen Works from corporate 10-Ksand it is available on the Internet. If youare interested, you can go to the Corpo-rate Tax Traitors Website at www.Citi-zenWorks.org/corp. There are anumber of countries considered to betax havens. Some of them include:Aguilla,Andorra,Antigua, Bahrain, Bar-bados, Belize, Bermuda, British VirginIslands, Canary Islands, Cayman Islands,Channel Islands, Commonwealth ofBahamas, Commonwealth of Dominica,Cook Island, Gibraltar, Grenada, Guer-nesey, Isle of Man, Jersey, Liberia, Liecht-enstein, The Principality of Maldives,The Republic of Marshall Islands,TheRepublic of Mauritius Monaco, ThePrincipality of Montserrat Nauru, TheRepublic of Netherlands,Antilles, Niue,Panama, Samoa, Seychelles,The Repub-lic of St. Christopher and Nevis, St.Lucia, St. Vincent, Tonga, Turks andCaicos,US Virgin Islands, and Vanuatu.

With so many choices available, itappears that companies wanting to



avoid paying taxes shouldnt have anyproblem finding an offshore home.Some of the worst corporate offendersare El Paso, Morgan Stanley, Citigroup,Marsh & McLennan, Mirant, Hallibur-ton, Bank of America Corp., MarriottInternational, PepsiCo, Pfizer, Viacom,and Interpublic Group. It should benoted that Enron was a big-timeoffender in its prime. President Bushhas done nothing to support legislationor regulatory efforts to close offshoretax haven loopholes. Meanwhile, anincreasing number of corporations areeither moving their headquarters off-shore or establishing subsidiaries in off-shore tax havens.The actual taxes paidby corporations are approaching histor-ical lows. In a recent special investiga-tion on corporate taxes, Business Weekreported that in 1940, companies andindividuals split the federal income taxbill equally. However, corporations nowpay only 13.7% of the federal incometax bill while individuals pay a whop-ping 86.3%. It is estimated that offshoretax avoidance is costing $70 billion ayear. This is something that shouldntset well with working men andwomen, retirees, and the owners ofsmall businesses.

ENRON BANKRUPTCY APPROVED

Enron convinced a federal judge andthousands of creditors that it hadfinally come cleanon the real value ofits assets and debts. After a lengthyhearing, the bankruptcy court judge incharge of the case decided that Enronsplan of reorganization should beapproved. According to reports, thecourt approval most likely will guaran-tee that the plan will gain finalapproval later this year.While this doeslittle to right all of the wrongs involv-ing Enrons former bosses, it may allowsome good and honest people to bringthe company back to life.

CANADIAN BANK PAYS $80 MILLIONTO SETTLE ENRON CHARGES

Adding to an already large list ofbanks that have paid to settle allega-tions that they had helped Enron

engage in misleading transactions,Canadian Imperial Bank of Commerce(CIBC) has paid the SEC $80 million tosettle Enron-related charges. CIBC, likeCitigroup, JP Morgan Chase, and MerrillLynch, was charged with helpingexecute loans that were structured tolook like asset sales, which allowedEnron to claim the loan as revenue,thereby misleading investors. CIBCallegedly advanced $2.7 billion toEnron through off-the-books-partner-ships. The $80 million fine includes$37.5 million of ill-gotten gains, a $37.5million fine, and $5 million in interest.The SEC also sued three current orformer CIBC executives.

INSURERS SUE TO STOP HALLIBURTONBANKRUPTCY

Halliburton Companys plan to sendseveral of its subsidiaries into bank-ruptcy as part of a $4.17 billion settle-ment of all current and future asbestosclaims wont happen if a lawsuit bymore than 20 insurance companies issuccessful. Halliburton filed a pre-nego-tiated bankruptcy petition on Decem-ber 16th in Pittsburgh for Kellogg,Brown & Root Inc., DII Industries LLCand six other subsidiaries, in an effortto settle about 400,000 asbestos and21,000 silica claims. According to anAssociated Press report, the insurersare asking a bankruptcy judge to rejectthe companys Chapter 11 filings.Theinsurers claim that the Houston-basedoil services and construction conglom-erate secured approval from more than90% of the claimants for the bank-ruptcy filing by agreeing to pay muchmore per claim than past asbestos set-tlements.The insurers assert they willhave to pay a large portion of the billfor the settlement, which they sayequates to $7,000 per claim onaverage. They insist that, historically,per-claim settlements in asbestos casesrun about $920. Halliburton itself willreportedly pay about $2.78 billion incash to settle the claims. It appears thatthe insurance companies believe Hal-liburton is paying too much per claim.

INITIAL APPROVAL TO SETTLEMENTGIVEN IN TRAVEL CASE

An Arkansas judge has given prelimi-nary approval to a $54.5 million settle-ment with PricewaterhouseCoopersLLP in a lawsuit that alleged theaccounting house overcharged clientsfor expenses.Warmack-Muskogee LP, aTexarkana-based real estate managerand shopping mall operator, broughtthe case as a class action lawsuit in2001 against PricewaterhouseCoopersand four other firms. Pricewaterhousedenied any acts of improper billing.Late last year, an Arkansas circuit judgeapproved the class action status forpurposes of the agreement only. Ahearing has been set for March 5th forthe court to determine whether to givefinal approval to the settlement.

If the settlement is approved, thelawsuit will proceed against theremaining four defendants: Ernst &Young LLP, KPMG LLP, BearingpointInc, and Cap Gemini. The companiesallegedly billed clients for consultingservices, airfare and other travelexpenses but later drew rebates thatwerent passed on to their customers.The suit was filed in October 2001.Thepreliminary settlement covers clientsof the accounting houses betweenOctober 16, 1991 and December 31,2001, which could mean tens of thou-sands of clients would be entitled to ashare of the settlement money. Price-waterhouseCoopers has been in talkswith the Justice Department andreportedly hopes for an amicable set-tlement.

SEC ACTION POSSIBLE IN DOLLARGENERAL CASE

It appears that federal regulators maytake civil action against IBM for possi-ble violation of securities laws relatedto a customers accounting transaction.International Business Machines hasbeen issued a Wells Noticeby the U.S.Securities and Exchange Commission.This usually means it is likely that theSEC will file a civil suit. The WellsNotice follows the earlier disclosurethat some 48 South Korean govern-


ment officials and corporate execu-tives, mainly from IBM ventures, hadbeen charged with bribery in a caseinvolving state contracts for computerparts and servers.The notice relates tothe SECs investigation of discountretailer Dollar General, which is a cus-tomer of an IBM unit that sells elec-tronic cash registers. IBM told USAToday that the SEC is consideringtaking action against IBM for possibleviolation of U.S. securities laws,by par-ticipating in and aiding and abettingDollar Generals misstatement of its2000 results. IBM paid Dollar General$11 million for certain used equipmentas part of a sale of IBM replacementequipment in Dollar Generals fourthfiscal quarter in 2000, according toIBM. In April 2002, the SEC disclosedthat it had opened and closed a prelimi-nary inquiry into IBM, but did notspecify the focus of that investigation.Anumber of IBMs retail customers arebeing scrutinized by U.S. regulators foraccounting practices. IBM dominatesthe market for point-of-sale systems. Itscustomers include major retailers inthe United States. IBMs own account-ing has come under scrutiny over theyears, with investors criticizing thecompany for its lack of disclosure.

VI.BUSINESS LITIGATION

MARKET TIMING EXPLAINED

In recent months, we have discussedthe growing mutual fund scandal.At itsheart are allegations of late trading andmarket timing. Late trading, which isillegal, is fairly self- explanatory.However, market timing is a more com-plicated concept to grasp and is gener-ally unethical, if not illegal. Markettiming is often referred to as rapidtrading. Rapid trading occurs when atrader buys a fund whose net assetvalue (NAV) per share is based on stalestock prices.This allows that trader toturn a quick profit at the expense oflong-term investors.

To help explain better how markettiming works, an example is appropri-ate. For example, overseas marketsclose down a significant percentage at3 a.m. This causes the value of thefunds stocks to drop, lowering theNAV. Later that day U.S. stock pricesrise, indicating that overseas stockprices will rally. At this point a largetrader,Trader X, invests several milliondollars at the lower NAV.The next daythe overseas market recovers, but thefund manager cannot immediatelyinvest Trader Xs large investment.Thiscauses the assets in the fund to begreater, i.e., a higher NAV.Trader X thenredeems his shares that same day,taking a windfall.Trader Xs removal ofa substantial profit reduces the value ofthe remaining individual shares byseveral cents apiece.

SEARS, EMERSON SETTLE EQUIPMENTDISPUTE

Sears, Roebuck and Co., the largestU.S. chain of department stores, will get$10.8 million to settle claims thatEmerson, based in Ferguson, Missouri,used Sears-owned machines to makepower tools for rival Home Depot Inc.In a lawsuit filed in August 2002, Searssaid that it spent $35 million to equipan Emerson facility in Paris,Tennessee,with machines to make parts for itsCraftsman-brand line of tools.The suit,filed in U.S. District Court in Chicago,alleged that Emerson schemed to gainpossession of Sears equipment andused it to make power tools for HomeDepot. Sears is based in HoffmanEstates, Illinois, a suburb of Chicago.Competition from Atlanta-based HomeDepot and other home-improvementchains has been cutting into sales ofSears Craftsman tools, the top-sellingU.S.brand.

A U.S. District Judge has approvedthe settlement.The Tennessee facility atthe center of the dispute has beenclosed.The lawsuit accused Emerson,the worlds biggest maker of electricmotors, of keeping equipment that itwas required to return when a 30-yearsupply contract with Sears expired in1998. Sears claimed Emerson put some

Sears equipment in an abandonedfactory and claimed it was obsolete orof little value.The suit also claimed thatEmerson had devised a scheme toregain possession and use of Sears toolsthat were supposed to be destroyed.Under the settlement agreement,Emerson will forgive a $1.3 millionSears debt. Emerson also will pay $4million in cash and provide $5.5million in rebates to Sears under supplycontracts for hand tools and vacuums.

TEXAS INVESTIGATES HOME WARRANTYFIRM

The Texas attorney generals office isinvestigating American Home ShieldCorp., a leading national home war-ranty company.This comes amid allega-tions of deceptive trade practices.Theinvestigation comes after dozens ofcomplaints were filed by Texas con-sumers during the past several months.Several consumers claimed that theMemphis, Tennessee-based companyrejected repairs on items covered bytheir warranties. Other complaintsclaimed excessive out-of-pocket feeswere charged for routine maintenancethrough their service representatives.

The attorney generals office said ithas received 112 complaints againstthe company and its subsidiary,Ameri-can Home Shield Corp. of Texas. Con-sumers for American Home Shield havetaken to the Internet to post their com-plaints. Some date back as far as 2000.American Home Shield is a subsidiaryof Downers Grove, Illinois-based TheServiceMaster Co., a publicly held con-glomerate of residential and commer-cial services companies, which includeMerry Maids, Terminix, TrueGreenChemLawn and Rescue Rooter, accord-ing to Hoovers Inc.The company con-tinues to sell policies throughout thecountry and apparently hasnt madeany changes in its policies.

TWO GERMAN BUSINESSMEN WIN$255 MILLIONIn a business case involving one of

the worlds largest media companies,two German entrepreneurs were



awarded a minimum of 209.3 millionEuros, which was worth $254.6 millionon the date of the verdict. The twoGerman businessmen claimed theywere cheated out of their equity stakein a European joint venture betweenBertelsmann AG and America Online.Jan Henric Buettner, 39, and Andreasvon Blottnitz, 38, had helped Bertels-mann set up a 1995 joint venture toestablish AOL Europe. They claimedthat Bertelsmann and its former chiefexecutive, Thomas Middelhoff, prom-ised them partial ownership of theonline venture company. Instead, whenBertelsmann sold its 50% share in theventure to AOL Time Warner in 2000 for$6.75 billion, Beuttner and von Blot-tnitz received nothing.The two men -who had both moved to Californiaduring the late 1990sfiled suit in thatstate, demanding their fair share ofproceeds from the sale.The jury delib-erated for nearly a week after a trialthat lasted for 3 months before reach-ing a verdict.

It appears that in the early 1990s,Buettner and von Blottnitz were bothrising young stars in the emergentEuropean online media market. Theyfounded a consulting firm in 1994, andwere recruited by Middelhoff - thenhead of Bertelsmanns multimedia andcorporate development - to helpdevelop the companys newmedia/Internet strategy. According totheir complaint, the plaintiffs had nointerest in being employees of Bertels-mann, but agreed to work for Middel-hoff in return for a significant equityposition in the companys Internetoperation. The plaintiffs claimed tohave turned down job prospects withMicrosoft and other companiesbecause their agreement with Bertels-mann meant that they would get equityand manage the companys onlineventure business. German law wasapplied in the case. Jurors found infavor of the plaintiffs on 5 separatecauses of action:

Breach of written contract by Bertels-mann

Breach of oral contract by Bertels-mann and Middelhoff

Breach of partnership agreement byBertelsmann

Breach of fiduciary duty by Bertels-mann

Culpa in contrahendo a uniqueGerman cause of action, which stipu-lates certain protective rights duringcontract negotiations.No punitive damages were

requested. The plaintiffs had initiallyrequested $5 billion, then lowered theirrequest to the jury to $3.5 billion.Thedefendant offered $25 million to settleall claims, which was rejected.This caseis noteworthynot just because of thenature of the dispute, but because all ofthe activity appears to have occurredoutside the United States.

SETTLEMENT APPROVED IN DEBITCARD LITIGATION

The nations retailers have receivedfinal approval of the $3 billion settle-ment with Visa USA and MasterCardInternational. It is said that this settle-ment will lead to substantial reductionsin certain transaction fees.The settle-ment, which was approved by a U.S.District Court judge in Brooklyn,resolved a six-year-old class actionlawsuit brought by the retailers thataccused the two card networks ofusing their dominance in credit cardsto force merchants to accept theirdebit cards as well, despite less-expen-sive debit processing offered by com-petitors. Under the terms of thesettlement, a merchant will no longerbe required to accept Visa or Master-Cards debit cards to accept the compa-nies credit cards, and vice versa,starting January 1st of this year. Theapproved settlement also awardedlawyers fees of $220 million, plusexpenses of $18 million, which are saidto be the largest amounts awarded inan antitrust case.

BLOCK SETTLES FRANCHISEE SUITSFOR $130 MILLIONH&R Block Inc. has settled a number

of lawsuits filed by its former majorfranchisees. The agreement settles

pending litigation from franchiseesclaiming that they werent paid fairmarket value when Block initially spentabout $107 million to buy out the fran-chisees. Block will pay $130 millionunder the settlement agreement. InOctober, a state court jury orderedBlock to pay $3.2 million to one formerfranchisee, JBW Limited Partnership ofLittle Rock,Arkansas. Originally, Blockhad paid JBW $4.9 million in terminat-ing the Little Rock companys franchiseon July 1st. JBW sued Block and soughtdamages of $38.7 million. The fran-chisee claimed that it hadnt receivedfair and equitable value in Blocksbuyout. Other lawsuits were subse-quently filed against Block by 11 termi-nated franchisees.

VII.CONGRESSIONALUPDATE

STORM WARNINGS ON THE HORIZON

If early warnings are any indication,American consumers will be in for astormy year in Washington. CorporateAmerica is pumping more money intopolitical campaignsespecially thepresidential racethan ever before.This does not bode well for consumerissues. Considering that 2004 is an elec-tion year, it looks like ordinary citizensand all consumers are in for somerough sledding. I hope there will beenough men and women in Congresswho will stand up for the rights ofpeople to make a difference.When youconsider where the Presidents cam-paign money is coming from and whohas his ear, ordinary citizens hadbetter pay special attention to whathappens in Congress this year.

MORE TORT REFORM BEING PUSHED

President Bush indicated in his year-end press conference that tort reformwill be a key part of his pro-growthagenda. President Bush stated that tortreform will benefit the economy.Addi-tionally, the President has indicated in


the past that the proliferations ofmedical malpractice suits are anational problem that needs a nationalsolution. However, a recent study bythe National Center for State Courtsfound that medical malpractice law-suits per capita actually decreased inthe most recent ten-year time periodexamined. This and other similarstudies are not surprising consideringthat only approximately 10% of allmedical malpractice lawsuits are suc-cessful.

While the President contends thatU.S. citizens pay more for health caredue to increased litigation, a recentstudy showed that medical malpracticeinsurers have raised rates on doctorswell beyond the cost of payouts inrecent years.This is particularly true fora number of states after medical mal-practice tort reform was enacted. Forexample, after over a year of newlyinstituted medical malpractice tortreform in Mississippi, insurance compa-nies have not lowered the rate premi-ums, and no signs of lowered ratesexpected in the immediate future.Addi-tionally, premiums for medical malprac-tice claims account for less than 1%total health care costs. Even advocatesof tort reform admit that tort reformdoes not reduce insurance rates. It isclear that President Bushs attempt topush tort reform legislation will havethe practical effect of hurting injuredvictims, which includes anyone whogoes to a nursing home.Without ques-tion, the President wants to help insur-ance companies and a few otherspecial interests.That has become evenclearer in recent weeks.

VIII.CAMPAIGNFINANCE REFORM

THE BUSH-CHENEY MONEY MACHINE

Lets take another brief look at theraising of campaign funds.With a presi-dential election some 10 months away,one would think the campaign fund-

raising efforts would just be gettingstarted. However, the Bush-Cheneypolitical operatives have been raisingmoney for months at a record pace.Their goal was to raise at least $200million during the primary seasoneven though the President wont bechallenged in the primariesand thatis shocking. The final figures willexceed all previous money-raisingefforts by a multiple that will be evenmore shocking.This gives credence tothe belief that we now have put theWhite House up for sale to the highestbidders. I suspect all of this wouldmake our Founding Fathers turn overin their graves.

LAWMAKERS TARGET ELECTION FUNDINGSYSTEM

Campaign finance reformers are stillat work in Washington.They are settingtheir sights on revamping the systemthat provides public money for presi-dential elections. Unfortunately, it is toolate for this years election.The lawmak-ers who wrote the new campaignrestrictions in place for the 2004 elec-tions recognize an urgent need toshore up the system for providing gov-ernment money to campaigns. SenatorsJohn McCain (R-Ariz.) and Russ Fein-gold (D-Wis.) and RepresentativesChristopher Shays (R-Conn.) and MartyMeehan (D-Mass.), who have workedfor years on campaign finance reform,have specific ideas on improving elec-tioneering rules. None is more timely,however, than the presidential publicfinancing issue. Options includeincreasing the pot of matching fundsavailable for the primaries and givingcandidates the money earlier.

Congress could take up several pro-posals seen by their sponsors as thenext step after what is known as theMcCain-Feingold campaign financereforms.These proposals include rulesfor fund-raising by special interestgroups, tax credits for smaller dona-tions, and other measures to either liftor further tighten restrictions on politi-cal contributions.The McCain-Feingold-Shays-Meehan proposal would increasefrom 1-to-1 to 4-to-1 the public funds

match for individual contributions to aprimary candidate that are $250 or less.It would increase the overall primaryspending limit for each candidate from$45 million to $75 million. More impor-tantly, it would move up the date whencandidates can start collecting publicfunds to help pay for their campaigns from January 1st of the election yearto July 1st of the previous year. It wouldalso set the spending limit for a partici-pating general election candidate at$75 million and double to $6 the indi-vidual check off on tax forms to fundthe public financing system.

APPEALS COURT UPHOLDS IRS POLITICALDISCLOSURE LAW

Some real good news concerningcampaign spending disclosures got lostin the hustle and bustle of the holidayseason. Just before Christmas, a federalappeals court upheld a law requiringsome nonprofit political groups toreport contributions and expendituresto the IRS. The court said there is noconstitutional guarantee to whatamounts to a tax subsidy.The decision,released by the U.S. Court of Appealsfor the Eleventh Circuit, reverses afederal district court judges ruling thatsaid requiring such groups to reportincome and expenses unconstitution-ally restricted free speech.The MobileRepublican Assembly and other conser-vative activists had sued in federalcourt to block the law.

The law, which took effect July 1,2001, requires all groups given tax-exempt status under Section 527 of thetax code to disclose their officers,address and other identifying informa-tion, along with donor names, size ofdonations and expenditures.The lowercourt struck down most parts of thelaw in August 2002. But the U.S. Courtof Appeals for the Eleventh Circuit saidthe judge wrongly interpreted the lossof tax-exempt status for groups that donot report contributions and expendi-tures to be a penalty. The unanimousdecision by a three-judge panel saidgroups must choose between the taxbenefits of disclosing donors andexpenses, and the desire to keep those



financial matters private. It found noconstitutional conflict in requiringthem to do so. In the appellate courtsdecision, it was stated: Congress hasenacted no barrier to the exercise ofthe (political groups) constitutionalrights. Rather, Congress has establishedcertain requirements that must be fol-lowed in order to claim

the jere beasley report feb. 2004

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